N O V E M B E R 1 9 6 1
by Leland Hazard
EARLY in 1961 big business drew down on itself some scathing headlines. Some corporate officials of high rank, close to the top, spent thirty days (less good-behavior time) in jail for conspiring to fix prices and allocate orders among their companies. Honored names were involved, among them Westinghouse and General Electric. This was the first time in seventy years that any American big businessman had been incarcerated for violation of the 1890 Sherman Antitrust Act.
The conspiracy was admitted in court. Some aspects of it were unusual, not to say ludicrous. The conspirators used assumed names, met not in exclusive New York and Pittsburgh clubs, but in motels, in the North Woods, and in other places frequently associated with activities more interesting than business conspiracy.
The purposes of the crimes, confessed by seven individuals and twenty-nine corporations, were to fix prices to which all would adhere and to allocate among the conspirators the available orders, including orders for the heavy electrical equipment usually purchased by public utilities and municipalities. The violations were of the most elementary antitrust kind. The cases did not involve circumstantial evidence or mere inferences of guilt. One of the conspirators, called before a grand jury, informed others that he would have to tell the truth. From then on a chain reaction of admissions put some of our foremost individual and corporate business names in the criminal category.
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That the crimes were committed, there is not a scintilla of doubt. Under the
law there were no extenuating circumstances. The guilt was stark. According to
most of the editorial writers, the sentences said to businessmen: Compete or go
to jail. Judge J. Cullen Ganey, in the Philadelphia federal court, said, "What
is really at stake here is the survival of the kind of economy under which this
country has grown great, the free-enterprise system." That was it -- our system
had been betrayed.
The GE conspirators, some of them with six-figure incomes, have resigned under pressure from GE; the Westinghouse conspirators are back in their jobs, having been punished "enough," according to Westinghouse President Mark A. Cresap, Jr. But a paradox haunts the scene. The crimes seem horrendous. Yet the Attorneys General of the United States and the American courts waited almost three quarters of a century to impose on big businessmen the criminal sanctions which have been in the Sherman Antitrust Act since 1890. This fact must give us some pause.
There are two famous sections of the act. The first enjoins conspiracy in restraint of trade, and the second forbids monopoly. These basic provisions have remained unaltered since the day in President Harrison's Administration when the law, with a minimum of debate, was first passed. These are the sections under which Theodore Roosevelt, through his Attorney General, induced the Supreme Court, in 1904, to break up J. P. Morgan's Northern Securities Company, a railroad empire; under which John D. Rockefeller's Standard Oil Company of New Jersey, in 1911, was fragmented; and under which the Aluminum Company of America, in 1945, was held, despite the absence of predatory activity, to be an unlawful monopoly, and its stockholders ordered, in 1950, to sell their holdings either in Alcoa or in Canadian Aluminium. In these and many other great cases, the object has been to restore or create competition.
To enforce competition the Sherman Act gives the government a two-edged sword: one, the injunction, which can reach into the most time-honored practices to assert the law's will; the other, criminal punishment for the offense of noncompetition or monopoly, which the Sherman Act designates a misdemeanor, providing up to a year's imprisonment or a fine (originally $5000, recently raised to $50,000) or both. The facts in Mr. Morgan's case, in Mr. Rockefeller's, and in Alcoa's could have been used by the government to press for the criminal penalty as well as for the civil injunction. John D. Rockefeller, one of America's greatest philanthropists ($550 million in charitable contributions), could have gone to jail. But the ultimate punishment was not imposed until just now.
It was not that the act had become a blue law. Far from it. In the first seventy years of the Sherman Act, there were 1580 antitrust cases, two thirds of them since 1940. Often the government has used the criminal (grand jury) process to get facts, only to seek injunction on the civil side. Often the government has pressed criminal cases through to a fine. (Judge Kenesaw Mountain Landis once fined Standard Oil Company of Indiana $29,240,000. The case was reversed on appeal.) But seven decades rolled away before seven highly placed business executives served time in a federal penitentiary.
IF there is something about competition so vital to our welfare that the men who serve the free-enterprise system must go to jail for not competing, we must examine the premise.
William James said: "The truth of an idea is not a stagnant property inherent in it. Truth happens to an idea. It becomes true, is made true by events: its verity is in fact an event, a process: the process namely of its verifying itself...." Our American philosophy bids us test every dogma by its results -- the dogma of competition no less than any other.
