Neither Populist nor Neoclassical: The Classical Roots of the Competition Principle in American Antitrust Law

Abstract

Contemporary critics of American antitrust law lament a supposed misinterpretation by modern, welfare-driven enforcers of the true meaning of the competition principle. This essay contributes to the debate by reconstructing the principle's historical origin. While it did not feature in the Sherman Act, the competition principle was introduced by the Supreme Court during the early years of antitrust law. The court formulated alternative versions of the principle; the one that eventually prevailed was neither populist nor neoclassical, as it was based on classical political economy and, in particular, on freedom of contract and “natural” values. This historical circumstance may pave the way for a new approach to antitrust law.

1. Introduction: History Matters

Antitrust is about protecting competition, or so it should be. However, the word competition has no single, undisputable meaning. As historians of economics know well (McNulty 1968; Morgan 1993), it never had. The Sherman Act itself offers no help either, because, as is also well known, it does not even contain the word competition. And it is dubious that Gilded Age congressmen voting Senator Sherman's proposal into law had a unique, let alone clear, notion of competition. Indeed, it may be argued that protecting competition, whatever this might have meant to them, was not even their true or predominant goal.

It is easier to identify how competition is interpreted in modern American antitrust. Several interpretations do exist, but one has dominated since the 1980s: competition is about having low prices and abundant output in the marketplace. By protecting competition and, therefore, by keeping prices low and output high, antitrust pursues its goal of helping consumers receive the full benefit of competition itself, a benefit neoclassical economics identifies with consumer welfare. That this is the sole, statutory goal of antitrust is the core thesis of the Chicago school, whose approach has shaped US antitrust law for the last half century.¹ While courts never fully endorsed their most extreme proposals, it is undeniable that today's enforcement still follows the path paved by Chicago scholars and summarized by the idea that neoclassical economics, in the form of basic price theory, should drive antitrust law (Posner 1976; Bork 1978). Putting consumer welfare and price theory at center stage has not been neutral, though. Since the 1980s, it has been difficult for government or private plaintiffs to win a verdict against an alleged antitrust violation. The number itself of criminal filings and other enforcement actions by US antitrust authorities has fallen to historical lows (Lancieri, Posner, and Zingales 2023).

Triggered by the aftermath of the great financial crisis, the rise of inequality in the US economy, and the emergence of giant technological firms, a lively debate about American antitrust law has started (actually, restarted) in the last decade or so. Many critical voices—variously christened as movement antitrust, populist antitrust, or neo-Brandeisian antitrust—have called for a rethinking of the antitrust enterprise.² The overhaul, it is argued, should begin from a redefinition of its main goal and, consequently, the abandonment of the Chicago view. Both the goal and the approach are deemed inadequate to curb the market power of tech behemoths like Alphabet, Meta, or Amazon. Absent intervention, critics lament, the American economy and, possibly, democracy itself will be subjugated by such power.

One of the clearest expositions of this critique came in 2017 in the Yale Law Journal, when the legal scholar and future Federal Trade Commission chair Lina Khan (2017: 716–17) focused on Amazon's market behavior to lament that

Khan's essay highlighted the return of antitrust at center stage of public concern in the United States. Since then, the debate has filled thousands of pages.³ Beyond the flood of publications, the most tangible outcomes of the renewed interest in the rules of competition have been an important proposal for reform of federal antitrust law and the recent revision of the Department of Justice's Merger Guidelines.⁴ While the neo-Brandeisians’ complaints are not univocal, as they “are lodged, variously, against absolute size, industrial concentration, high prices, leverage, and unspecified injury to small business” (Hovenkamp 2018: 597), one trait is common. Crucially, it is a trait whose roots lie in history.

Critics agree that an antitrust enterprise driven exclusively by economic theory and goals is out of step with the fundamental concerns that drove the 1890 enactment of the Sherman Act and that should again be at center stage in our so-called New Gilded Age—an era that, like the original one, purportedly shows the negative consequences for American people of giant business size, exploitative market power, and nasty corporate abuses. The key for triggering a U-turn in antitrust enforcement lies, it is claimed, in rethinking competition. Everyone in the neo-Brandeisian camp believes, contra Chicago, that antitrust law is not, or at least not exclusively, about consumer welfare and that the neoclassical dogma “competition equals low prices/high output” should be discarded as inadequate, oversimplified, and, above all, unfaithful to legislative intent (Vaheesan 2019). A different, richer idea of competition should be used in its stead—an idea relying on a broader set of principles than economics, including explicitly sociopolitical values such as equality and fairness.⁵

The question thus arises as to what such an alternative notion of competition should consist of. Following the critics’ appeal to look at history, and inspired by Cheffins's (2021) plea for setting the historical record of antitrust straight, this essay examines how the notion of competition entered antitrust law. As it turns out, the truism “antitrust is about competition” was hardly a given in those early days. Reconstructing the jurisprudential origin of the so-called competition principle—the idea that competition is fundamentally a “good thing” and that the law should therefore defend it—brings to the fore the peculiar intellectual background that underlined it. Contrary to neo-Brandeisian claims, economics was indeed decisive for the principle's formulation. However, contrary to Chicago claims, the principle did not stem from neoclassical economics (and, therefore, from a more or less explicit notion of consumer welfare) but rather from a pillar of classical political economy, namely, the very political idea of freedom. In a nutshell, competition was a “good thing” because, in the view of the Supreme Court justice who first affirmed the principle, it was an essential ingredient of Adam Smith's classical system of natural liberty, that is, of the only political, social, and economic organization of human affairs that, by warranting absolute legal protection to individual freedom, could provide justice and wealth to society.

The competition principle pertains to the legal realm but has obvious connections to economics. Reconstructing how it could become the law of the land thus requires an investigation of the intellectual sources of the legislators’ and judges’ economic views. Ideally, one could hope to find direct reference to economists and their works in congressional records or court decisions about antitrust. Unfortunately, no such evidence can be found, so much so that little economic literature will feature in the following pages. Why should this story be of interest for historians of economics, then? As it turns out, specific economic notions are distinctly recognizable behind some of the arguments put forward during congressional debates or enshrined in landmark decisions by federal courts. The main goal of the article is to highlight this economic rationale, in the belief that bringing to the surface the hidden, undeclared influence of “defunct economists and academic scribblers” upon so fundamental a branch of the American legal system is part and parcel of the historian's work. This is even more so if, as argued above, the current debate on antitrust law relies on dubious historical foundations. A further goal of the article is thus to show why the opposite conventional readings—that the early antitrust law was consistent with either the neoclassical (Chicago) or the populist (neo-Brandeisian) approach—are wrong and why the history of economics is useful for proving this.

The next section rehearses the story of how the Sherman Act was passed into law cleansed of any reference to competition. Section 3 is dedicated to the Supreme Court cases where the competition principle was first enunciated. As section 4 shows, those early cases proposed different, but equally legitimate, readings of the principle. Section 5 argues that the antitrust jurisprudence of a key character in our story, Justice Rufus W. Peckham, was fully imbued with classical political economy. Building on this, section 6 explains how Peckham's version of the competition principle was grounded on the classical notion of contractual freedom. Section 7 concludes by suggesting that this very version may offer a key for rethinking the antitrust enterprise.

