[Only the first part of this message is displayed. The entire message has been turned into a text attachment, which you can retrieve by selecting Download. Once downloaded, open it with a word processor or text editor for reading.] ******** Date: Wed, 17 Feb 1999 19:47:23 -0500 From: "James V. DeLong" <[EMAIL PROTECTED]> Here is a skeptical look at current antitrust enforcement. Best, Jim DeLong REASON * March 1999 The New Trustbusters What's behind the resurgence of antitrust activism--and why it's bad news for consumers. By <[EMAIL PROTECTED]>James V. DeLong Joel Klein is a famous man. The head of the Antitrust Division at the U.S. Department of Justice usually toils in anonymity, known only to the in-groups of the bar. Not Klein. He has sued Microsoft, the most prominent company in America's jazziest industry, and demonized the world's richest human, Bill Gates. He has assaulted the ubiquitous credit card franchises of Visa and MasterCard and blocked important aerospace industry consolidations. He makes speeches extolling the pivotal role of the Antitrust Division in the "new economy" of globalization and information. These acts have earned him serious attention in the national press. Not to be left behind, Klein's fellow antitrusters at the Federal Trade Commission are equally active. They have beaten up on superstores by stopping the merger of Staples and Office Depot and by knocking down important marketing practices of Toys "R" Us. Like the DOJ Antitrust Division, the FTC has gone high tech. It is challenging Intel, the grandee of computer chips, and probing Cisco Systems, the dominant company in Internet switching hardware. In a recent suit against a drug company, the FTC asserted a heretofore unknown authority to force an alleged monopolist to refund to consumers $120 million in allegedly ill-gotten profits. Professional discussion of this surge in antitrust activism is proceeding at two levels. One is the highfalutin language of bar association meetings and academic conferences, where sessions are given titles like "Antitrust Enforcement and High Technology Markets," "Networks, Lock-In Effects, and the******** Date: Wed, 17 Feb 1999 19:47:23 -0500 From: "James V. DeLong" <[EMAIL PROTECTED]> Here is a skeptical look at current antitrust enforcement. Best, Jim DeLong REASON * March 1999 The New Trustbusters What's behind the resurgence of antitrust activism--and why it's bad news for consumers. By <[EMAIL PROTECTED]>James V. DeLong Joel Klein is a famous man. The head of the Antitrust Division at the U.S. Department of Justice usually toils in anonymity, known only to the in-groups of the bar. Not Klein. He has sued Microsoft, the most prominent company in America's jazziest industry, and demonized the world's richest human, Bill Gates. He has assaulted the ubiquitous credit card franchises of Visa and MasterCard and blocked important aerospace industry consolidations. He makes speeches extolling the pivotal role of the Antitrust Division in the "new economy" of globalization and information. These acts have earned him serious attention in the national press. Not to be left behind, Klein's fellow antitrusters at the Federal Trade Commission are equally active. They have beaten up on superstores by stopping the merger of Staples and Office Depot and by knocking down important marketing practices of Toys "R" Us. Like the DOJ Antitrust Division, the FTC has gone high tech. It is challenging Intel, the grandee of computer chips, and probing Cisco Systems, the dominant company in Internet switching hardware. In a recent suit against a drug company, the FTC asserted a heretofore unknown authority to force an alleged monopolist to refund to consumers $120 million in allegedly ill-gotten profits. Professional discussion of this surge in antitrust activism is proceeding at two levels. One is the highfalutin language of bar association meetings and academic conferences, where sessions are given titles like "Antitrust Enforcement and High Technology Markets," "Networks, Lock-In Effects, and the New Economy," and "New Approaches to Reviewing Horizontal Agreements." In this world, Platonic guardians mull over the implications of technological change and devise optimal policies to safeguard American enterprise. They "open up a dialogue with the bar and the academic community about antitrust doctrine," as Klein put it in one of his speeches, on topics such as "the relationship between antitrust and intellectual property, the significance of...network effects and tipping points... the impact of differentiated products theory, the role of potential competition and innovation markets, and [the meaning of] `agreement.'" The second level of analysis is more skeptical, grounded in the public choice school of economics. Public choice theory holds that exercises of government power are driven by the material and ideological interests of the people who wield it and by the private parties who can reward them with campaign contributions, money, job security, or whatever else they value. Viewed through the lens of public choice theory, the recent burst of antitrust activity is not primarily about consumers or competition. It is about four kinds of interests: 1) competitors of successful firms who want to hamstring their rivals, appropriate part of their