Big Business and Regulation

 

Opinions and Evidence - The movement for regulation of big business in the late nineteenth century was largely the result of political pressure by small business. The success of small business in securing protection against competition from big business imposed significant costs on consumers.

Outline

1. The era from 1880 to 1920 saw the rise of big business; industry expanded and became more concentrated
   1. Concentration was a natural result of the pursuit of efficiency through economies of scale, but was also consciously sought as an avenue to monopoly power
      1. Internal expansion, and vertical and horizontal integration, increased the size of many firms
      2. Attempts to achieve monopoly power included "gentlemen's agreements," pools, cartels, trusts, and holding companies

   2. By 1905, the large firm was typical of the American manufacturing industry

2. The increasing concentration of industry led to a changed role for government
   1. Before the 1880s, the federal government played a relatively minor role in the American economy

   2. After the 1880s, the federal government, as opposed to the states, gained unprecedented regulatory powers

3. Antitrust legislation, in the form of the Sherman Antitrust Act, was government's response to public pressures
   1. Three possible sources of the pressure for business regulation
      1. Big business sought regulation as a way to have government enforce cartels
      2. Small businesses sought protection because they were at a disadvantage in competition with big business
      3. Consumers wanted protection from monopoly pricing by big business

   2. Evidence suggests that the impetus for the Sherman Act was the protection of small business rather than promotion of consumer interests
      1. Big business opposed the legislation
      2. Falling prices throughout the 19th century meant that consumers had no incentive to seek government action
      3. The voting record of congressmen supports the contention that the legislation was undertaken in the interest of small business

4. The Meat Inspection Act of 1891 is a case study in the promotion of the interests of small business and of cattle ranchers

5. Connections to today - does regulation protect consumer interests

Connections to Economics

Rules of the Game - How did the economy of the United States change after 1880? How can we explain the rise of big business? What impact did the rise of big business have on the national market for goods and services?

Trade-offs - What were the advantages and disadvantages to big size in business? How did society and government respond to the changes in business? Was regulation the only feasible response to increased business concentration?

Incentives - Who sought regulation of big business? Who benefited and who lost as a result of anti-trust legislation?

The Economic Way of Thinking - The political power of small business helps explain the success of efforts to pressure government for regulation of big business during a period when, despite increased industry concentration, consumers were experiencing lower prices.

Economic Concepts that support the historical analysis:

• competition
• market structure
• economies of scale
• efficiency
• monopoly
• cartel