Antitrust Law: Enforcing or Subverting the Private Law Order? – Comments on Professor Vanberg’s Papers (1/4)

Summary

The first article in this series comments several papers by Professor Viktor Vanberg. It argues that competition law cannot be analyzed as a means of enforcing a private law order. While it approves of Franz Böhm’s agenda of implementing a “private law society,” it claims that competition law tends to subvert the basic principles of private law. It holds that the private property principle is not totally malleable and cannot be freely redefined by the legislator. Although it admits that the recognition of private property does not solve all the problems, it maintains that it narrows down considerably the remaining issues. In particular, the principle of private property implies the right to inflict pecuniary externalities/pure economic losses, as classical lawyers and economists made it clear. The article also points out the difficulty faced by the Ordoliberal School, which must define the notion of restraint of trade without resorting to the analysis of welfare effects. It states that this fundamental issue has not been settled adequately so far, which conflicts with the alleged concern of the ordoliberal school for the rule of law. 

***

Professor Viktor Vanberg is the author of many studies about constitutional economics, competition law, and the thoughts of Friedrich Hayek and James Buchanan.

In a series of articles, I am going to analyze the work of Professor Vanberg regarding competition.

Most of my comments will pertain to a paper entitled “Consumer Welfare, Total Welfare and Economic Freedom – On the Normative Foundations of Competition Policy.”[1] I invite any visitor to read this paper, freely available on the internet, before reading my article.

However, I will also refer to two more general books, namely Rules & Choice in Economics (1994)[2] and The Constitution of Markets (2001).[3] These books are collections of papers written by Professor Vanberg.

In this first article, I am going to enquire whether competition law can rightly be considered, as Professor Vanberg (following Franz Böhm) argues, to amount to a private law order.

For the sake of clarity, let us specify from the outset that a “constitutional economist” as Professor Vanberg distinguishes between the constitutional level, i.e., the level at which the rules of the games are drafted (be it in a “constitution” in the traditional legal sense of the word or in an ordinary “law”), and the sub-constitutional level, that is, the level at which rules are enforced.

1°  Market and Non-Market Competition.

To begin with, Professor Vanberg makes some interesting comments on the nature of competition.

Indeed, he points out that “Competition in the most general sense of the word is an inescapable fate in a world of scarcity,”[4] because in such a world conflicts of interests are bound to arise constantly between “advantage seeking individuals.”

Thus, all that one can do is to choose the ways according to which competition can been carried out or, to say it otherwise, the methods that individuals are authorized to use in order to acquire scarce resources.

That is why liberalism, through the institution of private property, tries to set up rules channeling the efforts of the people to pursue their interests in the most socially-productive ways.

As Professor Vanberg puts it,

When Adam Smith described market competition as “the obvious and simple system of natural liberty,” he did not mean to imply that competition is per se beneficial, irrespective of the ways and means by which it is carried out. Instead, he quite explicitly argued that competition will only work beneficially when carried out within the constraints of appropriate rules, within what he called the “laws of justice.”[5]

Consequently, “By adopting a market order as its economic constitution a society chooses a particular way of organizing competition.”[6]

But what is exactly the liberal “way of organizing competition”? What are the rules constraining competition in a free market?

More importantly, do the current antitrust laws implement market or non-market competition?

2° Market Competition according to Franz Böhm.

In order to describe the liberal framework for competition, Professor Vanberg refers to Franz Böhm’s article entitled “Private Law Society and Market Economy[7]:

As Böhm explains, market competition is the kind of economic dynamics that results within a private law order from the ways in which individuals exercise their private autonomy, i.e. the individual liberty that they enjoy within a legal order that protects their property rights and freedom of contract. A market economy is in this sense, so Böhm argues, nothing but the twin sister of a private law society. Adopting a private law order and adopting a market economy are not two separate things. The second results as a consequence of individual choices when the first is established.[8]

This is in my opinion a fine description of free-market competition. However, except for the libertarians, nobody seems to take it seriously, not even ordoliberal authors. Indeed, as will be shown, this analysis does not leave room for any competition law.

3° Does Competition Law Fit the Böhmian Paradigm?

In the previous section, I quoted a very apt definition of free-market competition. But does competition law fit this definition?

3-1° Competition Policy as a Tool of Securing the Individual Liberty Provided by the Existing Private Law Order.

Professor Vanberg seems to think that competition law can be a suitable tool to enforce the Böhmian conception of competition. Indeed, he writes that

Freedom to compete in a private law based market economy means the ability to exercise one’s private autonomy and to freely choose from the range of behavioral options that are not prohibited by the ‘rules of the game.’[9] And to protect such freedom to compete means nothing other th[a]n to protect the individual liberty that a private law system provides for.[10]

As argued above, a society’s choice to opt for a market economy presupposes the adoption of a private law order that defines and protects private domains within which individuals are free to choose and to enter into voluntary contracts with each other. Accordingly, the demand that within a market economy competition policy ought to secure the freedom to compete is equivalent to the demand to respect and protect the individual liberty that the respective private law order provides for.[11]

This claim is curious. Indeed, it seems to assign a very modest role to competition law,[12] namely to enforce the provisions which are already set up by other fields of private law. Thus, competition law would amount to implementing the Böhmian conception of competition.

This statement implies that competition policy is not intended to add anything to the existing legal order. It is surprising because it is very widely admitted among antitrust practitioners that competition law has deeply transformed the legal order.

So, Professor Vanberg appears to contemplate a radical departure from the current competition law (and in particular from articles 101 and 102 of the Treaty on the Functioning of the European Union).

But have I not misunderstood what the author meant to say?

It seems that I have not. Indeed, in response to the criticism that the securing of “economic freedom” is of no guidance as a goal of antitrust, he writes that

When critics […] charge that the goal of protecting the freedom to compete is, in effect, an “empty formula” that per se, without the assistance of economic efficiency considerations, cannot provide guidance for competition policy, they can surely not mean to say that competition authorities or courts that are in charge of enforcing the ‘rules of the market game’ cannot know what this goal requires them to do. Within an established private law order what individual liberty and, hence, freedom to compete means is explicitly defined even if on occasion courts may have to decide how, exactly, the existing rules should be interpreted. At the sub-constitutional level, in its role of monitoring the ongoing market game, competition policy can surely be guided by the goal of protecting the freedom to compete.[13]

The argument that Professor Vanberg puts forward in order to prove that freedom to compete provides a real guidance for competition law is that this notion is explicitly defined in the established private law order.

Now, there are two ways of interpreting this statement. Either one considers that, within the established private law order, the explicit definition of freedom to compete is provided by a set of rules other than competition law; or one thinks that this definition is provided by competition law itself.

The first interpretation would tend to confirm that Professor Vanberg does not want competition law to modify the status quo ante.

The second interpretation would be subject to a twofold criticism.

First, it does not make much sense to say that freedom to compete is the goal of competition policy and to revert back to competition law to define freedom to compete.

In such a case, “freedom to compete” would aptly be described as an “empty formula”; indeed, it would be nothing more than a superfluous and cumbersome detour. It would amount to saying that the goal of competition policy is to enforce the provisions of competition law.

