Historical Developments of The Chicago School’s Approach Towards Antitrust (late 1970s – mid 2010s)

Author: Marvin Cheung

Publication date: 5 January 2021

The Chicago school of economics is a school of thought founded in the 1930s. It was originally developed by members of the economics department at the University of Chicago[1]. The Chicago School believed a laissez-faire approach with minimum government intervention would result in the most efficient allocation of resources, assuming that a self-correcting market composed of rational actors would maximize their own self-interest[2].

The ramifications of minimum government interventions: extreme concentrations of power and wealth has been well documented in Croly’s The Promise of American Life published in 1909. It is also worth noting that Franklin D Roosevelt “FDR” experimented with the idea of nationalizing business and exempting businesses from antitrust laws after the Great Depression through the National Industrial Recovery Act of 1933, but by the end of 1934, it was evident that “allowing de facto cartels to raise prices did not, in fact, stimulate economic growth. Instead, it made things more expensive, which given slumping wages and wide unemployment, made people buy less instead of more. What the economy needed was stimulus – the kindling of demand, a point made famous by Maynard Keynes. […] Today, economists are nearly unanimous in their condemnation of the experiment: the harshest critic estimate that it may have prolonged the depression by years and reduced GDP by some six to 11 percent.”[3]

However, since the Chicago School offered a simple theory to justify a more lenient approach towards antitrust enforcement in the late 1970s to rectify the “over-enforcement” [4] of the rule in earlier years, the Chicago School quickly rose to prominence in antitrust cases[5]. United States v. Topco Associates in 1972 epitomizes the excessively interventionist approach that characterized the pre-Chicago School, Warren Court liberal era[6]. The per se rule was applied to a “competitively harmless joint venture” [7] so as to avoid the rule of reason and “leave courts free to ramble through the wilds of economic theory in order to maintain a flexible approach”[8].

Reagan’s stance towards antitrust during his presidential term between 1981 and 1989 has been heavily influenced by the Chicago School[9]. By 1986, prominent legal scholars such as Herbert Hovenkamp found that “the Chicago School has done more for antitrust policy than any coherent economic theory […] No one, including myself, can escape its influence on antitrust analysis”[10].

The Chicagoans shared a belief that by applying economic analysis to the topic of antitrust and focusing on “evidence-based antitrust”[11], one can prevent the politization of antitrust law and ensure its legitimacy[12]. The inherent political nature of selecting one school of thought or one economic model over the other is one of the inconsistencies within the Chicago School[13].

By 1989, scholars such as Jonathan Baker have already identified key economic developments on vertical foreclosure, price predation, collusion, and entry barriers, that challenge the use of the Chicago School of Economics within antitrust laws[14]. While the Chicago School initially claimed the new developments lacked testability[15], new models based on imperfect competition and the applications of game theory to understand price-fixing and collusion in the 1980s and early 1990s[16] refuted such claim.

The rational actor assumption has also later been challenged by behavioural economics scholars, most notably by Richard Thaler, the 2017 Nobel Laureate, in his books Nudge: Improving Decisions on Health, Wealth, and Happiness published in 2008 and Misbehaving: The Making of Behavioral Economics published in 2015.

Nevertheless, the free-market ideology continued to exert its influence. Non-price vertical restraints[17], maximum resale price maintenance agreements[18], and minimum resale price maintenance agreements, were respectively moved from the unlawful per se to the rule of reason category in 1977, 1997, and 2007[19].

The enduring effects of the Chicago School, driven by the support of firms and individuals who would profit from less regulatory oversight[20], would still be felt during Barack Obama’s presidency between 2009 and 2017. Obama taught at the University of Chicago Law School for 12 years[21] and the economic approach to jurisprudence has largely been attributed to the Chicago Law School[22]. He also counts some of the Chicago economists “as his closest advisors”[23], though behavioural economist Richard Thaler has been associated with the Obama Campaign[24].

[1] “Chicago School of Economics | Economics,” Encyclopedia Britannica, accessed December 13, 2020, https://www.britannica.com/topic/Chicago-school-of-economics.

[2] Ibid.

[3] Wu, Tim, The Curse of Bigness: New Deal Supplement (July 8, 2020). Available at SSRN: https://ssrn.com/abstract=3646258 or http://dx.doi.org/10.2139/ssrn.3646258 Pg. 7.

