This is complete claptrap from a man who, like Barnaby Joyce, does not have the slightest idea about the nature of competition. His asinine comment about oil companies should alert any informed person to his economic ignorance. Steve and Joyce remind me of those officials in late nineteenth Austria who vainly strove to ‘protect’ small businesses from large stores and expanding factories. What these officials failed to grasp is that their meddling was attacking living standards and consumer sovereignty.

A good way of looking at mergers is to study cartels. Let us, for instance, go back to 2000 when the express trucking company McPhee and four of its executives were fined $4 million in a federal court for price collusion. The charges had been brought by Professor Alan Fels, then-chairman of the Australian Competition and Consumer Commission. The zealous Fels did nothing to conceal his relish at the size of the fines, warning other firms to expect similar treatment if they too colluded.

Unfortunately for justice, as well as the executives, the charge was groundless in the sense that Fels intended it. Now what Fels meant is that price-fixing by companies is anti-competitive and detrimental to consumers’ economic welfare. And this is precisely what Barnaby Joyce and Tony Steve are arguing. However, this line of reasoning simply does not hold up in a free market.

Fels, who was only following the orthodox economic line, was wrong. His error was to confuse the theory of perfect competition with competition. As the eminent economist Frederick von Hayek pointed out nearly 60 years ago, “perfect competition is no competition”, an observation that Joseph Schumpeter readily endorsed.

At best, perfect competition describes an economy at rest, one where all competitive processes have worked themselves out. So using a theory that does nothing to describe competitive behaviour, Fels condemned as anti-competitive that which is perfect keeping with competitive behaviour. And this was from a professor of economics. Unfortunately, since the 1920s most economists have come to think of competition as a quantitative state rather than a process. The emininent George Stigler was one such economist — until he significantly altered his views on monopoly and mergers. He stated somewhat ruefully that

I now marvel at my confidence at that in discussing the proper way to run a steel company. I certainly would not presume today to have that knowledge about any industry, even higher education. What is still more embarrassing is that I no longer believe the economics I was preaching… Memoirs of an Unregulated Economist, Basic Books Inc., 1988, P. 99).

The quantitative approach assumes that unless there are a large number of producers in the market there is no true competition. They therefore conclude that a market with few firms will set prices and cause output to diverge from the competitive level. There is absolutely no justification for this belief. What matters is not numbers but contestability. As long as potential competitors are not hindered by state imposed obstacles from competing with the incumbents the market is still competitive — even if it is being served by only one producer.

(The fallacious reasoning behind the concept of perfect competition has been compounded by the theory of monopolistic competition. And if you think this is an oxymoron, you are absolutely right).

What supporters of anti-merger laws argue is that when firms engage in price-fixing, as did McPhee Trucking et al., they raise prices above the competitive level. Really? How any company or companies can raise prices above the market level in an open market, i.e., contestable situation, beats me.

Even if the trucking companies had successfully implemented cooperative price-fixing arrangements this, as already pointed out, is not in itself anti-competitive. Benjamin R. Tucker demolished the view that collusion must of necessity always be anti-competitive. In his own words:

The right to cooperate is as unquestionable as the right to compete; the right to compete involves the right to refrain from competition; cooperation is often a method of competition, and competition is always in the larger view, a method of competition....in the light of irrefutable propositions, the trust, then, like every other industrial combination endeavouring to do collectively nothing but what each member of the combination might fully endeavour to do individually, is, per se, an unimpeachable institution. To assail or control or deny this form of cooperation on the ground that it is itself a denial of competition is an absurdity. It is an absurdity because it proves too much. The trust [cartel] is a denial of competition in no other sense than that in which competition itself is a denial of competition. The trust denies competition only by producing and selling more cheaply than those outside of the trust can produce and sell; but in that sense every successful individual competitor also denies competition . . . The fact is that there is one denial of competition which is the right of all, and that there is another denial of competition which is the right of none. All of us . . . have a right to deny competition by competing, but none of us . . . have a right to deny competition by arbitrary decree . . .