Second, and more importantly, it is not possible to refer to the provisions of competition law in order to “explicitly define” the notion of “freedom to compete.

Indeed, the problem is precisely that competition law, which is composed of “general clauses[14] and “open-textured” provisions, does not reveal to its enforcers what they are to do.

Enforcers need to inject a meaning into these provisions and could hardly use them to supply any meaning to something else. Thus, it is impossible to argue that the competition law currently on the books defines what freedom to compete is.

So, one is led to conclude that Professor Vanberg really wants to say that the goal of competition policy is or should be to enforce the “economic freedom” secured by other provisions of private law.

However, this opinion seems to be very hard to support, unless one has in mind a version of competition law markedly different from the one currently enforced in America and in Europe. Now, although Professor Vanberg is not explicit about the kind of competition law he desires, on the whole he seems to be rather satisfied with the current law.

To be sure, the drafters of the Sherman Act argued that they were just enacting the current common law; but I think that nowadays almost nobody would be ready to support such an analysis.

Indeed, as Bork noted,

The common law of restraints of trade and monopolies has been a variable growth, composed of diverse and contradictory strains, many of them obviously irrelevant or even hostile to the policy of fostering competition. Yet Sherman and many of his colleagues repeatedly assured the Senate, without objection by anyone, that they proposed merely to enact the common law.[15]

The same holds true in Europe. Indeed, the concepts of dominant position, abuse, relevant market, cartels (how to differentiate them from a merger or a cooperative agreement?) were not defined before competition laws entered into force. Even nowadays they are not satisfactorily defined.

So, at best, one could argue that, although they modify the legal order (and so cannot rely on the pre-existing legal order to explain what “freedom to compete” is supposed to mean), competition laws rightfully belong to a private law order because they share in the core features of this paradigm.

In the next section, I am going to address this line of argument.

3.2°   Is Competition Law Faithful to the Spirit of a Private Law Order?

Before entering the discussion, let us make clear that some of the arguments mentioned hereinafter are not explicitly advanced by Professor Vanberg in connection to antitrust; in such cases, I have taken the liberty to apply them to this field.

3.2.1°  At First, Competition Law Seems to Be in Conflict with a Private Law Order.

At first, competition law seems blatantly in conflict with a private law order.

Indeed, it drastically reduces the freedom of contract and the right of the owners of the productive factors to use them as they see fit.

Yet, private property and freedom of contract, together with tortious liability, are the pillars of a private law order. Indeed, according to Professor Vanberg, Böhm specified that a genuine private law order had to guarantee to individuals “their property rights and freedom of contract.[16]

One could argue at best that this body of laws is necessary for an efficient market (and that, as such, it is a proper “corrective” to a private law order), but it appears very difficult to claim that it is a furtherance of the principles of a private law order and not an exception to them.

3.2.2° May we Say that Competition Law Merely « Redefines » the Principles of Private Property and Freedom of Contract?

To that criticism, Professor Vanberg might answer that competition law just involves a redefining of the meanings and limits of private property and freedom of contract.

  • The Recognition of Private Property and Freedom of Contract Does not Settle “All the Issues.”

To begin with, the author makes the point that the recognition of private property and freedom of contract does not settle “all the issues.” To illustrate his thought, he relies on two quotations by Friedrich Hayek:

The market game […] can be played according to different rules, and with systematically different rules the market process will result in different patterns of outcomes. As Hayek (1960: 229) has put it: “How well the market will function depends on the character of the particular rules. The decision to rely on voluntary contracts as the main instrument for organizing the relations between individuals does not determine what the specific content of the law of contract ought to be; and the recognition of the right of private property does not determine what exactly should be the content of this right in order that the market mechanism will work as effectively and beneficially as possible.[17]

Hayek (1948: 111) points in effect to this distinction when he notes: “Where the traditional discussion becomes so unsatisfactory is where it is suggested that, with the recognition of the principles of private property and freedom of contractall the issues were settled, as if the law of property and contract were given once and for all in its final and most appropriate form, i.e. in the form which will make the economy work at its best. It is only after we have agreed on these principles that the real problems begin.”[18]

Thus, Professor Vanberg states that we are in need for “further specification”:

If the concept of the free, unhampered market is claimed to provide the appropriate standard for judging, what could be its criterion for distinguishing between the rules of an unhampered market and regulatory rules that interfere with it? One obvious criterion may seem to be provided in the concept of private property. If “the institution of private property” (von Mises 1985:30) can be said to provide the essential institutional foundation of a market economy, we can conclude that private property rights define the constitutive rules of the game of catallaxy. Accordingly, interference with these rights seemingly provides an unambiguous criterion by which regulatory rules could be distinguished from the rules of the unhampered market, as well as a criterion on which they could be critically judged from a liberal perspective. Yet, here again, the need for further specification becomes apparent as one examines the issue more closely.[19]

That said, Professor Vanberg advances two arguments.

  • Regulations “Re-Assigning” and “Re-Defining” Rights.

First, he elaborates a distinction between “assigning” and “defining” rights and argues that only the former is strictly incompatible with a private law order:

When we speak of the role of property rights, two separable, though interconnected, issues are involved. The issue of assigning rights, i.e. the question of “who owns what?,” and the issue of defining rights, i.e. the question of “what does it mean to own something?” In their rights-assigning role, property rights determine the allocation of entitlements, whereas in their rights-defining role they determine what the rules of the game are.[20]

Regulations that change the general rules of the game by redefining what it means to own something may well reduce the scope of permissible uses that private owners of assets may engage in, but they cannot [necessarily?] be said, in the same sense as rights-reassigning regulations can, to decrease the domain of the market in favor of communal rights.[21]

(As the last sentence indicates, when Professor Vanberg speaks of “rights-reassigning regulations,” he has in mind particularly regulations re-assigning rights from private individuals to the state.)

Has not competition law just “re-defined” property rights and freedom of contract?

  • Taking Account of Externalities Would Amount to Re-defining Property Rights.

Additionally, the author argues that taking account of (pecuniary) externalities, as competition law does, would only result in redefining the rights of private property and freedom of contract:

How the rules of the game should regulate such matters is, of course, linked with the externality issue. How property rights are defined decides, in effect, which of the ever present externalities of transactions third parties simply have to tolerate, and against which of such externalities they enjoy the protection of the law.[22]

When an ‘internalization’ of external effects is called for, what is actually suggested is a change in the rules, a change in the demarcation line between ‘admissible’ external effects and ‘inadmissible’ ones.[23]

Thus, if some regulation, let us say competition law, forces the owners of productive factors to take into account the harm they may inflict upon other people through externalities, in particular pecuniary externalities, it would not constitute a distortion of property rights, but just a redefining.

3.2.3° Answer: Not All “Re-Defined Rights” Are Compatible with a Private Law Order.

First, I would like to emphasize that one might agree with the idea that the recognition of private property and freedom of contract does not settle “all the issues” because it does not “determine what the specific content of the law […] ought to be” and yet insist that the recognition of these principles considerably narrows down the remaining issues and the acceptable way of settling them.

