Peeing in the Economists' Pool

Antitrust Division chief Jonathan Kanter told a roomful of fancy lawyers and economists that their day of controlling the law through tricky language is over.

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Antitrust Prom

Last week, the guardians of monopoly power, the American Bar Association Antitrust Section, had its spring conference, where thousands of lawyers and economists get together to network and keep up to date on the latest trends in antitrust.

Typically, the ABA tries to ignore anti-monopoly fervor, but this year, they couldn’t. The two people people running the antitrust enforcement agencies, Lina Khan at the Federal Trade Commission and Jonathan Kanter at the Department of Justice Antitrust Division, headed an ‘Enforcers Roundtable’ where the assembled lawyers came to understand whether their clients will get sued.

Typically Wall Street is more concerned about Khan, because she’s young and progressive, but in this roundtable, it was Jonathan Kanter who made a splash. “We are not going to provide special access to only folks who can hire expensive lawyers,” he told the assembled.

More importantly, Kanter went straight at the intellectual heart of monopoly, the “consumer welfare” standard framework created by Robert Bork. Here’s what Kanter told the audience. I’m going to unpack his comments and explain why they are so important.

“The consumer welfare standard gets a lot of discussion in narrow antitrust circles and I think it’s important, something I’d like to address. In my experience if you ask five antitrust lawyers, “What does the consumer welfare standard mean,” you will get six different answers.

The whole idea of there being a standard is that there be agreement as to what it means. We’re sitting here thirty, forty years later and there’s still no agreement as to what it means. I was just looking on twitter, forgive me for doing that, the other day, and a number of well-respected antitrust scholars were still debating the same, ‘is it total welfare? Is it total surplus? Is it consumer surplus? Is it consumer welfare? What does it mean? What’s the economic definition? What’s the legal definition?’

That is not a standard.

And so I think we have to start going back to first principles. Let’s look at the language of the statute. Let’s look at the intent of the statute. If the goal is to protect competition and the competitive process, that’s what we ought to do. And the benefits of competition, and the harms from corporate concentration, can be widespread. And that’s the goal of the antitrust, that’s how it was written on its face, as written by our Congress in the United States. And that should be our guiding principle. But we can have this broader conversation, this academic discussion about consumer welfare, but I’d like to point out that something is not a standard unless there is broad-based agreement as to what it means.”

In the antitrust world, those are fighting words.

Evil Nerd Fight!

When most people hear ‘monopoly,’ they think it means one entity controlling a line of business. When they hear ‘competition,’ they think it means having rivals. So antitrust statutes, which have words like ‘lessen competition or tend to create a monopoly’ seem pretty straightforward. It’s illegal to screw people over if you have a lot of market share, or so common sense would indicate. That is what the statutes were written to do, and that’s what they did until the 1970s. Then something happened. Congress didn’t rewrite the laws, but a concept called the ‘consumer welfare standard’ came along and penetrated the enforcement agencies and the courts.

What is the consumer welfare standard? There’s no real definition, and it depends who you ask. I’m going to go over what the debate appears to be, and then what the fight is really about.

Let’s start with where there’s consensus. In 1979, the Supreme Court, citing antitrust scholar Robert Bork, claimed Congress designed the Sherman Act in 1890 not to stop powerful firms from screwing people over, or to block corporate concentration, but merely as a “consumer welfare prescription.” This was bad history by Bork, but the court accepted it then and still accepts it now. There’s wide agreement that enforcement then declined precipitously, and that courts dramatically narrowed what the government and private plaintiffs could do to address market power.

Everyone also agrees that the consumer welfare standard appears nowhere in statute, which is oriented around words like ‘monopolization,’ ‘restraints of trade,’ ‘discrimination in price,’ ‘unfair methods of competition,’ and other moral language about commerce. There’s also a broad recognition that enforcers have chosen not to enforce certain very specific antitrust laws, like the Robinson-Patman Act, because economists think laws designed to help small business often harm consumers (more on this later). Finally, there’s consensus that the Sherman Act of 1890 was updated multiple times, in 1914, 1936, and 1950, and ‘consumer welfare’ was not the purpose in any of those updates.

And now let’s go to where there’s disagreement, which is pretty much on everything else. Fiona Scott Morton is a Democratic economist and an antitrust enforcer in the Obama administration, and today she teaches at Yale Law and until recently consulted for Amazon and Apple. Her view is that the consumer welfare standard means one thing in economics and another thing in law. “To academic economists,” she writes, “Consumer welfare is the area under the demand curve and above the price paid.” It is the same as ‘consumer surplus’ below.

This is a chart that I learned about in college, which I thought was very smart because it looks very smart if you don’t know anything.

To Scott Morton, antitrust law is supposed to work by having economists like her look at a transaction and guess whether it will make that green triangle bigger. That’s what the consumer welfare standard, to her, means. The basic goal of antitrust law, she believes (as do her allies), is to organize the law so that economists determine the best way to maximize output, and then divide that output among consumers and producers. In this framework, antitrust law is best seen as a technical science divorced from notions like fairness or rivalry. Size and power is irrelevant, what matters are elegant theoretical models of output.

