Peak Antitrust and the Chicago School

It was during the postwar years, over the 1950s and 1960s, that strong antitrust laws became most clearly identified as part of a functional democracy, and in that sense reached the fullest extent of their power, influence, and political support. Reflecting the mood, President Kennedy’s antitrust chief, Lee Loevinger, would testify before Congress as follows: “The problems with which the antitrust laws are concerned—the problems of distribution of power within society—are second only to the questions of survival in the face of threats of nuclear weapons.” As he told Robert Kennedy in a job interview, “I believe in antitrust almost as a secular religion.”

The road to peak antitrust was not entirely smooth. The laws did suffer a near-death experience in the early 1930s, at a time when nationalization and central planning were in fashion around the world. During FDR’s first New Deal, Congress effectively suspended the laws in a failed effort to generate economic recovery.* But the law began its recovery under a succession of prominent and effective Neo-Brandeisians, including Robert Jackson, the future Supreme Court Justice, and the legendary Thurman Arnold, the Wyoming Cowboy, who inherited Theodore Roosevelt’s trustbuster mantle, and who brought about a “shock treatment” campaign amounting to an astonishing 1,375 complaints in 213 cases involving 40 industries.†

But the real political support for the laws in the postwar period came from the fact that they were understood as a bulwark against the terrifying examples of Japan, Italy, and most of all the Third Reich. As antitrust scholar Daniel Crane writes, “the post-War currents of democracy-enhancing antitrust ideology arose in the United States and Europe in reaction to the role that concentrated economic power played in stimulating the rise of fascism.” Thurman Arnold was more blunt: “Germany became organized to such an extent that a Fuehrer was inevitable; had it not been Hitler it would have been someone else.”

Hitler’s rise and exercise of power were facilitated by the German Republic’s tolerance of monopolies in key industries, including the Krupp armaments company, Siemens railroad and infrastructure, and, most of all, the I.G. Farben chemical cartel. As a report by the Secretary of War concluded: “Germany under the Nazi set-up built up a great series of industrial monopolies in steel, rubber, coal, and other materials. The monopolies soon got control of Germany, brought Hitler to power, and forced virtually the whole world into war.” That conclusion came from the observation that the main German monopolists, over the 1930s, threw their weight behind the Nazi regime when it lacked support among other key groups, and that each ultimately became deeply allied with and enmeshed in the German war effort. As a U.S. military report concluded in 1945, I.G. Farben became “a colossal empire serving the German State as one of the principal industrial cores around which successive German drives for world conquest have been organized.” Ultimately some twenty-four Farben executives were tried for war crimes at Nuremberg, for practicing human enslavement in occupied territories, among other offenses. As for I.G. Farben, it was subject to an American style breakup into nine firms, including three large ones: Bayer, Hoechst, and BASF.*

Concerns that excessive corporate concentration undermined democracy prompted Congress to once again strengthen the antitrust laws, in a new “Anti-Merger Act.” Politically, the law was explicitly styled as a reaction to the German and Soviet examples. As Senator Estes Kefauver put it:

I think we must decide very quickly what sort of country we want to live in. The present trend of great corporations to increase their economic power is the antithesis of meritorious competitive development … Through monopolistic mergers the people are losing power to direct their own economic welfare. When they lose the power to direct their economic welfare they also lose the means to direct their political future.

He then turned to antitrust’s relationship to democracy.

I am not an alarmist, but the history of what has taken place in other nations where mergers and concentrations have placed economic control in the hands of a very few people is too clear to pass over easily. A point is eventually reached, and we are rapidly reaching that point in this country, where the public steps in to take over when concentration and monopoly gain too much power. The taking over by the public through its government always follows one or two methods and has one or two political results. It either results in a Fascist state or the nationalization of industries and thereafter a Socialist or Communist state.

