Economics Volume II: Modern Economic Problems

by Frank A. Fetter

To the economist, not bound in like manner by legal precedent, such a verdict was from the first impossible. The court appears to have considered that only the rights of the private litigants, the tramp steamship owners, were involved, not the rights and interests of the shipping public; it considered the immediate and not the ultimate effects of the "smashing" of rates; it allowed itself to be deceived by the appearance of acts that in outer form were competition, but that had as their purpose the strengthening and maintenance of monopoly. These acts are forms of the "unfair" practices that will be mentioned later.[9]

§ 7. #Increasing regard for results of competition.# Despite the binding precedents, the courts in some later decisions have refused to look upon competition as good regardless of its motives and of its consequences. In a federal case[10] the judge, in a brief and acute dictum, recognized the evil of a rate war that would result from threats of definite cuts. They impair "the usefulness of the railroads themselves, and cause great public and private loss." The court's opinion was no doubt largely influenced by the fact that railroad rates were already subject to regulation: "Every precaution has been taken by state legislatures and by the congress to keep them just and reasonable,—just and reasonable for the public and for the carriers."

In a state case[11] the facts were that a man of wealth started a barber shop and employed a barber to injure the plaintiff and drive him out of business. The court recognized that while, as a general proposition, "competition in trade and business is desirable," it may in certain cases result in "grievous and manifold wrongs to individuals"; and in this case the "malevolent" man of wealth was declared to be "guilty of a wanton wrong and an actionable tort." The economists can but pronounce this judgment admirable so far as it goes, but it is remarkably confined to a consideration of the private legal rights of the injured competitor, and gives hardly a hint of a higher criterion for judging competitive acts, that of the general welfare.

§ 8. #Common law remedy for monopoly ineffective.# The common law contained prohibitions enough, both broad and specific, against contracts and acts in restraint of trade. The common law contained likewise a closely related body of doctrine by which the railroads, as common carriers, ought to have given equitable and undiscriminating rates to all shippers. There was a strong body of influential opinion that long maintained that the case was sufficiently covered, that the only thing needed was to enforce the common law. Even now, after all that has elapsed, there are some in railroad and business circles who still appear to hold that opinion. But the evils of railroad discrimination and of other monopolistic practices continued, and for some cause the common law was not enforced, excepting occasionally, disconnectedly, and without important results.

Why? The answer may be ventured that in the common law the whole question of restraint of trade was treated primarily as one of private rights and only incidentally as one involving general public policy. Cases came before the courts only on complaint of some individual that felt injured. Now the injury of higher prices due to contracts in restraint of trade is usually diffused among many customers, and the loss of any one is less than the expense of bringing suit. Consequently, it rarely happened that cases were brought before the courts except by one of the two equally guilty parties to a contract in restraint of trade, when the other party had failed in some way to do his part. When such an illegal contract in restraint of trade was proved before a court by a defendant in a civil suit the contract was declared unenforceable, and the only penalty in practice was that the plaintiff could not collect his debt or secure performance from the defendant.[12] A very similar situation existed in the case of the individual's grievances against railroad charges and services.

§ 9. #Federal legislation against monopoly.# The passage of the Interstate Commerce Act in 1887[13] prohibiting discrimination and railway pooling, and that of the Act of 1890 "to protect trade and commerce against unlawful restraints and monopolies," popularly known as the "Sherman Anti-trust Law," were part of one public movement to remedy monopoly. From one point of view it seems true, as has often been said, that in essence these statutes were simply enactments of long established principles of the common law. Section 1 of the Sherman law declared illegal "every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations." Section 2 made it a misdemeanor "to monopolize, or attempt to monopolize."

But from another point of view, these new laws showed a marked change both in the conception of the interests involved and in the means of preventing the evils. The evil was at last conceived of as a general public evil; the laws are not merely to protect individuals,[14] but "to regulate commerce," "to protect trade and commerce." More important still, it was made the duty of public officers (district-attorneys of the United States) to institute proceedings in equity "to prevent and restrain" violation of the Sherman Act, and a special Commission was instituted to deal with railroad cases. It was this undertaking of the initiative by the government, the treatment of the problem as one of the general welfare, that marked a new epoch in this field. The methods and agencies provided might be at first inadequate and ineffective, but time and experience could remedy those defects.

§ 10. #Policy of the Sherman anti-trust law.# But in important respects opinion and policies were not yet clear and consistent. They wavered from one to another conception of the method for dealing with the problem. It was clear only that laissez-faire had been laid aside. There are three other possible policies reflecting as many different conceptions of the problem of monopoly: (1) monopoly-prosecuted, (2) monopoly-accepted-and-regulated, (3) competition-maintained-and-regulated. The policy of monopoly-prosecuted is merely negative. This is the policy of the Sherman law. It opposed no positive action to the making of monopolistic contracts and to the formation of combinations, but declared them to be illegal and provided for their prosecution and punishment after the mischief had been done. The great epoch of the formation of combinations[15] followed the enactment of this law. True, lack of experience by the department of justice, and lack of vigorous effort to enforce the law, and the slow action of the courts were largely to blame for this result. The law has proved to be more effective to prevent new combinations since it has been successfully enforced in a few notable cases. But once large combinations have been formed and complex individual financial interests have become involved, the courts have proved to be incapable of undoing the deeds. In practice the most sweeping remedy attempted under the law has been the dissolution of enormous combinations formed years after the law went into effect. This has been called the job of unscrambling the eggs. The most notable cases were those of the Standard Oil Company and of the Tobacco Company, decided in 1911, the results being absurdly futile.

§ 11. #Policy of monopoly-accepted-and-regulated.# A second policy may be called that of monopoly-accepted-and-regulated. This is represented by the Interstate Commerce Act (at first weakly, and more vigorously after its amendment), and by the great mass of state legislation putting the local and interurban public utilities under the control of regulative commissions. For some decades after these industries developed, the public faith was in competition as the effective regulator. If monopolistic prices were too high, another company was chartered to build a parallel railroad or another horse-car line on the next street, or to lay down another set of gas pipes in the same block. Almost from the first some students of the subject saw the wastefulness and futility of this kind of competition, and nearly a half century later the public reluctantly came to this view. Still, sad to relate, the same history had to be repeated in regard to the telegraph and telephone industry, and in some quarters the ultimate outcome is not yet recognized. The Interstate Commerce Act itself, with odd inconsistency, contains an anti-pooling provision (section 5) the purpose of which seems to have been to compel competition as to rates which is now practically impossible under the other provisions of the law. The policy of "monopoly-accepted" was seen to involve as a necessary feature, public regulation of rates, to the point, if necessary, of absolutely fixing them. The principle has come to be accepted that wherever competition ends there public regulation of prices and service begins. Monopolistic enterprises are ipso facto quasi-public institutions.

§ 12. #Field of its application#. This policy, gradually extending in practice, came to be applied to the class of industries which, for lack of a better name, are called local utilities. The one characteristic that they all have in common is that the service, or product, which is sold requires for its delivery an expensive, permanent, physical plant, and some special use of public highways. Thus gas pipes, water pipes, poles and wires for telegraph, telephones and electric light, street railways, regular steam railroads and some other minor industries all answer to this test.[16]