E S SAY

B GTHE CHAIN

The antitrust case against Wal ..MartBy Barry C. Lynn

Tere is an undeniablebeauty to laissez-faire the-ory, with its promise that

. by struggling against oneanother, by grasping andelbowing and shouting andshoving, we create effi-ciency and satisfaction andprogress for all. This con-cept has shaped, at themost fundamental levels,how we understand andengineer our basic free-doms-economic, politi-cal, and moral. Until re-cently, however, mostpoliticians and economists accepted that freedomwithin the marketplace had to be limited, at leastto some degree, by rules designed to ensure gen-eral economic and social outcomes. From AdamSmith onward, almost all the great preachers oflaissez-fairewere tempered by a strain of deep re-alism. Most accepted that a national economyultimately served a nation that had to survive inan often brutal world. So, too, did most accept thatall economies are characterized by struggles forpowerand precedence among men and institutionsrun by men; in other words, that all economies arefundamentally political in nature. And so most ac-cepted the need to use the power of the state-most dramatically in the form of antitrust law-to prevent anyone man or firmfrom consolidating

so much power as to throwoff basic balances. The in-visible hand of the mar-ketplace, and all that de-rives from it, had to beprotected by the visiblehand of government.

It is now twenty-fiveyears since the Reagan Ad-ministration evisceratedAmerica's century-long tra-dition of antitrust enforce-ment. For a generation, bigfirms have enjoyed almostcomplete license to usebrute economic force to

grow only bigger. And so today we find ourselvesin a world dominated by immense global oligop-olies that every day further limit the flexibility ofour economy and our personal freedom within it.There are still many instances of intense compe-tition-just ask General Motors. But since thegreat opening ofglobal markets in the early 1990s,the tendency within most of the systems we relyon for manufactured goods, processed commodi-ties, and basic serviceshas been toward ever moreextreme consolidation. Consider raw materials:three firmscontrol almost 75 percent of the glob-al market in iron ore. Consider manufacturingservices:Owens Illinois has rolled up roughly halfthe global capacity to supplyglasscontainers. Wesee extreme consolidation in heavy equipment;

Barry C. Lynn is a senior fellow at the New America Foundation and the author of End of the Line: The Rise andComing Fall of the Global Corporation.

Illustrations by Christopher Serra ESSAY 29

General Electric builds 60 percent of largegas tur-bines as well as 60 percent of large wind tur-bines. In processed materials; Coming produces60 percent of the glass for flat-screen televisions.Even in sneakers; Nike and Adidas split a 60-percent share of the global market. Consolidationreigns in banking, meatpacking, oil refining, andgrains. It holds even in eyeglasses, a field inwhich the Italian firm Luxottica has capturedcontrol over five of the six national outlets in theU.S. market.

The stakes could not be higher. In systemswhere oligopolies rule unchecked by the state,competition itself is transformed from a free-for-all into a kind of private-property right, a license

of today's largest firmsare built to do just that. Theultimate danger of monopsony is that it deprivesthe firms that actually manufacture products fromobtaining an adequate return on their invest-ment. In other words, the ultimate danger ofmonopsony is that, over time, it tends to destroythe machines and skills on which we all rely.

Examples of monopsony can be difficult to pindown, but we are in luck in that today we have oneof the best illustrations of monopsony pricingpower in economic history:Wal-Mart. There is lit-tle need to recount at any length the retailer'spower over America's marketplace. For our pur-poses, a few facts will suffice-that one in everyfive retail sales in America is recorded at Wal-

Mart's cash registers; that thefirm's revenue nearly equalsthat of the next six retailerscombined; that for manygoods,Wal-Mart accounts forupward of 30 percent of U.S.sales, and plans to more thandouble its sales within thenext five years.