[4] Hovenkamp, Herbert and Scott Morton, Fiona M., Framing the Chicago School of Antitrust Analysis (June 9, 2020). U of Penn, Inst for Law & Econ Research Paper No. 19-44, University of Pennsylvania Law Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3481388 or http://dx.doi.org/10.2139/ssrn.3481388 Abstract.

[5] Scholars have also attributed the “dimming collective memory of [WWII against fascism], the distrust of governmental institutions post-Watergate, and the rise of the consumerist movement [to] the demise of the anti-merger regime”. See Crane, Daniel A., "Antitrust and Democracy: A Case Study from German Fascism" (2018). Law & Economics Working Papers. 155. https://repository.law.umich.edu/law_econ_current/155

[6] Hovenkamp, Herbert and Scott Morton, Fiona M., Framing the Chicago School of Antitrust Analysis (June 9, 2020). U of Penn, Inst for Law & Econ Research Paper No. 19-44, University of Pennsylvania Law Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3481388 or http://dx.doi.org/10.2139/ssrn.3481388 Pg. 5.

[7] Hovenkamp, Herbert and Scott Morton, Fiona M., Framing the Chicago School of Antitrust Analysis (June 9, 2020). U of Penn, Inst for Law & Econ Research Paper No. 19-44, University of Pennsylvania Law Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3481388 or http://dx.doi.org/10.2139/ssrn.3481388 Abstract.

[8] United States v. Topco Associates., 405 U.S. 596, 609 n.10 (1972)

[9] “Milton Friedman and Cato,” Cato Institute, accessed December 13, 2020, https://www.cato.org/milton-friedman.

[10] Herbert Hovenkamp, Chicago and Its Alternatives, 1986 Duke Law Journal  1986: 1014. Pg. 1020.

[11] Wright, Joshua D. "ABANDONING ANTITRUST'S CHICAGO OBSESSION: THE CASE FOR EVIDENCE-BASED ANTITRUST." Antitrust Law Journal 78, no. 1 (2012): 241-71. Accessed December 13, 2020. http://www.jstor.org/stable/43486843.

[12] Katz, Ariel. "The Chicago School and the Forgotten Political Dimension of Antitrust Law." The University of Chicago Law Review 87, no. 2 (2020): 413-58. Accessed December 13, 2020. doi:10.2307/26892417.

[13] Ibid.

[14] Baker, Jonathan B. "RECENT DEVELOPMENTS IN ECONOMICS THAT CHALLENGE CHICAGO SCHOOL VIEWS." Antitrust Law Journal 58, no. 2 (1989): 645-55. Accessed December 13, 2020. http://www.jstor.org/stable/40841261.

[15] Hovenkamp, Herbert and Scott Morton, Fiona M., Framing the Chicago School of Antitrust Analysis (June 9, 2020). U of Penn, Inst for Law & Econ Research Paper No. 19-44, University of Pennsylvania Law Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3481388 or http://dx.doi.org/10.2139/ssrn.3481388

[16] Larry Samuelson, “Game Theory in Economics and Beyond,” Journal of Economic Perspectives Volume 30, no. Number 4 (Fall 2016): 107–30.

[17] Continenal T.V. v. GTE Sylvania - 433 U.S. 36, 97 S. Ct. 2549 (1977)

[18] State Oil Co. v. Khan 522 U.S. 3 (1997)

[19] Leegin Creative Leather Prods. v. PSKS, Inc. - 551 U.S. 877, 127 S. Ct. 2705 (2007)

[20] Hovenkamp, Herbert and Scott Morton, Fiona M., Framing the Chicago School of Antitrust Analysis (June 9, 2020). U of Penn, Inst for Law & Econ Research Paper No. 19-44, University of Pennsylvania Law Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3481388 or http://dx.doi.org/10.2139/ssrn.3481388

[21] Jodi Kantor, “Teaching Law, Testing Ideas, Obama Stood Slightly Apart (Published 2008),” The New York Times, July 30, 2008, sec. U.S., https://www.nytimes.com/2008/07/30/us/politics/30law.html.

[22] “Chicago and Law and Economics: A History | University of Chicago Law School,” accessed December 15, 2020, https://www.law.uchicago.edu/news/chicago-and-law-and-economics-history.

[23] Justin Lahart, “Obama Builds Ties to ‘Chicago School,’” Wall Street Journal, November 8, 2008, sec. US, https://www.wsj.com/articles/SB122610604643110229.

[24] Ibid.

Marvin Cheung, Head of Research and Strategy, Board Member, Unbuilt Labs