Breaking Up Consumer Welfare's Antitrust Policy Monopoly.

• Author: Glick, Mark

1. Introduction II. U.S. Antitrust Policy's Broad, Multi-Goal Tradition A. Antitrust in the Late Nineteenth Century 1. Antitrust Goals in the Sherman Act Legislative History 2. Early Antitrust Cases Support Broad Stated Antitrust Goals. B. Antitrust During the Progressive Era: The Clayton Act and The Federal Trade Commission Act 1. Legislative History of the Clayton Act and the Federal Trade Commission Act 2. Antitrust After the Passage of the Clayton Act and the Federal Trade Commission Act C. The Great Depression and the New Deal D. Chicago School Efforts to Rewrite History III. Understanding the Consumer Welfare Standard A. The Neoliberal Banishment of Antitrust's Traditional Goals and its Detrimental Effects B. Alfred Marshall and The Consumer Welfare Standard's Assumption That Marginal Utility of Money is Constant and Equal C. The Consumer Welfare Standard Does Not Embody Libertarian Values 1. Free Markets Do Not A Priori Increase Welfare 2. There is No Road to Serfdom D. Judge Bork 's Rendition of the Consumer Welfare Standard IV. Missing Aspects of Human Welfare Under the Consumer Welfare Standard A. The Transfer of Labor Rents to Corporations and Shareholders 1. The Origin of Labor Rents 2. Methods by Which Labor Rents are Transferred 3. Transferring Labor Rents Reduces Investment, Innovation, and Productivity 4. Transferring Labor Rents Leads to Greater Income Inequality B. Welfare Losses from Reduced Political Democracy 1. Political Democracy Improves Economic Performance 2. The Destructive Influence of Money in Politics 3. The Conservative Dilemma: How to Maintain Unpopular Policies in a Democracy V. The Consumer Welfare Standard Should be Replaced with the General Welfare Standard A. The Dominant Approach to Measurement of Welfare and its Problems 1. Decoupling Choice and Weil-Being 2. Debunking Assumptions Equating Choice with Well-Being a. Preferences Are Not Always Based on Self-interest b. Preferences Can be Other-Regarding and Be Perverse c. Economists Assume that Choices are Competent d. Competent Choices Require Adequate Information B. Reconsidering the Measurement of Well-Being 1. Laundered Preferences 2. Objective Measures of Well-Being C. Advantages of Adopting a General Welfare Standard VI. Conclusion Appendix: Aggregating Individual Welfare A. Utility in Economics B. Aggregating Welfare 1. Utility Functions 2. Indifference Curves 3. Deriving the Demand Curve 4. Pareto Optimality and the Contribution of Kaldor and Hicks I. Introduction

   Competition can be a powerful tool to help tackle such important social problems as increased inequality, reduced privacy, rampant misinformation, and the erosion of political democracy. For example, in their recent paper, Lina Khan and Sandeep Vaheesan demonstrate how practices that increase market power have facilitated the transfer of income and wealth from the working class, small businesses, the middle class, and the poor to large corporations and wealthy shareholders. (1) They contend that reenergized antitrust enforcement can help slow this destructive trend toward inequality. (2) Kahn and Vaheesan lay blame for this wealth transfer at the feet of the Chicago School, which emphasized limited antitrust enforcement under the banner of the "Consumer Welfare Standard." (3) Adoption of the Consumer Welfare Standard resulted in the abandonment of the traditional antitrust goals of protecting "consumers and small suppliers from the market power of large sellers and buyers, [maintaining] the openness of markets, and [dispersion of] economic and political power." (4) The authors document the large monopoly rents generated by six major economic sectors in the U.S. economy. (5) They contend that the current limited goals of antitrust enforcement stand in stark contrast to the broad concerns expressed by Congress in passing the major antitrust laws. (6)

   In a complementary analysis, Robert Lande and Sandeep Vaheesan argue that the antitrust laws should once again be concerned with firm size. (7) They argue that excessive firm size must be addressed even when not accompanied by reductions in competition, as in many conglomerate mergers. (8) They advise that excessive firm size inevitably leads to an erosion of political democracy, especially in an environment where limitations on political spending have been eliminated on constitutional grounds. (9) Like Kahn and Vaheesan, the authors rely on an extensive review of the statutory history of the antitrust laws that reveals a concern for preservation of political democracy. (10)

   We endorse these works throughout this paper; but we go one step further by offering an alternative to the outdated Consumer Welfare Standard--which we term the General Welfare Standard--and by demonstrating how that standard is supported both in economics and in recent advances in biology and the social sciences. Our argument is straightforward: progressive antitrust reforms are not "populist" or "hipster," as detractors have maintained; they are fully supported by economic theory. Progressive policies of reducing income inequality and fostering social democracy are entirely compatible with fundamental economic principles, and they are historically consistent with the purposes of the antitrust statutes.