The effects of monopsonyalso can be difficult to pindown. But again we have easyillustrations ready to hand, inthe surprising recent tribula-tions of two iconic Americanfirms-Coca-Cola and Kraft.Coca-Cola is the quintessen-tial seller of a product basedon a "secret formula." Re-cently, though, Wal-Mart de-cided that it did not approveof the artificial sweetenerCoca-Cola planned to use ina new line of diet colas. In a

response that would have been unthinkable justa few years ago, Coca-Cola yielded to the will ofan outside firm and designed a second product tomeet \Val-Mart's decree. Kraft, meanwhile, is aproducer that only four years ago was celebratedby Forbes for "leading the charge" in a "brutalindustry." Yet since 2004, Kraft has announcedplans to shut thirty-nine plants, to let go 13,500workers, and to eliminate a quarter of its products.Most reports blame soaring prices of energy andraw materials, but in a truly free market Kraftcould have pushed at least some of these highercosts on to the consumer. This, however, is nolonger possible. Even as costs rise, Wal-Mart andother discounters continue to demand that Kraftlower its prices further. Kraft has found itselfwithno other choke than to swallow the costs, andhence to tear itself to pieces.

The idea that Wal-Mart's power actually sub-verts the functioning of the free market will seemshocking to some. After all, the firm rose to dom-

to the powerful to fence off entire marketplaces,there to pit supplier against supplier, communityagainst community, and worker against worker, fortheir own private gain. When oligopolies ruleunchecked by the state, what is perverted is thefree market itself, and our freedom as individuals

within the economy and ultimatelyn within our political system as well.

Lpular notions of oligopoly and monopolytend to focus on the danger that firms, havinggained control over a marketplace, will then beable to dictate an unfairly high price, extractinga sort of tax from society as a whole. But whatshould concern us today even more is a mirror im-ageof monopoly called "monopsony." Monopsonyarises when a firm captures the ability to dictateprice to its suppliers, because the suppliers haveno real choice other than to deal with that buy-er. Not all oligopolists rely on the exercise ofmonopsony, but a large and growing contingent

30 HARPER'S MAGAZINE I JULY 2006

inance in the same way that many thousands ofother companies before it did-through smartinnovation, a unique culture, and a focus on serv-ing the customer. Even a decade ago, Americanscould fairly conclude that, in most respects, Wal-Mart's rise had been good for the nation. But theissuebefore us isnot how Wal-Mart grew to scalebut how Wal-Mart uses its power today and willuse it tomorrow. The problem is that Wal-Mart,like other monopsonists, does not participate inthe market so much as use its power to micro-manage the market, carefullycoordinating the ac-tions of thousands of firms from a position abovethe market.

One of the basic premises of the free-marketsystem is that actors are free to buy from or sellto a variety of other actors. In the case of Wal-Mart, no one can deny that every single firm thatsupplies the retailer is, technically, free not todo so. But is this true in the real world? Afterall, once a firm comes to depend on sellingthrough Wal-Mart's system, just how conceiv-able is the idea of walking away? Producers ownand maintain machines, employ skilled workers,lease land and buildings. Even with careful plan-ning, most would find the sudden surrender of20 percent or more of their revenue to be ex-tremely disruptive, if not suicidal.

Another basic premise of the free-market sys-tem is that the price of a commodity or good car-ries vital information from actor to actor withinan economy-say, that cherries are scarce, orvinyl floor tiles abundant, or the latest iPod in-cludes a new technology. Again, no one candeny that, technically, every firm that suppliesWal-Mart is free to ask whatever price it wants.But again, we must ask whether this holds true inthe real world. Every producer knows that Wal-Mart is, as one of its executives told the New YorkTimes, a "no-nonsense negotiator," which meansthe firm sets take-it-or-leave-it prices, which as weknow from the previous paragraph are far harderto leave than to take. Everyso often Wal-Mart willaccept a higher price, but then the retailer's man-agersmayopt to punish the offendingsupplier,per-haps bv ratcheting up competition with itsown in-house brands. Price, within the consumereconomy, increasingly carries but one bit of in-formation-that Wal-Mart is powerful enoughto bend everyone else to its will.

