ISBN 978-0-87332-854-8 9 780873 328548 www.routledge.com Antitrust, the Market, and the State Walter Adams earned his undergraduate degree from Brooklyn College in 1942, where he was Phi Beta Kappa and Adam Smith Gold Medalist, and his doctorate from Yale Univer- sity in 1947. Professor of economics at Michigan State University from 1947 until 1992, he also served as president of the University, and was awarded the rank of Distinguished University Professor. He has taught at the Universities of Paris, Lyon, Grenoble and Ancona, the Salzburg and Falkenstein Seminars, and the Industrial College of the Armed Forces. He also has been R.J. Reynolds Professor of Economics at Wake Forest Univer- sity, and Vernon F. Taylor Distinguished Professor of Economics at Trinity University in San Antonio, Texas. He was appointed to presidential commissions during the Eisen- hower, Kennedy, and Johnson administrations, including the Attorney General's Commit- tee to Study the Antitrust Laws (1953-1955), and has served as consultant and expert witness before numerous congressional committees. Past president of the American Asso- ciation of University Professors, the Midwest Economics Association, and the Association for Social Economics, he holds several honorary degrees, including Doctor of Humane Letters from Brooklyn College. Antitrust, the Market, and the State The Contributions of Walter Adams James W Brock and Kenneth G. Elzinga Editors I~ ~~o~;~~n~~~up LOicJDON AND NEW First published 1991 by M.E. Sharpe Published 2015 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN 711 Third Avenue, New York, NY 10017, USA Routledge is an imprint of the Taylor & Francis Group, an inforrna business Copyright © 1991 Taylor & Francis. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Notices No responsibility is assumed by the publisher for any injury and/or damage to persons or property as a matter of products liability, negligence or otherwise, or from any use of operation of any methods, products, instructions or ideas contained in the material herein. Practitioners and researchers must always rely on their own experience and knowledge in evaluating and using any information, methods, compounds, or experiments described herein. In using such information or methods they should be mindful of their own safety and the safety of others, including parties for whom they have a professional responsibility. Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. Library of Congress Cataloging-in-Publication Data Antitrust, the market, and the state: the contributions of Walter Adams I edited by James W. Brock and Kenneth G. Elzinga. p.cm. Includes bibliographical references. ISBN 0-87332-854-X.-ISBN 0-87332-855-8 (pbk.) 1. Adams, Walter, 1922- --Contributions in trade regulation. 2. Trade regulation-United States. 3. Big business-United States. 4. Competition-United States. 5. Antitrust law-United States. I. Brock, James W. II. Elzinga, Kenneth G. HD3612.A32A56 1991 338.8'0973-dc20 90-32017 CIP ISBN 13: 9780873328555 (pbk) ISBN 13: 9780873328548 (hbk) To Walter Adams il miglior fabbro Page Intentionally Left Blank Contents Foreword: Professor F.M. Scherer, Harvard University ix Preface: Professor Cecil Mackey, Michigan State University xi Part 1: Fundamentals Chapter 1. Corporate Giantism, Ethics, and the Public Interest 3 Chapter 2. Economists and Power 19 Part II: Selected Industry Studies Chapter 3. Big Steel, Invention, and Innovation 33 Chapter 4. Vertical Divestiture of the Petroleum Majors: An Affirmative Case 54 Chapter 5. The Role of Competition in the Regulated Industries 85 Chapter 6. The Reality of Administered Prices 102 Chapter 7. The Military-Industrial Complex: A Market Structure Analysis 122 Part III: Selected Policy Studies Chapter 8. Looking Backward: Some Medieval Precedents 135 Chapter 9. Is Bigness A Crime? 148 Chapter 10. The Case for Structural Tests 160 Chapter 11. Dissolution, Divorcement, Divestiture: The Pyrrhic Victories of Antitrust 171 Chapter 12. Business Exemptions from the Antitrust Laws: Their Extent and Rationale 204 Chapter 13. Import Restraints and Industrial Performance: The Dilemma of Protectionism 221 Chapter 14. Competition, Monopoly, and Countervailing Power 238 Part IV: A Public Philosophy Chapter 15. Interview: Economic Power and the Constitution 261 Chapter 16. Creative Capitalism 276 Publications of Walter Adams 283 Index 291 Foreword This book collects some choice fruits from a sturdy tree whose roots are firmly implanted in the soil of the late eighteenth century. Or to alter the metaphor, Walter Adams marches behind the banner of two eighteenth-century prophets. One is Adam Smith. Adams's mentor is not the Adam Smith of special interest pleaders, but the Smith who believed passionately in both competition and the need for a compassionate, ethical climate of rules within which competitive market processes could advance the public good. Too