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Antitrust law was originally intended to benefit politically connected industries at the expense of consumers. As Thomas J. DiLorenzo and Donald Boudreaux wrote in a 1993 paper, prior to the passage of the Sherman Act in 1890, “industries accused of being monopolized in the late 1880s were in fact dropping prices and expanding output faster than the rest of the economy.” Modern mythology, however, holds the Sherman Act is a “Magna Carta of free enterprise”1 that enables a benevolent government to protect consumers from higher prices due to “monopolization” and “unfair competition.” Of course, this consumer rights theory of antitrust directly contradicts the true bedrock of free enterprise – private property rights.
There are two basic strains of the modern antitrust virus. The first holds that the government may use its (self-granted) power of eminent domain whenever a particular industry is deemed insufficiently “competitive.” The second holds that a seller of a good or service is subject to unlimited liability if the government does not approve of any speech related to a product or service. The key is that private property rights are subject to violation anytime it suits the whim of the antitrust authorities, a group that is not subject to election, oversight, or constitutional limit.
The eminent domain power of the Federal Trade Commission and Department of Justice is not subject to the same public scrutiny as state eminent domain seizures – such as those in the famous Kelo v. City of New London case – largely because the term eminent domain is never used to describe antitrust activities. But that’s what we’re talking about. In a few dozen cases each year, the DOJ or FTC will use eminent domain to seize assets from one or more firms and transfer them to another firm selected by the government. The former owner does receive compensation, but as with any involuntary transfer, it is not at a market price. This is called “merger review,” because the firms whose assets are seized plan to merge or somehow combine operations. In antitrust, the decision to merge automatically forfeits property rights to the discretion of the DOJ or FTC.
Typically, if firms A and B merge, and the FTC or DOJ objects, some assets will be taken from A or B as ransom and given to firm C. In a few cases, A and B won’t be permitted to merge at all; while no assets are directly seized in such cases, the owners of A and B are nonetheless deprived of their right to enjoy their property as they see fit. Along these same lines, there are non-merger cases where a firm or individual’s property rights may be violated – say by invalidating a contract – where the FTC or DOJ objects.
In a handful of cases, A and B merge and the regulators use eminent domain ex ante. The Fifth Circuit Court of Appeals recently allowed the FTC to seize assets from a combined firm nearly seven years after the original merger’s completion. The FTC planned to recreate the market that existed pre-merger, as if antitrust were a form of time travel.
The underlying justification for all of these actions can be expressed as follows: Consumers of a given product (or service) have a property right in the value of that product at a particular time, and any change in market structure that could hypothetically alter that value, to the consumer’s detriment, is a violation thereof. Every antitrust invocation of eminent domain is based on this principle. The FTC and DOJ invoke the same reasoning in every merger case: The merger of A and B reduces competition such that the price of product X might increase in the near term and it is unlikely another firm will enter the market during that time to bring the price down to the pre-merger level. Ergo, eminent domain is necessary to reallocate property and protect the consumers’ right to a “competitive” price for product X.
This application of property rights (aka “consumer rights”) is comically non-linear. Somehow the consumer acquires a right in the value of physical goods that they do not actually possess. They might possess them at some future time – should they chose to purchase the goods in a voluntary exchange – but the right precedes physical possession, and indeed overrules it, since the actual possessor (what we’d normally call the property owner) may only retain control so long as the government is satisfied that in the future, the goods will be available to the consumer at the predetermined value. The property right is ultimately in the value – the price – and not the physical goods.
Hans Hermann-Hoppe has persuasively countered this class of argument:
[The idea] that one could be the owner of the value or price of scarce goods – is indefensible. While a person has control over whether or not his actions will change the physical properties of another’s property, he has no control over whether or not his actions affect the value (or price) of another’s property. This is determined by other individuals and their evaluations. Consequently, it would be impossible to know in advance whether or not one's planned actions were legitimate. The entire population would have to be interrogated to assure that one's actions would not damage the value of someone else’s property, and one could not begin to act until a universal consensus had been reached. Mankind would die out long before this assumption could ever be fulfilled.
Moreover, the assertion that one has a property right in the value of things involves a contradiction, for in order to claim this proposition to be valid – universally agreeable – it would have to be assumed that it is permissible to act before agreement is reached. Otherwise, it would be impossible to ever propose anything. However, if one is permitted to assert a proposition – and no one could deny this without running into contradictions – then this is only possible because physical property borders exist, i.e., borders which everyone can recognize and ascertain independently and in complete ignorance of others' subjective valuations. Antitrust relies on the related contradiction that competition can precede and exist independently of physical property rights – which is just another way of arguing that there is a “property right in the value of things.” Taken reductio ad absurdum, the antitrust theory of property leads to a state where no property can ever be owned, since antitrust authorities can infinitely redistribute physical goods in infinite combinations in pursuit of a mythical state of maximum – or perfect – competition.