Those who would use the word "free" to de-scribe the market over which Wal-Mart presidesshould first consult with Coca-Cola's product-design department; or with Kraft managers, orKraft shareholders, or the Kraft employees wholost their jobs. These results were decided notwithin the scrum of the marketplace but by asingle firm. Free-market utopians have long de-cried government industrial policy because it putsinto the hands of bureaucrats and politicians the

power to determine which firms"win" and which"lose." Wal-Mart picks winners and losers everyday, and the losers have no recourse to any

court or any political representative

A anywhere.

timonopoly sentiment in America dates tothe nation's founding. We see it in the acceptanceby the thirteen newly independent states of Eng-lish common law, with its rich antimonopoly tra-dition. We see it in the most vital statement on in-dustry in American history, Alexander Hamilton'sRepot: on Manufactures, itselfdeeply influenced byAdam Smith's antimonopolywritingsin The Wealth.of Nations. We see its citizen-centered nature in a1792 essay by James Madison, in which he con-demns monopolies for denying Americans "thatfree use of their faculties, and free choice of theiroccupations, which not only constitute their prop-erty in the generalsenseof the word;butare the means ofacquiring propertystrictly so called."We see it dominat-ing many of the greatpolitical battles ofthe nineteenth cen-tury, from AndrewJackson's war on the Second Bank of the UnitedStates to William Jennings Bryan's populist cam-paign of 1896.

It would be wrong, however, to regard Ameri-ca's powerfulantitrust lawof the twentieth centuryas especially populist in nature. By the time Con-gresspassed the Sherman Antitrust Act in 1890,the industrial explosion that began during theCivil War had resulted in the rise of hundreds ofbig firms, which often proved far more efficientthan their older, smaller competitors. The phe-nomenal productivity of these newcomers tem-pered support for more radical antimonopoly pro-posals. The result was a sort of compromise,engineered mainly by the progressive wing of theRepublican Party. The Sherman Act came to beseen not as a license to destroy all big firmssimplybecause they were big but as a very big stick withwhich to convince the average firm not to over-reach, and on rare occasions to break companieslikeStandard Oil, which had developedreputationsfor grosslyabusing power. Most big firmswere al-lowed to remain big as long as they avoided out-right collusion with competitors, or extreme abuseof their consumers,or overlyrapidpredation againstsmaller property holders.

Thus did antitrust power come to serve as a sortof constitutional law within America's politicaleconomy. The goal was to enforce a balance ofpower among economic actors of all sizes,to main-tain some degree of liberty at all levels within the

WAL-MART DOES NOT

PARTICIPATE IN THE MARKET SO

MUCH AS USE ITS POWER TO

MICROMANAGE THE MARKET

ESSAY 31

economy. In recent years it has become a truismthat antitrust law is designed to protect only theconsumer. But the fact that Congress intendedthese lawsalso to preserve both competition per seand to shelter entire classes of entrepreneurs(among whom is the individual worker) was clearat the beginning and has been made clearer manytimes since. The text of the Sherman Act itself isfamouslyvague, but the Supreme Court's decisionin the 1911 Standard Oil case was based flatly onthe assumption that the need to ensure robustcompetition sometimes outweighs the benefits ofnear-term efficiency. Standard's roll-up of the oilindustry cut the cost of kerosene by nearly 70 per-cent, and yet the justices shattered the firm intothirty-four pieces. For many legislators, this was

not nearly enough.Three years later,Congress greatlystrengthened therules against inter-firm price discrimi-nation, in the Clay-ton Antitrust Act.Then in 1936, Con-gress did so again,

even more resoundingly, by passing the Robin-son-Patman Act. Wright Patman, the Texas De-mocrat who was the main force behind the bill,made sure everyone understood Congress's intent."The expressedpurposeof the Act is to protect theindependent merchant," he wrote on the firstpageof a book he published to explain the law,"and themanufacturer from whom he buys."

During the twentieth century, antitrust lawshaped the American economy more than didany other government power. Over the years,many thousands of antitrust caseswerefiled,by fed-eral and state governments against particular firmsand by one firm against another. Antitrust lawdetermined not merely how big a firm could growbut where it could do business, how it was man-aged, how it could compete, even what lines ofbusiness it could enter. As the industrial scholarAlfred D. Chandler has noted, the vertically in-tegrated firm-which dominated the Americaneconomy for most of the last century-was to agreat degree the product of antitrust enforcement.When Theodore Roosevelt began to limit theability of large companies to grow horizontally,many responded. by buying outside suppliers andintegrating their operations into vertical lines ofproduction. Many also set up internal researchlabs to improve existing products and developnew ones. Antitrust law later played a huge rolein launching the information revolution. Duringthe Cold War, the Justice Department routinelyused antitrust suits to force high-tech firms toshare the technologies they had developed. Tar-geted firms like IBM, RCA, AT&T, and Xerox

WAL-MART HAS GROWN SO

POWERFUL THAT IT CAN TURN

EVEN ITS LARGEST SUPPLIERS

INTO EXTENSIONS OF ITSELF

32 HARPER'S MAGAZINE I JULY 2006

spilled many thousands of patents onto the mar-ket, where they were available to any Americancompetitor for free.