In other words, if one wants to stay within the confines of a private law order, one does not have an unlimited freedom of redefining what the governing principles of such an order entail. If it were not so, it would be meaningless to argue in favor of a “private law order,” because any statist measure could be made compatible with it. The leeway of a liberal legislator is limited.

Professor Vanberg comes close to this line of reasoning when, following Hayek, he (repeatedly) affirms that how well the market is going to work will depend on the specific characteristics of the “rules of the game.” However, one should add that the specific content of the rules also determines the nature of the game, i.e., whether it will be of a market or a non-market type.[24]

The author sets two criteria in order to determine at once whether a given measure is or not compatible with a free-market.

First, the regulation must respect the “rule of law,” and thus take the form of general and abstract rules leaving no room for any discretionary powers by the enforcers.

Once again, Professor Vanberg relies on Hayek to make his point:

[As Hayek] puts it, “so long as they are compatible with the rule of law, they cannot be rejected out of hand as government intervention but must be examined in each instance from the viewpoint of expediency.”[25]

The second limit is not really presented as such, but it can be reconstructed from the author’s words. Moreover, this limit is not mainly targeted at the redefining or rights, but rather at their re-assigning. It will nevertheless be shown that is can be transposed to the issue of redefining.

As has been said above, according to Professor Vanberg, regulations aiming at “re-assigning rights” can be rejected out of hand, or at least may be exposed to the “battery of liberal arguments,[26] so that there is a rebuttable presumption that they are not compatible with a free-market.

Now, this limit also has a bearing on the ability to redefine, because, as Professor Vanberg explains, “what appear to be redefining regulations may often be instruments for transferring rights from private holders into common pools.[27]

I agree that the two limits discussed above are important. However, I think that they are not the only requirements that a private law order entails; or, if one prefers, one might also say that these two limits implicitly include some other requirements that are to be unfolded.

In the next section, I am going to discuss the two main ones.

3.2.4° The Substantial Requirements of a Private Law Order.

It is not enough to claim that how well the economic game will work depends on the specific content of the rules of the game. Liberalism is not agnostic as to the rules, or the general characteristics of the rules, which ensure the smooth functioning of a market.

Now, what are the specific substantial requirements which are entailed by the basic principles of a private law order?

  • Only Private Property Limits Private Property.

As said above, the three main pillars of a private law order are private property, freedom of contract, and tortious liability. Actually, however, these pillars are not to be placed on the same footing. Private property is the central one, because it includes the two others.

Indeed, on the one hand, alienating a good that one owns through a contract is one of the prerogatives conferred by private property, and, on the other hand, the use of one’s property is only sanctioned by tortious liability when one injures someone else’s body or property.

As Armen Alchian explained,

Often the idea or scope of private property rights is expressed as an assignment of exclusive authority to some individual to choose any use of the goods deemed to be his private property. In other words the “owners,” who are assigned the right to make the choice, have an unrestricted right to the choice of use of specified goods. Notice that we did not add––“so long as the rights of other people are similarly respected.” That clause is redundant in strict logic. Private property owners can use their goods in any way they choose. If some of these chosen uses involve the use […] of other people’s private property, it follows that the private property system is being violated, for this use has denied to other people the control of use over the good classed as private property. To say I have private property rights is to say that no one else has the right to make the choice of use of that good […].[28]

This raises a serious difficulty for competition law, because this latter aims at making firms liable for the way they set their prices, although it would be very hard to argue that by doing so they might harm someone else’s property (or bodily integrity)[29].

To make competition law consistent with the principle of private property, it seems that there is no other way than to claim that the purported victims were “owners” of their “surplus”, that is, of the difference between the price paid and the so-called competitive level.

Indeed, at least one well-known author––Robert H. Lande––is famous for endorsing this thesis. For example, in a paper written with John B. Kirkwood, he submitted that

the antitrust laws on the books today best can be explained as a congressional declaration that the property right we term “consumers’ surplus” belongs to consumers, not to cartels or to no one. The antitrust laws were enacted primarily to award this relatively amorphous property right to consumers, and to prevent cartels and monopolies from taking it. […] These laws better define consumers’ property rights and protect them from being stolen by firms with market power.[30]

It is worth noticing that Professor Vanberg, who has necessarily heard of this thesis (the only thesis that I know which could potentially connect antitrust to a private law order) does not appear to support it. At the very least, he makes no reference to it in any of his works that I have read.

But actually this very thesis, not only is unsustainable on logical and economic grounds (e.g., we would need to know the “competitive level” in order to determine which “surplus” belongs to the consumers) but, more importantly, does not fit with the essential principles of a private law order, as will be shown in the next section.

  • Property Deals with Physical Goods, Not with their Value.

Professor Vanberg criticizes Hayek for not elaborating on the specific features of the rules of private law.[31] Indeed, it is true that Hayek does not deal much with this question.

Yet, it appears that actually he specifies at least one essential feature (which makes this feature all the more noticeable) of the right of private property.

Indeed, Hayek wrote that

The abstract rule of conduct can (and, in order to secure the formation of a spontaneous order, should) thus protect only the expectation of command over particular physical things and services, and not the expectations concerning their market value, i.e. the terms on which they can be exchanged for other things. This is a point of central importance which is frequently misunderstood.[32]

Similarly, Armen Alchian held that

[I]f I select a use for the goods said to be my private property, the selection must not affect the physical attributes of yours goods. If I own some iron, I can make window frames or fence posts out of it, but if I shove a piece of iron through “your” glass window, I shall be denying you the right of choice of the physical attributes of your private property. However, if I convert the iron to a special kind of good that other people are willing to buy instead of buying what you are selling, you may find that the reduced exchange value of your goods imposes a greater loss of exchange power (wealth) than if I had simply broken your window. Although the private property rights protect private property from physical changes chosen by other people, no immunity is implied for the exchange value of one’s property. […] Private property, as I understand it, does not imply that a person may use his property in any way he sees fit so long as no one else is “hurt.” Instead, it seems to mean the right to use goods (or to transfer that right) in any way the owner wishes so long as the physical attributes or uses of all other people’s private property is unaffected. And that leaves plenty of room for disturbance and alienation of affections of other people.[33]

In the same way, Murray Rothbard stated that

[W]hat the enforcing agency combats in a free society is invasion of the physical person and property, not injury to the values of property. For physical property is what the person owns; he does not have any ownership in monetary values, which are a function of what others will pay for his property. Thus, someone’s vandalism against, or robbery of, a factory is an invasion of physical property and is outlawed. On the other hand, someone’s shift from the purchase of this factory’s product to the purchase of a competing factory’s product may lower the monetary value of the former’s property, but this is certainly not a punishable act. It is precisely the condition of a free society that a property owner have no unearned claim on the property of anyone else; therefore, he has no vested right in the value of his property, only in its physical existence.[34]

As the last example shows, the fact that private property does not protect the value of things in itself, and hence that a direct injury to the value of property cannot entail the tortious liability of the injurer, is a necessary requirement of free-market competition.