But Robert Bork, she argued, played a mean trick, by confusing real consumer welfare with something else. (Forgive me for the following passage, it’s boring, but then again, most successful conspiracies are.)

Though Bork used the term “consumer welfare,” he defined consumer welfare as “merely another term for the wealth of the nation.” His model of “consumer welfare,” unlike that found in standard economics textbooks, included not just the consumer surplus but also the producer surplus—the area above the supply curve and under the price. That area represents producer profits, or how much the producer earns above its cost of production. In conventional economics, the combined producer and consumer surplus is called “total welfare,” not “consumer welfare.” 

Basically, the debate between left and right economists goes as follows. Morton cares about consumer surplus, Bork cares about both consumer surplus AND corporate profits. Growing the green triangle is the liberal ‘consumer welfare standard, growing the green OR red triangle is the right-wing ‘consumer welfare standard.’

Of course, it’s a silly and simplistic discussion, for two reasons. First, industrial organizational economists are not scientists, they do not know how the economy works, and their theoretical models about those green and red triangles are almost always wrong. Antitrust scholar John Kwoka actually looked back at mergers the Federal Trade Commission allowed in concentrated industries, ones that economists cleared as not inhibiting output or allowing increasing prices. And he found that merged entities almost always had more monopoly power. Economists are simply making wild guesses, so their charts and models are besides the point. It’s fake science.

Second, even on a theoretical level, ‘consumer welfare’ leaves out that consumers aren’t the only people affected by market power. Workers and suppliers, for instance, can be bullied by monopolies. If two mining firms merge, as happened in Nevada, miners no longer have an option about who to work for, and their wages go down. Almost everyone agrees that this kind of monopolization is illegal and covered by antitrust statutes, but such a violation can’t really be incorporated in a ‘consumer welfare’ model, either right or left, because incorporating workers into a framework about consumer harm and output doesn’t work. This very long Twitter thread that Kanter referenced involving multiple influential scholars and practitioners of antitrust makes the point.

In other words, ‘the consumer welfare standard’ isn’t a standard, at all.

Consumer Welfare vs The Rule of Law

If consumer welfare doesn’t have a real meaning, and if it’s not a standard, then why is there so much political acrimony over it? The answer is that the consumer welfare standard is merely a political campaign to rewrite antitrust laws without going through Congress. Here’s a short debate I had on Twitter with Chicago School advocate Geoffrey Manne, who is an ardent advocate of consumer welfare.

Geoffrey Manne @geoffmanne

There's also no agreement on what "reasonable" means, what "free speech" means, what "public interest" means.... The CWS isn't an operative, doctrinal rule; it's a standard, to be given meaning primarily by courts through case-by-case adjudication.

Matt Stoller @matthewstoller

Kanter cites this twitter thread between @Sherman1890 @marklemley @elhauge showing there is no agreement on what the consumer welfare standard means even among respected antitrust thinkers. Says we need to get back to the statutory text. https://t.co/iv51iQJ9YO

The key point here is that what Manne is describing, something to be “given meaning primarily by courts through case-by-case adjudication,” is not a standard but a statute. But if consumer welfare isn’t in a statute, why do we treat it as if it is? The reason is monopolists could never get Congress to repeal the antitrust laws, so they just convinced the courts to impute words that Congress never put in there. Advocates of consumer welfare on both sides, and for forty years, have been substituting a body of law they don’t like - one with words like monopolization, restraints of trade, unfair, price discrimination, et al - with words they do like, namely economic welfare.

In some cases, the rewrite of the law is subtle, like when they say that they are merely trying to give a standard to the antitrust laws so those laws are administrable. But in the case of the law I mentioned above, the Robinson-Patman Act, which bars price discrimination, enforcers simply chose to stop enforcing it because they didn’t like it. While some prosecutorial discretion is reasonable, I have never heard a satisfactory explanation as to why the Department of Justice can simply choose to legalize behavior Congress explicitly outlawed. And no one in the antitrust insider world can justify it in a legal sense, though they can certainly make policy arguments.

There’s a point in changing antitrust law from stuff people understand, like monopolization and fairness, and into something they made up that was never passed by Congress, consumer welfare. The goal is to turn antitrust into a game of charts only technocrats get to play. It’s why anything but consumer welfare becomes ‘Populist,’ which is a word most antitrust insiders despise, since it means bringing normal people into the discussion with their normal ideas that fairness is a thing, and monopolization means not screwing people over.

And that’s Kanter’s goal, to make antitrust law belong to the people once again.

“We are also expanding the scope of the people we’re talking to, and this is something that is getting overlooked and it certainly may not be a welcome development by certain folks in the antitrust bar. But we’re not providing special access for only folks who can afford it, folks who can hire expensive lawyers. We’re out there talking to the public, to affected stakeholders. The FTC is holding open public meetings and inviting anybody to show up to offer their concerns. We’re soliciting public comments on the merger guidelines… We are out there having that conversation, but it’s extremely important to have that conversation in a way that provides access to justice for everyone.”

That’s what the debate over consumer welfare is really about. Does the public get the protection of the law? Or, as Wright Patman once said, do we leave control of the law to people “who only believe in law and order when they write the law and give the order?” Kanter has staked his side of the debate. And that’s why the insiders are so angry.