The Anti-Merger Act, nicknamed the “Celler–Kefauver Act,” passed by large majorities in 1950, and gave the government new tools to prevent the buildup of giants firms in advance, by controlling—or undoing—mergers. Instead of trying to break up the giants decades later, its idea was to prevent their formation in the first place. The Justice Department and the Federal Trade Commission now had a powerful new tool for controlling bigness—one that was, in fact, potentially the most powerful.

It was over the same period that the European Community (predecessor to the European Union) adopted its own antitrust, or competition, system, modeled on the American Sherman Act.* As in the United States, it too was backed not just by the sense that the law would facilitate economic development, but also the belief that breaking up monopolies and prohibiting cartels was essential to democratic governance, human thriving, and a prevention of a return to the despotism of the 1930s and 1940s. The new European laws found support with an intellectual movement, the Ordoliberals, originally a German school that had faced repression during the Nazi-era based on its belief in economic freedoms. The Ordoliberal beliefs aligned closely with those of the Neo-Brandesians—with a commitment to free markets operating within a strong social, political, and moral framework. Like Thurman Arnold, Estes Kefauver, and other Americans, the Ordoliberals believed that the true origins of Nazi totalitarianism were the concentrations of economic power that began under Bismarck. In this sense, the European competition law was entwined, from the beginning, to the commitment to democracy and human freedom.

By the 1960s, the antitrust laws and an anti-concentration mandate were broadly accepted as part of a functioning democracy. To be sure, the laws had become far more complex and technocratic, and no longer the subject of a popular movement, nor were they the subject of contested electoral politics, as in the 1912 election.* But a broad political, legal, and intellectual consensus saw excessive economic concentration and monopolization as both economically dubious and politically dangerous.

However, a new intellectual opposition to antitrust was brewing, in a different form than before, and in an unexpected place. It formed at the University of Chicago, the school founded by John D. Rockefeller, and in the person of a professor named Aaron Director, and a particularly brilliant student of his named Robert Bork.

The Rise of the Chicago School

Since at least Adam Smith’s day, economists have favored competition and condemned monopoly. For most of the twentieth century, antitrust enforcement was, therefore, broadly supported by the economic profession in its home country. As Donald Dewey writes, “not a single American-trained economist of any prominence questioned the desirability of antitrust in the interwar years.” Given this baseline, the fact that mainstream antitrust economics would come to tolerate and even celebrate monopoly makes for an extraordinary tale.

By the postwar period, when antitrust reached its heights, there remained strong intellectual backing for antitrust laws among both conservative and liberal economists.* Liberal economists tended to support antitrust as a counter to the domination of big business. Conservatives feared “a road to serfdom,” in Friedrich Hayek’s phrase, resulting from central planning accomplished through a union of monopolies and the state. Some thought of monopolies as a threat to economic freedom by themselves; others feared that private monopolies provided an excuse for nationalization or at least extensive regulation. Here is conservative economist George Stigler, writing in 1952: “The dissolution of big businesses is … a part of the program necessary to increase the support for a private, competitive enterprise economy, and reverse the drift toward government control.”

A far more obscure man named Aaron Director would lead the economic attack that would later become known as the Chicago School of Antitrust. Director, who taught at the University of Chicago law school, but was neither a lawyer, nor an economist with a PhD, was a mysterious Socrates-like figure who left behind few written works, but whose students were many and whose intellectual influence over late-twentieth-century legal thought is matched by few. Born in the Russian empire, Director grew up in Portland, Oregon, and was a onetime leftist-socialist. At Yale, he published a socialist newspaper with his friend, artist Mark Rothko. Over the 1930s, he moved to the right, and by the 1950s, he was co-teaching antitrust law at the University of Chicago.

Director’s big idea was brilliant in its simplicity. Working with classic price theories (that, at the time, had been discarded as unrealistic by most of the economic profession), he attacked Supreme Court case law as insensitive or counterproductive in terms of “consumer welfare.” By this he meant the measure of whether the economic prospects of the consumer were enhanced in a measurable way, which usually meant evidence of lower prices. The goal of preserving competition might simply protect weaker, less efficient companies from more efficient firms that might lower prices for consumers.