The term "free enterprise" embraces an economic system which was first comprehensively articulated by the Scottish philosopher Adam Smith in The Wealth of Nations, 1776. Competition lies at the heart of Smith's analysis. In his economic scheme he assumes an aggressive, predatory, selfish nature in man. But, he explains, man's aggressions are neutralized in a marvelous mechanism called the market place, where the consumer bestows the favor of purchase upon the most competitive seller; or the worker, the favor of his services upon the highest bidder for labor. Competition does the trick. If prices of goods are high, the urge for profit will bring in more producers, and competition will bring the prices down. If wages are high, the ensuing well-being of the workers will increase population, and competition for jobs will bring wages down. Everybody pursues avidly his own selfish interests, but the self-regulating market place forestalls the evils of individual success. Hence, a good society ensues from the selfish pursuits of individual men.
Even Adam Smith applied a mystical term to his market place: "the hidden hand." But his thesis, product of the age of reason, had great appeal. Men long intimidated by taboos, priesthoods, fear of hell felt themselves emancipated. To pursue one's own selfish interest and at the same time, thanks to the market place, serve society well -- this was a new idea. Americans liked it. It fitted the pattern of escape from too much rulership, too much dogma, too much ecclesiasticism. America was through with revealed truth; it was ready to accept what would work in the market place. Adam Smith never put it this way, but actually he had substituted the market place for God, in so far as God cares about social well-being. So, if the market place had become the god of social well-being it must be sacrosanct.
John D. Rockefeller, a great business manager by any standards, past or present, was the first American to tamper with the market place so successfully as to create alarm in the American people. From the day in 1859 when E. L. Drake drilled the first artesian oil well in America, the oil regions a hundred miles north of Pittsburgh, Pennsylvania, were a bedlam of competition. There was a rush for the black gold as there had been in California in 1849. And the market in crude oil, dragged by wagon barge, steamer, and finally by railroad out of the wilderness, down the Allegheny and Ohio valleys to Pittsburgh and Cleveland, was as disorderly as unregulated competition could make it. Ida M. Tarbell reports that oil which had sold at twenty dollars a barrel in January, 1860, brought ten cents a barrel at the close of 1861. And the historian Allan Nevins, writing of 1866 and 1867, speaks of a "calamitous price fall" and calls the oil regions "half boom and half broke."
In the refining end of the oil business, high profits attracted new capital and enhanced competition exactly in accordance with the system as Adam Smith had described it a hundred years earlier. Exactly, until John D. Rockefeller, first consolidating the Cleveland refineries, then using that buying and shipping power to secure railroad rebates, not only on the combine's shipments but also on the shipments of the combine's competitors, gained control over the refining industry and monopsony power over the crude-oil producers.
Whether the Rockefeller goals, implacably pursued by him and his associates for almost half a century were essentially benign or essentially different from the goals of the oil industry today is not the question. Tarbell quotes Rockefeller's respected philanthropist son: "The American Beauty Rose can be produced in its splendor and fragrance only by sacrificing the early buds which grow up around it." But in 1881 Henry D. Lloyd had a different idea in his attack on the Standard Oil Company. Nine years later Congress expressed itself in the Sherman Antitrust Act in favor of competition.
Forty-three years later, another Congress, anguished by the Great Depression, suspended the antitrust laws pro tanto and invited competitors, whose lower and lower prices were producing less and less business, to agree, under the aegis of N.R.A., to codes of business conduct which fixed practices and sometimes prices. In our country's darkest economic hour we abandoned competition. Franklin Roosevelt in a fireside chat castigated "chiselers" (competitors). Frederick Lewis Allen, writing in The Big Change, put it bluntly: "In short, while the New Deal did not abolish the market place as the determiner of values and rewards, it rigged the market plenty." The Supreme Court voided N.R.A., not because the act abandoned competition but because it constituted an unlawful delegation of legislative power to the executive branch of the government.
We have been abandoning competition bit by bit in America for a long time. In two world wars and in the Korean War, our government fixed prices and allocated materials -- an obvious necessity, an interference with the market place which even Adam Smith might approve. But he would not approve minimum wage and hour laws, farm price supports, tariffs, or subsidies -- even health and safety laws for factories, or child labor laws, or laws establishing minimum working conditions for women. In Smith's philosophy these would impede the market place in its benign work.
Adam Smith did not foresee powerful labor unions or social welfare or heavy technology. He marveled at the productivity attained by division of labor in the making of pins. He knew nothing about single electric-current circuit breakers big as a house. Although accumulation of capital from profit and its reinvestment in productive equipment were cornerstones of his philosophy, the scale of investment required for the subsequent technological advances was beyond his ken. Amusingly, he saw no future for the corporation, because, in his opinion, such an artificial body could not marshal the selfish, driving search for profit so fundamental to his system. Adam Smith taught Americans a faith in competition which persists despite heavy impingements by government, by big technology, and by social welfare upon the freewheeling, bazaarlike market place, in which Smith, two centuries past, saw competition as the benign hidden hand.