Randall Holcombe & Russell Sobel dealt with this issue (known in economics as “pecuniary externality”) in a paper entitled “Public Policy Toward Pecuniary Externalities.” They wrote that

In the competitive model, resources are allocated efficiently when individuals have clear property rights over the ownership of all resources but not over the value of the resources they own. Because individuals do not have property rights to the present value of their assets in a competitive private market, pecuniary gains and losses do not require compensation by the inflicting party. […] In fact, the ability of new firms to enter an industry and inflict pecuniary losses on existing firms is the process that generates efficiency in competitive markets. The ability of some individuals to inflict pecuniary losses on others is necessary for economic efficiency.[35]

In find it interesting that all these economists do not seem to be aware that the way they characterize the limits of property rights in a liberal order actually recoups perfectly a traditional principle of private law[36] (which makes me think that, in order to support the repealing of antitrust law, it not necessary to be a good economist, being a serious lawyer is enough).[37]

Indeed, the law of torts states that only the so-called “consequential economic losses,” that is economic losses which are “consequential on physical damage (to the person or to property),[38] as opposed to “pure economic losses”, are compensable.[39]Pure economic loss” is thus the legal term for what is known as “pecuniary externality” in economics.

Of course, there are exceptions to this principle. Actually, it turns out that most of them are highly questionable and generate many serious practical difficulties. However, even if they were not, it would be of a primary importance to recall that they are exceptions and not a furtherance of the principle.[40]

Now, the “harms” that “restraints of trade” are supposed to cause to consumers (supra-competitive prices through exploitative practices) or to the competitors (sub-competitive prices through “predatory” practices) are pure economic losses (pecuniary externalities). Thus, it appears that competition law breaks with a traditional principle of tort law.

What does Professor Vanberg have to say about this issue?

  • Professor Vanberg Does not Really Address this Issue.

Curiously, it appears that Professor Vanberg does not address this issue and barely acknowledges its existence.

He does not seem aware that competition law differs from traditional private law on this regard and offers no justification for departing from this principle.

Throughout his various papers that I read, only once does he allude to this problem.

Indeed, in Rules & Choice in Economics, when arguing that the recognition of the principle of private property does not determine which negative externalities must be counted as an invasion of other people’s rights, he declares in passing that

When an ‘internalization’ of external effects is called for, what is actually suggested is a change in the rules, a change in the demarcation line between ‘admissible’ external effects and ‘inadmissible’ ones. Where this demarcation line is actually to be drawn cannot be derived from some supposedly inherent quality of externalities per se, as may be suggested by distinctions such as the familiar one between ‘pecuniary’ and ‘non-pecuniary’ externalities (Tullock 1970:161ff.). It is, instead, a normative judgement, based on a comparative evaluation of the expected general working properties of the alternative rules under consideration.[41]

Yet, the reason that he advances for scraping this principle, namely that the demarcation line is a “normative judgement” and must not rely on some “inherent quality of externalities per se,” is not convincing.

Indeed, it is a false dichotomy. Referring to some “inherent quality” (to wit, the physical nature of the damage to the thing owned) is a “normative judgement”––the normative judgement made by liberalism and traditional private law.

Moreover, in the book referred to, Tullock actually declares himself largely favorable to the principle that pecuniary externalities must not be compensable. What he criticizes is the lack of reflection about this principle.[42]

The only exception that Tullock sets up (and still it is not clear whether he wants it to be legally enforceable) concerns the “social loss” resulting from rent-seeking. Yet, even this exception generates many conceptual and practical difficulties and has been severely and cogently criticized.[43]

Moreover, after rejecting out of hand the “familiar” distinction between pecuniary and technological externalities, Professor Vanberg puts forward an example which precisely recoups the discarded distinction. Indeed, he writes that

the appearance of a new competitor will generally impose negative external effects on parties presently operating in the respective market, negative effects that may well be quite ‘significant’. The relevant normative issue, however, is not whether these external effects are, as such, significant, whatever the measure of significance may be.[44]

This is precisely the example which is used by the aforementioned authors in order to show that making pecuniary externalities (pure economic losses) compensable would block the economy.

I find it remarkable that competition law precisely needs to depart from a principle without which free-market competition could not be possible.

3.2.5° Why one Should not Depart from the Principle that Private Property Does not Deal with Values and that Pecuniary Externalities are not Compensable.

Let us recall that Professor Vanberg mentioned two principles according to which one could judge at once whether a rule was compatible with a free-market order.

First, the rule must aim at re-defining and not at re-assigning the rights; second, it must be compatible with the rule of law. I will show that the taking into account of pecuniary externalities necessarily leads to infringe these two rules.

  • Does Competition Law Merely Re-define Property rights?

According to Professor Vanberg, competition law would only re-define the rights of the owners of the productive factors, so as to prevent the infliction of some negative externalities to consumers or to rival firms. It would not purport to transfer these prerogatives to the public domain.

Yet, actually, what happens is precisely that competition law results in “taking well-defined rights away from individual owners, and placing them in a new common pool.”[45]

Indeed, without competition law, each firm would have a discretionary power to determine the prices of the products they turn out, without having to worry about pecuniary externalities.

Now, with competition law, the power to set prices is not strictly speaking transferred to the consumers (because the consumers cannot directly do so), but the firm must behave toward them as an agent toward its principal. This results in a clouding of the responsibilities.

If the firm is no longer authorized to maximize its income, it will no longer know what it is authorized to do, unless one tells it what is the “competitive price level” that it must not cross––which obviously nobody knows.

Moreover, the so-called “principal” is not one definite person, but a multiplicity of unknown individuals, to which the so-called agent is unable to request for definite instructions.

Thus, competition law takes “well-defined rights away from individual owners” (rights which conferred to the owners the absolute and discretionary power to choose the prices of their products) and dilutes them into a “common pool” of anonymous consumers.

Because consumers are unable to act by themselves, there is no other way but to appoint some intermediary between the agent and the mass of the principals. This intermediary is the state. And it is self-appointed; no assembly of consumers has commissioned it or can control it.

As a final result, the true consequence of competition is to re-assign property rights from the firms to the state. Hence, according to Professor Vanberg’s own criteria, it should be rejected out of hand.

Thus, Hayek was right to warn that

The power to determine the price or the quality of a product at the figure most profitable to the owner of such a rare resource used in its production is a necessary consequence of the recognition of private property in particular things, and cannot be eliminated without abandoning the institution of private property.[46]

Moreover, competition agencies tend to behave toward firms as if they were state-owned enterprises. Under the guise of general but open-textured rules, they issue specific orders with which private firms must comply.

Thus, far from amounting to a private law order, competition law is public law par excellence.

  • Is Competition Law Compatible with the Rule of Law?

According to most antitrust practitioners, competition law is fundamentally incompatible with the rule of law. However, most would argue that it is an advantage rather than a flaw. Many modern authors on competition law reject the rule of law as an old-fashioned principle.

As an author puts it,

Virtue is in the eye of the beholder. What advocates of the rule of law see as a flaw, antitrust advocates regard it as a virtue. One of the assets of antitrust policy, in the eyes of its advocates, lies in its flexibility and adaptability to changing economic circumstances.[47]

Or, more “poetically,”

Now this was getting serious,

So Smith felt that he must

Have a friendly interview

With the men in Anti-Trust.

So hat in hand, he went to them.

They’d surely been misled;

No Rule of Law had he defied.

