Competition Policy and the Great Depression: Lessons Learned and a New Way Forward

Posted by Social Science Research Network

Competition Policy and the Great Depression: Lessons Learned and a New Way Forward – Alan J. Meese (William & Mary Law School)

ABSTRACT: Using the Great Depression as a case study, the Article examines the link between competition policy and macroeconomic stability. This study sheds important light on claims that protection for economic liberty and resulting free competition exacerbated the Depression as well as modern arguments that coercive interference with free-market outcomes can speed recovery from the recent Great Recession.

Many equate competition policy with antitrust law. However, this Article widens the focus beyond antitrust. This wider focus reveals that, at least before the Depression, there were two other important sources of competition policy. Thus, while antitrust law protected free competition from undue private restraint, the Dormant Commerce Clause and Due Process Clauses furthered free competition by prohibiting undue state and federal restraints on economic liberty. As of 1929, then, these three sources of law combined to create and enforce a unified and doctrinally symbiotic commitment to free competition as the norm governing American economic life.

Unfortunately, relaxation of antitrust’s anti-collusion standards in the late 1920s and early 1930s paved the way for the 1933 National Industrial Recovery Act (NIRA), FDR’s stimulus plan. In particular, the NIRA fostered collective wage and price setting and banned forms of normal competition, thereby protecting incumbent firms from more efficient rivals. Antitrust’s surprising embrace of collusive practices also presaged judicial repudiation of due process protection for economic liberty, first in Nebbia v. New York, 291 U.S. 502 (1934), and then in West Coast Hotels v. Parish, 300 U.S. 379 (1937).

While the Court unanimously overturned the NIRA in Schechter Poultry v. United States, 295 U.S. 495 (1935) Congress and many states responded by enacting various statutes interfering with free competition, some of which survive to this day. In particular, the 1935 National Labor Relations Act (NLRA) mandated collective bargaining with labor cartels known as unions, thereby displacing free competition in wage setting, while the 1938 Fair Labor Standards Act further displaced such competition by imposing minimum wages. Shortly thereafter, the Supreme Court invoked Nebbia-like reasoning when holding that neither the antitrust laws nor the dormant Commerce Clause prevents states from organizing and enforcing cartels that would otherwise unreasonably restrain interstate commerce and thus violate the Sherman Act. See Parker v. Brown, 317 U.S. 341 (1943). This “state action” exemption applied, the Court said, even though California producers exported nearly all their raisins to other states.

By the mid-1940s the pre-Depression commitment to free-market competition was a thing of the past, as states and the federal government were free to displace free-market outcomes by statute. While proponents advocated the NIRA and other coercive interference with free markets as recovery measures, both theory and empirical evidence establish that these policies, including cartelization of labor via collective bargaining, deepened and lengthened the Depression. If history is any guide, then, free competition did not cause the recent Great Recession. Moreover, policies that displace free competition by, for instance, imposing minimum wages, condemning efficient conduct as “exclusionary,” or bolstering collective bargaining will only slow recovery.

This paper ends by sketching various lessons from the New Deal experience and advocating a return to the pre-Depression commitment to free-market competition. Antitrust regulation of private markets cannot ensure free competition if states and the national government can impose price and output restrictions that would be felonies if imposed by private parties. Restoration of free competition as the national norm requires a new symbiosis, whereby state and federal efforts to displace market outcomes are tested by the same skepticism as similar efforts by private parties. Antitrust experts can assist in developing this new symbiosis by devoting more intellectual energy to expanding the domain of antitrust by, for instance, advocating the elimination of various exemptions, particularly Parker’s state action exemption that currently shelters state-created cartels from the Sherman Act.