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Economists and Antitrust

Mises Daily: Thursday, May 11, 2000 by

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The current debate on the fate of Microsoft has managed (once again) to cause division in the economics profession, even among those who call themselves free-market economists.

On the one hand in the "free market" camp, there are the Austrians and their fellow travelers who believe that antitrust laws have no place in our economy and should be taken off the books.

On the other hand, however, are adherents of the Chicago School, who seem to be divided in their opinions regarding Microsoft, but agree that there should be some role for antitrust legislation in order to keep firms "honest."

Hence, we have Robert Bork, author of The Antitrust Paradox, a book that mostly dissented from standard pro-antitrust views, now being a paid spokesman for Microsoft's rival, Netscape. Bork even has endorsed an old-style antitrust "remedy," calling for the breakup of the embattled software giant. Other Chicago-oriented economists are not sure, although they seem to hold to a "last resort" view of antitrust.

Take Thomas Sowell, for example, who received his doctorate in economics at Chicago and later taught at UCLA, which was a thoroughgoing Chicago-oriented program. He has repeatedly condemned the Microsoft decision and the Justice Department's attempts to dismember that company.

However, Sowell has not brought himself to condemn the various antitrust laws which are the real culprit, although his latest columns have come close.

There is good reason why Austrians oppose antitrust laws. Not only are they purposely vague, but they represent a clear government assault upon private property. Antitrust laws operate in the same way that the economic laws of fascist Italy and Germany worked during the 1930s: they allow for a de facto nationalization of private enterprise without the government taking actual title.

Ludwig von Mises and Murray Rothbard of the Austrian School adamantly pointed out that private property is essential in the workings of an economy. As Mises noted in his discussion of socialism, private (unencumbered by government) ownership of the factors of production is necessary for economic calculation to occur. Without such calculation, Mises wrote, the economy would descend into chaos, something that was eloquently borne out in the various socialist schemes for most of the 20th Century.

That private property is necessary for economic efficiency separates the Austrians from the other schools of thought, including the Chicago School. The other factions hold that economic efficiency is simply a matter of pricing at marginal cost. According to their doctrines, any firm charging a price not equal to marginal cost creates a "market failure" that cannot be rectified by the market. Thus, the government must intervene to correct this aberration.

Austrians, on the other hand, believe such notion are pure folly. The idea that anyone in government--or even private enterprise--can know a particular firm's "marginal cost" at any stage of production is an exercise in self-delusion, for it would require an omniscience that no one possesses.

This gulf between Austrians and the other schools of economic thought is highlighted by a number of other differences. Austrians view market competition as a process, while others see competition as various static states which range from perfect competition to monopoly. The Neomarshallian view of competition holds that the natural state of economic affairs is the inevitable move from competition to monopoly. In other words, unless government intervenes, once-competitive markets, over time, will be transformed from states of pure competition to states in which firms own nearly pure monopoly privileges.

Austrians, on the other hand, take a different approach. They often note that in the beginning stages of production, relatively few firms produce goods and services. As these firms earn economic profits, however, entrepreneurs try to seize new opportunities for profit.

As production continues and the potential market for the particular good or service grows, firms often tend to merge. This is not necessarily a sign of lessening competition, Austrians contend. Rather, they note that the only way a firm can expand its operations--outside of government help--is to produce something that pleases a large number of customers, what Mises called "consumer sovereignty."

Therefore, Austrians see the growth of John D. Rockefeller's Standard Oil Company as being the result of the firm's ability to provide customers with a good product at a low price, not the other way around. As Austrians and other defenders of Rockefeller note, the growth of the Standard Oil Company coincided with better services and lower prices to consumers.

The differences between the two camps are fundamental and mutually exclusive. On the one hand, Austrians are not bound by the Neomarshallian models featuring smooth, continuous, U-shaped cost curves, and the standard by which firms know marginal cost and marginal revenue at every unit of production. These models, Austrians, contend, are crude at best and misleading at worst. While they may make for nice classroom (and courtroom) pedagogical tools, they are hardly the stuff governments can use to micromanage the affairs of business firms.

In fact, it was the very use of these models which formed the differences between Mises and Oskar Lange in the Socialist Calculation Debate of the 1930s. Lange held that government could use the Neomarshallian models to set prices and outputs, since costs were objective and the information needed for decisionmaking was embedded in the cost curves themselves.

Mises argued that Lange's reasoning was ridiculous. Not only could factor markets not operate without the institution of real private property, but there also was no way that socialist planning agencies could direct a country's economic affairs using crude, unsophisticated classroom models. In 1939, Lange won the praise of his peers, who declared him the "winner" of the debate. In 1990, Mises was vindicated by actual events.

Understanding the limits of the modern neoclassical models is essential to understanding the current debate over the efficacy of antitrust law. If the potential explanatory power of these models is weak, then harnessing them to laws which usurp private property is not only counterproductive, but also exposes government power grabs for what they really are. That economists have made millions of dollars testifying in antitrust case (and using their crude models as props) also tells us that some members of this profession are doing more than altruistically promoting "economic efficiency."

Austrian economists for more than a century have given accurate explanations for the economic phenomena which we have observed. In the case of Microsoft, they have not fallen into the trap of looking at the particular circumstances to see whether or not Bill Gates and Company "broke the law." Instead, Austrians have insisted antitrust legislation itself is fatally flawed. It is time to challenge the modern neoclassical paradigms upon which antitrust laws rest. In the words of Mr. Bumble in Dicken's Oliver Twist, "If that be the law sir, then the law is a ass."

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Willian Anderson teaches economics at North Greenville College. Send him MAIL.