But then their lawyer said:

“The Rule of Law, in complex times,

Has proved itself deficient.

We much prefer the Rule of Men,

It’s vastly more efficient!”[48]

So, it is very surprising to hear Professor Vanberg arguing not only that the ordoliberal brand of competition law is compatible with the rule of law, but that critics must mean something else when they complain that “economic freedom” does not enable the enforcers to know what they are supposed to do.

At best one could imagine that the author is referring to a body of competition laws totally different from the current one. (By doing so, he would differ from other “ordoliberals” because most of them seem to consider that the current case law reflects correctly enough their own philosophy.)

However, one might recall that, in the commented paper, Professor Vanberg holds that what the enforcers of the ordoliberal brand of competition law are required to do is “explicitly defined” by the private law order.

Thus, Professor Vanberg’s argument to prove that ordoliberal brand of competition respects the rule of law can hold true only if it would not change anything to the pre-existing legal order; unless the author has indeed such a modest ambition (and thus can be classified as a libertarian), which is extremely unlikely, one can conclude that his argument fails.

Moreover, it can be showed that the incompatibility between competition law and the rule of law is structural and does not depend on the brand of competition law which is used (unless one takes seriously the Böhmian manifesto, which once again nobody does, except the libertarians).

Indeed, as argued above, more than a century after the adoption of the first body of competition rules, notions such as dominant position, abuse, relevant market, restraint of trade, competitive price, barrier to entry, etc. are still undefined.

There is not even any objective criterion to distinguish a cartel from a merger or from a cooperation agreement.

Arbitrariness is a structural characteristic of any body of laws which tries to prevent or regulate pecuniary externalities, and hence prices, because there is no way to set any criterion to determine what the “fair” or “competitive” price would be.

Thus, if ordoliberals really cared about the rule of law, they should be the most stringent critics of competition law. Instead, they are their most fervent supporters[49].

3.2.6° Why Insist that Competition Law Be Enforced by Administrative Agencies?

A related criticism pertains to the fact that most ordoliberals do not seem to bother that competition law, which they analyze as an ordinary rule of private law, is primarily enforced by administrative bodies instead of ordinary courts.

Actually, ordoliberals often strongly insist on having competition law adjudicated by specialized agencies.

If competition law does not differ from other rules of private law, or if it is just a short-name to refer to a private law order, why entrust some specialized bureaucratic body with its enforcement?

4° The Specific Issue of the Restraint of Trade.

According to Professor Vanberg,

An issue that can serve to illustrate the difference between a free-market and a constitutional outlook at regulations that restrict the freedom of contract is the case, mentioned in the above quotation from Hayek, of contracts “in restraint of trade.[50]

Indeed, the author reports that Buchanan “chastise[d]”

the libertarian blunder of extending the defense of the liberties of individuals to enter into ordinary voluntary exchanges to a defense of the liberties of individuals to enter into voluntary agreements in restraint of trade.[51]

Now, it appears that Buchanan somehow misrepresented the libertarian thesis.

Actually, libertarian authors do not really argue that agreements in restraint of trade should be legal. They rather state that they do not know what such agreements are, or, more exactly, how to distinguish them from “ordinary voluntary exchanges.”

Indeed, it is hard to see how a private individual could ever “restrain trade” without the help of the state or without violating other rules of justice. If John wants to buy James’ car, but that James refuses to sell his car to John, can we meaningfully say that James is committing a “restraint of trade”?

Thus, according to Murray Rothbard,

An individual becoming idle instead of working may be said to “restrain” trade, although he is simply not engaging in it rather than “restraining” it. If antitrusters wish to prevent idleness, which is the logical extension of the W.H. Hutt concept of consumers’ sovereignty, then they would have to pass a law compelling labor and outlawing leisure—a condition certainly close to slavery. But if we confine the definition of “restraint” to restraining the trade of others, then clearly there can be no restraint of trade at all on the free market—and only the government (or some other institution using violence) can restrain trade. And one conspicuous form of such restraint is antitrust legislation itself![52]

It is vain, however, to call simply for clearer statutory definitions of monopolistic practice. For the vagueness of the law results from the impossibility of laying down a cogent definition of monopoly on the market.[53]

One can see that the issue raised by Rothbard is before all that of the meaning of the notion of restraint of trade.

Similarly, according to Dominick Armentano,

An additionally important part of the case against antitrust law and enforcement relates to basic questions of due process and justice. Prior to an antitrust action and any alleged violation of the law, no one can know with any reasonable certainty what it means to “reduce competition substantially” or to effect “unreasonable” restraints of trade […].[54]

Actually, this issue is also discussed by legal authors and courts. This problem is very serious and still unresolved. Specialists have failed to set up any objective criterion to distinguish an agreement “in restraint of trade” from an “ordinary” agreement.

The issue is particularly important at the “sub-constitutional level,” where one must find whether a definite contract constitutes an “illegal” cartel or a benign “merger” or “cooperative agreement.”

The result is that almost any agreement is exposed to be struck down by a court and its authors to be fined or jailed.

For instance, in the famous Standard Oil case (1910), Chief Justice White, speaking for the majority, stated that

[A]s the contracts or acts embraced in the provision [Section 1 of the Sherman Act] were not expressly defined, since the enumeration addressed itself simply to classes of acts, those classes being broad enough to embrace every conceivable contract or combination which could be made concerning trade or commerce or the subjects of such commerce, and thus caused any act done by any of the enumerated methods anywhere in the whole field of human activity to be illegal if in restraint of trade, it inevitably follows that the provision necessarily called for the exercise of judgment which required that some standard should be resorted to for the purpose of determining whether the prohibition contained in the statute had or had not in any given case been violated.

To hold to the contrary would require the conclusion either that every contract, act, or combination of any kind or nature, whether it operated a restraint on trade or not, was within the statute, and thus the statute would be destructive of all right to contract or agree combine in any respect whatever as to subjects embraced in interstate trade or commerce, or, if this conclusion were not reached, then the contention would require it to be held that, as the statute did not define the things to which it related, and excluded resort to the only means by which the acts to which it relates could be ascertained,––the light of reason,––the enforcement of the statute was impossible because of its uncertainty.

Similarly, in the Board of Trade of City of Chicago v. US (1918), Justice Brandeis, delivering the opinion of the Court, hold that

The case was rested upon the bald proposition, that a rule or agreement by which men occupying positions of strength in any branch of trade, fixed prices at which they would buy or sell during an important part of the business day, is an illegal restraint of trade under the Anti-Trust Law. But the legality of an agreement or regulation cannot be determined by so simple a test, as whether it restrains competition. Every agreement concerning trade, every regulation of trade, restrains. To bind, to restrain, is of their very essence. The true test of legality is whether the restraint imposed is such as merely regulates and perhaps thereby promotes competition or whether it is such as may suppress or even destroy competition. To determine that question the court must ordinarily consider the facts peculiar to the business to which the restraint is applied; its condition before and after the restraint was imposed; the nature of the restraint and its effect, actual or probable. The history of the restraint, the evil believed to exist, the reason for adopting the particular remedy, the purpose or end sought to be attained, are all relevant facts.