The second element of antitrust involves what is colloquially referred to as “consumer protection” – identifying and punishing firms that sell products that don’t meet the government’s approval for one reason or another. Many equate consumer protection with laws against fraud. But as Stephan Kinsella has explained, defining “fraud” is tricky even for libertarians:
The problem is in most people's minds “fraud” basically means misrepresenting the truth – i.e., lying. But clearly merely lying is not a rights violation. I think imprecise use of “fraud” permits it to be used to arrive at unlibertarian conclusions. It is imperative to understand it properly and to integrate it into libertarian theory in a way that is compatible with our notions of property and rights and aggression. Kinsella argues that fraud “is a means by which one party receives or uses or takes the property of someone else without their consent – and there is failure of consent because the first party's misrepresentation meant that one of the conditions to transfer of title was not satisfied.” This amounts to theft.
Superficially, the antitrust theory of fraud follows Kinsella’s definition. The FTC prosecutes company A for making “false or misleading” claims to induce consumers to purchase a product.2 Clearly, this is fraud that must be stopped. Upon closer examination, however, the antitrust approach departs sharply from a property rights-based definition of fraud. Most notably, the FTC need not allege – much less prove – that any actual consumer was defrauded. Even if there are no consumer complaints and every single purchaser is satisfied with their purchase, the FTC can still bring an antitrust action.
The FTC’s standard of proof is whether it believes that consumers should have purchased the product given certain information. The terms of any contract between the buyer and seller are irrelevant. As with merger cases, the antitrust authority may “go back in time” and recreate a hypothetical market that would have existed if only the seller had limited its claims about its product to those that the FTC would have approved of.
A common FTC argument is that a product claim must be supported by “scientific evidence,” otherwise the seller is subject to antitrust liability. Again, superficially this sounds unobjectionable: Who doesn’t support “scientific evidence”? But as with fraud, the definition is subject to manipulation. Who determines what evidence is “scientific”? In antitrust cases, it is the FTC – a collection of antitrust lawyers – that serves as sole arbiter. Science, it turns out, is primarily a political process based on who can influence the government most effectively.
So in contrast to Kinsella, the FTC defines “fraud” for antitrust purposes as, “a means by which one party receives or uses or takes the property of someone else without the government’s consent.” The penalty for such acts is often severe. If a firm sells product A and the FTC disagrees, ex post, with any speech related to the product, the firm can be forced to surrender all revenues generated by the product’s sale to the government. It doesn’t matter if any, or even all, of the purchasers were satisfied. Since antitrust liability is unrelated to physical property rights, there is no need for proportionality in any “remedy”. (More importantly, the mere possibility of severe financial consequences discourages firms from defending themselves before the FTC.)
When you combine both strains of the antitrust virus, what you’re left with is a mutant breed of feudalism. Property is no longer privately owned, but temporarily held by firms and individuals under an ever-changing set of obligations to a pair of lords and masters – the FTC and DOJ. And these masters are guided by mystical notions of time and space, to the point where they believe market outcomes can be ascertained and implemented with absolute precision.
The only saving grace is that time, budget, and personnel limits the practical damage of antitrust to a handful of firms and industries. (Not that it’s any consolation for those folks.) If antitrust were practiced consistently on a wider scale, it would lead to a virtual shutdown of entire economic sectors. In the absence of secure private property rights, nobody could accumulate capital, take risks, or learn from previous failures. A group of Washington-based lawyers would merely spend their days trying to design a hypothetical “perfect” market – but there’d be no actual buyers and sellers to bring it to life.
Unfortunately, even among some self-described libertarians, there is a sense that antitrust and property rights can somehow co-exist. This is perhaps driven less by conviction in the virtues of antitrust then fear of social ostracism from the mainstream view that antitrust is, in fact, “the Magna Carta of free enterprise.” Until this myth is shattered – and hopefully this article has made some progress on that front – property rights will continue to lose ground to the feudal lords of antitrust.
Notes:
(1) This phrase was made famous in a Supreme Court opinion written by Thurgood Marshall; it is likely derived from a former FTC chairman’s description of U.S. antitrust laws as the “Magna Carta of capitalism.”
(2) While merger cases are divided between the FTC and DOJ, the types of cases discussed below are handled almost exclusively by the FTC. |
