All Commentary
Friday, June 21, 2013

Balancing Powers?

The Mistaken Assumptions of Antitrust

Anyone who spends a lot of time discussing economic policy has probably heard the argument that a significant increase in economic power needs to be offset by an equally large expansion of political power. For example, some have characterized the various antitrust statutes (e.g., Sherman, Clayton, FTC) as a sort of “economic constitution” through which government constrains the power of private companies.

On the other hand, how many times have you heard someone argue that an increase in political power requires a countervailing increase in economic power? I can tell you how many times I’ve heard that argument:  zero.

I find that a curious asymmetry. After all, if political power (i.e., the organized use of aggression) can offset economic power (i.e., the ability to command wealth via voluntary exchange), why isn’t the reverse true? If economic power and political power are “countervailing forces,” why does the trade-off only seem to go in one direction, namely toward the expansion of political power?

If It’s a Zero-Sum Game, It Makes Sense

Throughout much of Europe during the Middle Ages and before the rebirth of cities and commerce, land was considered the basis of both wealth and political power. Two things seemed to follow from this. (1) If wealth in the form of land is more or less constant, then getting significantly wealthier must require taking land from someone else, rendering him poorer by pretty much the same amount. (2) Political power = land = economic power.

Applying this mindset to today, then, if Apple keeps getting wealthier over time, which it is doing, it must be because it’s somehow coercing its competitors or its customers. Wealth then is simply being redistributed from one entity (customers or competitors) to another (Apple). Economists refer to this as a zero-sum game.

So if economic power is political power, then you might sensibly assert that Apple’s use of power to acquire wealth could justify the government’s use of power to constrain it. And that’s pretty much the thinking behind the “antitrust-as-economic-constitution” idea.

There’s a Double Confusion Here

But the first idea—equating material objects with wealth—is fallacious because, as modern economics teaches us, value is not inherent in an object (or action) but depends entirely on the subjective preference of whoever owns it or wants to own it. So a parcel of land may in fact have no value, and therefore not constitute wealth at all. Also, it means that when two people successfully exchange goods for goods or goods for money, the net value that’s created from the exchange makes each person wealthier. Again, in the lingo of economists, it’s a “positive-sum game.”

The second idea—that economic power and political power are somehow equivalent—is also fallacious because, as I noted above, political power is about the use of aggression while economic power, which emerges from economic freedom, is about voluntary trade.

Looked at in this light, economic power and political power are two completely different animals; there’s no way to sensibly trade off one against the other. Or, more precisely, if government intervenes into the market ostensibly to offset economic power, this merely constitutes an increase in political power and a reduction in economic power.

And It’s Even Worse Than That

Now, reducing political power means an increase in the civil, economic, and personal rights of ordinary people. But reducing economic freedom—the freedom to peacefully associate where, with whom, and wherever you want—does not increase the “economic freedom of government,” whatever that could mean. In other words, the government doesn’t gain those lost freedoms in any meaningful sense. Whatever economic freedom people lose simply disappears.

Moreover, the nature of government is such that once political power encroaches upon economic freedom—once aggression displaces peaceful association—reversing the process is problematic. It’s very rare, although it does happen occasionally, for people holding political power to relinquish it without a fight, even, or perhaps especially, when they truly intend to promote the general welfare.

That could be why, in the rhetoric of the economic-political power “trade-off,” political power more readily encroaches upon economic power than the reverse. There may be an implicit recognition that alone, the freedom to associate (i.e., economic power) doesn’t stand much of a chance against political power, which after all involves the use of violence.

The challenge for libertarians then is to appreciate that, despite the inherent imbalance of power, sound ideas and principles backed by perseverance and courage can win the day. And so, yes, economic power can and indeed must reassert itself, through the ideas and actions of people of character, against expansions of political power, beating it back to where it belongs.

  • Sanford Ikeda is a Professor and the Coordinator of the Economics Program at Purchase College of the State University of New York and a Visiting Scholar and Research Associate at New York University. He is a member of the FEE Faculty Network.