American Political Development: The Evolution of Regulatory Regimes
American Political Development: The Evolution of Regulatory Regimes
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American Political Development The Evolution of American Regulatory Regimes Introduction Interested in Principles of Regulation Goal of course Becoming an effective participant in regulatory debate Nature of problems and solutions to problems ssue of appropriateness History is a vehicle for understanding events that happen over time Offers a regime perspective on the American political economy Distinctive Systems Described by ideas values and policy instruments What is a Regulatory Regime To regulate To induce publiclypreferred behavior among private individuals and businesses using selective incentives to alter their private behavior ReguIatory Policy A set of policy incentives that channels private behavior Negative inducements Coercion the stick Penalties for engaging in legally prohibited behavior Rescinding privileges monetary fines incarceration Positive Inducements Rewards the carrot Material payments for engaging in legallydesired behavior Government subsidies tax incentives extending privileged access to scarce resources or restricted markets Regulatory REGIME A regime is a system of government inducements both negative and positive Designed to channel private economic behavior to achieve politicallydefined ends Regulatory regimes are compromised of distinctive sets of informations Distinctive Regulatory Ideas 1 Explanatory ldeas Causal and fact driven ideas regarding the origins the nature and the consequences LISTEN TO PODCAST Two flavors of explanatory ideas IndividuaI level explanations Stress personalisticpsychological motivations StructuraI explanations Stress market pressures and incentive structures in which business decisions are made 2 Normative ldeas regarding the public interest in relation to outstanding economic problems Should we prioritize small business OR big business in the American economy Should we prefer competition OR cooperation in the marketplace What is the appropriate balance between clean and safe natural environment AND business efficiency and cost competitiveness when the two are in conflict Should we prefer a large powerful federal regulatory state OR something smaller less authoritative andor more decentralized Distinctive Regulatory Interests Every regime services a distinct coalition of regulatory interests Some mix of farmers labor small business big business consumers environmentalists conservationists Distinctive Set of Institutions Legal rules and governmental organizations that both define and enforce legitimate behavior in the market place EXAMPLE of legal rule The Sherman Anti Trust Act 1890 The Sherman Act identifies a public interest in the maintenance of market competition It prohibits unreasonable restraints of trade To be legal a combination in restraint of trade must be reasonable Unreasonable A price fixing restraint of trade Reasonable An efficiency enhancing restraint of trade There are many examples of government organizations that both make and enforce regulatory rules of behavior Eg FTC FDA SEC EPA Large complex bureaucratic organizations that bring together expertise and informations The promise of PROGRESSIVISM The marriage of expertise and political insulation The deployment of specialized knowledge political authority and political neutrality in the public interest Requires Powerful bureaucratic institutions with broad discretion and policy flexibility The PROBLEM of PROGRESSIVISM Economicpolitical Selfinterest partisan politics and policy distortion The corruption of political processes NEEDS Simple rules strict application harsh penalties Challenges to the Creation of a Federal Regulatory Authority in the US Overview Purpose of this lecture to present an image of 19th century America at mid century Just prior to emergence of first federal regulatory institutions A country predisposed toward local decentralized authority relations 1 Social Decentralization 2 Economic decentralization 3 Political and constitutional decentralization Punchline Multiple sources of resistance to the emergence and development of a federal ie national regulatory authority FederalismRelations between national government and state FederalNational government StateIn abstract way governmental power StatesThe 50 states Old way die hard Hurdles to overcome barriers to be chipped away before a federal regulatory state of substantial size or scope could be established Social Decentralization Robert Wiebe 19th c America A society of island communities These islands are small rural farmland and countryside proper and isolated Numbers Urban and rural switch people are moving away from rural and into urban Not until 1920 do more people live in urban than rural Vast majority of country is ruralCommunities are small Socia interactions are personal facetoface Local government is PRINCIPAL political unit acting upon citizens Gives strong sense of SELF DETERMlNATlON Political life reflects a key tenet of the Jeffersonian Republican ideal Primary political units should be small Small communities are HOMOGENOUS Shared interest identities values Small communities ALSO provide incentive to participate 1 Decisions are meaningful 2 Barriers to participation are low In small communities politics are personal and consensual Neighbors friends and acquaintances A politics of trust and enforcement by self regulation The SMALL and HOMOGENEOUS political community is the natural community Implications for national regulatory authority Unnatural is 1 Distant and alien 2 Heterogeneous and divisive A politics of interest antagonism and group conflict 3 Simple majoritarianism replaces consensus 4 Coercive Substitutes internal forces for external Economic Decentralization The era of proprietary capitalismThe owner and manager are same person Business units are small Capital intensity is low relative to labor Business start up costs relatively modest Entry into marketplace easy With thrift and hard work a wage labor can become a small business owner Property ownership widespread The high cost of overland transportation prior to the railroad means a majority of trade is LOCAL Reinforces sense of island communities Proximity to water routes was key to participation in distant markets Water transport was much cheaper The high cost of overland transportation acts like a HIGH TARIFF BARRIER Someone somewhere else in nation probably doing what you do at a lower price or better quality But transportation costs price them out of your local market Patterns of widespread property ownership reinforce core tenets of the political culture and therefore attitudes toward regulation Property in the Jeffersonian Republican Tradition Property in the ideology in free labor The function of property in the Jeffersonian Republican Tradition 1 Property as a critical source of person authority and independence 2 Property as foundational to a healthy republic Without propertygtNo independence and no willgt No public spirit gtNo citizenshipgtNo republic Property Ownershipgtlncome gtLeisure gtSelfeducation formal education time to participate in public affairs Property OwnershipgtExercise of SovereigntygtGovernor of an EstablishmentgtExercise will and independence experience in the arts of governance Property ownership should be as widespread as possible Jefferson Lincoln Radical Republicans Jefferson wanted to distribute land to people Jeffersonian Republican Impulse An important populist impulse for business regulation in late 19th century Breakup bigness concentration of property ownership However a preference for local political autonomy Antagonism to build up of a coercive federal presence in local matters Property in the Ideology of free Iabor This cultural strand is more consistently anti statist opposed to government intervention in economy and antiregulatory in its implication than JRT At BOTH federal and state levelsDoesn t like either Free labor tradition has gone up while Jeffersonian has gone down 19th c free abor tenets have a ring of greater familiarity to s Cassical or Lockean liberalism individual rights esp against the state Political rights to selfexpression selfdefinition selfdetermination Critical Difference Rights are