Sherman anti-trust act
Reasons for the enactment of the act
At the turn of the 19th century, American enterprise was growing something that saw the emergence of large corporations such as American Tobacco Company and Standard Oil Company that almost entirely controlled entire sectors. As the name suggests, the Sherman anti-trust legislation resulted from a general public resentment to the presence of large enterprises (trusts) that had so much control of the market that it was impossible to hold them accountable on any issue including pricing, quality and other concepts of fair trade.
One of the methods used by these companies to acquire and maintain monopoly in their spheres was through the use of agreements known as trusts. According to this agreement, stockholders in various companies pooled their shares in to one set of trustees in exchange for a certificate that gave them a share of the consolidated profits. At the time there was no regulation of this practice, something that led to some of the trusts growing in to monopolies. An example is the American Tobacco Company, which used this practice to bring over 200 companies under its control. The Standard Oil Company as well through a similar arrangement controlled over 90 of the oil sector (both refining and marketing).
It was in view of such strangleholds that in 1890 the then chairman of the senate finance committee drafted the bill that was passed unanimously in both congress and senate. The act empowered the federal government to monitor trusts and break those whose presence was monopolistic in nature. Prior to the passing of this act, different states had their own version of anti-monopoly laws, only that the acts passed within the states only applied to intrastate trade.
Purposes of the act
The act was the first of the many attempts to control the growth of monopolies within the free market that resulted from capitalism, and in fact, the act became a template on which future anti competition laws designed. Capitalism has proved good for prosperity but nevertheless, there is an inherent contradiction between prosperity and equity. A capitalist system with good management almost always gives rise to a prosperous state the problem is that the prosperity may be concentrated in the hands of a few. Similarly, growth of free enterprise is a healthy development for everyone including suppliers, consumers and government.
However, the growth is only beneficial as long as the stakeholders in the sector can hold the business accountable in terms of quality in its delivery of goods and services. That goes contrary to the growth of monopoly, a practice that kills the dimension of accountability within business leading to diminished quality in the value of services offered by a company. Competition is the foundation of free trade and enterprise, and lack of it defeats the whole logic free market, yet this is what monopoly does. The benefits of having competition can be analyzed as follows
Economic - A market full of competition forces companies to innovate so as to stay ahead of the rest. One of the economic effects of monopolies is killing innovation and stifling growth of the particular sector it happens in. It makes it hard for new players to get in to the market, which limits opportunities for other people in the sector. The Sherman anti-trust for example was used in breaking up the large monolith that was the American Tobacco company in to smaller independent units. In such small operating units, the companies are able to be more innovative and match their products to their niche markets.
Social - The social need for competition is in form of social responsibility and workers welfare. If too much power is concentrated in one enterprise, it becomes hard for any form of concessions to be extracted from such an enterprise especially in cases that the enterprise feels that it is to its disadvantage. In addition, such an enterprise may not be sensitive to the needs of all stakeholders, and may not therefore, to engage in corporate social responsibility.
Political - The government needs to exercise control over enterprises that operate within its jurisdiction, and one way of losing control over them is by allowing them to grow out control. If allowed to overgrow, especially by unorthodox means, they become hard to control because they now demand to enter in to any agreements with government on their own terms.
The act may have primarily been designed to spur the growth of an honest competitive enterprise, but the ultimate aim of the act was to allow for the above benefits to trickle down to the state.
Accomplishments of the law
The act was passed at a time when the American economy was experiencing rapid transformation from the improvement of mass production technologies that saw the growth of industry to the standardization of rail networks giving rise to wider distribution networks, the result of which was a robust economy growing steadily. This growth was however not without its own shortcomings, and some of them are captured in Upton Sinclairs book the jungle, which chronicled the corruption in the meat packing industry as well as the deplorable living conditions of the working class due to absence of social programs.