Director may have started alone, more or less, but he soon gained an impressive band of followers and associates. He was an exceptionally inspirational teacher and colleague, who prompted great loyalty and admiration. He influenced students and colleagues like John McGee (who attacked the Standard Oil decision), Ward Bowman (“Tying Arrangements and the Leverage Problem”), and future federal judges Robert Bork, Richard Posner, and Frank Easterbrook. To various degrees they tended to share Director’s method and assumptions. As McGee once put it, one must begin with “the strongest presumption that the existing structure is the efficient structure.” In other words, they began with a presumption that antitrust was unnecessary, based on the laissez-faire idea that problems work themselves out, and most of the time we live in the best of all possible worlds.

The Chicago School struck some important and worthy blows. Director encouraged McGee, then a graduate student, to study “predatory” pricing in the Standard Oil case, and if McGee’s historical work has been questioned since, it was worth asking when government should be challenging the strategy of lowering prices to defeat competitors, given that lower prices are also a means of competing on price. Perhaps Chicago’s most successful shots, however, were taken at the Supreme Court’s categorical, or per se, condemnation of “vertical agreements”—that is, agreements between producers and retailers. Total bans on such arrangements were hard to justify, and even Louis Brandeis was among the critics of them. Vertical-agreement rules would prove the easiest targets for the Chicago School’s attack.

Nonetheless, even by the mid-1960s, Director and his adherents remained in what Richard Posner would later call “the lunatic fringe,” and their views were not considered important enough to merit inclusion in mainstream legal or academic summaries of antitrust laws. Moreover, Director’s critiques were external; he faulted the law based on what he thought the law’s goals should be (“consumer welfare”), not what they were, like the scientist who faults Star Wars for failing to explain hyperspace. To become influential, what Director actually needed was a lawyer—someone who could weaponize his ideas, put them in a form usable by attorneys and judges. Fortunately for him, he would find his advocate in the greatest and most loyal of his students.

Robert Bork was born in Pittsburgh and grew up in the suburb of Ben Avon. His father was in the steel industry, and his mother was a teacher. Sometime in his youth, he surprised his parents and classmates by declaring himself a socialist, and remained loyal to that cause throughout college. Bork had originally thought he’d be a journalist and writer, in the model of Ernest Hemingway; like Hemingway, he liked to box, and he also made an effort to join the Marines at the end of the Second World War.

During law school, Bork began to soften politically, becoming what he called a “New Deal” liberal. And so things were, and might have stayed, until Bork took an antitrust class co-taught by Aaron Director. During that semester, he underwent what he later called a “religious conversion.” As Bork later said, “Aaron gradually destroyed my dreams of socialism with price theory.” He would become a self-described “janissary,” or loyal soldier, for Director.

As the switch from socialism to free-market libertarianism suggests, Bork dwelt in the extremes, preferring strong positions, which he stated with eloquence and confidence. And unlike Director or other Chicago School economists, he was a first-rate legal talent as well. In this respect he was equaled only by Richard Posner, but the latter never had the same singlemindedness and bombast that Bork did, nor anything like Bork’s inflexibility. While Posner would prove influential over a range of fields, and widely respected for his thoughtful and far-ranging mind, Bork was far more of a soldier: He advanced his position and marched forward without concession or regret, like the tank commander, leaving behind many critics, but also changing minds.

Bork’s signal contribution was this. He took Director’s “consumer welfare” idea—that antitrust was intended only to lower prices for consumers—and argued that it was not merely what an economist like Director thought the law should do, but that it had been, all along, the actual intent of the laws. Working with his Chicago allies, he then created a fully formed alternative account of what the antitrust laws should do and not do, in a book entitled The Antitrust Paradox. In 1964, when he first presented the thesis, it was considered absurd and even insane. But within twenty years he’d manage to convince a majority of the Supreme Court to adopt his position.