occupational Tied to one s identity as a producer an economic actor Industrial Liberty The right to a callingI Every free citizen has a right to enter into the ocupation of one s own choosing and to reap the fruits of one s labor and enterprise To stand or fall in the marketplace on basis of one s personal effort Government interference with the free market is injurious to the rights of individuals The Liberty of Contractll Every free citizen has a right to enter into formal contractual business relations with other wout government interference lmplications of IFL for emergence of national regulatory authority lndividualistic and aissez faire orientation Let it be hands off Constitutional Decentralizaiton A The doctrine of dual federalism State and national governments are equal and independent units Each has distinct responsibilities and powers Neither should interfere with the work of the other Job of the courts is to police the boundaries of federalism and enforce that constitutional separation Doctrine of dual federalism makes three distinctions that pose a threat to the scope of federal regulatory authority Distinctions rooted in a particular reading of the Commerce Clause of the US Constitution Congress shall have power to regulate commerce 1 The commerce power vs the police powers Commerce power Regulatory authority over economic activity of citizens Police power Regulatory authority over health safety good morals of citizens US Constitution only grants Federal govt regulatory over economic activity The states has both 2 Interstate vs intra state commerceState gets intra and federal gets inter Constitution limits Congress s regulatory reach to INTERstate commerce Economic activity had to cross state lines or involve transactions with individuals of different states Economic actitivue that falls wholly within the state is not federally regulated 3 Definition of Commerce Transportation commercial intercourse buying and selling What goes on at POINT OF PRODUCTIONinside of the manufacturing plant is none of Congress s business Wages Hours Working conditions Age of employment Example Of Difference between Commerce and Police Powers Hypothetical 1 If leakage is a function of the way containers are handled or stored during process of shipment across state lines Thats a problem in TRANSPORTATION That s COMMERCE That s INTERstate COMMERCE Congress CAN regulate that that activity under the Commerce Clause Hypothetical 2 IF leakage is a function of the way containers are manufactured prior to transport across state lines Thats a PRODUCTION problem Production is always located WITHIN BOUNDARIES That s a POLICE POWER matter for the states Congress CANNOT regulate A Brief Sidebar Advocates of federal regulation slowly chip away at these distinctions EVOLUTION Federal pure food and drug act of 1906 Prohibits the manufacturesae or transportation of adulterated or poisonous or deleterious foods drugs medicines and liquors Sounds like the exercise of FEDERAL police powerHealth regulation How is this constitutional Federal does not have police powers By early 20th c courts say Commerce Clause gives Congress authority to regulate the QUALITY of goods in interstate commerce Congress has constitutional interest in volume of interstate commerce Ouaity of goods affects quantity of goods volume CONSTITUTIONAL DECENTRALIZATION Illustration 1 US vs EC Knight 1895 American Sugar Refining Company charged with attempt to monopolize production and commercial distribution of refined sugar Section 2 of the Sherman Antitrust Act Prohibits monopolies attempts to monopolize and conspiracies to monopolize Does the Federal Government have the authority under the Constitution to break up the Sugar monopoly They say they don t have the authority This is a production monopoly pure and simple not a commercial monopoly Production occurs within individual business units Production within each unit is wholy internal to a state Therefore citizens must turn to their individual states for relief Illustration 2 Hammer vs Dagenhart 1918 KeatingsOwens Child Labor Act 1916 Congress attempts to prohibit goods manufactured using child labor from sale in interstate commerce The courts said that federal law in UNCONSTITUTIONAL The hiring of child labor is production decision has no bearing on interstate commerce itself Nor does use of child labor adversely affect the quality of goods bought and sold in interstate commerce Regulation of the age of employment is a police powers function state Constitutiona doctrine of substantive due process Supreme court constitutionalizes free abor ideology Distinguish SUBSTANTIVE from PROCEDURAL due process 5th Amendment Procedural safeguards process rights Outcome safeguards substantive rights Procedural safeguards process rights Standardized procedures assure equality of treatment before the law equal protection Examples of procedural due process in CRIMINAL justice setting Given all your Miranda rights Examples of procedural due process in modern administrative rule making setting 1 Government agency gives formal notice of intent to take new action 2 Hold public hearings 3 Shows evidence it weighed arguments and evidence of concerned outside groups 4 Publish final ruling several weeks before it goes into effect time to challenge in ruling in court Substantive due process Courts examine outcomes of govt actions to ensure citizens not deprived of constitutionallyprotected substantive rights In 19th c this means property rights and contract rights EX Government can regulate maximum rates prices that railroads can charge shippers for transporting goods But maximum rate set by govt fed or state must allow for a fair return on investment Otherwise it is confiscation of property and contrary to substantive due process rights of property owndes under 5th amendments Illustration 1 Lochner vs New York 1905 US Supreme Court strikes down NY law regulating number of hrsweek bakers can work to sixty Joseph Lochner an NY bakery ownder hires Aman Schmitter to work more than 60 hoursweek Suit brought against Lochner by NY state Att General Attorneys for NY state argue that it is a valid exercise of police power ensure quality of bread and thus health of consumers Attorney s for Lochner argue that Schmitter s liberty to contract under 14th amendment is being infringed upon he WANTS to work more hours In what way did working more than 60 hoursweek infringe upon health of consumers Illustration 2 Adair vs US 1908 Supreme court strikes down portions of the ERDman Act 1898 as unconstitutional Prohibits yellow dog contracts and prospective employees A contract that says an employee won t join a union Prohibits RRs from firing employees for unionizing activity Court offers liberty of contract rationale for its decision 1 Yellow dog contracts Employers have fundamental right to offer any terms of employment they wish Just as employees have right to decline terms 2 Re Union activities Employers have fundamental right to fire an employee for any reason and same as employees Conclusion 19th century America has a lot of obstacles to the creation of an expansive and powerful national regulatory state Those obstacles were social economic cultural political and constitutional in nature These factors would place clear limits and the scope and reach of American regulations And shape decisively its content and character especially in the period before the New Deal 1930s Regulatory Responses to the Railroad Problem Lecture 3 The Sunshine Commission Statutory Regulation and the Independent Regulatory Commission Political Response to the Railroad Problem OVERVIEW The Market Regime 1880 Basio Tenets The three flavors of railroad regulation The Supreme Court s role in the coming of federal railroad regulation The interstate commerce Act of 1887 The Market Regime An Overview Basics Core Tenet Belief in the salutary benefits of competition in the market place 1 Competition as an efficient regulatory tool 2 Accomplishes ends with a mean 3 Wherever possible the competitive market should be preserved Discourage horizontal forms of business combination pools cartels trusts holding companies Central tenet is the BELIEF in the efficiency of the marketplace A Role for the State 1 Government should use its coercive powers to punish efforts to restrain or suppress