businesses, or turn the clock back so they can re-run the race; 2) companies blown by the winds of technological change and looking for ways to nullify their disadvantage; 3) the personal ambitions of antitrust enforcers, who do not prosper in quiet times; and 4) the class interests of the legal profession, which are served by a combination of activist bias and mushy theories. Only a taste of this view creeps into the formal talks at antitrust conferences. To get the full flavor, you must hang out in the corridors and hotel bars, and stick around for the after-conference receptions. There you hear jokes like this one: "What is the government's theory in the Microsoft case? That the state of California has more computer companies than the state of Washington, and a hell of a lot more electoral votes." Or this one, about "Gore-Techs," the high-tech entrepreneurs who confer with Vice President Al Gore: "What is Gore-Techs? A new fabric made by combining silicon and money, used for wrapping up politicians." In these less formal settings, last summer's Senate Judiciary Committee hearings on Microsoft, in which Chairman Orrin Hatch (R-Utah) laid into Bill Gates, are dismissed with, "What else would you expect from a senator who has Novell in his state?" Testimony in the ongoing Microsoft trial about the frequency with which the head of Netscape, the moving force behind the lawsuit, met with Klein and other Antitrust Division representatives is greeted with blasé yawns. So are testimony and e-mail messages showing that high-tech companies regard government antitrust action as simply one more tool in their competitive arsenal, an alternative to price cuts or new products. And as the head of Netscape said when asked why he did not file his own suit, it is much cheaper to use the government's lawyers. Behind the scenes at the conferences, you hear snickers about the innocence of Microsoft, which thought it could sit out there in Redmond writing software and ignoring Washington, D.C.--as if such a big pot of wealth could go unnoticed by a rapacious imperial capital. The idea that perhaps a company should be able to do its business and ignore Washington is regarded as hopelessly naive. Microsoft is now playing catch-up, adding former congressional aides to its staff and boosting its budget for political contributions. The suit against Visa and MasterCard, announced in October 1998, also evokes grins. (See "Credit Where It's Due," January.) The Antitrust Division's press release speaks of harm to consumers and of an industry that is "competitively impaired." But the arrangement that the government just attacked has been around a long time and was created in part due to antitrust concerns expressed by the DOJ almost 20 years ago. Prior administrations investigated and declined to take action. The corridor talk notes the close relationship between the Clinton administration and American Express, which has been complaining about its rivals for years. Presidential friend Vernon Jordan is an AmEx director. According to news accounts, AmEx has other ties to the White House: It bought heavy advertising from the 1993 inaugural committee, it won the White House Travel Office account, and it has replaced Diner's Club as the government-issued credit card for federal workers. In the 1997 Office Depot/Staples merger case, the FTC defined the relevant market as "office supplies sold by superstores," even though the two chains together sell only about 5 percent of all office supplies. Wal-Mart alone sells more than this, and bulk mail-order firms sell another huge chunk. Everyone, except the FTC and the federal district judge who upheld its decision, regards the commission's market definition as a laugher. (See "Pricing Pencils," August/September 1997.) But no one can figure out who had the political clout to persuade the FTC to adopt such a silly position. The Wall Street arbitragers who lost a bundle when the deal cratered think the FTC's action was triggered by complaints from Office Max, the third major superstore chain, which stood to get some assets on the cheap if the government forced the merged entity to spin them off in the name of protecting competition. Last March, when the DOJ Antitrust Division nixed Lockheed Martin's effort to acquire Northrop Grumman, the formal reasons involved concentration in the defense industry. The corridor talk this time actually made it into The Wall Street Journal. Lockheed had been blindsided by rival Raytheon, which gave the government mountains of negative information. In its June 1998 story, the Journal noted that Lockheed, not expecting trouble, had failed to adopt the usual techniques of the merger game: "lobbying Capitol Hill, working the executive branch and creating a drumbeat of support in the media." The interests of selected businesses and political figures are not the only ones served by the trend toward antitrust activism. The corridor lounger also notes a certain incestuousness among the conference participants. Almost all the private lawyers and economists on the panels used to work for the government, while the government reps used to work in the private sector, and most will return there at some point. Even the career employees turn free agent if the stars are right. The FTC litigator who led the Staples