THE CLAYTON ACT
Intellectuals then arrogate the power of these ideas by
writing intellectual histories in which Adam Smith caused
free enterprise in England and Keynes rescued the world
from depression. Stigler, in particular, would take issue
with such procedures. His reasoning is that this approach is
hard to test, and causal evidence suggests that it is wrong.
Keynes wrote a book in 1936; perennial deficits in the U.S.
began in the 1960s. This emphasis on the secondary role of
ideas in CPE is related to the positive economics emphasis
on understanding the world and not changing it. Moreover,
ideas carry little or no weight just like ideological values
in relation to the basic economic forces which drive the
redistribution process.
In 1971, the primary alternative to Stigler’s theory of eco-
nomic regulation was the Pigovian or public-interest theory
of government, which was already under heavy assault from
earlier contributions to public choice theory. Today, virtually
no one thinks in such terms. The interest-group theory of
government has accumulated widespread recognition as a
valuable theory of government. The interest-group theory
has shown its explanatory power in a remarkably wide range
of areas of governmental activity in both a contemporary and
historical context (Ekelund and Tollison, 2001).
The fundamental point is that CPE is founded and
pursued on the grounds of positive economics and price
theory and not only is testability a key criterion of theories,
but actual testing is tantamount to being taken seriously by
CPE scholars. Other traditions in public choice embody
certain elements of the CPE approach, but none are so
rigorously empirical as CPE.
ROBERT D. TOLLISON
REFERENCES
Becker, G.S. (1985). “Public policies, pressure groups and dead-
weight costs.” Journal of Public Economics, 28: 329–347.
Becker, G.S. (1983). “A theory of competition among pressure
groups for political influence.” Quarterly Journal of
Economics, 98: 371–400.
Becker, G.S. (1976). “Comment.” Journal of Law and Economics,
19: 245–248.
Ekelund, R.B. and Tollison, R.D. (2001). “The interest-group the-
ory of government,” in W.F. Shughart and L. Razzolini (eds.)
The Elgar Companion to Public Choice, Northampton:
Edward Elgar, pp. 357–378.
Keynes, J.M. (1936). The General Theory of Employment, Interest
and Money. London: Macmillan.
Landes, W.M. and Posner, R.A. (1975). “The independent judici-
ary in an interest-group perspective.” Journal of Law and
Economics, 18: 875–901.
Lott, J.R. (1997). “Donald Wittman’s The Myth of Democratic
Failure.” Public Choice, 92: 1–13.
75
Peltzman, S. (1976). “Toward a more general theory of regula-
tion.” Journal of Law and Economics, 19(August): 211–40.
Rowley, C.K. (1997). “Donald Wittman’s The Myth of Democratic
Failure.” Public Choice, 92: 15–26.
Rowley, C.K. and Vachris, M.A. (1995). “Why democracy does
not necessarily produce efficient results.” Journal of Public
Finance and Public Choice, (December): 97–111.
Stigler, G.S. (ed.) (1988). Chicago Studies in Political Economy.
Chicago: University of Chicago Press.
Stigler, G.J. (1982). The Economist as Preacher and Other
Essays. Chicago: University of Chicago Press.
Stigler, G.J. (1976). “The sizes of legislatures.” Journal of Legal
Studies, V(January): 17–34.
Stigler, G.J. (1971). “The theory of economic regulation.” Bell
Journal of Economics and Management Science, 2(Spring):
3–21.
Stigler, G.J. (1979). “Why have the socialists been winning?”
Ordo, 13: 61–68.
Tullock, G. (1967). “The welfare costs of tariffs, monopolies, and
theft.” Western Economic Journal, 5: 224–232.
Wittman, D. (1995). The Myth of Democratic Failure. Chicago:
University of Chicago Press.
Wittman, D. (1989). “Why democracies produce efficient
results.” Journal of Political Economy, 97: 1395–1424.
THE CLAYTON ACT
The Clayton Act of 1914 was one of the major pieces of
legislation of the Progressive Era in American history. It
prohibited four specific types of monopolistic practices:
(1) price discrimination; (2) exclusive-dealing contracts
and tying agreements; (3) the acquisition of competing
companies through stock purchases; and (4) interlocking
directorates among companies with a market value of at
least $1 million, and in the same industry. Its main objec-
tive was to prevent business practices that may tend “to
substantially lessen competition or tend to create a mono-
poly.” It underwent several amendments in subsequent years
partly because of lax judicial interpretations. The most
important ones include the Robison–Patman Act of 1936,
which strengthened price discrimination prohibition, and
the Celler–Kefauver Act of 1950, which prohibited corpo-
rate mergers that would tend to reduce competition or pro-
mote monopolies (Shughart, 1990; Shenefield and Stelzer,
2001).