2. The Sherman Act Is about Competition—or Is It?

The common law of contracts in restraint of trade was the main reference for the framers of the Sherman Act, as shown by the use of common law terms like restraint of trade and attempt to monopolize. Still, the question arising in the courts called to enforce it was whether the act embodied or superseded the common law. Should the identified offenses—namely, contracts, combinations, and conspiracies in restraint of trade (as to the act's Section 1) and monopolizing attempts (as to its Section 2)—be given their traditional common law explanation, or did the new statute redefine them in a substantive sense? If the latter, what principle, if any, should drive the new reading? Congressional debates gave no clear-cut answer. In particular, the competition principle—to reiterate, the basic idea that competition is a “good thing” deserving legal protection—had played an ambiguous role during the new statute's enactment.

Congress first turned to the trust problem in 1888, at a time of great transformations for the American economy, the most apparent being the rise of big business. Driven by technological change and massive investments in fixed capital, the new industrial era had put at center stage the relation between business size and competition. Size meant scale economies and increasing returns, which in turn led to either monopolization or so brutal a competitive process—what economists and legal scholars called ruinous competition—that combination in its various forms (trusts, cartels, mergers, etc.) seemed the only available self-defense for businesses.⁶ New federal legislation was invoked by many because states seemingly lacked sufficient powers to check the growth of business concentration.⁷ However, by the time the Fifty-First Congress was eventually ready to debate a bill by Republican Ohio senator John Sherman, a couple of much-heralded lawsuits in New Jersey and Ohio, grounded on the trusts’ alleged violation of corporate law, had established the states’ formal competence on, and effective control over, the issue. This circumstance would be crucial for the statute's eventual content.

As legal historians know well, the enacted version of the Sherman Act was not authored by Sherman but mainly by Vermont senator, and prominent corporate lawyer, George Edmunds, chairman of the Senate Judiciary Committee.⁸ It is not just that the statute should more properly be called the “Edmunds Act.” The point is that in moving from Sherman's various proposals to Edmunds's final version, the competition principle lost any statutory role.

Sherman's original bill, titled “A Bill to Declare Unlawful Trusts and Combinations in Restraint of Trade and Production,” had been drafted on the assumption that the states were “unable to deal with the great evil that now threatens us,” the rise of industrial concentration. Given the trust-builders’ ability to evade the jurisdiction of state courts, the Ohio senator declared (21 Cong. Rec. 2456 [1890]), it was up to Congress to employ federal powers to dissolve combinations extending to two or more states, while state officials should continue to police the charters of those active within a single jurisdiction. No doubt existed as to Congress's constitutional power in the field because the effect of trusts was to “restrain commerce, turn it from its natural courses, [and] increase the price of articles.” All these activities, he remarked, negatively affected interstate trade in the same way a bridge obstructs interstate navigation or a state tax impedes the free circulation of goods—two realms where Congress's power was undisputed. With words echoed by modern neo-Brandeisian scholars (Vaheesan 2017), Sherman called his proposal “a bill of rights, a charter of liberty,” and stressed its importance in political terms. “If we will not endure a king as a political power,” he proclaimed, “we should not endure a king over the production, transportation, and sale of any of the necessities of life. If we would not submit to an emperor, we should not submit to an autocrat of trade, with power to prevent competition and to fix the price of any commodity” (21 Cong. Rec. 2457 [1890]). Clearly, he thought freedom was at stake—a freedom that was not only economic but mainly political. Sherman understood that concentration of economic power also consolidates political power. This would happen whenever enormous wealth, amassed through economic power, would be turned to influence government, undermining business and individual freedom, and thus democracy itself. As another senator, George Hoar of Massachusetts, put it, monopolies were “a menace to republican institutions themselves” (21 Cong. Rec. 3146 [1890]).

In the words of its proponent, the bill had another goal, beyond avoiding dangerous accumulations of power. Sherman asserted that competition was necessary to prevent wealth transfers from consumers to monopolies. His concerns here were purely distributional, not allocative. Indeed, as explained by Robert Lande (1982: 94–95), they had an explicit moral content, demonstrated by Sherman's calling monopolistic overcharges “extortion which makes the people poor” and “extorted wealth” (21 Cong. Rec. 2461 [1890]). Other participants in the debate echoed the latter expressions, revealing that at least for some congressmen only competitive prices were “fair” to consumers.

Sherman had probably in mind a kind of structural approach to antitrust, that is, a direct control over market structures by federal and, possibly, state governments. Much as a government could decide whether and where to build a bridge, so it should be allowed to determine the extent of competition in a given market. And exactly like unobstructed navigation or tax-free commerce, so free competition should be the default mode of operation. Accordingly, all of his proposals—he made three of them, between August 1888 and March 1890—contained (a version of) the following statement:

While he never defined the term itself, we may thus recognize Sherman as an early champion of the competition principle: he deemed antitrust as committed to defending and promoting competition as a “good thing,” antithetical to economic and, eventually, political power and capable of furthering consumers’ interests. Remarkably, both “full and free competition” and consumer protection were unfamiliar notions for the late nineteenth-century common law of restraints of trade.

Despite the urgency of the trust problem with the public, Sherman's bills faced strong opposition in the Senate, where a contrary faction immediately emerged. Doubts were raised about both the constitutionality and the necessity of so sweeping a reform. Several senators contended that Sherman's equation of the trusts’ effect on interstate trade with other kinds of interference, like obstruction to navigation and state tax barriers, was legally unfounded, given the Supreme Court's consolidated distinction between transportation and manufacturing. Others asserted that, far from being helpless, states had recently demonstrated in the abovementioned high-profile litigations in New Jersey and Ohio their legal capacity to handle structural problems caused by giant combinations.

In the end, the statute enacted by the Fifty-First Congress would contain little of Sherman's own text, beginning with the cancellation of the words competition and consumer. Senator Edmunds would draft it explicitly in the then-standard common law language of monopolizing attempts and of contracts, combinations, and conspiracies in restraint of trade. Were it not for its criminal penalties and innovative procedural provisions (the only surviving parts of the original proposal), the act could be plainly interpreted according to the common law doctrines of property rights and freedom of contract typical of English and American courts of the time, which had prima facie little to do with “full and free competition” as such.

Those opposing Sherman's proposal were no naive devotees of the power of laissez-faire to destroy monopoly and bring heaven on earth. On the contrary, most believed that competition could be as dangerous as combination and that only private agreements could mitigate its destructive effects. In this, they shared the views of the New School of American economists, a group of Progressive scholars who repudiated classical economics, opposed laissez-faire, and advocated social reforms.¹⁰ In the new environment of large-scale industrial processes, the group's leader, Richard T. Ely (1888: 121), explained that business concentration and monopoly were inevitable and often technically beneficial—an evolutionary outcome of competition that could not, and should not, be hindered by the government or the law. As another prominent New Schooler put it, “It is time that the public, with the economists, give up the idea that free, unlimited competition is the only normal condition of business, so far as fixing prices is concerned, and that they recognize the principle of combination and monopoly as equally normal in some places” (Jenks 1894: 486–87).

Many senators indeed argued in their interventions that, rather than some abstract competitive ideal, the new statute should defend freedom of contract. By that term it is meant, now like then, the ability to bargain about one's own property rights without any hindrance or constraint. A pillar of classical political economy as well as of classical contract law, the notion stems directly from the legal protection of property rights, including the right to the value of property itself: since value is determined in the market and materializes through exchange (i.e., via contractual activity), property is truly protected only when owners are free to enter any kind of contract they deem proper to reap the value of their property.