competition The market regime is NOT a laissezfaire regime It is a regime of GOVERNMENT enforced competition 2 There have to be Rules of the game in the marketplace Role for government to help devise and enforce rules of appropriate market conduct the state as umpire 3 SOMETIMES competitive markets fail natural monopolies and oligopolies or a policy area might be highly technical In these circumstances you may need some form of active and permanent bureaucratic oversight Institutions of progressive regulation Regulatory institutions with the authority resources and expertise Regulatory Responses to the Railroad Problem We have already seen how the emergence of the railroad has changed the natural way of things by virtue of its size wealth and integration into the very fabric of the economy No interest except its selfinterest STATE Level responses to the railroad problem came in three flavors 1st Sunshine Commission The first political response to the railroad problem Typically embraced by states in the geographic northeastern quadrant of the country New England and Mid atlantic Sunshine commission embodies distincitive set of regulatory principles Establishes regulatory voluntarismNoncoercion business autonomy business selfregulation Commissioners induce RRs voluntarily to adopt alternative standards of market behavior Make alterations that address public demands but remain sensitive to business needs of RRs Principles of regulatory voluntarismNoncoercion private sector autonomy They did NOT have power to dictate changes in the marketplace They lack Rulemaking authority Cannot impose just and reasonable shipping rates on RRs Cannot mandate adherence to a list of anticompetivie business practices They LACK coercive powers of enforcement No cease and desist powers Cannot directly force RRs to alter its behavior against its will They had powers only to INDUCE The CRITICAL powers of sunshine commission are investigatory and advisory 1 POwer to collect information on instances of alleged RR abuse 2 To discuss problems and possible solutions 3 SEE POWER POINT Several SPECIFIC powers To compel the production of info by RRs To call witnesses and compel testimony To conduct field investigation To work effectively sunshine commissions have to be seen by the RRs as Neutral bodies Not taking sides with shippers or political parties EXPERT bodiesThey had to be seen by shippers and railroad managers as expe s AND they needed sufficient investigative powers Neutrality expertise and information They tried to establish relationship of trust with railroadsNot enemies or friends Had to be honest brokers The IRON fist in the velvet glove of vountarismPUBLCTY The latent power of legislature is what the SUNSHINE commission had Critics of the Sunshine Commission States outside of the Northeast skeptical of sunshine approach The prettypretty please approach to regulation Too much discretion left to Railroads to reform or not it was up to them More over this commission neutrality was often said to be not aggressive enough by shippers They wanted something to represent their interests before the railroads Too friendly with the railroads Skeptical of COLUSION with railroad interests OUTSIDE of Northeast RR regulation typically develops in two stages First experiments with direct statutory regulation DIRECT STATUTORY REGULATION In northeast state legislatures tended to be fairly protective of the property rights of railroads Respect for property rights too much Unlike Northeast these states assert RRs to be Businesses affected with a public interest Critical of independent regulatory commissions RCs too Contempt for technocracy rule by technocratic experts Legislative regulation means dem control Not hard to regulate RRs You just need clear rules of economic behavior Formulated by people s representatives enforced by courts Pure executive commissions are created in some states Only job to police the market for violations of legislative policy Woodrow Wilson did not want the government to be governed by a small group of experts Advocates of DSR have contempt for case by case discretion by bureaucratic institutions Regulation by commission lack uniform application Supporters of regulatory commsision typically empower these institutions to exempt RRS selectively from the application of the law as circumstances merited Supporters of DSR maintain All we need is a clear order to stop bad behavior Morality is not relative its absoute Don t apply one standard of morality to different people When CLEAR declaration of right and wrong are replaced with qualified language you get Moral ambiguity Lega uncertainty Under what circumstances and conditions will the rights of the aggrieved be vindicated Who will be empowered to decided WHY should we trust THEM EXAMPLE 1 Preferred by DSR Advocates Not legal to charge more for a transportation of shorter distance IRCIndependent regulatory commission Supporters of lRCs argue The strict and unwavering application of uniform rules sometimes creates its own inequities Yes even when written by democratically elected legislative majorities Regulation by detailed statute poses its own problems 1 The Problem of expertise Not looking to ruin a good thing EXAMPLE First problem Freight is different Affects underline cost structure Some freight bulkier more difficult to load Some freight heavier per unit of cargo space Some freight takes up more space than others The Independent Regulatory Commission What does this mean In addition to investigatory powers that IRC also possesses like sunshine They also have legislative powers RULE making powers They have enforcement executive powers police the system for violations of these commission made rules They have judicial powers Hear and settle disputes under their rules Underlying Political theory of the IRC Consider each element seperately lndependent Regulatory commission Referred to a location placing these commissions outside of the regular line departments of the executive branch Patronage was rampant Why independece Idea to create space for application of neutral nonpartisan expertise to public problems Fixed terms for officeCommissioners can only be removed for cause Staggered terms of office Greater commission policy continuity REGULATORY Ability to make rules COMMISSION Muti headed authority sturcture promotes contending view points Minimizes arbitraryness of individual making policies NEED to be bipartisan IRC violates the bedrock American principle of separation of powers lntentionally combine legislative executive and judicial functions in a single institutions The Court and the Coming of Federal Railroad Regulation Lecture 2 The Rise of an Integrated National Economy 18701900 Mass Markets Economic Concentration and the Penetration of sand Communities Wiebe s Island CommunitiesThe stitching together of the national communities Joseph A Schumpeter and the Concept of Capitalism as Creative Destruction Capitalism is a form of economic change and cannot be stationary Everything is constantly revolutionizing This process of Creative Destruction is the essential fact about capitalism Overview 1 The railroad and the rise of integrated mass markets 2 The pathologies of the unregulated market 3 Mass markets and economic concentration the rise of big business Railroads and the Rise of a NATIONAL Marketplace Transcontinental railroad connects east and west The central pacific and union pacific are combined in may 1869 Two sets of relationships between shippers and northeastern quadrant Problem of monopoly Railroads and the Rise of MASS Markets RRs Stimulate the growth of mass markets 1 RRs dramatically lower the price of finished goods to distant overland locales a Access to new suppliers increases b Competition blw suppliers increases c Overland transportation costs to market fell d Competition between producers of finished goods increases 2 Lower prices broaden consumer base of economy In THREE ways then railroad reduced the cost of goods 1 Lowers the cost of productions a Producers can get inputs more cheaply 2 Lowers the costs of distribution getting finished goods to market 3 Expose producers to greater competition Mass Markets have both Horizontal and Vertical Dimensions Geographic breadth Stitching discrete locales into a single integrated units Social Depth Penetrating