few present-day Smithians remember that Adam Smith wrote The Theory of Moral Sentiments as well as The Wealth of Nations. Adams's other prophet is Publius of the Federalist Pa- pers, and in particular, James Madison, who taught that unless both political and economic power remained dispersed, factional interests would "concert and carry into effect schemes of oppression" against the common good. The essays by Adams in this volume examine the relevance of Smithian and Madisonian doctrine to the American economy of the twentieth century. Adams challenges the popular argument that a wide dispersion of power is no longer feasible because economies of scale require business organizations to be of gargantuan size, or because technological innovation, success in international trade, and economic stability can come only from powerful corporations pro- tected against the gales of domestic and foreign competition. The work reprinted here-for example, on the failure of large steel makers to adopt the basic oxygen process expeditiously; on the apparent absence of socially beneficial efficiencies from petroleum companies' vertical integration; on the inflationary pricing pro- pensities in the auto and steel industries during the late 1950s (that led to serious problems two decades later); and on the inefficiency of major defense contrac- tors--comprise a small but significant fraction of Adams's contribution to our understanding of how the American industrial economy functions. At least as important has been his service as general editor of The Structure of American Industry, now available in its eighth edition. Adams argues that market processes can fail, sometimes badly, when eco- nomic power becomes excessively concentrated. Like Publius, he is aware that governmental processes can also fail, especially when they are bombarded by ix x FOREWORD well-organized interest groups. Long before the "public choice" school in eco- nomics made its mark, Adams warned that governmental regulatory commis- sions were susceptible to "capture" by the private entities they regulated. He saw too that such commissions had acquired "an anticompetitive bias, a bureaucratic rigidity, an annoyance with the forces of change." As a remedy, he recom- mended the promotion of competition "to the maximum extent practicable," including a regulatory presumption in favor of competitive entry unless a heavy burden of proof to the contrary was borne. His 1958 American Economic Review analysis of the air transport and trucking industries was prophetic of the deregu- lation that came two decades later. Although competition has been revived in some traditionally regulated indus- tries, the 1980s witnessed a sharp resurgence of another Adams bete noire-gov- ernmental protection of domestic industries from foreign competition. My favorite story from that milieu is not in the Adams collection, but it is too laden with Adamsian paradox not to be told. During the early 1980s, U.S. timber and lumber interests sought from the government protection from Canadian lumber imports. Their claim was that the Canadian provincial governments were collect- ing too little "rent" for the trees sawn into lumber. In this they studiously ignored the teachings of Adam Smith's follower, David Ricardo, on the allocative irrele- vance of rent collection. Ignored too was Adam Smith's own observation that, "in many parts of North America the landlord would be much obliged to any body who would carry away the greater part of his large trees." Officials of a U.S. government whose leaders wore Adam Smith neckties rejected Smith's insights and compelled the imposition of restrictions that increased appreciably the cost of lumber used to build shelter for the American public. Fashions have changed in the economics profession, as in public service. Kudos go now to mathematical virtuosity, not to work that displays an instinct for the factual and philosophical jugular. But being fashionable, Walter Adams has shown repeatedly, is not the same thing as stating the durable truth. Readers young and old can benefit from reading the lessons collected here. F.M. Scherer Harvard University Cambridge, Massachusetts Preface I first met Walter Adams in the early 1950s. But before I actually met him in person, I had learned something very important about him. I was a graduate student at the University oflllinois, studying with Horace Gray, one of the senior professors in the Economics Department, and coauthor, with Adams, of Monop- oly in America. One summer Professor Gray and Mrs. Gray very kindly offered to let my wife and me house-sit for them while they were away from campus. On an evening in late spring, just prior to their leaving Urbana, the Grays invited us over to be sure we were familiar with the house and everything for which we would be responsible. While Mrs. Gray and my wife talked in the kitchen, Professor Gray introduced me to his library.