Antitrust And Labor Movements Return to Their Roots

While modern antitrust reformers are preoccupied with the amount of competition, Progressive-Era activists argued that the quality of competition mattered too. Two new bills harken back to that time.

By Brian Callaci

Tagged AntitrustCongressprogressivismUnions

With Congress gridlocked, hopes for progressive legislation has turned to state and local governments. True to form, the traditional leaders, California and New York, are considering landmark legislation to raise wages through sectoral councils: tripartite employer-worker-government bodies empowered to regulate competition in the fast food and nail salon industries, respectively. The California bill, the FAST Recovery Act, would create a council with worker and employer representatives empowered to set minimum wage and safety standards for the fast food industry. The New York bill, the Nail Salon Minimum Standards Council Act, would create a similar council for the nail salon industry. Both bills harken back to a Progressive Era movement, driven by small businesses, trade unions, and antitrust reformers, which called for the negotiation of similar fair competition codes to govern competitive practices in specific industries. While modern antitrust reformers are preoccupied with the amount of competition—the more competition the better—early twentieth century antitrust activists argued that the quality of competition mattered too: Were companies competing on the basis of superior efficiency and innovation, or were they unfairly pricing below cost, reducing quality and engaging in ruthless wage-cutting?

The proposed fast food and nail salon bills follow in this tradition by confronting the market conditions and competitive practices driving exploitative business models. California’s fast food council would include not only representatives of workers and fast food corporations, but also the independent small business franchisees that actually operate most fast food restaurants. Doing so could give mom and pop franchisees a voice in the price and operating standards—imposed by their corporate franchisors—that ultimately determine the wages they can afford to pay. Meanwhile, New York’s nail salon council would also go beyond merely establishing minimum wages and working conditions. It would also empower the industry council, in consultation with academic experts, to set a fair minimum pricing model for the industry. Establishing a fair pricing model would allow the council to address the cutthroat competition that makes employers that abide by industry standards unable to compete against low-road rivals.

Progressive Era reformers like Louis D. Brandeis, architect of the Federal Trade Commission and eventual Supreme Court justice, believed that cutthroat competition too often forced small firms to compete by reckless price- and wage-cutting instead of by improving quality and innovation. What is more, Brandeis and his allies believed that what they called “destructive” or “ruinous” competition ultimately led to the creation of monopolies, as unscrupulous competitors used predatory price cuts to grab market share, and financiers merged small firms into larger firms to control markets. These reformers therefore saw no contradiction between fighting monopolies with one hand while encouraging new forms of publicly supervised cooperation through small business trade associations and trade unions with the other.

The antitrust movement first emerged among populist farmers during the last quarter of the nineteenth century, a period of industrial chaos in which the economy veered wildly from boom to bust as it underwent the wrenching transition from agrarian and family capitalism to the industrial era. During periods of intensified competition, businesses who found themselves locked in existential struggles for survival often resorted to cutting prices below the level necessary to cover their fixed costs, threatening insolvency. Some businesses tried to take control by entering into combinations like cartels, pools, and trusts, in order to fix prices and allocate markets. Many of these combinations, most notoriously monopolistic railroads, abused their consolidated power to exploit farmers, small producers, and consumers.

When Congress ultimately acted to restrain the power of these business combinations with federal legislation, it did so through the notoriously vague and sparse Sherman Antitrust Act of 1890, which made it illegal to restrain trade or monopolize a market. Unfortunately, as federal courts came to interpret it, the Sherman Act had the perverse effect of facilitating concentrations of power. The courts found it easy to proscribe cooperative agreements like cartels and some trade union activities, but failed to regulate mergers in manufacturing and mining. This gave firms a powerful incentive to control markets through mergers rather than looser cooperative arrangements. American businesses pursued consolidation on a massive scale in this period, with an estimated 1,800 firms disappearing by 1904, representing 20 percent of GDP.

Many antitrust reformers were aghast at these effects of judicial reframing of the Sherman Act, which seemed to be creating exactly the monopolies Congress had intended the law to prevent. Foremost among these was Brandeis, who believed that predatory practices like below-cost pricing and worker exploitation, rather than superior efficiency, were responsible for the apparent competitive success of corporations like US Steel. These reformers, in alliance with small business groups like the American Fair Trade League, believed that negotiated fair competition codes among competing businesses could help companies stabilize markets without requiring them to merge into giant corporations. They advocated for exemptions to antitrust prohibitions on price-fixing agreements for certain groups like agricultural producers, trade unions, and makers of specialty consumer goods, and succeeded in securing these exemptions in states like California.

Brandeis and small business allies wanted government agencies to oversee trade association agreements implementing codes of fair competition. In addition to publicizing information on best practices, they hoped that these codes would prevent harmful forms of competition, like below-cost pricing and adulterating products. As historian Laura Phillips-Sawyer has detailed, they pushed for state-level antitrust exemptions to be extended to the federal level, where mutually agreed fair competition rules would be overseen by the Federal Trade Commission, a new antitrust agency created in 1914. By fostering codes of fair competition, government could steer competition in a positive direction, heading off the effects of ruinous competition—especially the rise of monopolies.