(As one can sees, so far Justice Brandeis’ reasoning is slightly different from Justice White’s; the former deals more directly with the notion of restraint of trade. But Justice White’s reasoning seems to have changed afterwards. See next quote.)

In the American Tobacco case (1911), Justice White started by recalling that the words “restraint of trade” were not defined by the Sherman Act and that consequently it was necessary to interpret this notion through the help of reason.

Then, referring to the Standard Oil case, he wrote that

the duty to interpret, which inevitably arose from the general character of the term ‘restraint of trade,’ required that the words ‘restraint of trade’ should be given a meaning which would not destroy the individual right to contract, and render difficult, if not impossible, any movement of trade in the channels of interstate commerce,––the free movement of which it was the purpose of the statute to protect. […] [T]he necessity for not departing in this case from the standard of the rule of reason which is universal in its application is so plainly required in order to give effect to the remedial purposes which the act under consideration contemplates, and to prevent that act from destroying all liberty of contract and all substantial right to trade, and thus causing the act to be at war with itself by annihilating the fundamental right of freedom to trade which, on the very face of the act, it was enacted to preserve, is illustrated by the record before us.

However, “reason” is not in itself a legal criterion. It is only the mental tool with which lawyers and economists might identify an objective criterion and enforce it in specific cases.

Thus, on can see that libertarians were well-inspired to criticize the notion of (private) “restraint of trade.” If there was a “blunder,” it was on the side of the drafters of the Sherman Act who, according to nobody less that the American Supreme Court, were about to annihilate “the fundamental right of freedom to trade.”

To sum up, the challenging task for an advocate of competition law is to set up a criterion––apt to be implemented at the sub-constitutional level––to define what a restraint of trade is and how to differentiate it from ordinary contracts.

For ordoliberals and constitutionalist economists, the difficulty of this task is compounded by the fact that they must not make welfare consequences enter the definition.

Regarding this issue, authors on antitrust divide into three classes.

First, some proponents of an “effect-based” approach argue that any failure to maximize the well-being of the relevant consumers constitutes a “restraint of trade.”

Of course, this conception is blatantly incompatible with the rule of law and a private law order because, as will be argued in the second article, enforcers and firms cannot reasonably assess the welfare consequences of any concrete practice.

Second, many authors just abstain from explaining how to distinguish an ordinary contract from a restraint of trade and, consequently, implicitly delegate this power to the antitrust enforcers who are then called to decide on a case-by-case basis, which obviously is contrary to the rule of law.

Third, some libertarian and ordoliberal thinkers define competition in institutional terms, as the ways in which an individual behaves within the confine of a legal order protecting private property. This definition does not leave much room for a private individual to commit a restraint of trade.

Now, to which side belong Buchanan and Professor Vanberg?

To my knowledge,[55] Buchanan has no sub-constitutional definition of “restraint of trade” to offer.

In the very paper where he “chastised” the libertarian “blunder,” he writes that

What criterion may be introduced to distinguish those exchanges that exclusively or primarily increase value to the exchanging parties from those in which the values to these parties are achieved at the expense of parties external to agreement? In Economist and the Public, Hutt introduced the now familiar notion of “consumers’ sovereignty,” which provided the criterion he needed. […] Value to consumers of final products and services––this becomes the test that may be used to make the distinction between voluntarily agreements that pass the ultimate value test and those that do not.[56]

As one can see, the criterion advanced by Buchanan deals with welfare effects. Now, the problem is that, as a constitutionalist economist, Buchanan is expected to be more than skeptical at the idea that bureaucrats or judges might try to assess any welfare effect at the sub-constitutional level.

So, either James Buchanan did not hold fast to the theories he is supposed to advocate, or he was unable to offer any criterion to define the notion of “restraint of trade” at the sub-constitutional level.

Surely, Buchanan also writes that

The gains that parties sought to secure, either through public or private agency, from agreements on sharing or dividing markets, on fixing prices or wages, on joint negotiations––these are not properly enforceable as gains-from-trade. These are, instead, gains from restrictions on trade, and as such, they are subject to normative condemnation on the principle of consumers’ sovereignty. The state’s enforcement and protection of individuals’ liberties of contract cannot be extended to contracts made in restraint of trade.[57]

However, just listing some broad categories of practices (“agreements on sharing or dividing markets, on fixing prices or wages, on joint negotiations”) and calling them “restraints of trade” is clearly not enough. The challenging task here would have been to set up a criterion which makes it possible to objectively determine at the sub-constitutional if a given practice enters these categories.

My take is that, on the one hand, there is no criterion apt for this task which does not refer to the welfare consequences of the practice under examination, and that, on the other hand, competition agencies cannot reasonably assess these welfare consequences.

As to Professor Vanberg, he exhibits an ambivalent attitude toward the concept of competition (and, reciprocally, toward the notion of restraint of trade).

He expressly defines competition in quasi-institutional terms. However, throughout his work, he often seems to revert to another, undefined conception of competition.

He borrowed from Franz Böhm his definition of competition as a quasi-institutional regime. This definition has already been quoted. Professor Vanberg words it this way:

As Böhm explains, market competition is the kind of economic dynamics that results within a private law order from the ways in which individuals exercise their private autonomy, i.e. the individual liberty that they enjoy within a legal order that protects their property rights and freedom of contract. […] Adopting a private law order and adopting a market economy are not two separate things. The second results as a consequence of individual choices when the first is established. […] Individual liberty as private autonomy is constituted by, and at the same time limited by, an effectively enforced legal framework.[58]

I find this definition excellent. Note that the “ways in which individuals exercise their private autonomy” and the “individual choices” are not specified; consequently, any way or choice will do, including “cooperation,” because contract law obviously does not prohibit it.

However, as announced, this definition does not seem to leave any room for the implementation of a specialized body of competition law.

Indeed, on the one hand, an individual or a firm can be said to injure competition when it violates the ordinary rules of private law relating to property and contract, but it is not a very enlightening way of speaking and there is no need of a Sherman Act or a European Treaty for preventing it.

On the other hand, an individual or a firm can adequately be described as injuring competition when they obtain through lobbying some special legislation favoring them or hurting their competitors. However, it would not seem appropriate to fight these restraints of trade through fines, as competition agencies ordinarily do.

However, curiously, Professor Vanberg seems to think that it is necessary to have some body of competition laws to prevent individuals from “abrogating” the rules of the game.

For instance, he writes that the founders of the Freiburg School argued that

the freedom of contract on the sub-constitutional level cannot include the right of the players to abrogate the rules of the game that are established at the constitutional level.[59]

Now, it is obviously possible that the “players” might try to abrogate or modify the “rules of the game” by intervening at the constitutional level through lobbying, but it is not easy to conceive how they could do so through the use of their freedom of contract.

***

[1]     Viktor J. Vanberg, “Consumer Welfare, Total Welfare and Economic Freedom – On the Normative Foundations of Competition Policy,” Walter Eucken Institut, Freiburg Discussion Paper on Constitutional Economic, 9/03 (hereinafter, “Consumer Welfare, Total Welfare and Economic Freedom”).

[2]     Viktor J. Vanberg, Rules & Choice in Economics, Routledge, Taylor & Francis e-Library, Economics as social theory, Series edited by Tony Lawson, University of Cambridge, 2003, first published in 1994 (hereinafter, “Rules & Choice in Economics”).

