What the heck is… the Chicago School?

Our Graham has the answer -- and explains its impact on the trial's outcome

MS on Trial We shall be hearing quite a bit about the so-called 'Chicago School' of antitrust law following Judge Jackson's appointment of the pro-Chicago School Judge Richard Posner as the mediator in the case, and the 'Post-Chicago School' Lawrence Lessig to write a brief on remedies. The Chicago School arose after John McGee's 1958 study of the Standard Oil break-up in 1911 in which he surprisingly concluded that there was no evidence that Standard Oil used predatory pricing. McGee did his work at Chicago, and the result was the overthrow of the Harvard School, which had held sway from the 30s to the 60s, as the advocate of predatory pricing as a key issue in antitrust law. A basic tenet is that antitrust law enforcement harms American competitiveness. Judge Richard Posner and others of the Chicago School argue that predatory pricing rarely or never exists since the market adjusts to allow competition. However, a strong case can be made that technology marketplaces sometimes have different characteristics, not known when Posner came to his conclusions. Neo-classical economic theory is used by the Chicago School in arguing that consumers benefit from lower prices, and that adverse effects on competitors are just tough -- and that a new competitor would come along if prices went up once monopoly had been achieved. It is significant that Judge Jackson did not refer to predatory pricing in his Findings of Fact. It may be that he did not wish to include any red rags, anticipating that Judge Posner would be mediating. The acceptance of Chicago School thinking by most judges results from massive fund the training of federal judges by conservative foundations. Th judges are subverted into regarding antitrust enforcement as inherently wrong. Newly appointed federal judges are invited to attend a two-week indoctrination in Chicago School economic ideas at a warm and pleasant resort, often in the Carribean, with all expenses paid. Most judges accept. The message they receive is that monopolies are good, and this is reinforced with supporting literature on a regular basis. The consequence is that the great majority of antitrust cases (some 1500 each year) are summarily dismissed, and in most cases the right to jury trial, assured under the 7th Amendment, is denied. The Chicago School plays down whether monopolists were avoiding being punished by appealing to American chauvinism. In 1982, William Baxter, then assistant attorney general for antitrust in the Reagan administration, decided to drop the then-current investigation of IBM, and arranged for DoJ antitrust lawyers to attend seminars on Chicago-School economics. The Bush and Reagan administrations rarely used antitrust law since they were heavily influenced by Chicago-school thinking. This changed with the Clinton administration, with Joel Klein, the DoJ antitrust chief, being a supporter of a so-called post-Chicago School, along with Robert Pitofsky, the FTC chairman. The main difference is that the Post-Chicago School accepts that predation does occur, that market forces do not always come to the rescue as new commercial challengers would be scared off and that judicial intervention may be necessary. Few observers doubt that this is the present situation in the PC operating system market. Lessig is also a member of the Post-Chicago School, and so it is reasonable to assume that if Microsoft was allowed to nominate Posner, the DoJ (and Judge Jackson) would have been happy with Lessig's appointment. Although Posner and Lessig are doing quite different jobs, what Judge Jackson is effectively saying is that either Microsoft and the DoJ work out a solution with the soft man, or he will be guided by his hard man. He is also wisely admitting that he has found it difficult to formulate appropriate remedies. The Post-Chicago School believes that predatory pricing is not as rare as the Chicago School believes. The evidence that Microsoft has used its deep pockets to remove competition is considerable, particularly when Microsoft decided not to charge for IE, despite the fact that its development and marketing had cost a great deal. The Supreme Court has not generally taken to Post-Chicago-School theory so far, despite a hint in a 1992 decision concerning Kodak that it had been influenced, but in 1993 in the Brown & Williamson case, the Chicago School triumphed. With the establishment of a firm theoretical basis for Post-Chicago arguments from game theory (and certainly not from the ridiculous arguments used by the economist witnesses in the Microsoft case), it could be that the Supreme Court will use USA vs Microsoft to make a landmark ruling. This must have occurred to the Microsoft legal team. Nevertheless, the uncertainties of how the Supreme Court might react to the Microsoft case is likely to make Microsoft think very carefully, and as a result, exploring the best deal it could get from the DoJ makes a lot of sense. If Microsoft escapes any drastic punishment, it would be for political reasons related to the Chicago-School desire to support large corporations. Klein, as a Post-Chicago-School supporter, is unlikely to be inclined to accept any compromise that does not have any prospect of opening up competition and stopping Microsoft's future unfair competition. Microsoft is well-aware of this, so we see the immediate objective of Microsoft being to delay any order by Judge Jackson in the hope that a new attorney general for antitrust will be a follower of the Chicago School, and abandon the case. Assuming that the mediation fails, there is insufficient time for any major appeal to be decided before the presidential election on 4 November 2000. Judge Jackson has probably been setting the timetable in order to bring his current phase of the case to a conclusion well before the election. ® Related Stories Who the heck is... Judge Richard Posner? Who the heck is... Lawrence Lessig? Full Register trial coverage

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