When Ronald Reagan took power in 1981, oneof his first targets was antitrust law. The new ad-ministration put forth a variety of arguments-notleast that international competition, especiallywith Japan, had rendered moot the old fearsof mo-nopoly. Yet the driving motive clearly was thephilosophical antipathy of the Reaganites to theidea that the American people, acting throughtheir representatives, had any business whatso-ever telling business what to do. And the practi-cal effect was to harness the institution of thecorporation to that administration's larger projectof shifting power and profit from the working,middle, and entrepreneurial classesto the powerfuland rich. The radical nature of Reagan's attack onantitrust law is, in retrospect, astounding. Early inthe administration, Attorney General WilliamFrench Smith declared that "bigness is not nec-essarily badness," Antitrust enforcer WilliamBaxter held that big firms were more efficientthan smaller and said he had the "science" toprove it. When the Reagan team published itsnew Merger Guidelines in 1982, the documentformalized two revolutionary changes: it rede-fined the American marketplace as global in na-ture, and it severely restricted who could be re-garded as a victim of monopoly. From this pointon, only one action could be regarded as trulyunacceptable-to gouge the consumer. Any firmthat avoided such a clumsy act was, for all intents,free to gouge any other class of citizen, notleast through predatory pricing and the blatant

exercise of power over suppliers

I and workers. .

f a single business deal illuminates the degreeto which Wal-Mart has centralized control overAmerica's consumer economy, it was last year'stakeover of Gillette by Procter & Gamble. Gillettewould seem one of the last firms likely to find it-self unable to protect its pricing power; its 70 per-cent share of global razorsalesgives it some weightat the negotiating table. Yet the Boston-basedfirm discovered that it could no longer keep itsprofit margins safely out of the grasp of theArkansas retailer.And so wasconceived the largestin a long list of buyouts due at least in part toWal-Mart's power, including Newell's takeover ofRubbermaid, Kellogg's purchase of Keebler, andKraft's buyout of Nabisco. And of course there isthe long list of firms that have ended up dead orin Chapter 11reorganizationat least partly becauseof their dealings with Wal-Mart. Some are smallfry, like Vlasic Foods. Others were once powers,like Pillowtex. Some were beloved brands, likeSchwinn. Others were family enterprises, likeLovable Garments.

Even with Gillette in hand, Procter & Gambleitself is anything but safe. For decades, P&G wasregarded by retailers as the "BOO-poundgorilla"among suppliers of home products. It was one of .two firms that most spurred Sam Walton as hebuilt Wal-Mart-the competitor to beat wasK-Mart; the supplier to tame, P&G. By the timeWalton died in the early 19905,he wasable to bragof how he had forced P&G to accept a "win-winpartnership" based on the sharing of information.Had he lived a few years longer, though, Walwnwould have witnessed what amounts to the out-right capture of his foe. And for a man who spentmuch ofhis lifescroungingfor dealson lingerieandhawking hula-hoop knockoffs, he would surelyhave relished how this struggle for the heights ofthe consumer economy was de-cided by the power to price toi-let paper and detergent. In re-cent years, Wal-Mart beat P&Ginto submission by mercilesslypitting its in-house brands againsttop P&G brands; the retailer, forinstance, introduced not one buttwo detergents to compete withTide and, in a particularly auda-cious move, grabbed outright thecopyright for the White Cloudline of toilet paper, after P&Gunwiselyforgot to protect its ownbrand's name.

