In their research, published in History of Economic Ideas, Thierry Kirat and Frédéric Marty stress the importance of the late 1930s in the making of antitrust. The moment was exceptional for its consensus within the economic discipline and the implementation of voluntarist public enforcement, particularly under Thurman Arnold according to the prescriptions of the Second Chicago School, institutionalists, and the preferences of the Neo-Brandeis movement.

American economists played no role in the enactment of the 1890 Sherman Act and had very little influence in the development of the Federal Trade Commission Act and the Clayton Act in 1914, even though the 1912 presidential campaign had focused on the antitrust issue. Former President Theodore Roosevelt had very harsh words to say about the effectiveness of antitrust policy, considering it at best vain if not counterproductive. Louis Brandeis, a populist attorney who advised Woodrow Wilson in the course of his presidential campaign, was one of the key players in the establishment of the FTC. However, even the future Supreme Court justice only intended the agency to be preventive, not curative. 

Institutionalist economists, such as John Rodger Commons, were skeptical about any set of prescriptions based on a theoretical view of perfect competition that contradicted their models showing how institutions (i.e., the state) could influence economic behavior and achieve a “reasonable capitalism” of target prices and values. In fact, they thought concentration might be necessary to achieve efficiency gains. In these circumstances, government regulation should only be necessary to ensure that a reasonable share of these gains were passed on to consumers and other stakeholders. From this perspective, echoed in the views of Theodore Roosevelt’s Progressive Party, antitrust enforcement could be counterproductive. 

Brandeis took a distinct approach to the question of economic concentration. In his perspective, and later in the one of Justice William Douglas, the monopoly is far from being a sine qua non condition of efficiency. Brandeis believed antitrust laws should prevent monopoly situations in themselves to avoid “the curse of bigness.” 

Regardless of these conflicting views, from the First World War to President Franklin D. Roosevelt’s First New Deal, antitrust rules were subject to marginal public enforcement. 

This situation contrasts sharply with the antitrust enforcement and intellectual consensus that formed at the end of the 1930s, as marked by FDR’s speech on curbing monopolies and the policies implemented by Robert Jackson and Thurman Arnold, who were successively assistant attorneys general within the Antitrust Division of the Department of Justice. Not since the Taft presidency would the government advance such an exceptional number of antitrust enforcement actions as it did under Arnold.

However, two points should be emphasized: first, the emergence of proactive antitrust enforcement by the government lasted only from 1938 until the United States entered the war in 1941. Second, the academic consensus between economists of the institutionalist tradition and economists of the First Chicago School that undergirded the U.S. government’s new policy did not last. The following sections describe the intersecting trajectories that gave rise to this intellectual convergence at the end of the 1930s and then saw its post-war disintegration. 

A competition law without economics: from the enactment of the Sherman Act to the Marple Flooring decision

There is no reference to the economic literature in the debates preceding the Sherman Act. Concerns about economic efficiency could not have motivated the Sherman Act, since the economic gains from the existence of trusts were not in dispute. Rather, the core impetus was concerns with the concentration of economic power in the hands of the few and their resulting ability to coerce, which allowed for undue wealth transfers from consumers to corporations.

Particularly, antitrust objectives at this time were concerned with the political ramifications of economic concentration. These were democratic questions about the maintenance of relative equality and independence of citizens. The legal foundations of the Sherman Act, in particular the notion of restraint of trade, were based on English common law. The practices of firms were evaluated on the basis of a standard of behavior with regard to fair market practices and not on their economic effect. References to economic theory only appear very late in the implementation of antitrust, one of the first being the Supreme Court’s 1925 decision in Maple Flooring Manufacturer’s Assn v. United States. 

The case for regulated competition in the interwar period

The 1912 U.S. presidential campaign and the two antitrust laws enacted under President Wilson in 1914, the FTC and Clayton acts, reflect the doubts that some antitrust thinkers  had about the Sherman Act as an effective tool for protecting the dispersion of economic power. However, even this tenuous adherence to values of competition was aggravated in the period before WWI by the influence of different philosophies about the organization of economic activities.

The fair trade leagues promoted before the war by Louis Brandeis were one such challenger to ideas of competition. Their purpose was to permit small firms to acquire collective market power through exchanges of information. Essentially, Brandeis advocated to allow small firms to coordinate their activities to counterbalance the power of large firms, a proposal that sought to level the competitive playing field by permitting collusion among smaller players. 

