Econlib

The Library

Other Sites

 Front Page arrow Titles (by Subject) arrow SAM PELTZMAN, BOOKS: Kefauver and Populist Economics - New Individualist Review

Return to Title Page for New Individualist Review

Search this Title:

Also in the Library:

Subject Area: Economics
Subject Area: Political Theory
Subject Area: History
Order this book from Liberty Fund

SAM PELTZMAN, BOOKS: Kefauver and Populist Economics - Ralph Raico, New Individualist Review [1961]

Edition used:

New Individualist Review, editor-in-chief Ralph Raico, introduction by Milton Friedman (Indianapolis: Liberty Fund, 1981).

About Liberty Fund:

Liberty Fund, Inc. is a private, educational foundation established to encourage the study of the ideal of a society of free and responsible individuals.


BOOKS:

Kefauver and Populist Economics

SAM PELTZMAN*

In a Few Hands: Monopoly Power in America by Estes Kefauver, Baltimore: Penguin Books, 1965. 246p. $1.25, paper.

THE LATE SENATOR Estes Kefauver first came into prominence in the early 1950’s as chairman of the Senate crime investigating committee. After he had made two unsuccessful bids for the Democratic Presidential nomination, his name reappeared in the headlines in 1958 when the Senate Subcommittee on Antitrust and Monopoly conducted hearings under his chairmanship on industrial pricing practices. In a Few Hands summarizes some of the more lurid findings which made those hearings newsworthy and serves as a vehicle for the Senator’s random thoughts on the problem of monopoly in American industry.

Since the book is about monopoly, it was to be expected that Senator Kefauver would define the beast. The etymologically correct definition—a market served by one seller—applies to none of the industries discussed in the book (drugs, steel, baking, automobiles). Most of the time Senator Kefauver seems to apply the term to an industry dominated by a few firms, but he never does precisely define it. Sometimes it appears that the word “monopoly” is just longhand for “bad”—since a monopoly, whatever it is, is bad, many, if not all bad things derive from monopolies. This utter failure to make necessary intellectual distinctions is well illustrated by the Senator’s discussion of the drug industry.

Here we have an industry in which Kefauver is able to cite numerous examples (pp. 11-23) of small competitors substantially undercutting their larger rivals in order to win orders, and he suggests that the availability of cut-price drugs is fairly widespread (p. 24). To be sure, price competition doesn’t characterize all drugs; but the Senator makes it quite clear that the most notable exceptions are to be found among patented drugs.1 Now, of course, price competition is absent here because of a legally enforced monopoly and has nothing to do with the particular market structure of the drug industry. Whatever else it may be, it is not the purpose of the patent laws to promote price competition in drugs or any other patented product but to prevent precisely that. If price competition in drugs now protected by patent is deemed desirable, then it is the patent law and not the structure of the drug industry which has to be changed.

If the drug industry, where it is unprotected by law, doesn’t exhibit the evil pricing policies of monopolistic industries, what other evil doings can it be saddled with? In answering this question Senator Kefauver makes much of some of the defective drugs that have been introduced onto the market in recent years, e.g., thalidomide, chloromycetin, MER/29. The tragic consequences of the introduction of these drugs is well-known, and the Senator recounts them for his reader. Yet, again, the connection of all this with the market structure of the drug industry is never made clear. Do such mistakes occur more frequently because the drug industry is dominated by a few large firms, or would such events occur about as frequently if there were ten thousand equal sized drug producers? Surely it would seem that the losses incurred by way of law suits, damaged trade reputation, etc., would weigh as heavily against relatively large as against relatively small firms. Implicitly Senator Kefauver must have believed that these losses were somehow not as great for the relatively large firms, or that such firms derived some special gains from selling bad drugs; if he didn’t believe this, why the association of the practice with “monopoly” and not, say, with stupidity? The reason for this belief is never spelled out, however, and it will remain a mystery to those who do not share the Senator’s animus against the drug industry.

Since Senator Kefauver’s discussion of other industries is no more precise and no less confused than that of the drug industry, it is easy to wonder if he was trying to make any point at all. He was; but it surfaces amidst contradiction, and it turns out to have nothing to do with monopoly at all.

