Antitrust law may curb growth

Antitrust law may curb growth

By Christopher Lingle

UBUD, Bali (JP): New antitrust legislation passed in Indonesia
is likely to place an unintentional burden on the economy. In
particular, proposals to exempt state enterprises from
antimonopoly actions while targeting any and all private
companies is the exact opposite of what solid economic theory
would prescribe. Companies enjoying monopoly privileges should
lose them unconditionally, while markets should be allowed to
operate to undo private sector monopolies.

The argument is that immunity from antimonopoly legislation
might be granted to state companies that supposedly provide
"vital" goods or services to the public. This may seem plausible
on its face. However, this condition is highly subjective and
prone to politicization. Given the endemic corruption in Jakarta,
such open-ended exemptions should set off alarm bells.

In all events, most of Indonesia's monopolies are cartels
created by government policies in the first place. Government-
granted monopolies, whether to state-owned or private companies,
will encourage and prolong inefficiencies that eventually are
eliminated under competitive market conditions. Economic logic
suggests that it is only government-sanctioned monopolies that
can survive in the long run.

This can be seen by considering what lies behind the implied
dangers of market power. In terms of monopolies, they are all-
powerful since they are literally the sole seller in a market.
However, this situation is quite rare and most have short lives.
That is, unless government intervention restricts the entry of
competitors. Most economists understand that monopolies exist and
survive in the long run due to government interventions in the
first place. If not, monopolies eventually become what Ludwig von
Mises referred to as a "trivial" economic problem because self-
adjusting market mechanisms eliminate them in the long run.

The eventual market destruction of monopolies is so certain
that I offer my students an "A" grade, without taking any
examinations, if they identify a counter example. All they must
do is point out a monopoly producer whose actions: (1) injure the
community (overprice and underproduce) so that consumers pay
higher prices and have less choice and (2) survive without
government restrictions on the entry of competitors. I made this
offer for over 20 years as an economics professor without having
once to deliver on the deal.

Under competitive conditions and without government
interference to protect them, monopolists simply cannot survive.
Monopoly positions are undone by the dynamics of time that allow
for consumers and other producers to react to the higher prices
and profits arising from restrictions on output. In effect,
eventually everything that is relevant to the market will change.

Changing relative prices induce consumers to seek substitutes
or for other producers making them. Changing tastes and
preferences result from new information about other goods.
Changing technology reduces the value and community impact of a
monopoly. Industries undergoing rapid technological changes will
dispose of monopolists the most promptly. Presumably, even
Microsoft will be forced to re-engineer itself or it will be
rendered ineffective and become a non-viable competitor.

If monopolies are so rare, might it seem strange that so many
valiant defenders of public interest seek to undertake antitrust
actions with such self-righteous conviction? A partial answer may
reside in political rather than economic impulses. On the one
hand, attacks on large corporations have considerable populist
appeal. Generally, citizens and consumers tend to be more in awe
of private corporations than they are of the power of their
governments. (And this despite the fact that there are many more
mechanisms to punish private sector actors than there are for the
removal of public employees.) On the other hand, competitors will
be delighted by threats of legal action on their behalf by
bureaucrats who may be prone to financial inducements (bribery)
to do so.

Ironically, antitrust actions might do more harm than good.
But it should come as no surprise that often there is a wide gulf
between intentions of public officials and outcomes of public
policy. Consider the impacts of a recession or inflation. Perhaps
government officials did not wish to inflict pain upon their
citizens of these circumstances. Yet, ill-timed or ill-conceived
government policy actions are the basis of every economic
downturn or price upsurge in history.

In a global economy, nimbleness and rapid response will become
increasingly necessary. Therefore, large firm size may be its own
punishment in certain markets. If Microsoft is "too large" and
does not respond to world competitive pressures, the market will
inflict far greater punishment than legal bureaucrats might wish
to do.

However, if large size is an advantage in the global setting,
it would be imprudent to impose a legally imposed downsizing of
Microsoft or any other industrial behemoth. Since "downsizing"
based upon corporate logic has led to its share of mistakes, it
can be expected that political logic will be even more short-
sighted.

In sum, ill-advised antitrust legislation can be expected to
result in unnecessary interference with corporate growth or
blocking of mergers that might have resulted in efficiency gains.
Such results will impose costs on the community that include
lower quality products, fewer choices, less R&D and higher
prices. The best antitrust protection is to ensure that domestic
and international markets are open and aggressively competitive.

The writer is an independent corporate consultant and adjunct
scholar of the Center for Independent Studies in Sydney who
authored The Rise and Decline of the Asian Century (Hong Kong:
Asia 2000, 1998).