Still, Brandeis’ model must be distinguished from the industry-spanning trade associations supported by President Herbert Hoover in the 1920s. Hoover’s aim was to allow competing firms, regardless of size, to exchange information on products and markets to enable the market to function efficiently. At the heart of this model rested the idea that competition could be managed scientifically in a Taylorist fashion to produce a more efficient economy (an “intelligent handling of competition”), rather than a suspension of competition.      

The Wall Street crash of 1929 and the onset of the Great Depression did not undermine support for trade associations but rather led to proposals such as the Swope plan, which amounted to state-protected cartelizations by large firms. Promoters of the Swope plan claimed efficiency had to come at the price of economic freedom. Hoover himself rejected the logic of these proposals. Nonetheless, the National Industry Recovery Act (NIRA), passed by FDR in 1933 as part of the suite of policies that comprised the First New Deal, contained some features of the Swope plan. 

Consensus building within the economic profession

Economists had much more to say about antitrust in the 1930s than they did for the Sherman Act. The institutionalists considered economic concentration to be efficient but argued that it should be regulated to allow capitalism to function reasonably. Opposite the institutionalists were classical liberal economists, such as Frank Knight and Frank Fetter, who considered it necessary to go beyond the Sherman Act to answer the question of increasing concentration. However, neither institutionalists nor classical liberals could accept the logic of the Swope plan. One of the first signs of convergence between these two groups of economists arrived with the inter-school endorsement of the 1932 Fetter petition in response to a proposal by the American Bar Association commerce committee to reform antitrust rules. 

Another essential step was Chicago economist Henry Simons’ positive program for a laissez faire political economy, published in 1934, and the defense he gave for his arguments in a 1936 article for the American Economic Review. Simons argued in an early neo-liberal formulation, specific to the First Chicago School, that a laissez-faire political economy permissible to the creation of monopolies no longer appeared to be sustainable. Therefore, he said, it was necessary to rely on effective antitrust law—a “positive state action,” in Van Horn’s words—to protect the market, particularly against itself.

This academic evolution accompanied a fragile but radical political shift. FDR’s position on antitrust had been inconsistent. Initially, he rallied behind NIRA. However, after the Supreme Court invalidated the plan in 1935, he did not pursue antitrust again until April 1938, when he gave his “Curbing Monopolies” speech and made the successive appointments of Jackson and Arnold as heads of the DOJ Antitrust Division. Arnold, particularly, enforced antitrust aggressively. His actions were paradoxically facilitated by the information collected within the framework of NIRA and favored negotiated settlements.

A short-lived consensus

The entry of the U.S. into the Second World War in December 1941 put an end to Arnold’s resolute action, and the academic consensus on antitrust rapidly withered after the war. Several phenomena contributed to this, whether it was the gradual disappearance of the institutionalist economists or the shift from the Chicago School to its second iteration from 1947 onwards. The premature death of Henry Simons did not immediately mean the abandonment of his positions by Aaron Director who, with law professor Edward Levi, took over the direction of the two successive programs conducted within the Chicago law school (the Free Market Studies Project and the Antitrust Program). At the first conference of the Mont Pèlerin Society, Director was still defending a conception of antitrust similar to Simons’ views. However, the split soon became apparent. In a 1956 joint article, Director and Levi severely criticized the landmark Alcoa decision for targeting monopolies that grew out of efficiencies rather than just coercion. Edmund Kitch, who taught at the University of Chicago from 1965 to 1982, further describes the Chicago School’s evolution on these issues  in his 1983 article “The Fire of Truth.”

If the Second Chicago School moved away from Arnold’s approach, which Simons defended, two essential points should be stressed. First, contrary to the post-war structuralist approach and the Brandeisian positions defended by Justice Douglas in the Supreme Court, the antitrust objective of the Second Chicago School was efficiency and passing on productivity gains to consumers. It did not seek to prevent the alteration of the market structure or the dispersion of economic power in itself. In fact, it feared active public enforcement or, as Van Horn noted, a pro-trust antitrust. 

Second, like the Second Chicago School, Arnold’s approach centered on the argument of economic efficiency, so it departed from the arguments of the Neo-Brandeis movement, as Teachout and Khan themselves noted in 2014. It thus falls under a Law and Economics logic, not one of Law and Political Economy. The paradox of Arnold’s heritage consists in the fact that the most active period of antitrust enforcement in the five first decades of the Sherman Act, one whose enterprise Neo-Brandesians wish to reproduce, pertained more to a focus on passing on efficiency gains to consumers than an assault against monopolies as Brandeis had defended and as the New Brandeis movement currently advocates.

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