But the faith is compromised. On the domestic scene the federal antitrust laws are modified to forbid different prices among buyers of commodities of like grade and quality. Manufacturers of branded products are permitted, by amendment of the antitrust laws, to fix resale prices under state fair-trade laws. These and other amendments of the antitrust laws are said to establish "soft competition." The more rigorous antitrusters deplore these compromises, but Congress does not agree.
ANTITRUST doctrine forbids certain forms of "hard competition." For example, General Motors would hesitate to price its cars as low as its efficiency might permit, for fear of driving Chrysler, American Motors, even Ford to the wall. As critics put it, businessmen must compete, but no one may win the competition. It is this aspect of antitrust which creates two standards, one for big business, another for small business. No matter how vicious the competition of the little fellow, the big fellow must not countercompete too hard.
Abroad, cartels of all types have long been pillars of trade in Europe and in the British Isles. In the 1930s it was popular to attribute the declining state of European industry to cartelization. But now that vitality and prosperity prevail in all of western Europe, we must wonder whether the earlier analysis confused causation with concomitance.
In the East the greatest industrial nation is Japan. Let Arthur Koestler, writing in The Lotus and the Robot, speak of competition in that society.
"In Japan, there was no comparable [to our competitive economy] organic development; when the country was suddenly thrown open, the very idea of 'competition' was strange to them, and when Western economic writings were first translated into Japanese, it was necessary to make a new word for it. It was a combination of the Japanese words for 'race' and 'fight.'"
And yet, as all manufacturers know, the Japanese, if not competitive at home, are nevertheless potent factors in all markets abroad. The Japanese economy waxes strong on something other than domestic competition, as does the British. For example, for more than a hundred years one British family has preserved a monopoly in glass. To this very day, much of the world pays royalties for the glassmaking innovations of this British company, which, by our doctrine, ought to have died on the technological vine years ago, for lack of competition.
In Communist Russia and China, competition is certainly not the way of economic life. State planning, bureaucratic decisions, the dictates of the commissars -- these shape the pattern of economic activity. The decentralization and fragmentation of decision making, which we prize in our competitive economy, are to Russia and China just so much capitalistic foolishness.
Now, after almost half a century of Communism, we must concede its growth both in Russia and abroad. And as the first generation of Chinese Communism passes, we are baffled by its unexpected successes. The answer to the obvious question, Why did it take such a long time before we resorted to incarceration for failure to compete?, may lie here. Russian commissars have been liquidated, at the worst, or sent to Siberia, at the least, for deviation from Communist doctrine, or even for simply failing to achieve a planned production quota. The Communist system could not be wrong; only men could be wrong. And so in America we increased the severity of punishment for deviation from capitalistic doctrine, for failure to compete. We too must prove that the system cannot be wrong, only men can be wrong.
I do not like this explanation any more than I like our dancing to the Russian tune in foreign and military policy. But a lethal force is loose in the world, and America is frequently on the defensive. Robert A. Bicks, a brilliant young New York attorney who was nominated by President Eisenhower to be in charge of the Antitrust Division, put our American embarrassment quite simply: "These men and companies have in a true sense mocked the image of that economic system which we profess to the world."
But one of the eight conspiracies was a quarter of a century old, according to Fortune magazine (April, May, 1961), others had endured for more than a decade. One suspects that the Russians caught their doctrinal deviates much more quickly.
Does this mean that for all of our protests in and out of government we are less sure of our doctrine than we admit? Even Teddy Roosevelt was charged with ambivalence by Finley Peter Dunne's Mr. Dooley. He summarizes Mr. Roosevelt on trusts:
"Th' trusts," says he, "are heejous monsthers built up be th' inlightened intherprise iv th' men that have done so much to advance progress in our beloved counthry," he says. "On wan hand I wud stamp thim undher fut; on th' other hand not so fast."
There are two parts to free enterprise: one is competition; the other is profit. Men compete because there are profits. This is straight out of Adam Smith. The profit part of the system has never been repealed. The system does not work on losses. That way has been tried, and the records of the bankruptcy courts attest the unsatisfactory results of that deviation. Therefore, however enlightened a corporate head may be, however socially conscious his pronouncements, whatsoever the corporate charities, profit is the sine qua non. A top executive may say that there is more to modern business than profit making, but before the applause has died away he will have some vice president, division head, or department manager on the carpet for unsatisfactory profits. This does not mean that the talk is double. It simply means that without the profit the stuff for humanitarianism is not there.
When competition does not yield profits, as it often does not, in the eyes of the businessman one half of the system fails. It is then that the front-line soldiers of the system feel a desperate need to alter conditions. Price wars are deadly to the system, even though price fixing may be anathema to consumers. Herein lies a conflict, inexorable and as yet unresolved in our society. I have spent forty years advising clients to respect and obey the antitrust laws. But I would be far less than honest if I did not concede that the conflict is there.