Brandeis also supported trade union rights to collective action, albeit with the usual paternalistic reservations of Progressive Era reformers about the readiness of propertyless workers to act “responsibly” in the public interest. Nonetheless, despite his elitist misgivings about unions, Brandeis was appalled by the violence unleashed by Carnegie Steel during the Homestead strike in 1892, and believed the courts should have protected the union against the assault from the Carnegie corporation’s concentrated power.

After a series of garment worker strikes in New York City in 1909, the liberal retail magnate Edward Filene persuaded the manufacturers and the union to bring in Brandeis to mediate their dispute. The result was the Protocols of Peace, an agreement of Brandeis’s design, signed by the International Ladies Garment Workers Union and hundreds of manufacturers of women’s clothing, which set out a code to govern competition in the industry. With the establishment of a neutral arbitration board to adjudicate differences of interpretation and labor disputes, the Protocols set the model for the labor relations machinery of the National Labor Relations Board, which would be established under the New Deal in 1935.

The logic of the Protocols mirrored that of the small business cooperation advocated by the American Fair Trade League: By removing ruthless wage-cutting and safety corner-cutting as a method of competition, the Protocols would steer competition in more salutary directions based on efficient production and innovation. As Julius Cohen, counsel to the garment manufacturers, said in praise of the Protocols: “If all paid the same price for the same labor, as all paid for merchandise, efficiency as manufacturers would count for something against unscrupulous competitors.” By taking away the competitive advantage of sweatshops, progressive manufacturers and the union believed, the Protocols would favor the most innovative and productively efficient firms, rather than the most exploitative.

The Protocols of Peace fell apart by 1916, undermined by their voluntary nature: Without the force of law, nothing prevented low-road companies from entering the market and undercutting union wage and safety standards. However, by the time the Protocols collapsed, a new model was being crafted under the aegis of New York’s Factory Inspection Commission (FIC). Created by the New York legislature after the Triangle Shirtwaist Factory fire killed 146 garment workers in 1911, the FIC at first focused on safety and sanitation. However, by the 1920s, FIC reformers like Frances Perkins (later FDR’s Secretary of Labor) and state Senator Robert Wagner (later author of the National Labor Relations Act) pushed for the creation of “wage boards” to set minimum wages in particular industries. The idea behind wage boards was to have representatives of workers and employers negotiate a minimum wage, with the resulting agreement having the force of law, binding on all employers in that industry. As reformer Florence Kelley argued in 1911, wage boards were another way to fight the ill effects of destructive competition: “[M]en can be enabled to [earn a living wage], even in previously subnormal occupations, by setting a wage limit below which the cutthroat competitor cannot go.”

Echoing the sentiments of Protocolist garment manufacturers, business trade associations in other industries came to support wage boards, in the hopes they would set common standards that would deny low-road companies a competitive advantage. The industrial laundry industry was one such example. Opposition no doubt softened due to militant worker organizing drives led by communists and progressive trade unionists in Harlem and Brooklyn. The spokesman for New York’s laundry industry trade association declared in 1933:

The better employers in the industry have to meet the competition at the wage levels of their competitors, which are really destructive to the industry as well as unfair to the workers. The group I represent would support a minimum-wage bill today, although it would not have been willing to do so a few years ago.

The middle-class reformers of the FIC unfortunately suffered some of the same paternalist biases as Brandeis, failing to create a stronger role for worker and independent union involvement in wage boards. Frances Perkins famously remarked that “I’d rather pass a law than organize a union,” downplaying the role independent worker organizations would have to play in any meaningful wage negotiation process. The fast food and nail salon bills look like an improvement on that front, as both are backed by unions and worker organizations in the relevant industries. Rather than a simple substitute for unionization, the backers of both bills hope they will make unionization more likely.

FIC reformers—including Frances Perkins—played a large role in President Franklin Roosevelt’s Administration, where they drew on their FIC experience to write economic regulations for the whole country. The federal government experimented briefly with fair competition codes under the aegis of the National Recovery Administration (NRA) in the early years of the New Deal, but unfortunately the NRA failed to foster either strong labor involvement or government oversight to keep business interests in check. Big business was largely left alone to write their own codes, which functioned in many industries simply as legalized price-fixing cartels. However, there were a handful of successful codes, such as those in the bituminous coal, garment manufacturing, and construction industries. In these industries, labor unions played a substantial role in writing the codes, which succeeded in stabilizing competitive conditions and restoring these notoriously chaotic industries to health.

When the Supreme Court struck down the NRA in 1935, Congress gave up on comprehensive fair competition codes. However, Congress did legislate pared-down competition regulations for industries, like airlines and trucking, where cutthroat competition threatened public safety. While regulation in these industries later came under pressure in the 1970s in the face of high petroleum prices and widespread inflation, subsequent deregulation has resulted—as Brandeis would have predicted—in successive merger waves ultimately leading to monopolization, higher prices, and lower wages.

Across the economy, today we find ourselves today back in the Wild West world of unfettered monopoly capitalism of the early twentieth century. As the recent legislative proposals in California and New York attest, old ideas are suddenly relevant again. Fair competition codes, which stabilize competition conditions without increasing concentration, and steer business rivalry toward efficiency and quality improvements instead of cutthroat wage-cutting, offer a valuable model for policymakers. As Brandeis and his fellow reformers understood, the quality of competition matters just as much as the quantity. Public policy still has a large role to play in ensuring the kind of competition we get is the right kind.

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Brian Callaci is chief economist at the Open Markets Institute.

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