case left a few months later for a well-paid partnership in a major law firm. In the condottiere world of lawyering, his victory in a case that looked like a dog greatly increased his market value. The arbs who lost big as a result want him on their side next time. It is a new springtime for antitrust lawyers and economists, promising a return to the good old days of three decades ago. Their memories of that era are bathed in a golden glow. It was a time when antitrust regulators were hyperactive, inhibited only by the need to invent a plausible scenario under which a business arrangement might be regarded as "anti-competitive," and this concept could be given any of several not necessarily consistent meanings. Given such a nonstandard, the government won almost every time it challenged a business arrangement. But the charade required a lot of lawyers and economists. This era ended in the 1970s. Two disastrous pieces of monster litigation--one against IBM by the DOJ Antitrust Division, the other against the oil companies by the FTC--ground on for years. Each went long past the point where it became obvious that the government lacked a coherent theory of the supposed offenses and long past the point where changes in the industry and in the world turned the case into a joke. During the same period, the University of Chicago school of antitrust analysis began to convince judges and law students, and eventually even the bar, that many of the government's anti-competitive scenarios were not plausible at all and that arrangements which were valuable to consumers were being outlawed. Antitrust law was suppressing rather than nurturing competition. This revolution in antitrust thinking was consolidated in the 1980s, when the Reagan administration pared enforcement back to the hard core of attacking agreements to fix prices or divide markets, which almost all antitrust analysts regard as beyond the pale, and preventing mergers among direct competitors in highly concentrated industries. The number of cases dropped off as enforcers ceased to invent new theories, and businesses, with a fairly clear idea of the line between legal and the illegal, could adjust their conduct with little reference to the high priests of antitrust. Antitrust practice came to mean filing the notification forms the government requires before a corporate merger can be consummated and negotiating the terms on which the government would approve. This often meant selling off a division or two in the name of preserving "competition" in some minor market or product line, but the issues were usually marginal, rarely involving fundamental questions of antitrust purpose and policy. Antitrust became a particularly boring kind of regulatory law, consisting mostly of copying thousands of pages of documents to ship over to the DOJ and the FTC for pre-merger review. Now, after almost two decades of marginal relevance, the thrill of activism is back. Corporate officers and Wall Street arbs once again furrow their brows when they speak of "The Division" or "The Commission." The telephone rings. Hours are billed. People who say "let's do lunch" actually follow up. Headhunters pass out business cards. Members of the opposite sex no longer flee when you say, "I do antitrust." It is important to avoid what the English writer C.P. Snow called "the cynicism of the unworldly." One should not underestimate the impact of sincere belief on the actions of government officials. The Antitrust Division, the FTC, and the private bar are full of honest lawyers who would be outraged at the suggestion that they are acting for personal or class interest, or that they are stretching the law in the interests of ideology. But it is also important to recognize that self-interest is the aphrodisiac of belief and that adopting the theories underlying the new activism is much to the benefit of the antitrust professionals on both sides. To those with a bent for public choice explanations, the enforcers, flogged on by the politicians and the competitors, have seized upon the computer, the information revolution, and the Internet as excuses to reverse the cautious "first, do no harm" antitrust policy of the past 20 years and restore the promiscuous activism that characterized the 1960s. The question, of course, is whether these dour apostles of the public choice view are right. Answering that question requires a return to the basics. The antitrust laws stem from our collective fear of monopoly, a bred-in-the-bone knowledge that a supplier of a good or service who lacks competitors will jack up the price, cut the quality, become arrogant and unresponsive, and in general behave obnoxiously. Economists can give you good explanations for this, complete with charts and graphs of supply and demand curves made out of solid and dotted lines and annotated with lots of alphas and deltas. They can explain with precision why raising the price increases the monopolist's revenue even if it cuts sales, and they can tell you the size of the price hike that will maximize the loot. The noneconomists among us fear monopolies even without the charts and graphs, based on common sense. After all, raising the price is logical; it is what we would do if we had a monopoly of our own. We also look to our experience. Think of the U.S. Postal