Yet, the main reason those senators were extolling freedom of contract was not for its beneficial effect on market exchanges. In their view, freedom of contract also encompassed those agreements and combinations that, ever more frequently in the new industrial era, were safeguarding businesses against the most destructive effects of competition itself. The contractual freedom that market participants should be allowed to enjoy thus included the liberty to voluntarily restrain one's own market opportunities. The law should aim at preserving such liberty by proscribing only those contracts and practices that curtailed it, that is, that coerced an individual into adopting a behavior he would not voluntarily choose. But this—the senators knew—was precisely the approach of the traditional common law of contracts in restraint of trade, which distinguished on this ground between reasonable and unreasonable restraints.

Originally aimed at encouraging market activity, freedom of contract thus took on a different meaning in the new environment of big business and massive scale economies. A quintessential feature of classical political economy and a pillar of nineteenth-century common law, it also provided the rationale for those who rejected Sherman's outright condemnation of business concentration. No contradiction thus existed between adopting classical principles, including the desirability of the utmost contractual liberty, and believing that the new industrial conditions had made classical laissez-faire utopian, if not harmful. Even more, one could endorse freedom of contract as, at the same time, a constitutionally protected principle, an established common law doctrine, and a milestone of classical political economy, and still belong to Sherman's faction, that is, to those who believed that the economic and political threats raised by business concentration, as well as their undesirable distributional effects, outweighed its alleged technical benefits.

The extent of the common ground provided by classical freedom of contract is revealed by what both camps praised as a key benefit of the market system, namely, the guarantee of a “fair price.” The true yardstick for assessing the desirability of a given price, fairness was indeed crucial for all participants in the debate.¹¹ A connection existed in the common law between fairness, contractual freedom, and the market. The most authoritative legal dictionary of the time defined the fair market value of a good as “the price which [a good] might be expected to bring if offered for sale in a fair market,” the latter being in turn where the price “would be fixed by negotiation and mutual agreement, after ample time to find a purchaser, as between a vendor who is willing (but not compelled) to sell and a purchaser who desires to buy but is not compelled to take [the good].”¹² We can thus safely credit 1890 legislators with the view that contractual freedom begot a fair market and that a fair market begot fair prices. From this, it also followed that the main concern of the common law of restraint of trade was to discriminate between fair and unfair behavior in the marketplace.¹³

A difference emerged, however, as to who would actually benefit from such fairness. While Sherman and his camp stressed that consumers should also be considered, in that they ought not to be “extorted” by the trusts, all senators believed that the primary beneficiaries were in fact someone else. To them fairness referred first and foremost to the fact that “every man in business” ought not to be deprived of what Connecticut senator Orville Platt called the “legal and moral right” to a “fair profit” (21 Cong. Rec. 2729 [1890]). Everyone on the Senate floor agreed that businessmen were entitled to a fair price embodying the “just” reward for their “honest work,” where “just” was in turn intended in the legal, and classical, sense of respecting the property rights to the fruits of one's own labor. “The true theory on these matters,” Platt proclaimed, “is that prices should be just and reasonable and fair, that prices, no matter who is the producer or what the article, should be such as will render a fair return to all persons engaged in its production, a fair profit on capital, on labor, and on everything else that enters into its production” (21 Cong. Rec. 2729 [1890]).

Both supporters and critics of the new bill endorsed Platt's words here. Where they differed was on the rest of his argument about what had actually to be done to guarantee the fairness of market prices. Sherman and his allies maintained that a fair price could only be achieved when conditions of “full and free competition” prevailed in the marketplace. Deeming competition necessary to attain fairness, they urged the new law to strike at combinations such as, say, price-fixing cartels, which generated an unjust reward for their members to the detriment of their competitors and their customers. The opposing camp prioritized business interests, emphasized the losses caused by excessive (or ruinous, as it was called) competition, and saw combinations, including cartels, as voluntary contracts aimed at guaranteeing fair prices and fair profits. The law should not prohibit such combinations, unless their practices imposed unfair conditions upon someone else's business.¹⁴

An influential figure among Republican senators, Platt belonged to the latter camp. Accordingly, he attacked “the theory of [Sherman's] bill” for entailing that “no matter how much the price may have been depressed, no matter how losing the business may be, the parties engaged in it must have no understanding between themselves by which they will come together and say that they will obtain a fair and fairly remunerative price for the article which they produce. That is wicked, the bill says” (21 Cong. Rec. 2729 [1890]). For those on Platt's side, no law should interfere with a businessman's effort to defend his right to a fair profit. This was the logical consequence of considering that “right” as part of his property, that is, itself a constitutionally protected property right at the owner's full and free disposal that no federal statute should cancel or limit.

The blending of contractual freedom with the rhetoric of property rights made Platt's the winning position, and not only with respect to “fair prices.” Most senators saw in the combined action of corporate and common law an adequate weaponry to protect the American economy from both dangers, unrestrained combination and unrestrained competition. Hence, they relegated the Sherman Act to a supporting role. The phrasing of the first two sections in Edmunds's enacted version of the bill mirrored this view.¹⁵ His recourse to familiar common law wording for defining statutory liabilities bears witness to the senators’ “reaction against the original bill's explicit and unmediated imposition of ‘full and free competition’ as the only natural and legitimate form of commerce” (Peritz 1996: 20)—and, accordingly, also against any plan to make the competition principle the law of the land.

Presenting the Judiciary Committee's outcome, Edmunds explained that the bill incorporated traditional common law categories and that Congress ought to leave courts free to determine the categories’ concrete applicability on a case-by-case basis (21 Cong. Rec. 3148 [1890]). An almost unanimous Senate voted in favor of the bill as proposed by the committee, with a new title: “A Bill to Protect Trade and Commerce against Unlawful Restraints and Monopolies.” As a courtesy to Senator Sherman, the act retained his name, although its substantive content had been transformed and notwithstanding Sherman's own complaint that the final version was “totally ineffective in dealing with combinations and trusts. All corporations can ride through or over it without fear of punishment or detection.”¹⁶

As neo-Brandeisian scholars rightly claim, by enacting an antitrust law Congress did aim at several economic and noneconomic goals. Among them, both the prevention of “unfair” transfers of wealth from consumers to big business and, conversely, the defense of every business's “right to a fair profit” were relevant. However, no explicit or implicit notion of the normative superiority of competition featured in the enacted version of the statute. Indeed, it seems not so important to pinpoint which goal, if any, drove the approval. Thoroughly reshaped by Edmunds, the Sherman Act sounded to those who voted it into law like a mere federalization of the common law of restraints of trade, with no direct reference to competition, let alone its being the “norm.” Neo-Brandeisians are therefore wrong in tracing the competition principle back to the 1890 statute. The question then arises: If it was not in the enacted text, when did the competition principle affirm itself in American antitrust law? The answer, as I explain below, is somehow surprising, at least for those accustomed to stereotypical accounts of Progressive Era law history.

3. A Literal Shock

The Supreme Court's five-to-four decision to reverse the lower courts’ acquittals in United States v. Trans-Missouri Freight Association (TMFA) was a turning point in antitrust law.¹⁷ Under scrutiny was an agreement among a number of railroad companies to fix uniform rates and terms of freight carriage. Lower courts had twice sanctioned (i.e., legitimated) the agreement, declaring that the Sherman Act mirrored the common law, including the traditional distinction between reasonable and unreasonable restraints, and did not aim at preserving competition as such. In the words of Kansas District Court judge Riner, “The public is not entitled to free and unrestricted competition, but what it is entitled to is fair and healthy competition” (TMFA District Court, at 456). This being the statute's accepted reading, the Supreme Court's verdict came as a surprise. For the first time the court construed the Sherman Act as recognizing no distinction between reasonable and unreasonable restraints of trade, thereby superseding the common law of contracts in restraint of trade.

