Summary of JOIE article (14 September 2021) by Mathew T. Panhans, Federal Trade Commission, Washington, DC, USA and Reinhard Schumacher, University of Potsdam, Potsdam, Germany. The full article is available on the JOIE website.
Antitrust and competition policy are back in vogue as of late. In March 2016, The Economist declared that “Profits are too high. America need a giant dose of competition.” And many reports on competition issues have since been published at the intersection of academia and policy, including the UK’s 2019 Report of the Digital Competition Expert Panel chaired by Jason Furman, the Chicago Booth Stigler Center’s 2019 Report on Digital Platforms, and the 2020 Investigation of Competition in Digital Markets by the U.S. House Subcommittee on Antitrust. The recent discussions reflect the centrality of economic reasoning when confronting issues of antitrust and competition policy.
These issues and an optimal policy framework to address them have long been discussed within economics. However, the way in which economists reasoned about competition and policy has changed over the course of the last century. During the early 20th century, when federal antitrust law was enacted and developed in the United States, the field of economics was broad and diverse in terms of methods of inquiry. Institutional economists were one influential group at the time, and they held prominent positions both within academia and at antitrust agencies. The pinnacle years of the institutionalist movement were from 1918 to 1947 (Rutherford 2011). Institutional economists published widely on the issues of monopoly and competition. They had intellectual connections to important figures in antitrust history, including Associate Justice of the Supreme Court Louis Brandeis. Several institutional economists worked at the Antitrust Division of the Department of Justice with Thurman Arnold.
The institutionalist approach to competition and monopoly contrasted with that of their neoclassical contemporaries. In actuality, this interwar intellectual debate was not always between two clearly defined camps; rather, most economists located themselves along various points of a spectrum between the institutional and neoclassical poles. But the intellectual battle was real, and there are some clearly distinct characteristics between their approaches to economics (Yonay 1998). Institutional economists differed both in their theoretical approach towards competition and monopoly as well as in their policy recommendations. In our paper we discuss an institutionalist perspective on competition theory and policy. To this end, we have identified eleven institutionalists with significant and relevant scholarship: Arthur R. Burns, John M. Clark, Corwin D. Edwards, Charles Gulick, Walton Hamilton, Dexter Keezer, Stacy May, Henry Rogers Seager, George W. Stocking, Irene Till, and Myron W. Watkins.
This first contribution of this paper is to identify three distinct dimensions to an institutionalist perspective on competition.
First, institutionalist approaches focused on describing industry details, so as to bring theory into closer contact with reality. Institutional economists repeatedly criticized the neoclassical tendency to start with abstract mathematical models, and then try to fit industry details into those stylized models. Second, institutionalists emphasized that while competition was sometimes beneficial, it could also be disruptive or harmful. As a consequence, institutionalists rejected using models of perfect competition as the benchmark scenario. Third, institutionalists had a broad view of the objectives and purposes of competition policy that extended beyond maximizing consumer welfare, and included economic stability, fair distribution to factors of production, diffusion of the gains of progress, and preservation of the competitive process. As a corollary of these three points, institutionalists saw existing antitrust legislation as insufficient.
While acknowledging that large businesses are in some industries the most efficient form of production, institutionalists also warned that these oligopolistic and monopolistic tendencies had potentially harmful effects for the consumers, workers, and the society as a whole. Because corporate activity had economic and social consequences beyond the private gains or losses of the owners, they stressed that industry was affected with the public interest. Therefore, institutionalists saw a far-reaching regulatory framework as justified within the program of social control (Rutherford 2015). Expansive regulation and the coordination they hoped it would achieve were not a substitute for markets, but rather mechanisms to improve market functioning for society’s benefit. Within this framework, institutionalist economist proposed policies to achieve the benefits of competitive forces. They were critical of forming antitrust policy based on the application of abstract and general mathematical models to modern industry.. Rather, they argued for a more sophisticated approach of competition policy, which takes the specific characteristics of industries and markets into consideration.
Institutionalists saw themselves as practicing a scientific endeavor, and in part that meant using experimentation to see what policies worked best. Their experimental attitude implied that policy would always be evolving, and antitrust enforcement might be only one stage in the development toward a regime of industrial regulation. Unsurprisingly given their experimental approach, institutionalists proposed quite diverse measures. These diverse measures can be categorized into three groups: (i) self-control by competing corporations, (ii) control by the various stakeholders, and (iii) direct control by the state. Self-control could be achieved by facilitating the self-regulation of industries, where competitors could agree on industry-wide trade practices and standards. Control could be exercised by all stakeholders, where it would be important that workers and consumers be involved in the management of a corporation. Finally, direct control exercised by the state included direct regulations, regulatory agencies, and reforming the antitrust system. Institutionalists did not want an overreaching government or a system of central planning. Rather, the main aim of social control by the state was to ensure fair competition where possible and, where not, to avoid the abuse of monopoly powers.
Rutherford, Malcolm. 2011. The Institutionalist Movement in American Economics, 1918–1947: Science and Social Control. Cambridge: Cambridge University Press. https://doi.org/10.1017/CBO9780511977046.
———. 2015. “Institutionalism and the Social Control of Business.” History of Political Economy 47 (Annual Supplement): 77–98.
Yonay, Yuval P. 1998. The Struggle Over the Soul of Economics: Institutionalist and Neoclassical Economists in America Between the Wars. The Struggle over the Soul of Economics. Princeton, New Jersey: Princeton University Press. https://www.degruyter.com/document/doi/10.1515/9781400822522/html.