Service, cable television companies, state liquor stores, or the local public school. Monopolies all, and legendary for unresponsiveness, ineptitude, and overcharging. But these things are mostly peripheral to our lives, or there are safety valves in the form of substitute goods or direct action, so the lack of competition is an annoyance rather than a disaster. Imagine the impact of a complete monopoly in a truly essential product, such as automobiles or groceries. The fear of monopoly that triggered the first of the big antitrust statutes--the Sherman Act of 1890, which outlawed combinations in restraint of trade and attempts to monopolize--was far from unfounded. Alfred D. Chandler Jr., the eminent business historian, documented the situation in the late 19th century in his classic book The Visible Hand. The rise of mass production, combined with the railroad, the steamship, the telegraph, and the telephone, created the possibility of nationwide marketing and management. As output exploded, prices dropped precipitously. Many industries responded by attempting to put together cartels intended to reduce output and stabilize prices. The means varied--contracts, holding companies, corporate voting trusts, mergers--but the goal, as explicitly stated by the participants, was to attain the joys of monopoly power over a market. Considering these expressed intentions, public fear was rational, but history has shown that it was largely unnecessary. It turned out that amalgamation is not alchemy, and the trusts could not achieve their goal of excluding competitors and sustaining prices at monopoly levels. The experience of the National Cordage Association, recounted in Chandler's book, illustrates the vulnerability of monopoly schemes. The NCA could not achieve economies of scale in operation or management. Nonetheless, it was forced to pay premium prices to lure competing companies into selling out, which stuck it with huge capital costs. The bought-out competitors then used their money to start new cordage companies that were more efficient than the NCA, so they could undercut its prices. The association went bankrupt in 1893. Even mighty Standard Oil, the great bête noire for trustbusters of the late 19th and early 20th centuries, was a symbol more than a true villain. By 1911, when the Standard "monopoly" was broken up by the Supreme Court, eight other large integrated oil companies were competing with it. Before that, Standard never tried to sustain prices at high levels. The history of oil during the late 19th century was one of huge expansion in markets and facilities and steadily falling prices. Many of the complaints about Standard came from medium-sized refiners that lost cozy local monopolies to Standard's rationalizing and price cutting. The same pattern has been repeated many times. As changes in communications and transportation create possibilities for new forms of business organization that might make things cheaper and better for consumers, firms that are doing well under the old forms fight back. This was true in the late 19th century, and it remains true today. Often, the beneficiaries of the status quo cry "Monopoly!" Almost always, they are wrong. If you look back at the examples of monopolies given a few paragraphs ago, you will notice that all are public institutions or publicly regulated businesses. It is impossible to find examples of truly private monopolies, except on a minor scale. In areas where the natural technical and economic structure of an industry would tend toward monopoly, such as utilities or railroads, public regulation was imposed early (with dubious results--but that is a different tale). In other sectors, monopolies are rarely developed and never sustained. Some thinkers, such as Dominick T. Armentano, a professor emeritus of economics at the University of Hartford and a scholar of antitrust history, have responded to this experience by advocating the elimination of the antitrust laws. They argue that the benefits from the few instances in which these laws might do good are outweighed by the harm caused by their inevitable misapplication at the behest of the political system. Others are less willing to scrap the antitrust laws. They note that it's always possible that the members of an industry might succeed in getting together and setting a monopoly price. Perhaps in 1911 Standard and the other eight big oil companies could have set up regular meetings and fixed prices or merged into one company. Over the long term, such a monopoly would not last, any more than OPEC lasted. As the price remained high, new entrants would want to get a cut and would have to be brought into the cartel. Eventually, shares would get so diluted that some members would find it worthwhile to break off and cut the price, thereby ruining the system. But a cartel can cause pain while it lasts, as did OPEC, and the wait for its inherent contradictions to assert themselves can seem awfully long for us short-lived humans. So most people who study the problem, whatever their general political orientation, agree that a core of antitrust enforcement is important. In particular, they agree that price fixing among competitors should be outlawed, and so should merger to monopoly and agreements to divide markets and set up a series of