Antitrust’s Sordid History-it served special interests, not the consumer

By Donald J. Boudreaux.

"As the 100th anniversary of the passage of the 1890 Sherman Antitrust Act approached, Robert Bradley wrote a book that included a chapter on the unseemly interest-group roots of that statute. An anonymous referee upbraided Bradley for his "cynical explanation of the passage of the Sherman Act, a view not shared by most contemporary economists." (This account is found in Bradley’s 1990 paper “On Origins of the Sherman Antitrust Act.”)

In 1984, the famously cynical 1982 Nobel-laureate economist George Stigler said about the Sherman Act that “so far as I can tell, it's a public-interest law. If you propose an antitrust law, the only people who should be opposed to it are those who hope to become monopolists, and that's a very small set of any society. So it's a sort of public-interest law in the same sense in which I think having private property, enforcement of contracts, and suppression of crime are public-interest phenomena.”

Few pieces of legislation in the United States are so widely respected as is the Sherman Act. But this respect is undeserved. The referee of Bradley’s book along with Stigler and the many other people who continue to take the Sherman Act at face value ignore the full history of antitrust legislation in the U.S.

This history begins, not in Washington, but in the states. From 1889 through 1893, a total of 16 states enacted antitrust statutes. Thirteen of these state statutes — 12 in 1889 and 1 in 1890 — were on the books before the July 1890 enactment of the Sherman Act.

Especially because U.S. senators were then chosen by state legislatures, an understanding of the economic and political forces that sparked the sudden enthusiasm during the 1880s for antitrust statutes at the state level is indispensable for a full appreciation of the history of American antitrust.

No Evidence of Monopolization in the Late 19th Century

"If antitrust legislation were really meant to increase economic competition, we would expect to find that in the 1880s the prices of many goods and services rose and the outputs of these goods and services fell, at least relative to some plausible trend line. After all, genuine monopolists raise prices and restrict outputs. Yet when Thomas DiLorenzo — in his classic 1985 paper “The Origins of Antitrust: An Interest-Group Perspective” — examined the prices and outputs of those late 19th-century industries that were accused of being infected with monopoly power, he found the opposite.
According to DiLorenzo,

Output in these [allegedly monopolized] industries generally expanded more rapidly than output in all other industries during the ten years preceding the Sherman Act….

Real GDP increased by approximately 24 percent from 1880 to 1890, while those allegedly monopolized industries for which some measure of real output is available grew on average 175 percent — seven times the rate of growth of the economy as a whole.

DiLorenzo reports also that throughout the 1880s “prices in these industries were generally falling, not rising, even when compared to the declining general price level…. [T]he data that are available indicate that falling prices accompanied the rapid output growth in these industries.”

Later research done jointly by DiLorenzo, Stephen Parker, and me found that what fueled antitrust movements at the state level (and eventually at the national level) were these dramatically rising outputs and falling real prices.

Local Producers Sought Protection From National Competitors

Here’s the summary account. The post–Civil War transcontinental expansion of railways and telegraphy, along with other technological developments such as the refrigerated railroad car, markedly increased the scale on which many goods could be profitably produced and supplied. Entrepreneurial firms that took advantage of these economies of scale expanded outputs and lowered prices to unprecedented levels. While as a result consumers reaped massive benefits, many established producers suffered. Older, smaller, and less entrepreneurial firms could not match the low prices offered by their large-scale rivals.

The demise of many familiar, small-scale producers along with the rise of unprecedentedly huge firms — and equally unprecedented personal fortunes — created the mirage of monopolization. This mirage was opportunistically exploited by some producers who could not match the lower prices of newer and larger rivals.

Playing a central role in this sordid political episode were local butchers and independent cattle ranchers. Not until the rise in the 1880s of Gustavus Swift’s Swift & Co. and other centralized butchers, operating chiefly in Chicago, did butchers selling fresh meat face competition from out-of-town suppliers. But the refrigerated railroad car changed all that. For the first time in history, people could safely consume meat slaughtered hundreds of miles from where they purchased it.

Swift, Armour, and other centralized butchering firms took advantage of the large markets that refrigeration opened to them by slaughtering cows and pigs en masse and shipping the cuts by rail to distributors throughout the country. This centralization of butchering also disrupted the older means of supplying cattle to local butchers. Many smaller independent cattle raisers could not successfully compete in supplying cattle to Chicago’s big slaughterhouses.

But this creative destruction was an enormous boon to consumers. By the mid-1880s, in little more than half a decade the real price of fresh meat in much of the U.S. had fallen by 30 percent.

Unable to supply fresh meat at these low prices, local butchers formed the National Butchers’ Protective Association to lobby for protection from the competition of the Chicago meat-packers. The butchers were joined politically by what turned out to be the even more politically potent independent cattle raisers.

A major conference met in St. Louis in March 1889 for the purpose of drafting model legislation to protect independent ranchers from the effects of what was by then called, slanderously, “the beef trust.” Attended by delegations from more than a dozen states, this conference resulted in the drafting of two model statutes. The conferees agreed to attempt to enact each of these statutes in their respective states.

One statute required that all fresh meat offered for sale be inspected live on the hoof in the county in which it is sold. Obviously, under this statute, meat slaughtered in Chicago was ineligible to be sold outside of Cook County, Illinois. (Minnesota’s somewhat-modified version of this statute was struck down in 1890 by the U.S. Supreme Court in Minnesota v. Barber. The court ruled that this inspection requirement violated the Constitution’s Commerce Clause.)

The second model statute was an antitrust statute. It declared all “trusts” to be unlawful, and included in its definition of a trust “a combination of capital, skills or acts by two or more persons, firms, corporations or associations of persons … to limit or reduce the production, or increase or reduce the price of merchandise or commodities.”

The tenor and goals of this conference make clear that its delegates believed that this wording would enable state governments to take action against any suppliers that threatened to shrink the markets of existing sellers — against any suppliers that caused existing sellers to reduce their production or to sell at prices deemed too low. The goal, in short, was to protect existing, politically influential producers from the competition of newer, more efficient firms.

This animus, in the late 19th century, of smaller-scale producers against their upstart, large-scale, and more efficient rivals supplied the fuel for antitrust legislation, first at the state level and soon afterward at the national level.

Conclusion

George Stigler was incorrect. Far from monopolists being the only parties to oppose antitrust legislation, it was firms seeking monopoly power — producers seeking protection from new competitors — that pushed hard for antitrust statutes. Antitrust, while costumed as a tool to promote competition, was from its start a scheme to promote and protect monopoly power."