These conditions were symptomatic of a society whose economy was growing at the same rate as the rot within the society. The best explanation for the rot would be that the growth was happening in an inadequately regulated environment leading to inefficient monitoring and control mechanism by the relevant authorities. As the enterprises were growing, there were underhand dealings such as price fixing (or artificial market shortages), tax evasion and suspect mergers that were going on, and some of them were not contrary to any laws existing then. That signified the failure of the laissez faire capitalism and called for or justified government intervention. The Sherman anti-trust act was one such as act whose intention was to eliminate monopolies.
The acts success can be measured by assessing how much its application has been used to curtail growth of monopolies both in the progressive era and at present. The first substantive application of the act was in 1902 when the then president Theodore Roosevelt invoked the law in breaking up the Standard oil Company that had dominated the market to the extent that small companies in the sector were left with no choice but to join them. It was in 1911 that the Supreme Court finally held that the operation of the standard oil contravened the provision of the Sherman anti-trust act, and ordered it broken down in to smaller constituent units. Subsequently, the Standard Oil Company was broken down in to 33 smaller companies that operated independently, though the ownership structure remained more or less the same.
Using this case as a prototype, it was later to emerge during a congressional hearing that the combined profits for the enterprise increased over period signifying the growth in the sector. This may not be a success indicator because it shows that the breakup of the enterprise did not diminish its economic power, but that is because the law had a weakness in that it did not provide for a change in the ownership structure of the enterprise to make the fragmentation real. Nevertheless, the break up gave resulting small companies some leverage or freedom in managing their affairs in a more efficient manner. Perhaps the glaring weakness with the original act was its failure to state explicitly what kind of activities constituted monopolistic practices, and that is the loophole that some companies such united Steel Corporation exploited when they contested accusation of monopolistic tendencies in the 1920s.
The most notable and recent success of the act was in curtailing the monopoly of the software giant Microsoft in the late 1990s. Microsoft, aware of the potential growth in the internet market sought to give its internet browser software a head start over the other entrants using its advantage in the operating system market. To do this the company embedded its browser software, known as internet explorer, in to its operating system and made the operating system incompatible with the other browsers that were being sold by the other companies. On assessment, the court concluded that the practice of embedding the browser in to the operating system was tantamount to the company monopolizing the browser market using its dominance of the operating system market.
The subsequent ruling enabled other browsers to operate smoothly on the windows platform (Microsoft operating system) and as a result today though many enjoy using the Microsoft operating system, they have a choice of browsers, some of which have proven to be more popular than the Microsoft internet explorer. Without the Sherman anti-trust legislation, the browser market would still be stuck with the Microsoft browser because the other companies would have probably never managed to overcome Microsofts dominance in the market. There are more instances the law has been applied to tame large corporations sometimes with success, such as the case with ATT communications, but the Microsoft case presents the best scenario of anti- monopoly legislation. The act may not be perfect, but it has proven that even free markets can be monitored and controlled without losing the very ideals that created them.
Consequences
The act may have been intent on protecting the market from unfair trade practices of large companies, but the act may have unintentionally protected inefficient businesses in the market. Some of the monopolies may have been large enterprises that capitalized on economies of scale to produce at costs that enabled them to sell at the lowest prices, and by so doing became the dominant players in the market. In that sense, the act may have denied the consumers the benefits of a free market because it protected inferior competitors.
Some companies also evaded this law by reorganizing themselves in to forms that could not fit the definitions prohibited in the act. Some companies reorganized themselves in to holding companies while others vertically integrated. The net result is that some of the trusts that were being fought by the act metamorphosed in to newer forms with the same, or sometimes, worse effects. An example is the case of Standard Oil, which although was no longer a monopoly on paper ended up controlling the oil sector from the refining, shipping, transport and marketing.
The other unintended consequence of the law is its effects on US enterprise in a global economy. Some companies may find the law detrimental to their growth and decide to relocate their operations to other countries but ship goods back to the US. This matter arises because at the time the bill was drafted, globalization was not an issue, but this can be taken care of by amendments to the act and requesting mutual cooperation with the international community in monitoring international companies doing business in the US.