TO the businessman, a social philosophy constructed in an economy in which pin making was a marvel (1776) is not necessarily adequate for an economy of electric generators and nuclear reactors. To those who labor in the system, a philosophy which makes the good society depend upon blind competition carried on in ignorance of market facts and in disregard of the profit which, and which alone, can give the business institution permanence -- such a philosophy seems irresponsible. Such men find themselves pressed on the one hand by the dogma, Compete yourself out of profits. On the other hand, they are pressed to conserve the business, to make it grow, to keep it ready for every change, from peace to war, from old styles to new styles, from obsolete technology to advanced technology. The businessman does not understand why his quest for certainty is wrong, why the dogma of competition should be pressed so far as to make a guessing game of the system.
I do not extol business or businessmen. That is not my purpose. I point rather to a failure of our business actors to understand our business theorists, a failure of such major proportions that we must examine the theory. It is not enough just to condemn and punish.
We have never faced up to a frank and exhaustive examination of our system. In 1953, Attorney General Herbert Brownell, Jr., appointed a distinguished committee of antitrust lawyers, law teachers, economists, and government officials to make "a thoughtful and comprehensive study of our antitrust laws." There was not one practicing businessman on the committee of sixty. The committee produced a scholarly compendium of comment on the antitrust laws but made no significant recommendations. The report makes no reference to the problem of profits versus competition.
The economist may regard profit as only a transitory agent for producing equilibrium. In his book, profit serves not as a reward but as an inducement to competitors to enter the market and take the profit away, from enterpriser after enterpriser. But to the businessman, this is just so much academic nonsense. To him, the profit is the reward for good management, and the loss is the unpardonable business sin.
Practicing antitrust lawyers and government antitrust lawyers are a kind of priesthood spinning ever more gossamer refinements of the antitrust commandments. Businessmen are excluded from the councils in the legal temple. Between the government and businessmen there is a cops-and-robbers atmosphere. This is bad. It is doubtful whether America can long afford such immature attitudes. When Roosevelt moved in the courts against Northern Securities Company, Morgan asked why the President could not have come to him as one gentleman to another and made known the government's wishes. I think Morgan had a point. For some reason, gentlemanly relations were never established. Businessmen move at their peril while the law waits in ambush.
In the electrical cases the record shows that the guilty individuals and companies alternated between fierce, quarterless competition and unabashed price fixing. There were times when the price cutting reached as high as 60 per cent of the going price. Suppose a study were made to determine the reasonableness of the average prices over the whole period in which the conspiracies were on and off. The antitrust doctrine is that reasonableness does not matter. Very well. But are we afraid even to look? Are we, like medieval doctors, unwilling to test the dogma; like them, unwilling for Galileo to drop the balls?
Suppose Congress should provide an amnesty, forgiving all companies and individuals who would make full disclosures of past infractions of antitrust law. The investigators, turned scientists from prosecutors, would develop a kind of economic Kinzey Report. Then economists, psychologists, sociologists, and people from other relevant professions, having access to all the facts, might evaluate the doctrine and measure the harm, if any, which has ensued from the deviations.
When police methods fail, for example, in curbing juvenile delinquency. We apply investigatory and analytical techniques. Often the detection of the causes of antisocial activity results in social change. If doctrine and dogma on the one hand and business and businessmen on the other will submit to exhaustive fact finding and an uninhibited critique, we may discover the common ground for competition and profit, the way to a more stable economy, and an end to internecine distrust. Our hard-pressed country can no longer afford sadism in government and paranoia in business.
A less ambitious program, but one quite worth while, would be an amendment of the Sherman Act which would require the government to employ the noncriminal remedies of the act before invoking the criminal penalties. In the civil proceedings, the courts' equity powers to order cessation of practices and to require new practices are almost without limit. After having heard a given case, the court might then decide whether civil remedies were enough or whether to authorize the Attorney General to proceed for recriminatory criminal penalties. Such an amendment would take some of the gaming out of antitrust enforcement. It would give a partial answer to Mr. Morgan's reasonable question, Why couldn't the government make known its wishes rather than suing as if he were a "common crook"?
There are those who still say that the men of the electrical conspiracy are common crooks. But the case is not that simple. It is necessary to differentiate. The men whose jail terms must make us think are more like those who violated Prohibition than those who burgle a house. A society which has not resolved the periodic incompatibility between competition and profits, has not cured its business cycles, is not able to explain fully its economics -- such a society does not have the right to cast first stones at those who must work its imperfect system. The men were guilty, but guilty in a system which is itself not without blame.
Copyright © 1961 by Leland Hazard. All rights reserved.
The Atlantic Monthly; November 1961; Are Big Businessmen Crooks?; Volume 208, No. 5; pages 42 - 45.