With the purchase of Gillette,P&G has achieved a new scopeand scale, vaulting past Unileverto become the world's biggestmaker of consumer goods.Yet thenew balance of power is unlikely to last. Wal-Marthas become so strong, so sure of the invulnerabil-ity of its position, that not only does it not fear.con-solidation among its suppliers; it actually forcesmany of them to form fully self-conscious, collu-sive oligopolieswith their rivals.Not that these re-lationships are advertised as such. The key here isthe innocuous-sounding term "category manage-ment," and it describesa practice that isnow com-mon to all large retailers. But it is a practice thatgrewout ofWal-Mart's original "partnership" withP&G, and it is a practice that has been pushed es-pecially hard by Wal-Mart.

Until recently, every retailer would draw up itsown merchandising plan, detailing which brandsto promote, how much shelf space to grant each,which products to place at eye level. These days,Wal-Mart and a growing number of other retail-ers ask a single supplier to serve as its "CategoryCaptain" and to manage the shelving and mar-keting decisions for an entire family of products,say, dental care. Wal-Mart then requires all oth-er producers of this class of products to cooperatewith the new "Captain." One obvious result is that

a producer like Colgate-Palmolive will end upworking intensely with firms it formerly com-peted with, such as Crest manufacturer P&G, tofind the mix of products that will allow Wal-Mart to earn the most it can from its shelf space.IfWal-Mart discovers that a supplier promotes itsown product at the expense ofWal-Mart's rev-enue, the retailer may name a new captain in itsstead: Not surprisingly, one common result isthat many producers simply stop competing headto head. In many instances, a single firm ends upcontrolling 70 percent or more of U.S. sales inan entire product line, such as canned soups orchips. In' exchange, its competitor will expectthat firm to yield 70 percent or more of someother product line, say, snacks or spices. Such

sharing out of markets by oligopolies is.takingplace throughout the non-branded economy-in grains, meats, medical devices, chemicals,electronic components. But nowhere is it morevisible than in the aisles of Wal-Mart.

In essence, Wal-Mart has grown so powerfulthat it can tum even its largest suppliers, and en-tire oligopolized industries, into extensions of it-self. The effects of this practice are most obviousin Wal-Mart's horizontal competition against oth-er retailers. Retail experts sometimes talk of a

* Such blatantly enforced coUusionhas not gone entirely un-noticed in Washington. Toward the end of its time in of-fice, even the merger-happy Clinton Administration al-lowed the Federal Trade Commission to launch aninvestigation of thesepractices, and an FTC report in ear-1y 2001 identified four ways that Category Managementmay violate even the remarkably loose antitrust guidelinesof the last generation. All four of these violations cut rightto the core of the free-market system. As the FTC put it,a category captain might "( 1) learn confidential informa-tion about rivals' plans; (2) hinder the expansion of ri-vals, (3) promote coUusionamong retailers; or (4) facili-tate collusion among manufacturers." 1n Wal-Mart'sworld, aUfour violationsarepresent to at least some extent.

ESSAY 33

"waterbed effect," which takes place when a sup-plier insists on collecting from weaker retailers atleast some of the rent a more powerful firm refusesto pay. One recent study of how such power playsout within an entire system shows that a small re-tailer can expect to pay upward of 10 percentmore than a powerful firm for the same basket ofitems. The effect also explains what takes placeeconomically between communities served byWal-Mart and those served by less powerfulfirms-the more power Wal-Mart accrues, themore it is able to shift costs from, say, suburb to

city. And so everyday the competitivelandscape tilts justthat much more inWal-Mart's favor.And so, every year,the landscape is lit-tered with thatmany more dead orhalf-dead retailers-

including such once-big names as Winn Dixie,Albertsons, K-Mart, Toys R Us, and Sears.