   Part II of this Article validates the contentions of the earlier works by Kahn, Lande, and Vaheesan (and others) that Congressional intent in passing the antitrust statutes was never limited to correcting only "pure" economic effects such as higher prices, lower output, compromised product quality, or even reduced innovation. It was much broader. In general, Congress saw antitrust law as a tool to curb the practices and influence of dominant firms in the economy. (11) The damage from excessive influence of large firms ran the gamut of limiting the opportunities of small business, undermining political democracy through domination of the political process, creating income inequality, distorting corporate governance, harming innovation and growth, and yes, raising prices and lowering output to consumers. Today, one would have to add concerns about privacy and misinformation to that list.

   Part III of this Article critically assesses the Consumer Welfare Standard and its theoretical flaws. As originally articulated by Judge Bork, the Consumer Welfare Standard was simply a restatement of Marshall's theory of consumer's surplus. (12) As one of us has argued elsewhere, Marshall's approach assumed cardinal utility and interpersonal comparison of utility. (13) This point is addressed at length in the Appendix to this paper, where we discuss aggregation of ordinal utility and its problems. Marshall also assumed that the marginal utility of income was constant and equal among individuals, although he acknowledged this was not a reliable assumption. Marshall measured utility by willingness to pay and did not consider willingness to accept as another measure of utility. (14) These assumptions were ported over by Judge Bork in his Consumer Welfare Standard. Bork, however, did not accept (or was unaware of) Marshall's views that poverty and inequality were particularly harmful to human welfare based on his reading of the empirical evidence. Quite the opposite, the Consumer Welfare Standard has come to be associated with conservative and/or libertarian values that are unconnected to welfare economics.

   Part IV of this Article discusses two critical aspects of human well-being ignored by the Consumer Welfare Standard: the deleterious results of transferring labor rents to corporations, their executives, and shareholders; and the undermining of political democracy caused by the concentration of political power in large corporations and the wealthy. The Consumer Welfare Standard is not a barrier to a revitalized antitrust concern for income inequality and transfers wealth from labor to shareholders; nevertheless, that has been the practical result of its application. Even under the Consumer Welfare Standard, the welfare of all individuals impacted by mergers or dominant firm conduct must be considered. And even if courts impose restrictions, such as limits on cross markets effects or singular consideration of consumer surplus, the welfare of workers should be considered part of consumer welfare. (15)

   Transfers of labor rents have to date been ignored primarily because the Consumer Welfare Standard assumes that the marginal utility of income is constant and equal for everyone--an assumption that has no economic supporters. Treating transfers of income from the poor to the rich as welfare-neutral has no justification. Moreover, in this section we show how lowering wages dilutes incentives to innovate and harms the economic performance of the economy generally.

   Part IV then turns to another important source of welfare loss--welfare losses from reduced political democracy--that could be ameliorated by antitrust enforcement but is beyond the ability of the Consumer Welfare Standard to address. Indeed, it is particularly ironic that a key concern of Congress in crafting the antitrust laws--protecting political democracy--falls outside of the boundaries of the Consumer Welfare Standard. Judge Bork claimed that the pursuit of antitrust's traditional goals "would have serious deleterious effects upon national wealth." (16) Subsequent research, to the contrary, has shown that political democracy is a critical element of economic growth, innovation, and efficiency. This is because dominant firms use their influence to raise their own profitability by avoiding competition, rent seeking from the government, shifting costs (such as environmental costs) to the public, outsourcing legal responsibilities for worker safety and medical benefits to smaller firms, and reducing the power of unions. Nonetheless, the Consumer Welfare Standard's narrow subjective measure of welfare makes it virtually impossible to bring modern social science to bear in the debate about...