the class structure of American consumption Prior to RR cost of overland transportation almost prohibitively expensive Pathologies of the Unregulated Mass Market New vulnerabilities facing 19th century proprietary capitalismSmall businessmen 1 Exposure to the business cycle Boom and bust 2 Cutthroat competition 3 Predatory Competition The Business Cycle Boom and Bust Phases Unfettered market competition exposes more and more people to the SEE powerpoint Expansionary Phase Demand greater than supply prices and profits rise more firms enter the market Demand for labor increases wages rise and unemployment shrinks Contractionary Phase Reverse Overcapacity supply greater than demand Prices and profits fall Demand for labor decreases wage shrink and unemployment grows Businesses fail inefficient firms exit the market Cutthroat Competition Definition A market environment in which businesses are forced because of competitive pressures to charge prices below the cost of doing business Call cutthroat competition because its like cutting one s own throat because of pressures to compete Cutthroat competition for available freight traffic charactereist of RR industry RR cutthroat competition harmful to individual railroads and to the RR using public Dynamics of RR competition The logic of RR pricing decisions freight rates Person discrimination Place discrimination The RR pooling problem FIRST big business to be regulated by federal government Root Cause Overbuiding of RR lines to capture profits at terminal points Result 1 intensification of competition for available traffic at the terminal points Result 2 The Great Trunkline Chicago to NYC Traffic was greater than any two spots in the nation Profits from this enormous volume was tremendous So many people wanted to get in on this Question How do you increase your revenue Volume of traffic and avoid financial ruin The rise of deeply unpopular RR pricing practices Person and place discrimination and pooling PERSON Discrimination Rebates and drawbacks Private discounts between RR and individual shippers as inducement to move goods with particular RR line Rebates Discounts given at point of origin Drawbacks Discount given at point of terminus Quantity discounts to those who can fill RR cars with goods for shipment Large shippers vs small shippers PLACE Discrimination The longhaul shorthaul problem Questions If RRs are losing money in the competition for available traffic at the competitive terminal points Where can they recoup that lost revenue Answer 1 Along those portions of their line where they have an effective monopoly on the shipping of available traffic Answer 2 At the terminal point by entering in agreement with other RRs to stop competing Cutthroat Competition and Pooling The Railroad pool A form of cartel or horizontal combination An association of competing RR lines POOLS are notoriously unstable Collective action problem lncentives to defect Courts won t enforce pooling contracts Predatory Competition A practice of larger nationallyoriented firms though can observe similar dynamic at regional and local levels When moving into a new market Temporarily drop prices below levels at which our local competitors can do business Meanwhile raise prices in those markets where you are already dominant Walmart is predatory Rise of Big Business Trends Toward Economic Concentration Mass markets and the intensification of competition were spurs to innovation in business organization Economies of scale Horizonta combination vertical integration Economies of Scale Definition Cost efficiencies due to firm size Economies of scale highlight the inverse relationship between the size or scale of a business operation and the cost of a unit of production In some industries core industries as the scale of production increases the costs of production decrease Scae economiesMake it difficult for smaller firms to compete with larger firms FOUR difference scale economies 1 Physical scale economies substitute machinery for labor Investment in expensive laborsaving capital equipment machinery technology Profitabe when scale of production is large enough to recoup initial investment Bessemer process steel oil refining process the RR Mechanized Glass Bottle Production The first commercially successful glass bottle blowing machine was introduced in 1905 The machine you could reduce employment to two men and they would produce six times the amount of bottles Capita equipment makes labor more productive 2 Organizational scale economies increase the division of labor Break down a complex production process into a series of basic tasks Each worker is responsible for single task Simpification and repetition enhance individual task proficienty Allows for the substitute unskilled labor for skilled labor 3 Commercial Scale Economies Large enterprises purchase much larger sums of inputs into their production process than do small enterprises The larger input needs of large enterprises make them more attractive to suppliers 4 Financial Scale Economies Large enterprises borrow much larger sums of money than do small enterprises borrow much larger sums of money than do small enterprises Regulatory Responses to the Trust Problem O417 Lecture 4 Part 1 The Common Law of Contracts and Combinations in Restraints of Trade Interstate Commerce Act The impact of the Interstate Commerce Act on interstate transportation Revenues continue to hemorrhage at terminal points lCA did nothing to stop this RRs can no long recapture revenue back through practices of personal and place discriminationAntipooling causecan no longer pool Secuar decline in RR profitability that we can kind of trace from that moment Underinvestment in new track and trade over time While interstate and foreign trade continue The demand for transportation services is growing and the culmination will be WWI the railroads have huge demand Consequences of WWI Delays bottlenecks critical shortages inflation in transportation Huge problem for railroad revenues going on in the country Argument is not that the ICA causes it it is that ICA does nothing to alleviate the problem Common Law of Contracts and Combinations in Restraint of Trade The Sherman Act of 1890 Necessary starting point to find out what the antitrust movement was responding to Why these new anti trust rules at the state level took the particular form that they did Sherman Act Every contract combination or conspiracy in the restraint of trade or commerce among the several statesis hereby said to be illegal What is the authoritative reading of this policy s intent What is the approprate way to read a statute and determine its intent Business Regulation in period Prior to the Antitrust Movement Business regulation was the responsibility of the indidivual states The Common Law regulated the business activity The Common Law customary can be distinguished from positive law by understanding it to be customary law both declared by judges and enforced by judges Authority rests on past practice and historical traditions ts authority is predicated on the judicial respect for precedent Looks at how community has always done things Organic and experientialRises from experiences of individuals Expressive of community values Subject to change over time Positive statutory law Current legislative authority ts authority rests on popular principles of electoral democratic It looks to results of last election for authority will of majority Common law does not rely on legislative but more on decrees of court NO real federal common law incorporated in country The states had a common law lncorporation of common law by statutory or constitutional act Why Regulate the Economy through the Court and the Common Law 19th century is era of amateur legislature Part timers little expertise among legislators Meet for three or four months only every two years No careerists with committee position no knowledge or expertise Few institutionalized sources of competence in state legislatures Era of patronage bureaucracies Not very advanced Executive branch positions are party resources Jobs are not assigned on meritocratic basis Jobs are not insulated from political manipulation Courts are the most professionalized government insitution in 19th century Lawyers and judges have learning training and status SO courts are the most