Why We Shouldn’t Abandon the Consumer Welfare Standard

Seventy-five years ago, a federal court in New York issued one of the most destructive decisions in the history of American law. Bizarre as it sounds, that ruling, called United States v. Alcoa, essentially made it illegal for businesses to succeed through hard work, and established a precedent that threatened the competition and efficiency upon which economic growth depends. It took decades for legal scholars to persuade judges to abandon that foolhardy rule, and adopt a more pro-competitive principle called the “consumer welfare standard” instead. Their success led to an explosion of innovation and vast improvements in the standard of living. But today, in supporting antitrust actions against Google and Facebook, intellectuals on both the left and right are trying to eliminate that rule and move backwards to a day when antitrust laws served to punish economic success.

The Alcoa case was the brainchild of Thurman Arnold, a Columbia law professor whom Franklin Roosevelt chose to lead the Justice Department’s antitrust division in 1938 after Arnold published a book denouncing capitalism as a myth that rich people use to control the working class. But Arnold was not so much a radical as a Machiavellian cynic who believed that all “social creeds, law, economics, and so on” were forms of “mysticism” with “no meaning whatever.” Instead, government was solely a question of power—and he brought that mindset to the Justice Department when he was put in charge of a vastly expanded team of antitrust lawyers. Heavy new taxes and regulations adopted in 1936 had led to a downturn that his opponents called “the Roosevelt Depression,” but which the president thought was actually a secret plot by capitalists to undermine the New Deal by refusing to hire new employees or increase output. Arnold was charged with pursuing the president’s vendetta.

There was no evidence of a conspiracy, and to the extent that there was any economic theory behind this idea, it was absurd. For decades, progressives such as Louis Brandeis had argued that businesses tend to consolidate and, by outperforming other businesses, cause unemployment and misery. “Bigness” was therefore itself a “curse”—regardless of whether companies became big by satisfying customers—and government should aim to protect small businesses against competition by more efficient rivals. In practice, this meant policies that effectively made it illegal to reduce prices or improve productivity, and that forced customers to subsidize firms that couldn’t compete fairly.

If bigness was bad, then Alcoa—the Aluminum Company of America—was a prime target. In 1938, it had no effective competition in the production of aluminum, thanks to patents it had lawfully purchased and, more importantly, its extensive, cutting-edge research and innovation. It had developed ingenious new ways to extract aluminum from ore, which enabled it to outperform any potential competitors. Alcoa did not sabotage rivals or steal industrial secrets to become the market leader; it produced good products at reasonable prices.