Writing for the narrow majority, one of the court's most conservative members, Associate Justice Rufus Wheeler Peckham, the same justice who a few years later would pen the (in)famous Lochner v. New York opinion, built on a simple, literal reading of the statute—hence the name literalists given by law historians to the faction of the court that joined him in the majority—to announce that the Sherman Act had supplanted the common law. “The language of the act,” he wrote, “includes every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states or with foreign nations. So far as the very terms of the statute go, they apply to any contract of the nature described. A contract, therefore, that is in restraint of trade or commerce is, by the strict language of the act, prohibited” (TMFA, at 312), and not just, the opinion also read, “that kind of contract which was invalid and unenforceable as being in unreasonable restraint of trade” (TMFA, at 328). It followed that a price-fixing agreement like that established by TMFA defendants was unlawful, regardless of the reasonableness of the established prices.

As said, the verdict was unexpected—a literal shock indeed (Sklar 1988: 127). The doctrine that the Sherman Act had actually declared unlawful every contract that somehow restrained interstate trade could wreak havoc on the American economy. Even the most innocent contract between businesses from different states now seemed at risk because, by definition, it barred trade with other potential partners. Met with a furious reaction from the business and legal community, the Supreme Court swiftly—albeit only implicitly—watered down its literalism in a couple of later opinions authored by Peckham himself.¹⁸

While the court's literalist stance would not last long, much more persistent was the other innovation brought by the TMFA ruling. The majority declared that the only “fair” prices are competitive prices, thus providing the earliest express statement of the competition principle.¹⁹ To defend his literal reading of the statute, Peckham had in fact to rule out that any agreed price could ever be reasonable. Why? Because, he argued, only competitive prices are reasonable: “Competition, free and unrestricted, is the general rule which governs all the ordinary business pursuits and transactions of life” (TMFA, at 337). This categorical statement about the merits of “free and unrestricted competition” somehow vindicated Sherman's original bill. Absent from the act's final text, the competition principle found its original formulation in TMFA and has been a pillar of American antitrust law ever since.

Beyond establishing competition as the “norm,” the TMFA court also warned against the sociopolitical consequences of an excessive concentration of economic power. Like Sherman and his faction, Peckham viewed rivalry among roughly equal firms of relatively small size as the bedrock of the American system, both ethically and politically. With words that would become a battle cry for future supporters of a sociopolitical—rather than strictly economic—interpretation of antitrust law, the justice averred that powerful combinations in restraint of trade could drive out of business the “small dealers and worthy men whose lives have been spent therein,” turning each of them from “an independent businessman, the head of his establishment, small though it might be, into a mere servant or agent of a corporation” (TMFA, at 323–24). Only “free and unrestrained competition” could effectively rein in economic power and prevent its undesirable effects on the fabric of American society.

The competition principle played still another role in TMFA. Many at the time—including several prominent economists—held the view that competition could be destructive, especially in industries with huge fixed costs like railroads. Under particular circumstances, Cornell professor Jeremiah Jenks explained, “competition will eventuate, not in the elimination of some few while the majority are still making profits, but rather in a depression of the entire business, so that only the very few most skilful or best situated will be making any profit at all, while the others still struggling along may be losing money for a long period before they finally yield” (Jenks 1900: 19). Another important economist, Arthur Twining Hadley, summarized what those circumstances were: “The larger the permanent investment, the less good and more harm competition can do” (Hadley 1896b: 223). Not only was competition in highly capitalized industries destructive, but it often led to the survival of only one firm and thus to monopoly and the end of competition itself (see previous section). A solution existed, though. Combination, which could take various forms (from loose deals to tight cartels to complex governance structures), entailed an agreement between producers to act as a joint monopoly and set “fair,” that is, noncompetitive, prices capable of guaranteeing an adequate return on capital—a “fair profit”—to all participating firms, yet prices that were still lower than what a full-fledged monopolist in a winner-takes-all market would charge.

Railroads’ counsel in TMFA had invoked this so-called ruinous competition defense to dismiss the charge: companies, they said, should “be allowed to save themselves from themselves” (TMFA, at 331). Driven by the competition principle, the Supreme Court's majority rejected this argument. While acknowledging the abstract validity of the defense, Peckham countered that no clear-cut answer existed as to the possible beneficial effects of combination in the railroad industry. It was indeed impossible to know a priori whether the prices fixed by the combination were reasonable, while any ex post assessment would fail against the “infinite variety of facts entering into the question of what is a reasonable rate” (TMFA, at 332). But this, he concluded, was precisely the reason Congress had not distinguished between reasonable and unreasonable restraints and had, at least in his view, enshrined competition as the “norm.”

First formulated in TMFA, the competition principle would find its classic statement a few years later. Writing for a plurality in another famous antitrust case, the most Progressive member of the Supreme Court, Associate Justice John Harlan, argued that trusts were unlawful per se: “Every combination or conspiracy which would extinguish competition between otherwise competing railroads engaged in interstate trade or commerce, and which would in that way restrain such trade or commerce, is made illegal by the act” (Northern Securities, at 331).²⁰ Besides the sheer size and power of the merger under scrutiny, the competition principle played a key role in that ruling. Harlan repeated several times that the Sherman Act prescribed “the rule of free competition” (Northern Securities, at 198, 331, 332, 337). Competition was always beneficial (“If such combination be not destroyed, all the advantages that would naturally come to the public under the operation of the general laws of competition . . . will be lost”: Northern Securities, at 327), and no room existed for legal escapes such as the ruinous competition defense: “If, in the judgment of Congress, the public convenience or the general welfare will be best subserved when the natural laws of competition are left undisturbed by those engaged in interstate commerce,” he wrote, “that must be, for all, the end of the matter if this is to remain a government of laws, and not of men” (Northern Securities, at 199). With Harlan's words, the competition principle was established for good in American antitrust law.

Given the court's bitter split in the case, it is no surprise that Harlan's views came under his brethren's fire, the competition principle being at the top of their complaints. Even a Progressive hero like Associate Justice Oliver Wendell Holmes strongly dissented from Harlan's reading of the Sherman Act. Holmes's dissent was a passionate defense of the traditional common law of restraints of trade against the competition principle—whence his iconic dictum, referring to the Minnesota District Court's earlier decision to invalidate the merger but clearly directed at Harlan: “The court below argued as if maintaining competition were the expressed object of the act. The act says nothing about competition” (Northern Securities, at 403; emphasis added). The Congress's real concern was, to Holmes, “the ferocious extreme of competition with others, not the cessation of competition among the partners” (Northern Securities, at 405). Thus, the act aimed not at promoting “free and unrestrained competition” but rather at protecting competitors from aggressive business practices, like predatory pricing or boycotts. Given that the combination under scrutiny had been made voluntarily—none had been coerced into it or had suffered any coercion or exclusion because of it—it was perfectly lawful at common law and, therefore, beyond the Sherman Act's reach.

The danger of Harlan's Northern Securities (and, by implication, of Peckham's TMFA) interpretation was not just that it paved the way to destructive competition. Concern with the sociopolitical consequences of a misguided antitrust policy was high in the dissenting justices. As Holmes put it, the Sherman Act should not “be construed to mean the universal disintegration of society into single men, each at war with all the rest, or even the prevention of all further combinations for a common end” (Northern Securities, at 407). Anticipating his even more famous dictum in Lochner v New York (198 U.S. 45 [1905], at 75) that “the Fourteenth Amendment does not enact Mr. Herbert Spencer's Social Statics,” Holmes ended his dissent in Hobbesian tones, warning against “an interpretation of the law which in my opinion would make eternal the bellum omnium contra omnes and disintegrate society so far as it could into individual atoms” (Northern Securities, at 411)—the very interpretation, we may add, which underlay the image of an atomistic market of small, independent firms as the “norm” of “free and unrestrained competition” that antitrust law was allegedly called to defend.