Even a superficial reading of Tucker makes it clear that so long as force is not used by a combination then competition has not been harmed and consumers are not being exploited. A more careful reading, however, reveals the full power of Tucker’s penetrating argument while showing how absurd the orthodox case really is. The essence of his argument is voluntary cooperation. This means that the absence of coercion leaves the market open to potential competitors.

It follows that any trust/cartel could only succeed in keeping out competition by providing a superior product. It could do this by buying in bulk, merging certain operations, eliminating duplication, etc. It is these cooperative activities that allow the cartel to lower prices. When we think of it along these lines, the cartel becomes a cooperative. Consistency demands that those who oppose cartels should also oppose producer cooperatives and all industrial mergers.

The critics’ main argument is that cartels –– and mergers –– operate to raise prices and curb output, not the reverse. What should be asked is how can a cartel raise prices above the market clearing level in a free market? If several companies combine to form a cartel then any attempt on their part to raise prices will only encourage others to enter the market place and drive prices back down again. Cartels in the anti-social sense can only emerge if competitors are kept out by force. And only the state can wield that kind of power. Even then problems will still emerge.

Let us say a number of companies form, with the support of the state, a cartel. Raising prices forces the cartel to curb output. This means that the more efficient members of the cartel will have to curb output to a greater extent then the less efficient members if the cartel’s numbers are to be maintained. But why should they? Eventually, the more efficient members break away (sometimes after a great deal of cheating on their quotas) so that they can fully exploit their superior efficiency by expanding output.

This is basically why cartels are inherently unstable. If the state intervenes to maintain the cartel, subsidies will have to be paid to compensate for lost output. The point, however, is that the cartel can only exist with the support of state power, as was the case in Bismarck’s Germany.

This brings us back to our Australian trucking companies. That they formed a cartel-like arrangement is indisputable. So what? So long as others were free to compete against them their action cannot be seen as anti-competitive, except by those who do not really understand the nature of competition. I have already explained why a cartel formed for the purpose of raising prices above the market rate will collapse in a free market.

What the supporters of anti-merger laws cannot see is that the cooperative angle of the firms’ actions. Cartel-like behaviour can be viewed as a means of evading merger laws. In other words, what appears to be a cartel can really be a substitute for a merger or a form of producers’ cooperative, which is also a form of merger. In these cases assets are pooled so that they can be more efficiently allocated.

The work of Professor Coase can, I think, be of some help here. He showed that firms internalise certain market transactions and this, he believes was the reason for the existence of the firm. (I think he went to far here. Even in the absence of transaction costs firms will still emerge). It takes little intelligent thought to realise that the kind of voluntary behaviour that Fels, for, example, dragged before the court might also have had the effect of lowering the costs of production by eliminating many transaction costs. After all, as Coase pointed out, firms have a tendency to expand until the internal costs of doing so equal transaction costs. Now this also fits in with Coase’s illuminating observation that government

planning is imposed on industry, while firms arise voluntarily because they represent a more efficient method of organising production. In a competitive system there is an ‘optimum’ amount of planning. (R. H. Coase The Firm, the Market and the Law, University of Chicago Press, 1990, p. 37)

But when we say “firms arise voluntarily” this must also include the kind of cooperative activity that Barnaby Joyce and Tony Steve condemn as anti-competitive! There is, in principle, no difference between several firms pooling their assets (fixed and circulating capital) than several people pooling their liquid assets (cash) to form a corporation. Both are pooling savings because fixed and circulating capital are savings.

It is safe to conclude that Fels was wrong morally and economically in bringing a case against these trucking companies, unless he could show they were using violence or intimidation to suppress competition. It follow that Barnaby Joyce and Tony Steve are equally wrong about the Government’s proposed merger laws.

Note: Why is the Government screwing up on these matters? The situation with labour market reforms has been even worse. The problem is that the Liberal Party hierarchy is not interested in economic ideas. The result of this arrogant indifference could be electorally disastrous. Liberal Party treats members with contempt reveals what happens when an ordinary member of the Party is rash enough to present it with some helpful economic arguments.

Gerard Jackson is Brookes’ economics editor