monopolies in different sectors of the economy. This was the basic antitrust policy of the Reagan years. As the abolitionists love to point out, though, when you take this first step you step on an intellectual banana peel that sends you skidding down a slippery slope. The fundamental problem is that the meaning of "monopoly" is amorphous, and the ambiguity leaves unclear exactly what the law is trying to prevent, encouraging ad hoc approaches and governmental mischief. A true, clear monopoly would be something for which there are no substitutes. If you are drowning in the middle of a lake, and someone in a boat comes along and asks if you want to buy a life jacket, he can fairly be said to have a monopoly. Short of a situation like that, there are only varying degrees of power to charge a premium price. A beef company's power is limited by the availability of chicken and fish, and a local grocery store's power is limited by your ability to shop in a neighboring town. In each case, the power is real but limited. So at what point does this power justify government action? There is no clear answer, and no satisfactory theoretical basis for developing one. This fuzziness gives those interested in expanding antitrust enforcement, including the enforcers, a lot of leverage. They argue that any power over price, however small, in any identifiable product market is illegal. Then they seek to define the market narrowly, making it easy to find a price effect. In a recent paper for the Cato Institute, University of Mississippi economist William F. Shughart II, one of the most relentless public choice critics of antitrust policy, lists some markets defined by the government: "high-priced, non-ethnic frozen entrees" "noncarbonated, ready to serve, naturally or artificially flavored fruit drinks, fruit punches, or fruit ades which contain 50 percent or less fruit juice and are customarily sold under refrigeration to the consumer" "direct contract front-loaded trash removal in Dallas." These market definitions do not have quite the same impact as "oil" or "steel." The next step in expanding the realm of antitrust is to use static economic models to predict an effect on price, often ignoring strategic responses available to competitors that would erode any monopoly power. In analyzing the Staples/Office Depot merger, for example, the FTC noted that slightly higher prices prevail in some areas where only one of the companies operates. It assumed this pattern was immutable, ignoring the ability of superstores, mail-order houses, and customers to observe it and react. By the time these steps are taken, the result is ordained. Anyone playing by these rules who cannot find a monopoly on every corner isn't trying. This game discourages efficiency-enhancing mergers. It also discourages arrangements among firms, such as joint ventures and strategic partnerships, that could create innovative products and reduce costs. Such deals always involve some agreements on price and territory because the partners must decide how to split the proceeds. Each also needs to ensure that its partner does not use it for a time, then muscle it out of the way and take over the whole business. Banning these contracts outlaws many worthy projects. As Fred Smith, head of the Competitive Enterprise Institute, explains: "Any company wants to do many different things. But it can be only one size, which means it cannot be exactly the right size and have exactly the right mix of skills and resources for each of the things it wants to do. For some it is too big, for others too small." If different and possibly competing businesses can integrate some of their operations without merging entirely, they can form entities that are the right size for the venture at hand. The size that is appropriate for inventing a software product, for example, may be different from the size needed to make it commercially viable. Manufacturing and marketing require still different sizes, talents, and structures. The industry is filled with people patching together the temporary alliances needed to fill the gaps in their own organizations. The result, in software and elsewhere, is a flexible and adaptive economy, which serves consumers well. For a century, antitrust enforcement has been hostile to such partial integrations among businesses. Ironically, this hostility creates pressure for firms to merge completely. Due to oddities of antitrust law, merger may be allowable under circumstances where partial integrations by contract would be blocked. In the 1960s, scholars with a public choice perspective began analyzing whether past antitrust actions had actually benefited consumers. It is not an easy question to research, but a variety of ingenious studies have looked at stock prices, scholarly opinions, competitors' reactions, and other indicators. The results are strikingly consistent: Antitrust actions do not help the public, though they may help the special interests that trigger them (while providing well-paid employment for antitrust professionals). CEI's 1997 Antitrust Reader and the 1995 book The Causes and Consequences of Antitrust: A Public Choice Perspective (University of Chicago Press), edited by Shughart and Emory University economist Fred McChesney, are good introductions to this literature. This