4. Competition À La Carte: The Standard Oil Solution

Surprisingly enough, among the justices who joined Holmes in his Northern Securities dissent was Peckham himself. The same justice who had first invoked the competition principle and had eulogized the “small dealers and worthy men” was now ready, in the most important antitrust case discussed until then by the Supreme Court, to subscribe to a reading of the Sherman Act that sidelined the principle itself and cautioned against the undesirable consequences of an atomistic marketplace. To further complicate the matter, Holmes and Peckham would famously clash just one year later in the Lochner case, with Holmes writing one of the most celebrated, and most trashing, dissents of all time to shatter Peckham's opinion invalidating a labor regulation.

How can Peckham's seemingly schizophrenic behavior with respect to the competition principle be explained? Here lies a crucial juncture in our story. Contrary to what neo-Brandeisian scholars may claim, not only was the competition principle absent from the enacted version of Sherman's bill, but it received no univocal reading even by the justices who first affirmed it. Legal historians depict the divide within the court in the early years of antitrust enforcement as solely grounded on different readings of the Sherman Act's relation with the common law of restraints of trade—the abovementioned “embody or supersede?” issue that the 1890 Congress had left indeterminate. However, another disagreement existed among the justices, centered on the notion of competition and mirroring the similar congressional split. Like the senators before them, the justices also harnessed competition in pursuit of sociopolitical goals, beyond and before economic ones. Yet, they diverged as to how to read the law in this respect.

On the one side were those who, like Harlan, proclaimed the absolute validity of the competition principle and argued that antitrust law should guarantee “free and unfettered competition,” not only for the latter's strictly economic benefits but, more importantly, for its dissipative effects on big-business power, which threatened the integrity of the American system. In this reading, competition meant (what in modern jargon we would call) absence of market power. On the other side featured those like Peckham, whose interpretation of the competition principle equated, as we argue below, competition with the unfettered exercise of freedom of contract. Finally, we had Holmes's thesis that the Sherman Act established no “competitive norm” but on the contrary aimed at preventing competition itself from inflicting economic and sociopolitical harm on American society, especially on those “small dealers and worthy men” everyone wanted to protect. As we know, even Holmes's dismissal of the competition principle could be faithful to the expressed intent of many congressmen who had voted Sherman's bill into law.

A question thus arises for today's supporters of neo-Brandeisian antitrust. When they invoke a return to the competition principle, reading into it the “original meaning” of the Sherman Act and an effective weapon against the rising concentration of power (both economic and political) in twenty-first-century Corporate America, which version of the principle do they wish to restore? Harlan's, Peckham's, or, possibly, Holmes's? Apparently, neo-Brandeisians could endorse at least two of them. Let antitrust law protect and promote competition in its endless power-destroying activity, à la Harlan. But, at the same time, let antitrust law prevent, à la Holmes, the inevitable effect of competition itself, namely, the survival of the fittest. Such inconsistency is no big news, as it mirrors the well-known dilemma between protecting competition and protecting competitors, a dilemma often cast as the following questions: How should antitrust deal with a business that gains market power because of its superior product or higher efficiency, i.e., by exploiting the very mechanism of competition? Should the law let its competitors be “competitively killed” or should it protect them, if only to avoid the accumulation of market power? The answer given by mainstream, welfare-driven antitrust is clear-cut, at least in principle.²¹ The same cannot be said for neo-Brandeisian antitrust. The next section argues that a possible way out of the dilemma is offered by Peckham's approach. Before that, however, it is useful to recall how the Supreme Court solved the controversy back then.

As historians of antitrust law know well, a few years after Northern Securities a new legal doctrine, the rule of reason, would settle the issue for good. Formulated by Chief Justice Edward Douglass White in the epoch-making Standard Oil case of 1911, the doctrine—to which all other justices, apart from Harlan, would adhere—would assert that only those business behaviors were illegal that unreasonably restrained trade.²² Hence, it would stand for the implicit propositions that, first, good trusts and bad trusts existed; second, that the former could be perfectly lawful even under the Sherman Act; and third, that competition was not necessarily beneficial but could well be destructive, so much so that even combinations could be a reasonable solution. It all depended, White would underline, on how businesses competed.

Legally speaking, the rule of reason would build on the freedom-of-contract doctrine established six years earlier in Lochner, as well as on a reaffirmation of the traditional common law distinction between reasonable and unreasonable restraints. These legal foundations would allow White to properly qualify the principle of “free and unrestrained competition” without invoking anymore vague notions of fair price or fair profit. Trusts and monopolies were illegal not because of their sheer existence or size but only because of their behavior, that is, “because of their restriction upon individual freedom of contract and their injury to the public” (Standard Oil, at 54). Crucially, freedom of contract would be elevated to the status of necessary condition for competition to work its magic. This, according to an almost unanimous court, was the correct reading of antitrust law. The Sherman Act, White's opinion averred,

Freedom of contract, undisturbed by government interference, was the key liberty fostering competition and its various beneficial effects, including the eventual dissolution of monopolies created by market forces themselves.

As formulated by White, competition did remain the “norm,” as in TMFA and Northern Securities, but only within the meaning and limits set by the higher principle of contractual freedom, itself an embodiment, per the Lochner decision, of the constitutional protection of life, liberty, and property and of the due process clause of the Fourteenth Amendment (see Bernstein 2003). This was the version of the competition principle that the early era of antitrust law, so often nostalgically invoked by neo-Brandeisians, bequeathed to subsequent enforcers.

5. Justice Peckham's Classical Competition

To fully assess Peckham's competition principle, we need to dig a bit deeper into Peckham's jurisprudence.²³ Despite his ill repute among Progressives as the despised author of Lochner v. New York, Peckham defies stereotypes. True, he was an architect of so-called laissez-faire constitutionalism and an enemy of Progressive reforms, but at the same time he supported a literalist interpretation of the Sherman Act and pioneered the use of antitrust law as an effective weapon against big business and market concentration.

Let us first dispel a myth surrounding Peckham's TMFA defense of the “small dealers and worthy men” whose business was being crushed by powerful combinations. Much has been written about these words. It is undeniable that Peckham was here giving voice to the Jeffersonian dream of an economy composed of self-employed owners of small, independent firms, each of roughly equal size and devoid of significant market power—entrepreneurial republicanism, as it may also be called (see Alexander 1997: chap. 7). Yet, Peckham was no naive defender of (usually inefficient) small businesses or someone who invoked antitrust law to protect competitors rather than competition. A careful reading of the passage about those “small dealers and worthy men” proves that.