This advantage is simply what can be quanti-fied in price. Many of the benefits Wal-Mart ex-tracts from its suppliers lie in a realm far beyondthe market economy. If Wal-Mart's aim weresimply to dictate the price it will pay for a prod-uct, then leave up to its suppliers all decisions asto how to get to that price, it would cause far lesseconomic damage than it does now. But that isnot Wal-Mart's way. Instead, the firm is also oneof the world's most intrusive, jealous, fastidiousmicromanagers, and its aim is nothing less thanto remake entirely how its suppliers do business,not least so that it can shift many of its owncosts of doing business onto them. In addition todictating what price its suppliers must accept,Wal-Mart also dictates how they package theirproducts, how they ship those products, and howthey gather and process information on themovement of those products. Take, for instance,Levi Strauss & Co. Wal-Mart dictates that itssuppliers tell it what price they charge Wal-Mart's competitors, that they accept paymententirely on Wal-Mart's terms, and that theyshare information all the way back to the pur-chase of raw materials. Take, for instance, NewellRubbermaid. Wal-Mart controls with whom itssuppliers speak, how and where they can selltheir goods, and even encourages them to supportWal-Mart in its political fights. Take, for in-stance, Disney. Wal-Mart all but dictates to sup-pliers where to manufacture their products, aswell as how to design those products and whatmaterials and ingredients to use in those products.Take, for instance, Coca-Cola.

We should be most disturbed by the fact thatWal-Mart has gathered the power to dictate con-

RELATIVE TO WAL-MART, THE A&P

WAS A FAR LESS AWESOME FORCE-

BUT IT WAS REPEATEDLY HAULED

INTO COURT FOR ITS ABUSES

34 HARPER'S MAGAZINE / JULY 2006

tent, even to the most powerful of its suppliers.Because no longer is the retailer's attention fo-cused only on firms that produce Tvshirts, elec-trical cords, and breakfast cereal. Every day Wal-Mart expands its share of the U.S. markets formagazines, recorded music, films on DVD, andbooks. This means that every day its tastes, in-terests, and peculiarities weigh that much moreon decisions made in Hollywood studios, in Man-hattan publishing houses, and in the editorial of-fices of newspapers and network news shows.Americans who favor abortion have much toworry about these days, between South Dakota'srecent ban and the appointment to the SupremeCourt of Justice Joseph Alito. But at least thesebattles are taking place entirely in the public eye,and the decisions are being made by democrati-cally elected representatives. Such was not thecase when Wal-Mart recently decided to alloweach individual pharmacist in the company tochoose whether or not to stock the "morning af-ter" pill. Given the degree to which Wal-Mart hasrolled up the pharmaceutical business in manytowns and regions across the country, this actamounted, for all intents, to a de facto ban onthese pills in many communities. This

political decision was made and en-

T forced by a private monopoly.

o appreciate just how blatantly Wal-Mart de-fiesAmerica's antitrust tradition, consider how ourgrandparents handled the last retailer to gatherextreme power: the Great Atlantic & Pacific TeaCompany. Better known as the A&P, the grocerat its height operated more than 4,000 super-markets in nearly forty states and wielded im-mense influence over the entire food economy.The A&P was famous for its innovations in dis-count retailing, in distribution, in advertising.And it was infamous for its use of monopsonypower, not least its perfection of the art of settingin-house brands against producers who resisted itswill. Relative to Wal-Mart today, the A&P ahalf century ago was a far less awesome force.The firm sold only groceries; it was only doublethe size of its nearest competitor; and its totalworkforce was, as a percentage of the U.S. pop-ulation, only a fifth as large asWal-Mart's is now.Even so, the A&P was widelyand vociferouslyde-nounced by local communities, state govern-ments, newspapers, and labor unions as a threatto the American way of life.

Over the years, the federal government re-peatedly hauled the A&P into court for abusingits market power. The government first began toscrutinize the firm in 1915, when Cream of Wheatrefused to sell to the A&P because of its pricingpolicy. Then in 1936 came the Robinson-Patman law, which was popularly known as the"Anti-A&P Act." A year later, the Federal Trade

Commission filed suit against the A&P, chargingthat the company had forced a Maryland veg-etable packer to grant it a special 4 percent dis-count. In November 1942, the Antitrust Divi-sion filed a Sherman Act case against the retailer,one section of which detailed how the A&P hadused "several turns of the screw" to coerce RalstonPurina into granting it a discount three and a halftimes what the cereal packer offered any otherfirm. Three years after winning that case, the Jus-tice Department was back in court in September1949 with another Sherman Act suit, this timeasking for the dismemberment of the A&P. Filedat a time when the grocer was already clearly indecline-not least because of antitrust enforce-ment-the 1949 case was dropped five years lat-er. But this was only after the A&P admittedguilt, agreed to dissolve an internal company thattraded in agricultural products, and signed an out-right prohibition against "dictating systematical-ly" to suppliers.The final antitrust case against theA&P was not resolved until February 1979, amonth after a West German grocerymogulboughtcontrol over the remnants of the once-huge firm.