How did Bork do it? The key was a 1966 paper, “Legislative Intent and the Policy of the Sherman Act,” arguably the most influential single antitrust paper in history. There he conducted his own investigation of the debates surrounding the Sherman Act and arrived at an extraordinary conclusion. “Congress intended the courts to implement … only that value we would today call consumer welfare. To put it another way, the policy the courts were intended to apply is the maximization of wealth or consumer … satisfaction.” In case that wasn’t clear, he put it again this way: “The legislative history … contains no colorable support for application by courts of any value premise or policy other than the maximization of consumer welfare.” Instead, Bork insisted, “courts should be guided exclusively by consumer welfare and the economic criteria which that value premise implies.”

What did Bork mean by this exactly? He meant that in any antitrust case, the government or plaintiff had to prove to a certainty that the complained-of behavior actually raised prices for consumers. Consider Standard Oil, which, as we’ve seen, used a number of strategies and techniques to both destroy old competitors and keep out new ones. Not a problem, according to Bork, unless it could be proven that Standard Oil maintained higher prices or that those competitors would have actually lowered the price of heating oil. That approach to antitrust—the one, suspiciously enough, just invented by Aaron Director and his followers—had magically been in the minds of members of Congress in 1890 when they wrote the Sherman Act.

Absolute certainty in the face of much contradictory evidence is classic Bork. No other scholar ever managed to find what Bork did in the Congressional record. Bork relied heavily on the views of Senator Sherman, who did think the interests of buyers were important. However, Sherman had much broader concerns as well. He wanted antitrust law to fight “inequality of condition, of wealth, and opportunity” and feared that the trusts created “a kingly prerogative, inconsistent with our form of government.” As Herbert Hovenkamp, today’s reigning dean of antitrust doctrine, puts it: “Bork’s analysis of the legislative history was strained, heavily governed by his own ideological agenda.… Not a single statement in the legislative history comes close to stating the conclusions that Bork drew.”

Among other things, Bork’s radically narrow reading of the Sherman Act threw out the broader concerns that had long animated the Act and its enforcement. Most important was the idea that grounds much of this book: that antitrust represented a democratic choice of economic structure and a check on the political and economic power of the monopolies. So was any regard for small producers. As Learned Hand had written, “It is possible, because of its indirect social or moral effect, to prefer a system of small producers, each dependent for his success upon his own skill and character, to one in which the great mass of those engaged must accept the direction of a few. These considerations … prove to have been in fact [the law’s] purposes.”

Even within a strictly economic framework, Chicago was leaving much behind. The focus on “allocative efficiency” yielded almost no consideration of the “dynamic” costs of monopoly, like stagnation or stalled innovation. Virtues of competition stressed by Hayek, like the virtues of decentralizing information and the avoidance of central planning, were lost. Perhaps most surprising for a view inspired by economics was an approach to antitrust that was shockingly tolerant of monopoly, supposedly the economist’s bête noire.

Given that Bork’s singleminded interpretation was at odds with seventy years of precedent, as a legal matter his argument was dead on arrival. But over the years, Bork managed to skillfully tie Chicago School consumer welfare theories to another, very powerful legal locomotive that was just beginning its run by the late 1960s. By that point, concerns of “judicial activism” were no longer a liberal fear (as in the 1930s), but had become an important conservative trope. Bork repackaged his approach to antitrust as a tool of judicial restraint (not unlike “originalism,” another of Bork’s favorites). He insisted that the multiplicity of values served by antitrust was too vague, and served judicial irresponsibility, by allowing the judge to choose whatever value happened to match the judge’s preordained result.* In Bork’s critique, it seemed an antitrust law driven by anything but consumer welfare was the law of the libertine, degenerate and debauched. Economic analysis was now righteous and self-restrained. As such, Bork managed to embed the culture war into one’s method of interpreting the Sherman Act.