SENATOR KEFAUVER’S central point becomes obvious when one compares his discussions of the steel and baking industries. The steel industry is chided for various monopolistic pricing practices—rigid prices, implicit collusion whereby all firms adopt the prices set by one of them, etc. If this or any industry is to serve the public interest, according to Senator Kefauver, the firms in it really ought to compete against each other in the most vigorous manner:

It is this free spirit of individualistic behavior which gives to the public the benefits of competitive enterprise, namely lower prices and better quality. It is this same spirit which earns the enmity of the monopoly for its unsettling and disturbing impact upon established ways of doing things, not to speak of the disruptive consequences on [sic] monopolistic pricing and profits.2

Now, sometime after World War II some baking companies prospered by acting as the Senator believed steel companies should. They penetrated many markets by offering lower prices than existing bakers. Predictably, this forced some established bakers out of business. Yet this particular disturbance of established ways of doing business is not welcomed by Senator Kefauver. It is, instead, cause for complaint that “small producers, unable to stand up under the pressure directed against them by the giants of the industry, are disappearing from the American scene.”3 All of a sudden the laudable “competitive enterprise” recommended to the steel industry becomes, when practiced by baking companies, evil “competitive warfare.”4 The desideratum is no longer the “free spirit of individualistic behavior” but rather “free and reasonable competition.”5 Why this palpable contradiction, this switch from the ethics of competition to the ethics of the cartel? The answer has already been suggested: The aggressive bakers, because of their success, have become large; they are replacing small bakers. This really is the crux of the matter. Both the aggressive baker and the somnolent steelmaker are bad mainly because they are big. It would do little good to point out that large absolute size has nothing per se to do with monopoly; that, in fact, many of the small bakers replaced by large, nationwide bakers were local monopolies; and that a few large companies competing in several local markets make for a more competitive industry than several local monopolies. Senator Kefauver simply seems to have had a tropistic reaction against big corporations (the TVA excepted) which he embellished with the nostalgia for rural and small town America that comes from his Populist political heritage.6 He tends to identify this advocacy of an economic system composed of many, physically small firms with advocacy of the competitive system and opposition to monopoly. The normal functioning of a competitive system will, of course, comprehend cases where large firms win out over small firms. At no point in his book, however, does the Senator point to any such event as an example of the healthy functioning of a competitive economy. Where such events are alluded to, as with the baking industry, the context is the triumph of evil bigness over the victimized innocence of the small.

Once Senator Kefauver’s basic premise becomes clear, many of the other points he makes become explainable, if not particularly understandable. Take, for example, his discussion of the relationship between monopoly and the development of a community—“monopoly” for these purposes being identified with the dominant importance of large absentee-owned industries in a community’s economic life. To monopoly, or rather to this grotesque A is bad, B is bad, therefore A is B definition of monopoly, Senator Kefauver attempts to attribute, in whole or part, each of the following community ills or presumed ills: shoddily built houses, slums, high bankruptcy rates among small retail stores, high infant mortality rates, lack of popular interest in literature and education, low church membership, a diminution of the spirit of neighborliness and good fellowship, and excessive time spent by youths in pool halls.7 This incredible list could be expanded. Some may be tempted to find in all this a reflection of the type of mentality that moved men to burn witches in former times. To Senator Kefauver, however, it must have appeared the simple truth that where the desirable attributes of the small Tennessee town have vanished, big companies captained from the far-off metropolis are the cause of it all. Anyhow, talking against monopoly is these days more socially respectable than witch burning.

IT IS PERHAPS fortunate that all Senator Kefauver, the co-author of an important antitrust statute, did in his book was to talk against monopoly. He made no important policy recommendation for remedying what he conceived to be the monopoly problem. In fact, he is at his most perceptive where he discusses and rejects certain remedies advanced by others. He rejects general government price regulation, for example, because of a clear recognition that where it already exists—e.g., airlines, railroads, natural gas—such regulation has become little more than a shield for cartelization.8

[* ] Sam Peltzman is Assistant Professor of Economics at U.C.L.A., and a Contributing Editor to New Individualist Review. He received his Ph.D. from the University of Chicago in 1965.

[1 ]Op. cit., pp. 23-25, 36.

[2 ]Ibid., p. 138.

[3 ]Ibid., p. 143.

[4 ]Ibid., p. 139.

[5 ]Ibid., p. 144. Emphasis added.

[6 ]Ibid., pp. 160-61.

[7 ]Ibid., pp. 170-71, 177-78, 183.

[8 ] Cf. C. D. Stone, “ICC: Some Reminiscences on the Future of American Transportation,” New Individualist Review, Spring 1963, pp. 3-15; S. Peltzman, “CAB: Freedom from Competition.” ibid., pp. 16-23; R. W. Gerwig, “Natural Gas Production: A Study of Costs of Regulation,” Journal of Law and Economics, V (1962), 69-92.