expert and professional legislation and executive sucks The Common law works best in this area Need to make rational decisions Common law provides for continuity and predictability Case by case proceedings allow judges to view a detailed consideration of how economy is changing Change is slow but you can observe changes in common law The Limitations of the Common Law The gradualism of the common law makes it best suited when economic change is slow and gradual as wellthe common law can keep pace with it Support for common law will be overwhelmed by the rapid pace of economic change and the massive scale of its change It will fuel demand for popular institutions legislatures to seize control of the moment and intervene Increasing pressure to replace common law rules of legislation with popular legislation Business Regulation in the States prior to the Anti Trust Movement View the common law of contract and combinations in restraing of trade TWO distinct bodies of regulatory principles in common law Common law of CONTRACTS and COMBINATIONS in restraint of trade COMBINATIONS will be the focal point of the anti trust movement However contract will be important as well Rule of Reason Clarify the meaning of the Sherman Act to clarify meaning of which restraints of trade were contrary and not contrary to public policy Things from contracts get applied to combinations Common law of contracts were put to use to decipher Sherman Act and clarify meaning of Sherman Acts prohibition against combinations The Concept of Restraint of Trade What is it Think about the relationship between restraint of trade and ideology of free labor We talked about free labor the principle of the right to a calling or industrial liberty that everyone has Right to choose our occupation and stand in marketplace as free and equal member of marketplace Liberty of Contract Supports right to calling Right to enter into binding contractual relationships for mutual benefit and without outside interference So what is a restraint of trade with relation to free labor Artificial restriction on the right to enter into an occupation of one s choosing and to compete freely in the marketplace Under what circumstances does the common law tolerate restraints of trade The Law of Contracts in Restraint of Trade What is a contract in restraint of trade A formal contractual arrangement in which one party to a contract agrees to stop competing with the other party An agreement to withdraw from the marketplace An agreement to cease engaging a line of work The courts broadly intolerant of contracts of restraint of trade If restraint is challenged by one of the parties court will enforce only under limited certain limited conditions Public benefits of industrial liberty Facilitates the widest possible diffusion of skills products services in the community Public cost of contractual restraints on trade Diminished that diffusion of skills Potential to turn productive individuals into community liability crime Courts apply rule of reason to determine if a particular restraint is justified Distinguish between contracts that reasonably and unreasonably restraing trade What was a reasonable restraint on trade Ancillary indirect restraint 1 A restrictive arrangement on competition that was incidental to some other legitimate business purpose EX a transfer of business property between two parties IncidentalRestrains competition Main object is not to restrain competition EX An agreement by a master craftsman to take on an individual as an apprentice Perhaps competitions is restrained but thats not the main point 2Another reasonable reason A narrow restraint A restrictive arrangement of limited application EX Two indiviudals enter into contract to purchase pharmacy for 1 millions dollars But it also contains this provision which says that the seller of the property will not open competing pharmacy within twenty mile radius WHY Is there a legitimate raionale for the restraint of trade is it reasonable LETS SAY YES In order to protect the fair market value of the property just purchased Make sure the value stays the same The ELEMENTS of fair market value Value of actual property Value of stock goods To keep traditional patterns of customer traffic Records of sales revenue Goodwill Long standing reputation Common law judges uphold such restraints on trade as reasonable Partial indirect ancillary restraints are oka 1 Restraint on industrial libery is incidental to ANOTHER legitimate business purpose 2 Restraint is of limited application Tailored to achieve main objective and no more Judges will not enforce contracts of unreasonably restrain trade Where the scope of restriction too great Object not simply to protect fair market value but to SUPPRESS competition per se Unreasonaby restrains individual right to practice occupation The Law of Combinations in Restraint of Trade Reference to horizontal combination Voluntary NOT FORMAL NOT LEGAL agreements among natural competitors to stop competing To abide by common schedule of administered Prices output levels market shares Poos cartels trusts holding companies are all examples of horizontal combinations that restrain trade There are looser and tighter forms of combination If you stop competing you can raise prices and stabilize prices Peope do not like thisRestricting production to keep a price Vertical integration is when they take care of everything throughout the process on their own Coordination and control of discrete stages across a production chain Horizontal combination Coordination and control among formerly competing firms within a stage of the production chain Different Forms of Horizontal Combination Pools and cartels represent the loose horizontal combination Both have ownership and day to day management of individual property units remain decentralized Rational reorganization of productive enterprises difficult COORDINATION problems And defection is easyCOOPERATION problems TRUSTS are a tighter form of combinations Ownership remains decentralized but day to day management transferred to central director In exchange owners received trust certificates entitling them to some agreed upon share of aggregate profits of the trust Ownership decentralizedManagement centralized No defections The Law of Combination in Restraint of Trade Common law of combination in restraint of trade apply to these horizontal combinations Broadly tolerated by common law courts Horizontal arrangements among former competitors to restrict competition seen as part of producer s industrial liberty Public welfare was not compromised as long as 1 Potential competitors were free to enter the market 2 Combination not dealing in survival goods necessaries of life coal gas lumber milk bread Actions to restrict entry of new firms into market is illegal at common law Conclusion Common law tolerance toward horizontal combinations in restraint of trade The major focal point of popular discontent in the states Should state legislatures replace common law with strict and punitive measures to break up these combinations Should they be forced to compete against their will At federal level the issue is different There there is no interstate common law of contract and combinations in restraint of trade DEBATEShould Congress create one Should Congress adopt the new state leve and antitrust principles gaining ascendance and apply them to interstate commerce EXPLAIN RULE OF REASONH C4454273dO Regulatory Responses to the Trust Problem Lecture 4 Part 2 Cooperation competition and the struggle over Antitrust Policy 18801914 Contract in restraint of Trade A contract to push out a particular competitor Courts broadly intolerant of contracts in restraint of trade In order to determine this the courts would apply the rule of reason to determine if a restraint was justified in a particular case A reasonable restraint is an indirect or ancillary restraint A restrictive arrangement where the incidental or subsidiary to some other legitimate business purpose was a restraint on trade EX a transfer of business property between two parties to make sure the value was upheld EX The transfer of knowledge from apprentice to trainer Partial restraintA restrictive arrangement of limited application What is a combination in restraint of trade Formal arrangement to stop competing Abide by