Antitrust enforcement against the A&P andother bigfirmslike Searsprevented any twentieth-century American retailer fromever growingnear-ly as powerful as Wal-Mart is today. But since theReagan Administration, the only effective con-straints on Wal-Mart have been set by investorsand revenue flow.Even during the 1990s,when theClinton Administration targeted a few companiesfor abusing their pricing power, the Arkansas-based retailer somehow managed to avoid any ac-tion. It isunclear whether this was in any way dueto the close relationship between the Clinton fam-ilyand Wal-Mart, on whose board Hillary Clintonserved for many years. But even as Staples andMcCormick & Co. were sued, a firm with vastlymore power over the American economy was leftentirely free to extend its domain in whatever di-rection and to whatever extent it wished. In fact,in one of the highest-profile antitrust cases of the1990s, an FTC suit against Toys R Us for collud-ing with toy manufacturers, WaI-Mart emergedas one of the biggest winners.

The Reagan Administration's assault on an-titrust enforcement had an even more dramatic ef-fect on manufacturers.Complete license to expandhorizontallyresulted, in many industries,in the vir-tual collapse of the vertically integrated firm.Once they consolidated control over their mar-ketplaces, scores of big manufacturers shut downor spun off most or even all of such naturally ex-pensive and risky activities as production and re-search. These firms opted instead to purchasecomponents and other manufacturing "services"from smaller companies whose main or only pathto the final marketplace passed through their of-fices. This is true of corporations as diverse as

N ike, Boeing,3M, and Merck. Although it has be-come commonplaceto trace the phenomenon of"outsourcing" to the emergence of new tech-nologies and changes in the global "marketplace,"it ismuch more accurate to trace it back to the dis-appearance of antitrust enforcement. The changein law that gave Wal-Mart license to grow to sucha huge size also gave to many manufacturers thelicense to recast themselves in WaI-Mart's imageand become retailers themselves.The result?Moreand more production systems are run by compa-nies designed not to manufacture but to trade incomponents manufactured by other, smaller firms,

over which they can exercise at least

S some degree of monopsony power.

ome ofWal-Mart's more sophisticated boost-ers will defend the company by defending the ex-ercise of monopsony power itself. Wal-Mart, intheir view, should be seen as a firm that aggregatesour will and buying power as consumers in muchthe same way that unions once aggregated theinterests of workers. One of the better knownversions of the argument was put forth by JasonFurman, a former campaign adviser to SenatorJohn Kerry, who last year published a strong de-fense of Wal-Mart. The huge retailer, Furmanwrote, is "a progressive success story" that hasbrought "huge benefits" to the "American middleclass." Sure, this argument goes, Wal-Mart mayemploy its power with a certain Stalinist flair; butit does so in our name, and the result is to makethe production system on which we all rely moreefficient. This efficiency is good for all society,and it is especially good for those poor folks whocling to the lower rungs of the economic ladder.

There are two great flaws in such thinking.The first and most obvious is that it ignores theeffects of monopoly on our political system-theconsolidation of vision and voice, the de factomergerofprivate and public spheres, the gatheringof power unchecked and unaccountable. It is toview American society through an entirely ma-terialistic prism, to measure "human progress"only in terms of how many calories or blousescan be stuffed into an individual's shopping cart.It is to view'the American citizen not as someonewho yearns to decide for himself or herself whatto buy and where to work in a free market but tosay, instead, "Let them eat Tasrykake."

