Faculty Research Working Papers Series How Conservative Economics Has Influenced Antitrust F. M. Scherer John F. Kennedy School of Government - Harvard University June 2007 RWP07-027 The views expressed in the KSG Faculty Research Working Paper Series are those of the author(s) and do not necessarily reflect those of the John F. Kennedy School of Government or of Harvard University. Faculty Research Working Papers have not undergone formal review and approval. Such papers are included in this series to elicit feedback and to encourage debate on important public policy challenges. Copyright belongs to the author(s). Papers may be downloaded for personal use only. HOW CONSERVATIVE ECONOMICS HAS INFLUENCED ANTITRUST F. M. Scherer Abstract This paper, written for a Georgetown University Law School conference in April 2007, addresses the allegation that "conservative" economic analyses have had a disproportionate influence on the substance and vigor of U.S. antitrust enforcement and adjudication. It acknowledges the significant impact of research associated with the University of Chicago and its satellites, much of it inspired by the critical suggestions of Aaron Director. It argues that the "Chicago" efforts have for the most part been beneficial, helping to illuminate weaknesses in accepted antitrust doctrines. Thus, a vigorous academic debate has been stimulated. To the extent that biases have resulted, they stem more from one-sided judicial interpretations of the extent theories and evidence and from the appointment of antitrust enforcement officials who take a one- sided view of the academic debate and/or who believe that "government is the problem, not the solution." HOW CONSERVATIVE ECONOMICS HAS INFLUENCED ANTITRUST F. M. Scherer Harvard University May 2007 Revision 1. Introduction The conference task, as I interpret it, is to evaluate the influence conservative economics has had on the enforcement and adjudication of antitrust in the United States. I assume it to be proven, without undertaking the arduous task of providing support, that the economic doctrines underlying the corpus of judicially accepted antitrust law have gravitated during the past half century in a more conservative direction. This statement of the problem immediately demands a deeper level of analysis. Antitrust is accomplished through enforcement, and what gets done depends in significant measure on the laws Congress passes and how the courts, especially the higher courts, interpret statutes whose implications and intent are often not precisely stated. What gets written into the statutes and how they are interpreted by the courts depend in part upon economic analysis, although to be sure, much else is thrown into the stew. If there has been a change in emphasis over time, the cause may lie in the underlying economics. But it is much more probable in my opinion that changes are attributable to how antitrust enforcers and the courts read what economics has to say, that is, on which among conflicting propositions they have placed emphasis and which ones they have downplayed. And those choices depend importantly upon the values the decision-makers -- typically, lawyers rather than economists -- bring to the table. As Paul Samuelson wisely quipped, "Economists should be on tap, not on top." No one can deny that there are conflicting economic analyses. That, in my opinion, is an unmitigated blessing. Knowledge advances through the juxtaposition of alternative theories and testing against evidence to determine which ones are more nearly correct. "More nearly correct" is as close as I dare come in characterizing what economics can add to the debate, because economic propositions are among the least provable of those addressed in the various sciences. Economists' subject matter is intrinsically complex, 1 characterized by uncertainty, reciprocal expectations puzzles (the analogue of physicists' three-body conumdrum), and incommensurable values. Our data are often deficient and our empirical methodologies less than satisfactory (but improving). Accepting that we cannot conclusively separate what is true from what is untrue, the best one can hope for from economics in informing antitrust enforcement and adjudication is that differences in the findings from economic analyses will be made clear, as will the probable reasons why those differences cannot readily be resolved. If the above premises are anywhere near correct, we should be thankful for the existence of a so-called "Chicago School" of economics, which is often (incorrectly, I shall argue) associated with conservative economics. One clear characteristic of the Chicago School -- not the only one, to be sure -- is what I, as a person born and raised in what Chicago Tribune publisher Robert R. McCormick called "Chicagoland," identify as the great Chicago "a'giner" tradition. If the conventional wisdom says X is true, one redoubles one's efforts to find the flaws supporting that inference and perhaps also to show that instead, Y is true. Epitomizing this attitude was the role of Aaron Director at the University of Chicago.1 Director encouraged legal and economic scholars at Chicago to investigate critically the facts, assumptions, and theories underlying important antitrust doctrines. Those investigations often identified weaknesses in the foundations and sometimes showed that the emperor had no clothes. That train of scholarly work has been of enormous benefit to all of us. It should be recognized too that virtually all professional economists plying their trade in the United States are conservatives, in the sense that we believe in free markets and capitalism as instruments of discovery and engines of progress - 1 . On Director's influence, see Stephen Stigler, "Aaron Director Remembered," and Sam Peltzman, "Aaron Director's Influence on Antitrust Policy," Journal of Law & Economics, vol. 48 (October 2005), pp. 307-330. In the Preface to his book, The Antitrust Paradox ((Basic Books: 1978), p. ix, Robert Bork acknowledges the decisive role Director played in Bork's education and says that Director "has long seemed to me, as he has to many others, the seminal thinker in antitrust economics and industrial organization." Director was in residence at the University of Chicago from 1947 to 1965. 2 - views we adopt inter alia from Friedrich Hayek2 -- and in markets as relatively efficient allocators of resources. If some of us (not I) once believed in central planning as a superior alternative, we were disabused of that notion by the failure of socialism in the Soviet Union and China and the rather more equivocal triumph of capitalism. I believe it was Chicago's George Stigler who once observed that "The study of economics makes a person conservative." That said, it must be recognized that there are widely varying degrees of conservatism in the economics practiced within the United States (as elsewhere). The differences stem more from fundamental values and assumptions about human behavior and about the desirability of such phenomena as unequal income distribution than from the choice of one analytic or empirical technique over another. It would certainly be a mistake to view Chicago as the citadel of all conservative economics. One could with equal accuracy point to conservative schools with roots at Auburn University (uniquely attached to the pronouncements of Ludwig von Mises), the University of Virginia, George Mason University, the University of Rochester, and Washington University, not to mention minority groups at a host of institutions including my alma mater and employer, Harvard University. And for dogmatic differentiation, one would be hard-placed to match the range of extremes represented by economic think tanks. 2. The Influence of "Chicago" Economics As I have indicated, the University of Chicago is often singled out as the leading bastion of conservative economics. This, I believe, is wrong for at least two reasons. First, by digging into and exposing flaws in accepted antitrust doctrines, Chicago has focused and sharpened the debate -- a virtue that I identify with enlightened liberal scholarship. But second and more tellingly, Chicago economists and antitrust scholars have been far from monolithic in advocating a retrenchment of antitrust enforcement programs. I mention briefly four of the most prominent counter-examples. (1) While New Deal politicians were backing off from their 2 . See Friedrich A. Hayek, The Road to Serfdom (University of Chicago Press: 1944). 3 ill-fated experience with cartelization under the National Recovery Administration, "conservative" Chicago economist Henry Simons proposed in 1936, among various policy redirections:3 ... Operating companies must be limited in size, under special limitations prescribed for particular industries by the Federal Trade Commission ... There would be a breaking down of enormous integrations into more specialized firms, with ownership separation among phases of production which are now largely separate in place and management. For horizontal combinations, the policy would require ownership separation among operating units which are now connected by little more than common advertising and selling organizations. (2) The most sweeping proposals for deconcentration of concentrated industries made by an official governmental commission came in 1968 from the so-called Neal Report, chaired by University of Chicago Law School dean Phil Caldwell Neal, who had co-taught the School's antitrust law course with Aaron Director.4 (3) Richard Posner's