US Airways/American Merger: Government Has To Help Save Capitalism From Itself

John D. Rockefeller

The news that the Department of Justice is opposing the US Airways – American merger is good news, not just because you should never fly US Airways since they love to lose your luggage (happened to me TWICE) but because this type of behavior should never just get a rubber stamp of approval.

Even if the merger does eventually get through (that seems to be the consensus from People Who Know Things), the consumer’s interests are often never given a second thought in these combinations of big business.

I’m currently reading an excellent biography of John D. Rockefeller, arguably the greatest capitalist that ever lived, and it’s stunning how much he hated the free market. Our friends on the right always hold up business and the free market as their twin pillars of America, but its worth remembering that the idealistic version of the free market often doesn’t happen in reality. The textbook world where companies equally compete against each other in a war to appeal to consumers is often the stuff of myth at the mega company level of business.

In reality, as Rockefeller did, companies often move towards collusion, cooperation and combination. They work in cartels to raise/lower prices depending on their needs – not the actual market demand. Or they just eliminate pesky competition by absorbing each other.

Rockefeller hated the gyrations in price and profit that an actual free market generated. He preferred control and settled markets and worked to eliminate competition either by buying them out or driving them out of business by manipulating prices with his market power.

When this happens, in the case of trusts, etc. it is the consumer who suffers. Here’s the DOJ on the proposed merger:

If this merger were to go forward, consumers will lose the benefit of head-to-head competition between US Airways and American on thousands of airline routes across the country – in cities big and small.  They will pay more for less service because the remaining three legacy carriers – United, Delta and the new American – will have very little incentive to compete on price.   Indeed, as our complaint shows, the management of US Airways, which will run the new airline, sees consolidation as a vehicle to reduce competition between the airlines and raise fees and fares.

The role of the government is to police these abuses and planned abuses of the consumer by business. It is to referee the market from its inclination to fatten its pockets and squeeze choice from the market, giving the consumer the shaft.

We must always be vigilant of capitalism’s inclination for this sort of business, and while we encourage capitalism, be aware of its potentially abusive power.

  • Salmo

    You are being too kind, Oliver, and you don’t have to go back to John D. Rockefeller. Of course the proposed merger between United and American is an effort to gain market power and exploit it to the detriment of the consumer. Of course the result would be higher cost and less service; that’s the plan. That is the sort of thing American capitalists have been doing for decades, and its why so much of what we now call profits are in fact monopoly rents. With the merger of Exxon and Mobil, for example, Mr. Rockefeller’s Standard Oil is essentially reconstituted, right now, with nary a peep out of the DOJ. I am pretty sure no one was surprised. The surprise here is not that the merger is just the latest example of monopolistic tendencies, and the “free markets” are a fairy tale used to quiet the rubes, it is that the DOJ stirred itself at all. I suspect that someone guiding that merger is being taught a lesson. Don’t worry, I’m sure it will all be straightened out with appropriate contributions and the inclusion of the right set of plutocrats in the deal.

    • Christopher Foxx

      Of course the proposed merger between United and American is an effort to gain market power and exploit it to the detriment of the consumer. Of course the result would be higher cost and less service; that’s the plan.

      No company ever anywhere was motivated to do a merger because they thought it would be good for customers. They do mergers because they think it will improve their business. Period.

      • Salmo

        Yes, that is true but misses my point. The merger is to gain and exercise monopoly power, extracting rents not profits. Lots of companies do mergers for reasons other than that, and it used to be that mergers for that purpose were routinely blocked.

        • Christopher Foxx

          I don’t follow what you mean by “rents not profits”. What “rent” is an airline customer paying?

          • Salmo

            Economists use the term “rents” in a way that is quite different from its use to describe the payment under a lease arrangement, for example. A full discussion of this would be a very lengthy response, so let me offer a quick outline and a couple of references. The simple answer to your question is that the “rent” in the airline ticket price I was writing about is the difference between the minimum price necessary to provide the service (and remember, in a theoretical free market – which we know is a rare condition if not utterly the fantasy of ideologues and academics – aggregate profit is theoretically zero) and the actual price.

            The idea arose from the observation that there are some economic inputs whose quantity is fixed, like land. Changes in price will not affect the supply, whatever the price. So, looking at the classic supply/demand curve chart, the price is solely determined by the demand, and to the extent that demand is also inelastic, the owners of the supply can set the price at any level, limited only by their power. We would call that a monopoly, and the price a monopoly price. The difference between the actual price and the price minimally necessary to supply that input is not derived from a free market as classically defined, but raw power. We would call that difference a “rent” and in this simple case, a monopoly rent.

            Here economics blends into politics, which is perhaps why classical economists like Adam Smith called his discipline Political Economy. It is worth noting that his description of what we would now call macro-economics included not just capital, labor, and government, but also a fourth class of participants: rentiers (who he said contribute nothing, but take a substantial portion of the productivity of society by virtue of their position, not their contributions to productivity). My own view on this is that Smith’s distinction between capitalists and rentiers was lost in US policy discussions in the pushback against the New Deal.

            See also: http://en.wikipedia.org/wiki/Rent-seeking

          • http://drangedinaz.wordpress.com/ IrishGrrrl

            So, from your description of “rentiers”, would it be possible to label the 1% who live off their investments and contribue nothing to society (and in some cases are actually destructive as well, i.e., someone like Romney who invests in tax protected havens overseas, destroys companies at home for profit but does invest in growth in foreign companies)?

          • Salmo

            Yes, overwhelmingly our plutocratic overlords are exactly what the term means.

          • http://www.facebook.com/felonious.grammar Felonious Grammar

            Rentiers make money off of their money, and they pay a lower tax rate on the money they make than the people who work for their wages.

            Land, resources, labor, capital— I agree with Henry George that land should be taxed so that there is a strong disincentive to own land and not develop it for speculation so that the value of the land would rise by virtue of all the economic activity that other people engage in around that vacant lot, but don’t agree that it would work as a single-tax.