[3]     Viktor J. Vanberg, The Constitution of Markets – Essays in Political Economy, Routledge, Taylor & Francis e-Library, 2003, first published in 2001 (hereinafter “The Constitution of Markets”).

[4]     Viktor J. Vanberg, Consumer Welfare, Total Welfare and Economic Freedom, p. 7.

[5]     Viktor J. Vanberg, The Constitution of Markets, p. 3.

[6]     Viktor J. Vanberg, Consumer Welfare, Total Welfare and Economic Freedom, p. 8.

[7]     Franz Böhm, “Privatrechtsgesellschaft und Marktwirtschaft”, Ordo-Jahrbuch für die Ordnung von Wirtschaft und Gesellschaft 17, 1966, 75-151. Reprinted in Böhm 1980, S. 105-168. It seems that this article has never been translated in English, which is a real pity. For the present discussion, I rely exclusively on Professor Vanberg’s account of this article. If ever this account was not faithful, it should be considered that I commented Professor Vanberg’s thought, and not Böhm’s.

Update: For a translation, see Alan Peacock and Hans Willgerodt (eds), “Germany’s Social Market Economy: Origins and Evolution,” Palgrave Macmillan, 1989, pp. 46-47. The text is entitled “Rule of Law in a Market Economy,” but a footnote indicates “Translated from the original article which was published in 1966 in the Ordo yearbook, Vol. 17. It was originally entitled ‘Private Law Society and the Market Economy’.”

[8]     Viktor J. Vanberg, Consumer Welfare, Total Welfare and Economic Freedom, p. 8.

[9]     This wording seems to imply that the extent of “the range of behavioral options that are not prohibited” does not matter. Indeed, as will be argued in the fourth article, Professor Vanberg often seems to use a purely positivist conception of freedom. However, he also writes that “Concepts such as private autonomy, individual liberty or economic freedom have a definite meaning within a legal-institutional framework that defines and protects private domains within which individuals are entitled to freely pursue their own ends. To have meaning at all they presuppose, to be sure, the existence of a system of negative or prohibition rules that leave room for free individual choice” (see ibid., p. 11). Yet, the question should be “how much room”?

[10]    Ibid., p. 9.

[11]    Ibid., p. 10.

[12]    One might note that Professor Vanberg often employs the notion of competition policy and not the one of competition law. Now, it would not be problematic to consider that the goal of competition policy is to enforce competition law, but it just pushes back the real issue which then is to know the goal of competition law.

[13]    Ibid., p. 10.

[14]    Ibid., p. 24 (“It is entirely uncontroversial that, in this sense, competition agencies in enforcing the rules of the market game may need to rely on knowledge about factual matters that only economics can provide, especially in cases where the rules include general clauses that need to be interpreted in light of the particular facts in a given case.”)

[15]    Robert Bork, The Antitrust Paradox – A Policy at War with ItselfThe Free Press, 1993, p. 20.

[16]    Viktor J. Vanberg, Consumer Welfare, Total Welfare and Economic Freedom, p. 8.

[17]    Ibid., p. 13.

[18]    Ibid.

[19]    Viktor J. Vanberg, The Constitution of Markets, p.23.

[20]    Ibid.

[21]    Ibid.

[22]    Ibid., p. 34.

[23]    Viktor J. Vanberg, Rules & Choice in Economics, p. 217.

[24]    Or, to employ a different terminology, whether this game is “economic” or “political.” See Franz Oppenheimer, The State, Liberty Fund, p. 19 (“There are two fundamentally opposed means whereby man, requiring sustenance, is impelled to obtain the necessary means for satisfying his desires. These are work and robbery, one’s own labor and the forcible appropriation of the labor of others. […] I propose in the following discussion to call one’s own labor and the equivalent exchange of one’s own labor for the labor of others, the “economic means” for the satisfaction of needs, while the unrequited appropriation of the labor of others will be called the “political means.” ”).

[25]    Viktor J. Vanberg, The Constitution of Markets, p. 20.

[26]    Ibid., p. 24.

[27]    Ibid., p. 25.

[28]    Armen Alchian, Economic Forces at Work, LibertyPress, 1977, pp. 130-131. This point helps refuting a curious objection raised by Professor Vanberg. Indeed, this latter writes that “The private property rights that constitute markets are inevitably “restricted” rights in the sense that they define socially sanctioned limits to what the owner of an asset is entitled to do, and which uses of his property are prohibited in order to protect the interests of other players in the game of catallaxy. In other words, the question of the desirability of regulation cannot be an issue of unrestricted versus restricted rights because a market based on literally unrestricted rights is unimaginable” (The Constitution of Markets, p. 25). This amounts to defining the problem away. However, the point is whether (and to what extent) property rights are “restricted” by something else than other property rights. As will be argued later, if the property rights of the owners of productive factors are restricted in order to increase the “surplus” of the consumers, the institution of private property is impaired because consumers cannot have a property right on “their” surplus and so the property rights of the firms are limited by something else that other property rights.

[29]    As an author says, “The traditional role of tort law has been to protect people against damage to their person and property” (John Cooke, Law of Tort, Pearson Education Limited, 9th ed., 2009, p. 19).

[30]    John B. Kirkwood and Robert H. Lande, “The Chicago School’s Foundation Is Flawed: Antitrust Protects Consumers, Not Efficiency,” in Robert Pitofsky (ed.), How the Chicago School Overshot the Mark – The Effect of Conservative Economic Analysis on U.S. Antitrust, Oxford University Press, 2008, p. 90.

[31]    This is a kind of paradox, because Hayek claimed that the real discussion started there. However, he also admitted that this issue concerned more the lawyers than the economists. See Friedrich Hayek, The Constitution of Liberty, The University of Chicago Press, The Collected Works of F. A. Hayek, volume XVII, 2011, p. 339 (“The application in detail of these general principles must be left largely to experience and gradual evolution. It presupposes concern with concrete cases, which is more the province of the lawyer than of the economist”).

[32]    Friedrich Hayek, Law, Legislation and Liberty, Routledge Classics, 2013, p. 283.

[33]    Armen Alchian, Economic Forces at Work, aforementioned, p. 131-132.

[34]    Murray Rothbard, Man, Economy, and State, Ludwig von Mises Institute, 2004, p. 183.

[35]    Randall Holcombe & Russell Sobel, “Public Policy Toward Pecuniary Externalities,” Public Finance Review, Vol. 29, n°4, July 2001, pp. 304-325.

[36]    It must be noted that Buchanan was an exception. Indeed, he wrote that “The market does allow persons to act without direct regard for the interests of others, and, over very extensive areas of interaction, this process does generate results that are welfare maximizing for the whole community of persons. The market process fails in this respect only in the presence of relevant externalities. But these are only a small subset of the set of all externalities, if this term is defined simply as the imposition of noncompensated harm or benefits on parties who are not primary participants in exchanges. The conventional distinction in theoretical welfare economics is that between technological and pecuniary externalities, that is, between those actions that directly affect the utility or production functions of parties outside the exchange, and those actions that affect such parties only through changes in terms of trade, or prices. This distinction is also broadly recognized in the traditions of the common law. The market fails in the standard sense when the first sort of externalities are present; the market works only because the second sort of externalities can be disregarded.” James Buchanan, The Economics and the Ethics of Constitutional Order, The University of Michigan Press, 1991, p. 210. Then Buchanan enters into a discussion about whether for moral theory “there exists a means of making this distinction.”

