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).