Features

July/ August 2013 Estates of Mind

The answer to America’s techno-malaise is to force big corporations to compete more. And to open their patent vaults.

By Barry C. Lynn

Gary Reback, an antitrust lawyer who took part in the case against Microsoft, sums up the current policy: “In information technology we have no antitrust enforcement today, and I don’t expect any enforcement for at least the next four years.” Worse, in realms ranging from drugs to genetically modified food, the longer the government allows big companies to swallow smaller ones, the harder it becomes to restart the processes of innovation. As antitrust lawyer Robert Litan has observed, “Mergers in high-tech markets should face an extra degree of scrutiny.” The “relative sluggishness of the judicial process,” he says, can make it very hard to “unscramble” a deal after the fact.

The debate over the relationship between monopoly and innovation goes back at least as far as the Industrial Revolution. Indeed, striking the right balance was a preoccupation of the Founders, as evidenced by their concern with patent monopolies. Thomas Jefferson, who served on the first U.S. Patent Commission, rejected the idea that a citizen had any “right” to monopolize control over a technology. Ideas, Jefferson wrote, “cannot, in nature, be a subject of property.” But, to give the inventor a chance to perfect his conception and grow it to scale, Jefferson believed that some ideas are “worth … the embarrassment of an exclusive patent.” Jefferson emphasized, however, that officials must always be chary in granting such privilege.

Nevertheless, problems soon emerged. By the mid-nineteenth century, American financiers had figured out how to use patent monopolies not merely to hobble rival innovators but also to erect corporate empires; by the turn of the twentieth century, they had largely perfected the art. One of the more notable instances saw J. P. Morgan grab control of the electrical patents of Thomas Edison, George Westinghouse, and Nikola Tesla, and then use the resulting “pool” to control the entire electrical industry. One lawyer of that era even penned a primer for businessmen. “Patents are the best and most effective means of controlling competition,” he wrote. Sometimes, he added, patents “give absolute command of the market, enabling the owner to name the price without regard to cost of production.” The first coherent reactions against such abuse of patents also date to this time. In 1900, political scientist Jeremiah Jenks proposed using antitrust law to compel giant companies to license their patents.

During the Progressive Era, the country passed its first antitrust legislation, but enforcement proved weak and never tackled the problem of patent monopoly. This remained true through Roosevelt’s first term. Indeed, during the first two years of the New Deal, FDR largely suspended antitrust enforcement. But following the economic and political failure of the National Industrial Recovery Act, Roosevelt reversed course. In a 1938 message to Congress, FDR said he would use antitrust policy to unleash the “vibrant energies” of entrepreneurs and thereby bring a “new vitality” to America.

The first step was not to dispatch a mob of hillbillies with broad axes. Rather, it was to join Congress in launching the Temporary National Economic Committee (TNEC) to investigate—empirically—how big companies concentrated and used power. The result was the most extensive study of monopoly in the history of America, and a series of shocking revelations. One was the detailed account of how the glass companies Hartford-Empire and Owens-Illinois had managed to capture and hold a 100 percent monopoly over the business of making bottles in America.

As a summary of the TNEC put it, Hartford-Empire had “demonstrated how a corporation might rise to a position of power and monopoly, not through efficiency or through managerial skill, but by manipulating privileges granted under the patent laws.” Once there, Hartford-Empire maintained a “control over production and prices more complete than that exercised by most public utility commissions.”

U.S. patent policy, the summary concluded, promoted two contradictory processes: “One is creative, the other, restrictive; one encourages or rewards inventiveness, while the other fosters monopoly; one promotes production, the other fosters predation.” The overall balance, however, favored the suppression of better ideas. “The patent system permits powerful units or combinations to destroy small competitors by endless litigation or by threats of litigation, regardless of the merits of the small producer’s case or of his product.”

Based largely on these revelations, the Roosevelt administration began to establish the foundations of a competition policy that would remain in effect for two generations. The main architect was Wyoming-born lawyer Thurman Arnold. During the early days of the New Deal, Arnold had been skeptical of antitrust enforcement. But when he was named to head the TNEC inquiry into patents and saw how companies like Hartford-Empire operated, his thinking on the issue changed completely.

Roosevelt named him to run the Antitrust Division of the Department of Justice (DOJ) in 1938; by 1942, Arnold had boosted the staff from eighteen to nearly 600. He also launched a slew of new cases, bringing ninety-two in 1940 compared to just eleven in 1938. And he established clear strategic goals. Arnold agreed with Jeffersonians like Louis Brandeis that the central aim of
anti-monopoly law is to disperse political power. He also believed that competition was best for technological advance, and here he made his greatest mark.

There were three main components to the overarching competition strategy that emerged in the 1930s in the complex dialog between the Roosevelt administration and Congress. One was an acceptance that some industries, like electricity, telephones, and gasworks, were natural monopolies and hence should be regulated by the public. Second was the belief that in areas of the economy that did not require high degrees of scientific knowledge—such as retail, farming, and banking—the government should promote as wide a distribution of power and opportunity as possible. Hence the anti-chain store legislation of the time.

The third component, created largely by Arnold and his team, was a coherent approach to regulating industrial corporations engaged in the art of applying science to mass production.

Well into the 1930s, giant companies like AT&T and DuPont were investing in research, sometimes extravagantly. But their dominance over their markets meant they—like Hartford-Empire—often had little incentive to introduce superior technologies when doing so threatened to cannibalize their existing product lines or otherwise diminish their profits. Arnold tackled this challenge first by insisting that all such companies compete at least to some degree. This led the DOJ to adopt a general policy of aiming to have at least three or four firms engaged in every industrial activity. (One example is the government’s 1945 decision to force Alcoa to share its 100 percent aluminum monopoly with Kaiser and Reynolds.)

Arnold then combined this policy with an entirely new approach to patents. The TNEC had recommended that any patent held by a dominant firm be made “available for use by anyone who may desire its use,” that all licenses be entirely “unrestricted,” and that suits for infringement be all but prohibited. As one writer put it, the goal was to treat the patent monopolies of dominant companies as “a public utility.”

Innovation by Acquisition? The graphs below depict some but not all of the major high-tech companies absorbed in recent years by Google, Oracle, and Monsanto.
acquisitions

Barry C. Lynn directs the Markets, Enterprise, and Resiliency Initiative at the New America Foundation.

Comments

  • POed Lib on July 22, 2013 10:59 AM:

    Anti-chain store - now that is a concept that many should get behind. We are in an era of relentless homoginization. Every shopping center has the same stores. We need to end that.