Indeed, Peckham was not suggesting that minor businesses be protected from competitive forces. He plainly conceded that

Clearly, what concerned him was not the inevitable ill fate of the small producers unable to keep pace with technical innovations and market pressure.²⁴ What he did complain about was that the same outcome might occur not as an effect of genuine competition but rather as the manifestation of undue market power stemming from combinations and restraints of trade. “It is wholly different,” the passage continued, “when such changes are effected by combinations of capital whose purpose in combining is to control the production or manufacture of any particular article in the market, and by such control dictate the price at which the article shall be sold, the effect being to drive out of business all the small dealers in the commodity” (TMFA, at 324). The sense is clear: the very same sacrifice of the “small dealers and worthy men” that was justified (in fact, socially beneficial) when caused by competition and technological progress became a social loss if precipitated by the action of cartels or combinations. Far from being the nostalgic warden of inefficient ways of doing business, Peckham sounds in this passage like a champion of free competition as a pro-efficiency driver and of antitrust law as an antimonopoly weapon.

Still, this passage and, more generally, Peckham's original version of the competition principle may be given alternative readings. One possibility is to stick to our previous remark and identify him as a forerunner of the neoclassical approach, emphasizing the welfare-enhancement effect of competition.²⁵ Another is to focus on entrepreneurial republicanism as a sociopolitical goal itself, one that Peckham had pursued with his early identification as a Jacksonian Democrat.²⁶ Competition was in this view simply the key to reconciling politics and economics. A core Jacksonian tenet—also echoed by modern neo-Brandeisian antitrust—held that excessive market power would eventually turn into undue political power, thereby endangering the republic itself. Regardless of its economic merits, competition could prevent that by dissolving or limiting market power. Was Peckham's TMFA opinion simply giving voice to this political view?

My reading is different. Yes, Peckham did believe that with the Sherman Act Congress had declared competition as the sole legitimate market “norm.” But, no, not in a Jacksonian, purely political sense, nor in the neoclassical sense of a welfare-maximizing market structure. The kind of competition that Peckham read into the new statute was the classical one, according to which competition was conceived as a dynamic process actuated by the continuous interaction in the marketplace of individuals endowed with complete freedom of contract.²⁷ In contrast to the neoclassical image of competition as a specific market structure, characterized by multiplicity and free entry of economic agents placed at the same level of the value chain, classical competition was first and foremost a vertical relation—actually, a contrast of interests—between buyers and sellers, each trying to get the most from their trading activities. The rivalry between buyers and sellers—their effort to “buy cheap and sell dear”²⁸—played a specific analytical function in classical models, namely, bringing market price to its normal, or natural, level. This, of course, required that market participants be free to bargain without any hindrance or constraint—that is, be free to contract.

The classical view of competition was still taught in economics textbooks of the Gilded Age. To quote just a few of them: “If labor and capital are free; the flow of each, under the law of competition, toward an equilibrium, is as natural as that of the waters of the ocean under the action of gravitation. . . . Competition is the endeavor of two or more persons to gain the same thing, at the same time” (Wayland and Chapin 1878: 95, 172); “Competition signifies the operation of individual self-interest among the buyers and sellers of any article in any market. It implies that each man is acting for himself solely, by himself solely, in exchange, to get the most he can from others, and to give the least he must himself” (Walker 1892: 91–92); “Competition may be defined as the effort of rival sellers to dispose of their goods and services, or of rival buyers to secure the goods and services which they require; an effort limited by the desire of the seller to secure as high a price as possible, and by the desire of the buyer to pay as low a price as possible” (Hadley 1896a: 73).

Classical competition was also familiar to Peckham. While still a judge in the New York Court of Appeals, he had penned a strong dissent in a price regulation case, People v. Budd.²⁹ There Peckham dealt with monopoly power and its sources like a full-fledged classical economist would. Two of his arguments in particular had implications that transcended regulation and involved antitrust. First, he claimed that, absent legal impediments to entry, the liberty of individuals to transfer their capital from one sector to another would defeat attempts to maintain prices above the natural level in any specific industry. The claim captured Peckham's, and the classical economists’, faith in the perfect harmony between the defense of individual rights to property and contract and the antimonopoly effect of free entry and potential competition.³⁰ Second, he extended this thesis also to cartels and other price-fixing conspiracies. While these agreements inevitably limited the participants’ pricing liberty, they were as well exposed to competitive pressure arising from newcomers attracted by supernormal returns. Potential competition would prevent cartelization from being a successful price-enhancing strategy, again conditionally on free entry being unimpeded by legal obstacles. Peckham's conclusion in Budd was that common law rules sufficed to police business affairs, while statutory price regulation should be canceled.

Less than a decade later, Peckham's classical faith in potential competition and the common law to prevent any excessive concentration of economic power was seemingly replaced by a more mundane appeal to the express prohibitions of the Sherman Act. My point is that, while his anticartel stance in TMFA likely stemmed from a newly gained awareness of the changing conditions of American industry, Peckham still stuck to trusting classical competition and its natural, beneficial effects. Only, he now thought that in the age of big business, competition required specific conditions to properly work. Those conditions would represent the red thread connecting not only his antitrust jurisprudence but also his Lochner opinion.

6. The “Ordinary Way” of Doing Business

A passage in another antitrust case is the key to unlocking Peckham's competition principle. Two years after TMFA, he would author the opinion in Addyston Pipe, a case originated by the federal government's prosecution of a cartel of cast-iron pipe producers active in thirty-six states.³¹ The case owes its fame to the opinion delivered by then-judge William Howard Taft for the Court of Appeals of the Sixth Circuit.³² Taft's ruling to dissolve the cartel did not rely on TMFA literalism but on a distinction between direct and ancillary restraints of trade that was to become a pillar of American antitrust law. Much less famous is Peckham's opinion for the Supreme Court. While confirming Taft's conviction of the cartel, Peckham built his argument on partly different grounds. To our aims, what matters is a passage toward the end of the opinion. What makes a combination an unlawful restraint of trade, he wrote, “is the effect of the combination in limiting and restricting the right of each of the members to transact business in the ordinary way, as well as its effect upon the volume or extent of the dealing in the commodity” (Addyston Pipe, at 244–45; emphasis added).

Two readings of the passage are possible. Taken literally, it may again identify Peckham as a forerunner of the neoclassical “high price, low quantity” characterization of antitrust violations. Market power always constrains, either directly or indirectly, the trading opportunities of economic agents by affecting their liberty to conduct their affairs—as a neoclassical author would indeed say, by reducing “the volume or extent of [their] dealing in the commodity.” Market power, in other words, always materializes as a formal or informal, direct or indirect, contractual obstacle to trade. Only under “free and unrestricted competition” would agents be able to fully exploit their trading opportunities, but this requires that all contractual restraints be made unlawful—the hallmark of antitrust literalism. In this reading, Peckham's competition principle is identical with Harlan's in Northern Securities, or indeed with Sherman's original bill.

That the author of TMFA, and a champion of the literalist faction in the Supreme Court, could embrace this reading of the Sherman Act is surely a possibility, with authoritative supporters.³³ However, it is difficult to reconcile this conclusion with Peckham's position in other cases, not only because, as we know, he would join Holmes's dissent in Northern Securities against Harlan's reading of the competition principle, but, above all, in view of what Peckham himself had declared just one year before Addyston Pipe in another, much less famous antitrust case, Hopkins v. United States (171 U.S. 578 [1898]).

The contract challenged in Hopkins was accused of violating the Sherman Act precisely because its bylaws deprived the underwriters of the liberty to conduct their business as they saw fit.³⁴ This was a clear instance of a contract-induced, output-restraining practice. But Peckham, writing again for the court, expressly rejected the challenge. A citizen, he maintained, had the right to freely perform his business activities as well as the right to give up such freedom. “Cannot the citizen, for what he thinks good reason, contract to curtail that right?” he asked. “What a State may do is one thing, and what parties may contract voluntarily to do among themselves is quite another thing” (Hopkins, at 603). Peckham was crystal clear that antitrust law did not prohibit restraints on the competitors’ freedom but only restraints on trade. It was the effect of a contract upon interstate commerce that controlled the application of the Sherman Act, determining whether the constitutional protection of contractual liberty ceased to operate, not the circumstance that the contract might entail a restraint of its subscribers’ own freedom. As the law historian Alan Meese (1999: 58) put it, “The mere fact that a contract restrained the ‘liberty’ of private parties did not thereby render it a direct restraint beyond constitutional protection.”