A final characteristic of Bork’s approach was not merely to tap the culture war, but to offer judges a relatively easy way to deal with hard cases: They could eradicate messiness and complications in exchange for a simpler, disciplined, and single-pointed theory that yielded straightforward answers. This revealed an acute understanding of the judicial mind; despite the robes and bench, judges are still lawyers, and can become anxious when asked to decide complex and challenging cases. Bork offered a calming remedy, with an appealing simplicity and apparent rigor. For Bork’s antitrust economics are easy—not easy enough for a schoolchild, but easy enough for a lawyer who does not specialize in antitrust and is looking for a dignified and respectable manner in which to decide, or get rid of, a hard case. The simple question that Bork posed for every doctrine was this: Does it clearly prevent harm to consumers? Have you proven it? Or might there, plausibly, be an economic explanation that doesn’t imply harm, and if so, what is it? Hence Christopher Leslie’s critique that “Bork’s legacy is an oversimplified economics that often rests on unfounded or disproven assumptions.”

In truth, clad in the costume of economic rigor, Robert Bork’s attack on antitrust was really laissez-faire reincarnated, without the Social Darwinist baggage, and with a slightly less overt worship of monopoly—but with much the same results. With narrow exceptions, mainly related to price-fixing, the government was once again barred from trying to influence economic structure, regardless of what Congress said or did. The belief that really mattered was that the market enjoyed its own sovereignty and was therefore necessarily immune from mere democratic politics. That meant that the antitrust law, which dared dictate what the economy should look like, needed be put into hibernation—perhaps forever.

*The National Recovery Act of 1933 allowed industries to submit their own codes of competition, and offered an exemption from the antitrust laws in exchange.

†The law also received a boost from the famous Alcoa decision, a condemnation of the persistent aluminum monopoly written by judge Learned Hand. In Alcoa, Hand articulated a better repudiation of monopoly than Brandeis himself had ever managed, writing that a “possession of unchallenged economic power deadens initiative, discourages thrift, and depresses energy; that immunity from competition is a narcotic, and rivalry is a stimulant, to industrial progress; that the spur of constant stress is necessary to counteract an inevitable disposition to let well enough alone.” Congress, said Hand, had chosen to “prefer a system of small producers, each dependent for his success upon his own skill and character, to one in which the great mass of those engaged must accept the direction of a few.”

*American war efforts had also been hindered by a series of international cartel agreements in areas like synthetic rubber and aluminum that became essential to the buildup of American forces. There had been, as the New Republic alleged, “a Corporate International, joining the Communist International and Fascist International, seeking to undermine the free world.” The cartels were alleged to be part of Germany’s plan for world domination. German-run international cartels, the theory went, limited production while Germany prepared for war, part of an alleged “Peace at Düsseldorf.”

*In contrast, efforts to transplant U.S. antitrust laws to Japan during the same period were not particularly successful. The U.S. occupation authority forced passage of an antitrust law, and created an agency to enforce it, but the law was overshadowed by the economic planning practiced by other agencies. See Etsuko Kameoka, Competition Law and Policy in Japan and The EU (2014), pp. 5–6

*In the early 1960s, historian Richard Hofstadter would famously remark that antitrust was no longer a popular movement but that it “now runs its quiet course without much public attention.”

*One prominent exception was the iconoclastic economist Joseph Schumpeter, who had championed the entrepreneur in his earlier years, but in his later years grew to admire the large monopolistic corporation and begun to see the lure of monopoly as a principal driver of innovation and “creative destruction.” Schumpeter, however, did not take seriously the problem of investment in barriers to entry, and particularly the power of government to insulate monopolies from creative destruction. See Tim Wu, The Master Switch (2010).

*In Bork’s words: “A value will be announced as pertinent with a confidence that is matched only by the mystery that shrouds its derivation. A very specific decision is then whelped from the value premise without benefit of midwifery by any visible minor premise.”