Nonetheless, the intended consequences of the act were largely achieved. The major aim of the act was to protect all the stakeholders in the economy from illicit trade practices, something the act largely did. The extent of the success may be debatable, but the consequences of failing to regulate the market at the time are too grave to contemplate. The Originators of the act may not have intended for it to be perfect, they wanted to create a framework or set a precedent for future legislations on matters of ethical trade practices. Anti-monopoly laws have evolved from this act, and as of now that area of commercial law has been fairly developed in to a set of laws that have a wider coverage.
Should the law be retained
The law should by all means be retained and even made stronger or broader. The financial crisis was a demonstration that capitalism needs more regulation than what the laws were offering at the time. The financial crisis may not be purely attributable to monopoly, but it is a good eye opener of the degree of greed that can pervade an unregulated market. During his tenure, President George W Bushs approach towards anti-trust policies favored a hands-off approach. This may have been done with good intentions of creating a liberal environment for commerce to thrive, but the result was that instead of the market becoming liberal and competition thriving greed took over and the results were near disastrous for the countrys economy.
The lesson from the crisis is that laissez faire capitalism only exists on paper it cannot be practically applied to any country. Activities that are contrary to the anti-trust act are still prevalent today, and if the events of 2008 are anything to go by then the position of laws such as those in the act should be strengthened. Several cases related to the breaking of the act have been presented to the Federal Trade Commission (FTC), and it is then left to ones imagination what would have been the case had the law not been in place.
It however imperative to note that the act was created at a time when the idea of globalization was still far-flung and remote, but that has since changed and the law must change as well to reflect this. One effect of globalization is the mobility of factors of production such as labor and capital. If, for example, the cost of production increases disproportionately, the factors of production will move elsewhere leaving the economy weaker. Labor is a very important factor of production and any change in labor rates translates to conspicuous changes in the cost of production with the appropriate consequences following.
The amendment of the act in 1914 that resulted in the Clayton act disqualified the activities of labor unions from provisions of the Sherman antitrust act. This may need to be relooked afresh because the effects of trade unions that are too powerful are unfavorable to the economy because production may move elsewhere in case the trade unions abuse their power to arm-twist companies in to paying unreasonable wages. As a precautionary measure therefore, the act should start regulating trade unions, and in any case, if the entrepreneurs paying the workers are being regulated then it is fair to also regulate the workers as well.
Measure of success
The act faced an initial challenge in its first years of application due to the ambiguities that existed in its original format. Some entrepreneurs took advantage of these and some of them got away with trade practices that qualified as monopoly practices, an example being the US steel company in the 1920s. Another failure of the act was the unintended shelter it provided for the inefficient companies because of the camouflaged protection it offered to them.
Apart from those failures, the act was largely successful, and although its measure of success is not quantifiable, it can be inferred from the number of unfair trade practices it managed to stop. An example of cases that were brought against dishonest practices of entrepreneurs was a case against Intel computers. Intel computers at the time had a policy of severing links with customers who sued it. The courts ruled that the practice amounted to contravention of Sherman anti-trust laws leading to the company being fined for the practices. Without the law, the customers would have been powerless over Intel. By any measure, Intel is a large company, and without the law the customers would have had no way of getting justice because principles of laissez faire capitalism gives the company the liberty to associate with anyone as its deems fit. This, in addition to other cases such as the Microsoft and ATT are highlights of the acts success. The emergence of similar laws in the country also counts as successes associated with the bill because of the acts pioneering effect.
Conclusion
The Sherman anti-trust act and similar laws seek to strike a balance between the protection of free enterprise and those of the society as consumers within a capitalist environment. A centrally planned economy such as a communist or socialist system need not have such a law because every aspect of enterprise is under complete control of government. For the US economy however, the combination of globalization and liberal economic policies have increased the need for regulatory laws.
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