How to explain, then, that passage in Addyston Pipe? How to reconcile it with Peckham's other jurisprudence and his own competition principle? The key is to recognize that the effect a restraint may have upon competition and prices is not necessarily allocative, as in the neoclassical approach, but may well be distributive, as in classical political economy. The latter is the effect Peckham, like most other jurists of his time—and, as we know, many of the congressmen who approved the Sherman Act—had in mind when thinking of the adverse impact of cartelization.

In classical political economy, the true yardstick for assessing market outcomes, be they prices, quantities, or profits, was their conformity to the natural (i.e., long-run equilibrium) values, rather than their being conducive to allocative efficiency (which was merely a consequence, to be assessed in dynamic terms). While not “just” in themselves, natural prices were the prices that would spontaneously emerge from the working of markets under ideal conditions of justice and liberty, that is to say, within what Adam Smith called the system of natural liberty.³⁵ Competition had a central role in this system.

Unlike justice and liberty, competition was not desirable in itself, because it was simply the manifestation of the individual pursuit of self-interest—of “buying cheap and selling dear.” When this pursuit took place within the ideal system of natural liberty, the term free competition could be used. It was indeed free competition that brought market values to gravitate toward their natural level (Smith [1776] 1904: I.vii.15).³⁶ Being the outcome of free competition, natural prices thus testified to the prevalence of justice and liberty in society. This in turn entailed that natural prices could not be a target for policy: it was pointless for governments to try enforcing them because any permanent discrepancy between market and natural levels testified to the existence of imperfections in the system of natural liberty that could not be cured via price interventions.

Being the manifestation of the proper working of the system of natural liberty, free competition had to be the “norm” in the classical system, a “norm” that classical writers interpreted as the free interaction between buyers and sellers—in short, as freedom of contract. But if free competition meant freedom of contract, it followed that contractual freedom was itself part of the system of natural liberty, that is, of that very system grounded on justice and liberty that brought natural values in the marketplace.

Building on the original analysis of Meese (1999), I thus claim that the “ordinary way” of doing business evoked by Peckham in Addyston Pipe was any conduct conforming to the free-competition norm and, therefore, capable of generating natural values. I also claim that the competition principle in TMFA should be read as Peckham's endorsement of the classical notion of free competition as freedom of contract—the very same notion, it may be noted, that Chief Justice White would later enshrine in Standard Oil. A business behavior was ordinary when it conformed to the specific way of arranging contractual relationships that met the requirements of the system of natural liberty—when it was, in short, a classical contract.³⁷ On the contrary, an unlawful restraint—a direct restraint, in Taft's terminology—was any contract or other agreement inducing an agent to behave in a nonordinary way, that is, to deviate from classical competition and determine nonnatural prices. In short, direct restraints were all those contracts and agreements that fell outside the boundaries of classical contracts and, therefore, violated the classical competitive norm.

A consequence of this interpretation is that, as noted by Meese (1999: 66), it turns on its head the relationship between freedom of contract—Peckham's signature doctrine in Lochner—and antitrust law. Contrary to what is usually claimed, it was contractual liberty that set limits to the Sherman Act, protecting “ordinary” contracts and combinations but not direct restraints. In other words, the notion of direct restraint was not a limitation to the scope of classical contractual freedom but rather emerged by difference from it. The right way to read Peckham's passage in the Addyston Pipe opinion is then to acknowledge that, for him, freedom of contract controlled the scope of the Sherman Act, not the other way around. It did so by guaranteeing constitutional protection against antitrust challenge to all “ordinary” contracts, that is, contracts generating classical outcomes in the form of natural values.³⁸

In particular, a restraint was direct, and so triggered intervention, if and only if it affected interstate trade “in a way that produced the sort of harm that justified regulatory intervention under the classical economic paradigm that informed liberty of contract jurisprudence” (Meese 2012: 796). All other agreements remained beyond the reach of the Sherman Act and under the freedom-of-contract shield. The latter covered standard contracts like partnerships but also covenants not to compete, and even mergers. Any of these agreements might well lead to higher prices, because of their restraining effects upon competition. Still, their impact on prices was natural because—actually, as long as—they were within the classical boundaries. In other words, a contract or any other business practice could well be “ordinary” despite leading to higher prices. No price was unjust, that is, itself the harm the law should redress. It was not the price per se that, in Peckham's view, should control the application of the act but whether the reason for that specific price—that is, the restraint determining it—was in harmony with the classical system of natural liberty.

Far from testifying to the abandonment of the classical approach in favor of a (largely ante litteram) neoclassical view, Addyston Pipe thus rested on the same principles of classical political economy that inspired the rest of Peckham's jurisprudence—like, for instance, his Budd dissent (see previous section), where he had extolled the virtues of the “ordinary laws of trade” in preventing firms from pricing above the competitive (i.e., natural) level. Liberty of contract, epitomized in that case by perfect capital mobility, always retained a central position in his judicial opinions, regardless of the kind and the source of the regulation under scrutiny. Were it a New York State price regulation, as in Budd, a federal antitrust statute, as in Addyston Pipe, or a state law limiting working hours, as in Lochner, Peckham's political economy did not change.

Or almost so. I agree with Meese (1999: 67) that one aspect of Peckham's political economy did evolve: his awareness of the power of cartels to keep prices above their competitive level. Contrary to the classical monopoly theory he had followed in Budd, his later jurisprudence recognized that an association of private producers could defeat competitive pressures and retain abnormal prices even without state-conferred privileges or unlawful coercion upon partners and outsiders. A cartel, in short, could well be a direct restraint transgressing the boundaries of classical competition. We can only surmise what may have led Peckham to qualify his beliefs in the effectiveness of competition, actual and potential, to destroy cartels. Were it because of contemporary industrial reality, or because of his earlier encounter with railroad cartels, or because of the influence of new economic theories, what is certain is that Peckham replaced the certitude of the Budd dissent—discard regulation and let markets work their magic—with the dissolution orders that struck the TMFA and Addyston Pipe cartels. Yet, it is remarkable that the principle driving Peckham's injunction in the latter case was still aligned with the classical paradigm. Whatever the reason for its persistence, the iron-pipe cartel prevented competition from deploying its beneficial effects and kept prices above their natural level. Therefore it had to be dissolved as a direct restraint in violation of the Sherman Act—more generally, as an impediment to the classical system of natural liberty.

7. Conclusion: Classical Competition for a New Antitrust

In this final section I claim that Peckham's approach may still matter for contemporary antitrust. Trapped in between Harlan's and Holmes's orthogonal readings of the competition principle, which they both proclaim to endorse, neo-Brandeisians have so far neglected Peckham's interpretation. This despite several features that should suit them, namely, its being a version of the principle with strong historical roots, its being premised on classical notions of justice and liberty, rather than mere economic values, and its being distinctly nonneoclassical and, therefore, distant from the Chicago approach.

