William and Mary Law School

An Excerpt from "Competition Policy and the New Deal: Lessons Learned and Forgotten"

An excerpt from the Introduction of Professor Alan Meese’s paper, "Competition Policy and the New Deal: Lessons Learned and Forgotten" is below. 

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We are, it is said, living through the worst economic contraction — what many are calling “the Great Recession” — since the Great Depression.  Predictably, the downturn has induced a search for causes and possible cures and, of course, a vigorous debate about both.   At the same time, and independent of macroeconomic events, the Nation continues to debate the proper role of government in general, and the division of responsibilities between state and federal governments, in constructing the sort of background rules necessary to facilitate and encourage the optimal allocation of resources.    This conference seeks to shed light on both debates, by focusing on the role that free market competition — and regulation of general applicability that fosters such competition — can and should play in various industries critical to our nation’s economic and social progress and macroeconomic stability.

The organizers of this conference asked me to examine the state of antitrust law just before and during the Great Depression.   I have chosen to widen the focus of this endeavor somewhat.  Thus, this paper considers competition policy more generally, and not simply antitrust law, though of course the latter is a very important source of competition policy.  This wider focus reveals that, at least before the Great Depression, there were two other important sources of competition policy, sources that the New Deal Court would greatly alter or repudiate, to the detriment of economic welfare.  To be precise, both the so-called “dormant” commerce clause and the due process clauses of the Fifth and Fourteenth amendments, taken together, placed significant limits on the ability of states and the National government coercively to displace free market competition with monopoly or its equivalent, horizontal cartels.  Taken together, these Constitutional provisions and derivative judicial doctrine worked hand-in-hand with the Sherman Act to thwart public and private efforts to displace free market allocation of resources.  Moreover, these doctrines were not unrelated to each other, but were instead symbiotic, with concepts from one set of doctrines informing ostensibly unrelated doctrines and vice versa.  Predictably, then, developments in one area of the law sometimes “spilled over” to other doctrinal contexts.  Thus, relaxation of antitrust norms just before the Depression, and in the early stages of the Depression, helped pave the way for judicial validation of coercive interference with economic liberty, validation that in turn emboldened Congress and the states to displace free market competition with anti-competitive regulation in a variety of industries.  The Supreme Court, in turn, gave its blessing to such regulation, holding in particular that neither the Sherman Act nor the dormant commerce clause prevents states from organizing and enforcing cartels in industries that primarily export their product to other states.  The (d)evolution of competition policy  during this period reveals various important lessons which antitrust scholars and practitioners should take to heart.

Part I examines the state of competition policy before the Great Depression, focusing on three sources of such policy: 1) the Due Process Clauses of the 5th and 14th Amendments, 2) the Commerce Clause, with its affirmative and negative components and 3) the antitrust laws.  The Due Process Clauses, it is shown, prohibited state price and wage fixing unless the regulated industry was “affected with a public interest,” a narrow category of businesses.  The dormant aspect of the Commerce Clause interdicted state-mandated “direct restraints,” including state-imposed horizontal price fixing.  The Sherman Act, in turn, prohibited “undue” restraints of interstate trade or commerce, including “direct” restraints such as naked horizontal price fixing between substantial participants in the marketplace.  Part II examines the Depression and recounts then-contemporary thinking about possible causes of the downturn and cures for it.  This Part also discusses the Appalachian Coals decision, in which the Supreme Court declined to condemn a massive joint selling arrangement between dozens of coal producers that seemed to contravene previous decisions.

Part III examines the National Industrial Recovery Act (“NIRA”), which encouraged industries collectively to raise wages and facilitated and immunized from antitrust attack numerous practices that reduced economic welfare and would otherwise have violated the Sherman and/or Clayton Acts.  Part IV recounts the demise of the NIRA, which the Supreme Court unanimously declared unconstitutional in Schechter Poultry v. United States in 1935.

Part V recounts the limited and very short-lived influence of Schechter.  Within two years of the decision, the Supreme Court had abandoned the doctrinal foundation of Schechter’s commerce clause holding, leaving Congress perfectly free to impose anticompetitive restrictions on an industry-by-industry basis, thereby avoiding Schechter’s non-delegation limitations.  Moreover, even before Schechter, a bitterly-divided Court had, in Nebbia v. New York, cast aside numerous precedents limiting the authority of states and the national government to regulate prices.  Congress and various states took full advantage of these developments, directly regulating prices and output of various industries and requiring firms with modest connections to interstate commerce to recognize and support labor cartels known as unions.  This Part also recounts how the New Deal Court, in Parker v. Brown, unanimously removed commerce clause restrictions on state efforts to adopt NIRA-like coercive restrictions on price and output, thereby giving states carte blanche to directly burden and distort interstate commerce.  In so doing, the Court expressly rejected arguments by the Department of Justice, including trustbuster Thurman Arnold, that the Sherman Act preempted such restrictions.  At the same time, the Court credited reasoning first embraced in Nebbia, to the effect that state-mandated cartelization could serve legitimate state interests, thereby blunting the argument by the United States that the restriction was indistinguishable from private cartelization.  Part VI evaluates the New Deal assumption, apparently embraced by some modern Supreme Court Justices, that state-enforced cartelization of industry and labor enhanced “purchasing power” and thereby helped reverse the Depression.  Basic economic theory suggests the opposite, i.e., that such state-enforced cartelization would in fact tend to thwart economic recovery, by preventing labor and product markets from reaching equilibrium, therefore interfering with the full employment of resources.  Recent empirical work confirms this theoretical prediction.  Part VII lays out several lessons we should have learned from the interplay between competition policy and the Great Depression, some of which we have apparently forgotten.

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[S]cholars and lawyers interested in protecting a free market allocation of resources must take care not to confuse free market competition with atomistic rivalry.  The later can itself often reduce welfare, thereby giving rise to the need for contracts that better align incentives and thus overcome potential market failures. Ditto for unilateral conduct such as refusals to deal.  Competition policy, of whatever source, should take its cue from the rule of reason explicit in Standard Oil, and implicit in the Court’s pre-New Deal economic liberty jurisprudence and ban only those agreements or conduct that in fact reflects a market failure and resulting externality.

These admonitions are particularly important during a serious economic downturn.  Vague and unspecified claims that “free markets,” many of which are in fact improperly and unduly regulated, have caused macroeconomic instability do not thereby justify more aggressive enforcement or the summary rejection of carefully developed enforcement standards or judicial doctrines. To be sure, economic distress does not justify or otherwise counsel relaxation of anti-cartel norms.  Nor, however, does it justify overly aggressive enforcement that bans practices that produce more wealth than they destroy, even when such enforcement purportedly increases the welfare of the particular consumers that purchase a defendant’s product.  If the New Deal and its aftermath taught us anything, it taught that regulation seeking to enrich some at the expense of others reduces overall welfare and exacerbates economic instability.