The theoretical foundations justifying the existence of
antitrust laws in general, and the Clayton Act in particular,
rely on analytical models of industrial organization and
microeconomic theory. These models show that the
economic paradigm of competitive markets, in which eco-
nomic decisions are freely made by firms and individuals,
76 THE CLAYTON ACT
each looking out for its own interest, deliver the highest
possible level of social welfare. The system of prices and
the allocation of resources in such an environment is the
most efficient one in the sense that a reallocation of
resources cannot make someone better off without making
someone else worse off. The reason such an outcome
obtains is because in a purely competitive environment
equilibrium prices of goods and services reflect exactly the
cost of the inputs used in the production of these goods or
the provision of these services.
This result has two socially desirable implications. First,
only the correct quantity of goods and services is produced.
This follows from the fact that in equilibrium the extra rev-
enue the firm receives from selling one more unit of the
good is its price, which exactly equals its production cost.
Increasing the level of production of this good further will
result in a price decline, and hence, in a negative profit for
the firm. Analogously, a decrease in this level of produc-
tion will result in a price increase, and hence, positive
profit for the firm. A positive profit, in turn, will encour-
age firms to increase their output levels. The price level
will consequently decline until it finally reaches its
production costs.
This well-known result of microeconomic theory
was understood even as early as the 18th century. Adam
Smith ([1776] 1981), for example, made the following
observation:
When the quantity of any commodity which is brought
to markets falls short of the effectual demand, all those
who are willing to pay the whole value of rents, wages,
and profit, which must be paid in order to bring it
thither, cannot be supplied with the quantity which they
want. Rather than want it altogether, some of them will
be willing to give more. A competition will immedi-
ately begin among them, and the market price will
rise … When the quantity brought to market exceeds
the effectual demand, it cannot be sold to those who are
willing to pay the whole value of the rent, wages, and
profit, which must be paid in order to bring it thither.
Some part must be sold to those who are willing to pay
less … The market price will sink more or less below
the natural price. (Smith, 1776 [1981]: 73–74)
A second socially desirable implication is that only the cor-
rect number of firms prevails in the industry. This follows
from the fact that in equilibrium there are no economic
profits because positive profits will attract new entrants,
while negative ones will force some firms to leave the
industry.
These two results obtain when there are a large number
of firms in an industry, or when there are no entry barriers
to keep new entrants from exploiting profitable opportuni-
ties. When there are only a few firms participating in the
market, these results may no longer hold. The extreme case
would be when there is only one firm, a monopolist, oper-
ating in the market. As the only participant, the monopolist
has the ability to control the market price of its product,
as well as its production level. Because the monopolist’s
objective is to maximize its profit, not society’s welfare,
the equilibrium price of the good or service that the
monopolist charges will be higher than the cost of the
inputs necessary to produce the good or service. In addi-
tion, the resulting level of output is lower than what obtains
under competition. As a result, a market structure in which
there is only one firm is seen, in general, as a socially
undesirable outcome.
There are instances in which a monopoly delivers the
most efficient output level in an industry. This may happen
when production costs decline as the size of the firm
increases due to, for example, very high initial fixed costs.
Public utilities are classic examples of these industries.
However, even in these instances, the monopolist will
choose to produce below the social’s optimal level, since it
has full control of prices and production.
Thus, when the effect of a monopolist on society’s wel-
fare is likely to be severe, public policy is seen as necessary
to correct or prevent such outcomes (Blair and Kaserman,
1985). Although this is a highly simplified description of
how markets operate in reality, it forms an integral part
of the economic rationale for government intervention
(Singer, 1981; Shenefield and Stelzer, 2001).
Few would dispute the validity of these theoretical argu-
ments. However, the notion that government intervention
will result in an improvement of social welfare by
“correcting” the deficiencies associated with large devia-
tions from the competitive equilibrium paradigm is not
well founded theoretically or empirically. One of the major
tenets of public choice theory is that governments and reg-
ulatory agencies are composed of individuals who, just as
other market participants, seek to maximize their own well-
being, and not necessarily social welfare (McChesney and
Shughart, 1995). When the objective of regulators and
politicians is changed from the hypothetical maximization
of social welfare to the maximization of their own well-
being, there are profound implications, many of which can
result in outcomes that, from a social welfare point of view,
are worse than simply not intervening at all. Consider, as an
example, the arguably sensible proposition that one of the
most important objectives of a politician is to maximize his
or her probability of re-election. Because this probability is
an increasing function of campaign expenditures among
other factors, politicians may have an incentive to vote
strategically on bills in order to maximize contributions
from constituents and corporate supporters who stand to