common formula for the setting of prices production levels market shares and revenue shares EX pools cartels trusts holding companies Combinations were broadly tolerated by common law courts Took a hands off laissezfaire approach Horizontal arrangements to limit competition were part of a citizen s right of voluntary association and the public was not compromised by this As long as potential competitors are free to enter the market or consumers are not compelled by necessity to buy Survival goods Necessaries of life Heat food building materials TODAY Consumer welfare per se was not the object of the law The idea of maximizing consumer welfare had not gained traction in economics of business regulation The goal of public policy was to minimize coercion in the marketplace Consumers are not coerced to buy products in the marketplace as long as it is not a survival good A price being higher is not coercion On other hand Producers are coerced when limits are placed on their freedom of action in the market Common law places Few restraints on voluntary combination No restraints on market entry No restraints on exit from cartel contracts Vision of a producer s republic One in which people have the freedom to become what they want Public policy ought to reflect the aspirations and realities of a producer s republic Common law tolerance toward combinations in restraint of trade The major focal point of popular discontent in the states Especially the Great Plains Midwest Agrarian states Replace common law with strict things to break up horizontal combinations Antitrust Debates Antitrust debates pose fundamental questions about American industrial structure Fundamenta questions about the industrial structure are being debated What is the optimum scale of production Such thing as too big in terms of American productive enterprise What roles should competition and cooperation play in the American Economy How do you best preserve economic opportunity Conceived of as this opportunity of you and I to obtain some degree of capital and become owners of productive property in our own right What are the broader socialpolitical consequences of economic concentration Central to the debates are the question of the relative roles of competition and cooperation Under what condition are prosperity and opportunity for the public preserved Competitions and combinationBoth forces that are correctives of one another Both have to exist Just as necessary to restrict competition as it is to restrict combination The number of people seeking restraint on both sides is very small Very polarized Arguments in favor of Cooperation Combination RooseveltGood trusts Keep behavior that is beneficial for the common good A Abundance Efficiency and productivity from economies of scale Scarcity was an issue but NOW with corporations you have the opportunity to generate material goods enough to satisfy a population To a certain extent the debate will shift from the production to distribution Why would you give up this great productive force for creating material goods necessary to welfare of community B Consumer welfare When you can produce goods and services at lower and lower prices because of economies of scaleyou and I benefit Necessaries of life become cheaper and allow for purchase of luxury goods C Economic StabiIityA cooperative economy can more effectively moderate the huge gyrations of the business cycle The basic problem of a competitive economy is its prone to over production Over production equals recession and depression If everyone is over producing then at some point so much stuff will be produced that you will glut the marketplace Once you have all these goods not going anywhere is to start lowering price Then it becomes competition between who can lower price the most to get their stuff off the marketplace As prices fall producers are getting less revenue Profit margin is shrinking Then you start cutting thingsEmployees lose money or jobs Then if that doesn t work you go bankrupt Then underconsumption happens reducing effective demand D Conservation Less waste of natural resourcesWhy not allow businesses to cooperate so they can set prices at a given level restrict production and minimize the waste of a country s natural resources E Social and Moral Responsibilities Welfare capitalism Ford established eight hour work day and 5 dollar a day Employee benefits When you can set prices you can set prices at a level that will allow level of profitability that will allow you to treat your employees well PUBLlC PHILANTHROPY These big businesses open all these public benefitting things It is in cooperative portion in economy that you can generate resources to give back to community I Cooperation and Morality in economic decision making Competition reduces the moral playing field in the marketplaces to the level of its least ethical member EX Child labor Arguments in favor of Enforced Competition William Jennings Bryan I don t divide into good and bad monopolies There IS NO good monopoly in private hands There CANNOT be a good monopoly in private hands Until there are angels to preside over those with monopolies There may be a good monopoly who is better than another but there is not good monopoly Private monopolies are intolerable They are most efficient but only most efficient for getting benefits for few at expense of many Greed All wealth will be given to few and the republic will be destroyed Competition Supply and demandls the ONLY nonarbitrary mechanism available for regulating distribution of power in the market place TRUE cooperation confers the power to do good for society BUT it also confers power to do harm and ultimately these are humans with power and greed and they exercise discretion They are corruptable and mixed with power you have corruption Liberty against powerCry of the American revolution when the colonists turned against the concentrated power of the British government cry of Civil War and revolutionary era The only defense against corruption is Free and unrestricted competition Market competition is the only defense against unjust pwoer Without competition public welfare will always be dependent upon the charity of the big businesses s too much competition wasteful and subject to periodic bouts of instability YES but worth it You do not want an efficient organization of power is the constitution efficient NO meant to complicate power Additionally if you allow the concentration of economic power then you get the concentration of governmental power as well Opens door to domination by an overbearing bureaucratic state Liberty s greatest nightmare Economic and bureaucratic tyranny 1880 s and 1890 s The agrarian states break with their common law tradition of business regulation State statutes literally command market participants to compete in marketplace or face criminal sanctions Any restraint on competition even if tolerated at common law now illegal Louis Brandeis A Third View Brandeis opposes both 1 all forms of big business cooperation and 2 The radical new procompetition laws sweeping through south and west He agrees with Bryanites that bigness is not natural and it runs counter to public values Big business does not get big mostly through economies of scale and other efficiency gainsThey are actually aided by anti competitive collusive techniques Aided by undue political influence But even if the advocates of big business and their economies of scale are correct in their economics Sizegreater efficiencylower costs They are dead wrong in their political economy Brandeis is disdainful of the growing 20th century consumers movement Democracy is about a lot more than where you can buy your underwear most cheaply It is about the distribution of property Sma businesses are more consistent with enduring republican values Then Brandeis breaks with Bryan over their indiscriminate commitment to market competition Lemonade stands and steel producers are NOT the same with same punishment He believes that small business needs greater protection from competitive pressures It can t be subject to same antitrust prosecution that big businesses have They should be encouraged small businesses to form trade associations In sum antitrust law should be hostile to cooperation and combination of big businesses but not to small businesses The