research, combined with the dearth of empirical work on the other side, was an important factor in the reforms of the 1980s. Proponents of interventionist antitrust had an embarrassing lack of good examples. As McChesney and Shughart point out, when you have a century of experience with a program and virtually every landmark case looks to have been a mistake, perhaps it is time to stop saying, "well, we'll get it right next time," and start rethinking the basic premises. The current activists are having none of this. Quite the opposite. The seminar sessions at antitrust conferences--the serious part, where the participants do not joke about Gore-Techs--operate as if none of this rethinking happened. The governing assumption is that basic antitrust policy and doctrine was and is sound. The question is whether this tool that has served us so well can be applied to the growing high-tech economy as it stands, or whether it needs to be adapted and extended to reflect new realities. The possibility that the antitrust emperor might be stark naked is ignored. This should not really be surprising. More than 20 years ago, when I was a middle manager in the FTC, an exasperating commission action prompted me to say to another staffer: "They tell the story of `The Emperor's New Clothes' a little differently around here. It goes along as usual until the little boy pipes up, `That man is naked!' Then, in the government version, the emperor turns and says, `Kill that kid.' And they do." Public choice analysts know that an agency-emperor will seize any opportunity to off the uppity kid and re-impose the myth of the beautiful robes. It will be assisted enthusiastically by private interests who want to turn the myth to their own advantage. As a result, there is now a gusher of amorphous theories justifying renewed antitrust activism. For example, theories of "path dependence" and "lock-in" hold that society can become committed to an inferior technology, unable to break free when a superior one comes along. It is an interesting idea with little empirical support, as has been demonstrated by economists Stan Liebowitz and Stephen Margolis in the pages of REASON ("Typing Errors," June 1996) and at greater length in the academic literature. The Dvorak typewriter keyboard was not really significantly better than the old QWERTY version, and now that anyone can go Dvorak with a computer keystroke, almost no one does. The other standard example, the triumph of VHS over Beta in videotape, is also wrong. VHS, with its longer recording time, was regarded by consumers as a better product. It's true that once companies or consumers buy into a technology they will incur costs if they want to change later. But this is hardly a new development; the same is true for purchases of equipment, constructing buildings, or any other investment. Change occurs only when a new technology is sufficiently superior to justify the switching costs, or when investment is turning over anyway. So what? The fact that a company that introduces a good product gets some first-mover advantages is one of the mainsprings of innovation. Is the government now saying this should be foreclosed? Another phrase popular among antitrust activists is "network effects." Some things become more valuable as more people sign up, and the company that gains an initial advantage may then sweep the field. The classic example is the telephone, where everyone wants to be on the same network. Again, an interesting idea, and one with clear merit. But again, not new, and not unique to high-tech industries. Timothy Muris, now a professor at George Mason University law school and, as head of the FTC's Bureau of Competition, an architect of the antitrust reforms of the 1980s, notes: "The fact that network effects are everywhere should give us pause about the utility of the concept [for antitrust]. Many products, not just high-tech ones, have the characteristic [that] the benefits of use increase as the number of users grows. Thus, consumers of products that require post-sale service, such as automobiles and appliances, produce network effects from the growth of service outlets when more consumers purchase the product. Coke and Pepsi drinkers benefit from the network of their fellow consumers in that their drinks are widely available in restaurants and from vending machines. Sports fans benefit when they live in an area with enough other fans that teams find it profitable to locate there." During the formal presentations at antitrust conferences, the audience listens raptly as phrases such as "path dependence" and "network effects" roll off speakers' tongues. During the receptions the respect drops off, especially because the speakers seem more interested in explaining why the concepts justify an increase in their power than in any real analysis. A typical corridor reaction to the new concepts is "buzzwords and bullshit." More genteelly, participants note that most of the ongoing antitrust actions lack basic clarity and coherence. The Microsoft litigation started with the idea that the company was illegally tying sales of a Web browser to its operating system. Then, during the trial, the theory shifted to a charge that Microsoft wanted to divide the browser market with Netscape--a pretty silly idea, given the capacity