[37]    Let us also note that, to my knowledge, from the above-mentioned economists, only Rothbard supported an outright repeal of competition law. This can be explained in two ways. Either the other economists did not realize that competition law violated the principle discussed, or they wanted to make an exception for competition law.

[38]    John Cooke, Law of Tort, aforementioned, p. 6.

[39]    Regarding pure economic losses, one applies the maxim “damnum sine injuria” (or “damnum absque injuria”) which means that although there is a real (and potentially significant) damage, the person who caused it is not liable for it. For instance, in his Commentaries on the Laws of England, William Blackstone wrote that “Neither is it a nuisance to set up any trade, or a school, in a neighbourhood or rivalship with another: for by such emulation the public are like to be gainers; and, if the new mill or school occasion a damage to the old one, it is damnum absque injuria.”

[40]    According to Buchanan, “Adam Smith distinguished between what we would now call pecuniary and technological externalities. His approved interferences with natural liberty extended only to those cases where genuine technological externality could be demonstrated, and he quite explicitly stated that possible pecuniary spillovers gave no cause for restrictions on trade.” He added that “It would, of course, be absurd to suggest here that Smith’s final array of potentially justifiable interferences with the freedom of individual choices corresponds fully with that which might be produced by the modern welfare economist. Furthermore, his own array of examples of potentially warranted interferences with natural liberty would surely be different in 1976 from that of 1776” (James Buchanan, The Logical Foundations of Constitutional Liberty, Liberty Fund, The Collected Works of James M. Buchanan, Volume 1, p. 300).

[41]    Viktor J. Vanberg, Rules & Choice in Economics, pp. 217-218.

[42]    Gordon Tullock, Private Wants, Public Means – An Economic Analysis of the Desirable Scope of Government, University Press of America, 1970, chapter 7, “Merely Pecuniary,” pp. 161-172. Thus, Tullock writes that “The traditional explanation of why we do not attempt to reduce externalities in this area has been to say that they are “merely pecuniary.” This phrase has never impressed me as being self-explanatory and therefore I wish to develop the reasons in a somewhat more careful way” (pp. 161-162). At the end of the chapter, he concludes that “Perhaps as a result of mere tradition, perhaps as a result of the considerations that we have discussed, and perhaps as the result of other reasons that have escaped my search, most economists refuse to apply the concept of externality in the areas that we have been discussing [i.e., pecuniary externalities] and argue that individual behavior in which individuals ignore some of the effects their behavior has on others is more desirable than compelling them to take these effects into account. I do not wish to quarrel with this line of reasoning, since I find that this is the way my own personal preferences point” (pp. 171-172).

Moreover, pondering why it would not be proper to “have the government purchase the right to cut prices from the existing producers and then collect by taxation the area of the dotted rectangle from the customers,” he answers “Repeating the slogan “merely pecuniary” does not help. There is, however, a perfectly good argument for this policy. The process of condemnation and collection of the cost by the government through taxes would necessarily be an uncertain one. The gain to society (the small triangle) is fairly certain to be relatively small […] and it seems probable that the government would frequently miscalculate” (p. 165). Tullock also enquires “whether we should permit enterprises to enter into voluntary agreements to eliminate this externality” (p. 166).

[43]    Mark Glick, “Is Monopoly Rent Seeking Compatible with Wealth Maximization?,” Brigham Young University Law Review, 1994, pp. 499 and ff; Thomas DiLorenzo, “Property Rights, Information Costs, and the Economics of Rent Seeking,” Journal of Institutional and Theoretical Economics (JITE) 144 (1988), 318-332.

[44]    Viktor J. Vanberg, Rules & Choice in Economics, p. 218.

[45]    The Constitution of Markets, p. 25.

[46]    Friedrich Hayek, Law, Legislation and Liberty, aforementioned, p. 411.

[47]    Ignacio de Leon, “Antitrust policy versus the rule of law,” p. 34.

[48]    R. W. Grant, The Incredible Bread Machine.

[49]    Let us notice that even Hayek seemed to agree to make an exception to the rule of law in favor of antitrust. For instance, he wrote in The Constitution of Liberty that “I have become increasingly skeptical, however, about the beneficial character of any discretionary action of government against particular monopolies, and I am seriously alarmed at the arbitrary nature of all policy aimed at limiting the size of individual enterprises.” As one can see, he is only “skeptical” about the “beneficial character” of “any discretionary action of government against particular monopolies”; it is very different from arguing that one is skeptical about the possibility of designing some antitrust law which would not involve the granting of discretionary powers to the state (see The Constitution of Liberty, aforementioned, p. 382). To be sure, this could be simply explained by a typical Hayekian miswording. Moreover, in a subsequent work, he wrote in a similar connection that “to avoid greater evils, a free society must deny itself certain kinds of power even if the foreseeable consequences of its exercise appear only beneficial and constitute perhaps the only available method of achieving that particular result” (Friedrich Hayek, Law, Legislation, and Liberty, aforementioned, p. 417).

[50]    Viktor J. Vanberg, The Constitution of Markets, pp. 30-31.

[51]    Viktor J. Vanberg, The Constitution of Markets, p. 32. See, James Buchanan, The Economics and the Ethics of Constitutional Order, aforementioned, p. 119. In this paper, Buchanan made the very curious claim that “The libertarian who defends private, cartel-like agreements among contracting parties on the same side of the market, as long as such agreement is voluntary, must have difficulty arguing against politically orchestrated cartel-like restrictions in particular markets.”

[52]    Murray Rothbard, Man, Economy, and State, aforementioned, p. 1119.

[53]    Ibid., p. 1118.

[54]    Dominick Armentano, Antitrust: The Case for a Repeal, Ludwig von Mises Institute, 2001, p. 101.

[55]    Let us make clear that I am not a specialist of Buchanan and that I have only a limited knowledge of his work. So any reader knowing any doctrinal proposal brought about by Buchanan as to this issue would be welcome if he posted a comment.

[56]    James Buchanan, The Economics and the Ethics of Constitutional Order, aforementioned, p. 112.

[57]    Ibid.

[58]    Viktor J. Vanberg, Consumer Welfare, Total Welfare and Economic Freedom, p. 8.

[59]    Viktor J. Vanberg, The Constitution of Markets, pp. 31-32.

Publicités

2 réflexions sur “Antitrust Law: Enforcing or Subverting the Private Law Order? – Comments on Professor Vanberg’s Papers (1/4)

  1. Pingback: An Ordoliberal Criticism of The (Subconstitutional) Effect-Based Approach: Comments on Professor Vanberg’s Papers (2/4). | Sophismes juridiques

  2. Pingback: Total Welfare and Consumers’ Sovereignty: Comments on Professor Vanberg’s Papers (3/4) – Sophismes juridiques

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