wide distribution of productive property is the material foundation of a healthy republic Federal Response to the Trust Problem In the midst of the agrarian disagreement of common law The SHERMAN ANTITRUST ACT OF 1890 CENTERPIECE of federal antitrust law Response to growth of interstate business combinations and the absence of a federal common law Debate Create federal common law Protect small producers through enforce competition Protect consumers by distinguishing good and bad combinations Section 1 of Sherman Every contract combinationin restraint of trade is hereby declared to be illegal Section 2 Every attempt to monopolize and every monopoly in interstate commerce is illegal Sherman act allow US attorneys to institute proceedings against violators at direction of attorney general How should courts interpret congressional intent behind Sherman Act More like a federal common law or a radical agrarian state law Congress does not determine what restraint of trade is and judges must turn to common law for interpretive guidance Look at TITLE of Sherman Act An order to protect trade and commerce from UNLAWFUL restraints and monopolies Makes distinction between lawful and unlawful Three Acts of Sherman Act Act II Radicalization of Sherman Act 18971911 1897 TransMissouri Freight Association Case Supreme Court rules Sherman Act to be read literally Every restraint of competition prohibited Court distinguishes between direct and indirect restraints on competition Indirect restraints are reasonable hence legal Direct restraints are unreasonable hence illegal Comparison of two rules of reason Common law of contracts in restraint of trade A restraint is overbraod if its direct aim is to suppress competition Sherman Act combinations in restraint of trade s restraint narrowly tailored to produce greater productive efficiencies and or greater consumer welfare Federal Trade Commission Act and the Clayton Act 1914 Congress won t allow courts decide what will constitute a reasonable or unreasonable competitive practice FTCA of 1914 creates 2nd national independent regulatory commission FTC empowered to 1 Define unfair trade practices 2 Police Interstate commerce for violators 3 Adjudicate disputes on case by case basis Clayton Act is direct statutory regulation Prohibits certain widely unpopular trading practices Predatory pricing Vertical price fixing Manufacturer to retailer If you want access to products you must sell them at this price Exclusive dealing contracts If you want my most popular products you can only sell MY products Tying contractsIf you went my most popular products you must sell ALL of my product line The Economic Origins Of Associationalism Market RegimeTimeline General trend in this period away from forced competition at all cost towards an increasing dependence on bureaucratic institutions to manage big business Progressive RegulationBureaucratic institutions using their expertise for the good of the people The emphasis on enforced competition is in the early years for the most part As we move closer towards the Progressive era we get more bureaucratic We get a relaxation on competition through the reading of the rule of reason Gradual move away from the principle of enforced competition towards this more complicated progressive competition regulated under the eye of expert bureaucrats given power and discretion to formulate decision However the bias is still always toward the preservation of market competition This provides the segway into our next period To many businesses and increasingly to govt officials as well the problem is not too little competition but too much competition CUTTHROAT competition Public policy problem becomes how to lessen the degree of irrational competition in the public interest Limits of Market Regime s Regulatory Imagination Public policy makers will train their attention on the supply side Basic problem is disparity between production and consumption One way to approach is to beef up the demand side Other way is address the supply sideEarly New Deal focused its attention on The problem is the supply side and its impact on the business cycle The downside of the economyPublic policy makers are concerned w this ASSOCIATIONALISM Mark this cooperative turn in American regulation Distincitve regulatory framework Relatively brief lifespan 1920searly 1930s Origins in WWI The challenges of organizing a modern industrial economy for warComplicated National regulatory policy is no longer a blank state We have been through the market era There are laws and institutions in place nowWhenever they insert something they are inserting it into something that exists already Advocates of Associationalism will have to navigate this environment and will have to reformulate old assumption Vested interested die hard THINK ABOUT How every new regulatory regime has to be laid upon the old regulatory regimes like a patchwork quilt lnstitutional Layering Slate does not get wiped clean What exactly is Associationalism A cooperative regulatory strategy for rationalizing competition and moderating the business cycle through voluntary institutions of business selfregulation Cooperative strategy Business cooperationEmphasis is on collaboration and collective action between natural competitors to solve shared problems and achieve mutually agreed upon goals On one hand you have a market with some kind of goods and servicesThere is struggle for business but there is still a community of similar interests and if they collaborate not only will they be better off but we will be better off Rationaizing Competition To make more scientific apply knowledge reason and hard data to decision making An irrational decisionComplicates and undermines and hinders achievement of goals Rely on hard data in the process of arriving at economic decisions Moderating the Business Cyce Associationalism marks the first national effort to regulate the business cyce An attempt to rein in excess competition and with it the severity of economic recession Trying to get into understanding the business cycle Rein in severity of economic depressions and recession Vountary Institutions of business selfreguation A national strategy of government assistance in organizing these communities of natural competitors into cooperative trade associationsTRADE ASSOCATONS CRTCAL This is where era gets its name At the heart of associationalism is a new economic vision to build up the communicative infrastructure of American BusinessIndustry by industry Knowing what other businesses are doing so you can make more knowledgable business decisions Goal of associationalism is to institutionalize these mechanisms of industrial self help Separate Elements of Assocationalism ECONOMIC ASSOCIATIONALISM What collective functions do trade associations perform for their individual members How do they help them communicate more effectively and make rational decisions Disseminate industrywide information on the state of the market Trends in the aggregate demand levels aggregate production levels the average COSTS of production What is happening currently and over time Set industrywide standards Businesses have interests in promoting standards EX wages and hours fair trade practices production quality Strong incentive to do thisBut everyone has an incentive to break these too under competition Which is why you need institutions To monitor compliance of these institutions And you need power to punish defectors t s voluntaristic underpinning to associationalism and it characterizes itself as a regime of business selfhelp committed not to build up power of state but to enforce selfdiscipline Enforcement and punishment will always be associationalism s weak underbelly What do trade associations do for the PUBLIC overall performance of economy They help moderate the econoic ills of modern industrial capitalism Moderate the contractionary phase of the business cycle Address root problems Central public policy problem of 1920s What do you do when the productive capacity of your economy far outstrips the ability of the market to absorb its output The marketplace could be flooded with goods but no one can buy them Enormous downward competitive pressure on prices and cost of production wages and hours employment levels Enormous threat to business solvency Competitive behavior