of other companies to make browsers of their own. Now the government seems to be trying to prove that Microsoft is a meanie, which is not an offense under the Sherman Act. It is for the most part simply hard-edged jockeying over the terms of the partial integrations that are crucial to an efficient software industry. The government also seems to think that high market share alone meets the legal definition of monopoly, even if there is only tenuous evidence of power to raise prices. Microsoft argues, of course, that it has a high share only because it keeps prices low and that this is what really bothers its competitors. They want Microsoft to be forced to set prices high enough to leave room for them. The incoherence extends beyond the Microsoft case. The FTC accuses Intel of withholding information about forthcoming chips from companies that sued it for patent infringements. This is a novel extension of antitrust law. The relief sought would force Intel to treat all similarly situated customers alike, which would put the FTC in the middle of endless disputes over the meaning of "similarly situated" and "alike." The case looks like intervention in contract disputes combined with casual meddling in difficult intellectual property issues, plus an unarticulated assumption (also apparent in the Microsoft case) that any company with a large market share should be converted into a new breed of public utility by government fiat. The DOJ's Visa/MasterCard case is also puzzling. Two separate violations are charged. First is the practice called "duality," whereby the two brands of card are issued by the same banks. The government contends that duality causes both Visa and MasterCard to go easy on introducing new products, such as smart cards, that might damage the other. The second alleged violation is that the Visa/MasterCard banks do not issue AmEx, Discover, or any other card. These theories are confusing. If Visa and MasterCard are agreeing to slow down innovation, then AmEx, Discover, and other potential competitors should be thanking them for leaving open such a valuable market opportunity. Government intervention would be superfluous, and the last thing a competitor would want is for the government to wake Visa and MasterCard up. As for the other theory, if duality is illegal, then why is the government trying to make it into quadrality? Or is the government saying that the banks must become the partners of anyone who wants to go into the credit card business? Again, this is a theory that converts any dominant company into a public utility. All of these matters, and more besides, fan suspicions that government policy is blown by the winds of special pleading and political interest, and that the complex intellectual rationales are simply a new cover for old-fashioned rent seeking. In a 1961 paper later published in Ayn Rand's Capitalism: The Unknown Ideal, Alan Greenspan wrote: "The entire structure of the antitrust statutes in this country is a jumble of economic irrationality and ignorance. It is the product: (a) of a gross misinterpretation of history; and (b) of rather naive, and certainly unrealistic, economic theories." His analysis is still on target. Building a new structure of "buzzwords and bullshit" atop an old one of irrationality and ignorance will not fix the problem. In the end, the private interests that are so eager to foster this activism will regret it. As more than a few princes of Renaissance Italy could testify, once you bring in the condottieri you have a problem. Before long, you don't own them; they own you. The princes of Silicon Valley will soon have cause to reflect on this lesson of history, as they plead with ignorant but arrogant lawyers for permission to make deals or enter partnerships. As T.J. Rodgers of Cypress Semiconductor recently warned his fellow tycoons in a New York Times op-ed piece: "Winning by politics is antithetical to the free-market competition that underpins Silicon Valley's success. The Justice Department isn't just attacking Microsoft; it's attacking the way Microsoft does business--and, by extension, the way most successful high-technology companies do business." Rodgers closed by pleading with his colleagues to go back before it's too late. It is possible they will see their own interest and bring their political weight to bear on the side of free markets. If not, then the weary witness to the predictive power of public choice theory, watching the government re-create the good old days of antitrust disasters, will be left with nothing but the consolations of schadenfreude. Contributing Editor <[EMAIL PROTECTED]>James V. DeLong is an adjunct scholar with the Competitive Enterprise Institute and the author of <http://www.amazon.com/exec/obidos/ISBN=0684874377/reasonmagazine/>Property Matters: How Property Rights Are Under Assault--And Why You Should Care (The Free Press). His Web site is <http://www.regpolicy.com>www.regpolicy.com. -------------------------------------------------------------------------- POLITECH -- the moderated mailing list of politics and technology To subscribe: send a message to [EMAIL PROTECTED] with this text: subscribe politech More information is at http://www.well.com/~declan/politech/ --------------------------------------------------------------------------