Consider how nineteenth-century American law translated the abstract principles of the classical system of natural liberty into a list of lawful business conducts. Most of the weight of discerning between natural and nonnatural interferences with someone else's rights fell on the specific doctrines of classical contract theory. The controlling condition was that the agreement or practice under scrutiny belong to the catalog of “accepted” contracts—that is to say, of those restraints that, by virtue of their belonging to that catalog, led to presumptively “natural results,” whatever these results might be allocatively speaking (i.e., whatever their effect on output and prices). Admission to the catalog was policed by a contract's distributive effects, that is, by its being favorable to the “just” distribution envisaged by the classical system. In other words, the yardstick for lawfulness was neither a contract's impact on the price level nor the net creation of wealth but the circumstance of its being listed or not among the contracts deemed “conducive to natural results” in a distributive sense. Here lay the reason for condemning cartels. “Cartel-generated prices were deemed ‘harms’ as a distributional matter,” Meese (1999: 87–88) explains, “because they departed from the prices that would have been produced by the ‘natural’ workings of the market.” On the contrary, contracts that, like Taft's ancillary restraints, were merely supportive of the achievement of another natural outcome always passed the test.

The distance from the Chicago approach is manifest. Crediting the judges and congressmen of the Gilded Age with a price-theoretic notion of the benefits of competition is historically unfounded, as it would attribute to them a grasp of neoclassical economics that antedated the latter's diffusion among economists themselves. Pace Robert Bork's well-known narrative, Chicago-style economic efficiency and consumer welfare were not the goals pursued by legislators and courts in the formative years of antitrust law.³⁹ Indeed, this article has shown that the version of the competition principle that became the law of the land after 1897 (or, at most, 1911) did not even look at prices and quantities per se. In the classical view of competition, economic variables such as prices and quantities were at most a useful, yet not wholly reliable, signal of the effective working of competition and, therefore, of the conformity to justice and liberty of the underlying legal relations. The true goal was a just and free polity. Freedom of contract, when exercised within the boundaries of classical law, was instrumental to achieving it on matters economic.

It is crucial to recognize that the classical approach, while categorical, was also very flexible and open. The list of lawful contracts was neither definite nor fixed. Legal conflicts often arose over contracts on the catalog's boundary or because of changing business practices. Indeed, the common law of contracts continually filled in, or revised, the catalog with an eye toward evolving economic conditions and the welfare-improving potential of the various contracts. So, yes, allocative issues did play a role in determining whether, say, a price-increasing contract passed muster. But it was not the static, neoclassical efficiency à la Bork that the ideal master-of-the-catalog had in mind. It was a growth-inducing, dynamic efficiency à la Adam Smith. Here lay a possible objective anchor for closing the classical system, avoiding the risk of circularity: the yardstick for admitting or not a given contract to the catalog was whether its enforceability preserved or harmed competition as a long-run process with socially beneficial effects.⁴⁰

Placing the agents’ contractual activity at center stage was a classical feature of the competition principle that disappeared in later developments of antitrust law, when neoclassical elements, such as the markets’ structural characteristics (market shares, scale economies, and the like) or the welfare gains generated by low prices and large outputs, became prominent.⁴¹ Historically speaking, contracts would regain centrality in antitrust analysis only with the rise of Oliver Williamson's transaction cost economics, when practitioners would learn that in a world of incomplete contracts the efficiency—and thus, in a neoclassical setting, the lawfulness—of each business contract should always be evaluated vis-à-vis the alternative provided by vertical or horizontal integration (see Meese 2005; Hovenkamp 2010). In a sense, Williamson's approach would build a theoretical bridge connecting Peckham's classical competition with the Chicago-driven, welfare-centered rehabilitation of some specific contracts and business practices that post–World War II structuralist antitrust had declared per se unlawful.

The span of Williamson's bridge may even be longer, though. Focusing on contractual activity within a classical process view of competition may well become the core of a new approach to antitrust more in tune with the dynamics of modern markets, especially in the web economy where formal and informal contracts are the essence of so-called internet ecosystems (see Petit and Teece 2021). If so, the bridge would directly connect Peckham's antitrust with the present-day issues raised by so-called Big Tech, bypassing altogether both Chicago and the neo-Brandeisians.

While classical law had a contract-based anchor, the overall classical system found its main closure rule in the allegedly natural character of competitive market outcomes, provided “natural” be taken in the Smithian sense of “conforming to the system of natural liberty.” Viewing competition as a natural baseline, or norm, capable of ensuring distributional justice and individual autonomy, as well as dynamic efficiency, is the most general message we may draw from Peckham's competition principle—a message grounded on the rich and flexible discourse of classical political economy. As is well known, the latter was not just an “economics” but a “political economy” in the proper sense of the expression. That is to say, it was a specific worldview about the relationships between individuals and society, the market, and the state, which drew upon fields as diverse as (what we today call) economics, political science, philosophy, and sociology. As Peckham recognized, the competition principle was a pillar of that worldview. Properly adapted to the economic reality of the twenty-first century, I suggest that the idea of a competitive norm—where competition is defined as contractual freedom, rather than as a welfare-maximizing market structure, and the legal keystone is the distinction between competitive, that is, lawful, and noncompetitive, that is, unlawful, harm caused by the different, continuously evolving business practices—could revive contemporary antitrust.

Selecting the natural outcome of classical competitive markets as the baseline was at the time neither arbitrary nor casual. The strong distributive and allocative arguments of classical political economy made this baseline highly recommendable vis-à-vis American constitutional law, even beyond the obvious link to individual freedom itself.⁴² By preventing nonnatural distributions of wealth, the competitive baseline guaranteed at the same time the intangibility of the individual's sphere of economic rights and the provision of correct incentives to address the exercise of these very rights toward the maximization of social wealth. In the classical paradigm, the natural, that is, competitive, distribution of wealth was also the best distribution—where “best” meant the distribution guaranteeing the maximization of “the Wealth of the Nation.” The natural outcome of the classical model was not only just, but also efficient, albeit in a long-run, dynamic sense.⁴³

Reconstructing antitrust along classical lines would therefore preserve the efficiency goal—indeed, it would enhance it by replacing, as explained above, the current, short-term, static view of welfare with a long-term, dynamic one more aligned with the actual functioning of contemporary high-tech markets. On the other hand, the notion of harm controlling Peckham's antitrust jurisprudence was distributive rather than allocative. Its grounds were moral, more than economic. Harm meant, as in Adam Smith, the unjust violation of individual rights, including property rights, the almost sacred status of which permitted only one kind of lawful breach, namely, those caused by impersonal competitive forces.⁴⁴ This narrow requirement provides one last lesson for contemporary debates.

While today we may disagree with the way Peckham, and the classical economists before him, drew the line between competitive and noncompetitive practices, it is the line-drawing exercise itself—and the sophisticated worldview of classical political economy that guided it—that need to be rediscovered by those willing to rebuild antitrust upon grounds different from mere static welfare. The competition principle, classically understood, suggests that one such ground does exist. Classical authors called it natural liberty.

Without involving them in any responsibility for remaining mistakes, I thank James Ely, Randy Barnett, Paul Moreno, Thomas Leonard, Steven Medema, Ross Emmett, Daniel Hammond, Amos Witztum, Simon Cook, Luca Fiorito, Michele Grillo, Melvin Cross, and John McClintock for their help and advice at different stages of my research on the influence of economic ideas upon American antitrust law. I am also grateful to Mario Rizzo and the other participants of the NYU Colloquium on Market Institutions and Economic Processes, as well as to this journal's editor and referees, for their useful comments and suggestions.

Notes

References