does not affect your success Dropping of prices to clear your shelves and keep your head above water The downward pressure overtime creates severe obstructions to the economy In the short termThe most flexible part of your production costs are your LABOR costs they are the FIRST to suffer This is sort of like cutting your own throat cutting demand you need to keep your boat afloat Enormous threat to business solvency Associationalism will try to replace the Wild West free for all of the tradition American market place with a modern economy that is much more rationalized managed and planned So Associalationsm must be devoted to building up the power of the state FALSE POLITICAL ASSOCIATIONALISM They want to stay true to deepseated political cultures in America Suspicion of state power and its commitment to individualistic values The autonomy of the individual business enterprise is still important to them New ideological charge to them with the rise of the new Soviet Union BolshevismA centrally directed economy a large and powerful centralized bureaucratic state ndividuaism is subordinated to state power People do not like this Associationalism will define itself against this new model Define what makes America unique Associationalism A regime of business selfregulation By definition government play a much more limited role in the that process but still a critical one Government becomes Facilitator coordinator and collector Bringing businesses together helping them coordinate their communicative efforts bringing info to everyone Commitment to building up a nondirective and noncoercive role Exception Government enforcement of industrydefined standards of market behavior For example They would use their coercive authority to help businesses enforce industry defined market behavior standards As an idealized conception they commit themselves to building up the institutions of the state but building up those institutions by allowing them to collect informations Theorists of Associationalism Hoover envision a progressive strategy for national economic planning Progressive because they had maximum confidence in science expertise organization information and analysis Distincitive form of ProgressivismSought to minizmie reliance on large coercive bureaucratic structures because they were a threat to market freedom and American individualism They see an enhanced and proactive role for the state in national economic regulation They are no long antagonists Help business help itself Assist in the creation of trade association Undertake and disseminate efficiency studiesSo they can teach them how they can improve without cutting labor Collect and disseminate statistical info on the state of the market Bring together industries to help them develop their own codes of fair competition in their market place Each of these are relatively new roles in the federal government Herbert Hoover Progressive Don t want to over do his Progressivism but we define him in his presidency and response to Great Depression American politics got shifted leftwards Anyone that doesn t shift looks reactionary and Hoover did not shift Hoover has this long history of productive public service But no one was actually sure what his type of politics was Both parties went into a struggle to get him to be apart of their parties Hoover embraced the central tenet of early 20th century Progressivism A belief in the power of institutionalized expertise to solve public problems A commitment to building up the expertise of the American state Government could play a leadership role and a facilitating and coordination role Mobilizing the public spirit of experts in business to solve public policy problems Economic Overview of Associational Era Two distinct economic eras 1 1920sSo called second industrial revolution The roaring twenties economic Huge changes in both the structure of the economy Overall standard of living An era of profitless prosperity Unstable business climate Problem of intense competition for market share 2 Great Depression of late 1920s early 1930s 1920s American Economic productivity Growth and production and yet you don t have a corresponding expansion in the size of the industrial labor forceDepending on WHEN you measure it Enormous growth in the capacity to create things is because of a technological change Percentage of industry utilizing electricity has an enormous growth IMPLICATION Lion s share of productivity gains achieved through laborsaving changes Technological innovation machinery Henry Ford Give us the continuous moving assembly line The iconic example of laborsaving innovation Inspiration The Chicago meat packing industry and the disassembling line And scientific management in the structuring of tasks in the assembly line Owed to Fredrick Winslow TaylorGospel of Efficiency Two step process Ford brings Taylor into the company to study First step Breakdown what is a complex production process of making a car into a series of simple differentiated and repetitive tasks Simplicity and repetition yield efficiency gains Allows you to substitute inexpensive unskilled labor for skilled Second step Time and motion studies If you want to minimize wasted effort you must know what is the speed and what is the motion that we want workers to perform their tasks Not too slow not too fast Production of Model T broken up into 84 distinct steps Each trainer trained to perform just one of these steps You read people who have been apart of an assembly line process and they say how grueling and repetitive it is THIS gives Henry Ford INSPIRATION to give five dollar a day wage This made him a traitor to his class He thought it was economical because he could afford to do it And he thought if he had well paid workers he would have loyal workers who would also buy his relatively inexpensive Model T 1913Year before Assembly line In 1925 Ford boasted he could roll a vehicle off assembly line every 10 seconds Industrial Expansion Existing industries expanded at striking rate PetroIeum grew 16 fold Iron and Steel grew 5 fold New industries Auto ChemicalFragrances explosives etc Synthetics plasticrayon Food Processing Consumer Goods Industry Consumer electronicsRadio telephone phonograph Radio in particular really striking growth in production and dissemination Percent of homes with radios exploded within a matter of years Household durablesRefrigerator washing machine electric stove Household appliances More people lived in cities rather than rural areas In 1920s these industries were booming In part because not only did electricity come to the workplace it came especially to the urban household as well The centrality of the auto industry as a stimulus to economic boom Crucia to the diamondism of the 1920s Stimulus to input materials used to make its products rubber steel lead Incredibe spur to expansion of petroleum Also helped to stimulate housing boom because now you could live in suburbs and commute to work Also stimulated government spending on infrastructure while most of it came from federal funding it also led to Passage of FederalAid Road Act of 1916 Smooth roads make it less expensive to move goods and services around Stimuates development of trucking industry to compete with railroads in the moving of goods and services Paradox of the 1920s How does the tremendous expansion in productive capacity foster a decade of profitless prosperity Despite waves of horizontal integration Basic Problem The supply side will overproduce excess capacity that the demand side will not be able to absorb it imbalance of supply and demand With so much stuff being produced it generates this excess of pressure Which causes falling prices Which causes profit squeeze Have to find ways to cut your rate of production and that means you cut labor Then because of cutting labor costs it makes it even worse because even less people will have money and it will make it even worse VICIOUS CYCLE Associationalism in 1920s will try and restrain behavior of businesses so they produce less and all of the above things DO NOT happen All energy will be focused on how to give business the tools cut production and keep the labor so people will have more money Won t stop the cycle but it will moderate it SEE CONCLUSION ON POWERPOINT
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