The second flaw is economic, and is of evenmore immediate concern. Even if the Americanpeople did choose to bear the extreme politicalcosts of monopoly, the particular type of powerwielded by Wal-Mart and its emulators makes noeconomic sense in the long run. On the surface,it may seem to matter little who wins the great bat-tles between such goliaths asWal-Mart and Kraft,or between Wal-Mart and P&G. Yet which firmprevails can have a huge effect on the welfare of

ESSAY 35

our society over time. The difference between asystem dominated by firmsbuilt to produce and asystemdominated by firmsbuilt to exercisemonop-sony power over producers is extreme. The pro-ducers that dominated the American economyfor most of the twentieth century were geared tobuild more and to introduce new, to protect theircapital investments against overly predatory in-vestors, to raise price faster than cost, to showsome degree ot loyaltv to workers and outside sup-pliers and communities. Wal-Mart and a growingnumber of today's dominant firms, by contrast,are programmed to cut cost faster than price, toslow the introduction of new technologies andtechniques, to dictate downward the wages andprofits of the millions of people and smaller firmswho make and growwhat they sell, to break downentire lines of production in the name of effi-ciency. The effectsof this change are clear:We seethem in the collapsing profit margins of the firmscaught in Wal-Mart's system. We see them in thefact that ofWal-Mart's top ten suppliers in 1994,four have sought bankruptcy protection.

In a world of rising tensions within and amongnations, of accelerating climate and environ-mental change, we would be wise to design theproduction systems on which we rely to be ableto evolve as rapidly as the human and naturalworlds around us evolve. Instead, we have pro-grammed the dominant institutions within oureconomy to eliminate all the wonderful chaos ofa free-market system. Rather than speed up therandom motion and serendipitous collisions thathave for so long propelled the American econ-omy, Wal-Mart and other monopsonists are slow-ly freezing our economy into an ever more rigidcrystal that holds each of us ever more tightly inplace, and that every day ismore liable to collapsefrom some sudden shock. To defend Wal-Martfor its low prices is to claim that the most perfectform of economic organization more closelyresembles the Soviet Union in 1950 thantwentieth-century America. It is to celebrate

rationalization to the point of com-rJ"' plete irrationality.

~here are many ways to counterbalance thepower of Wal-Mart and the other new goliaths.In the case of Wal-Mart, we could encourageyet more mergers among its suppliers and itscompetitors. Or we could make it easier for itsworkers to unionize. Or we could micromanagethe firm through our state and municipal gov-ernments (e.g., requiring it, as Maryland recent-ly did, to devote 8 percent of its payroll tohealth insurance). Yet everyone of these ap-proaches runs the risk of only further warpingour economy and perhaps even reinforcingWal-Mart's power by creating new allies for it.After all, super-consolidated suppliers already

36 HARPER'S MAGAZlt\E / JULY 2006

share many of Wal-Mart's political interests; la-bor unions now committed to Wal-Mart's de-struction could overnight become equally ascommitted to the further extension of Wal-Mart's power; and new bureaucracies will gener-ally tend to sympathize with the firms they reg-ulate. We can also, of course, choose to donothing, and surrender to the immense retailerall the decisions that in the past were madewithin the marketplace itself or by democrati-cally elected legislators. In other words, we cancede to Wal-Mart the role it so relentlesslyseeks for itself-to be dictator over the centralfunctions of the U.S. consumer economy.

If, however, we choose the path of the freemarket, and of individual freedom within themarket; if we choose to ensure the health andflexibility of our economy and our industrialsystems and our society; if we choose to protectour republican way of government, which de-pends on the separation of powers within oureconomy just as in our political system-thenwe have only one choice. We must restore an-titrust law to its central role in protecting theeconomic rights, properties, and liberties of theAmerican citizen, and first of all use that powerto break Wal-Mart into pieces. We can deviseno magic formula or scientific plan for doingso-all antitrust decisions are inherently sub-jective in nature. But when we do so, weshould be confident that we act squarely in theAmerican tradition, as illuminated by the casesagainst Standard Oil and the A&P. We shouldact knowing that the ultimate fault lies notwith Wal-Mart but with our last generation ofrepresentatives, who have abjectly failed to en-force laws refined over the course of two cen-turies. We should act knowing that much simi-lar work lies ahead, against many other giantoligopolies, in many other sectors. We shouldact knowing that to falter is to guarantee polit-ical and perhaps economic disaster.

As we make our case, we should be sure tocall one expert witness in particular. Last year,Wal-Mart CEO Lee Scott called on the Britishgovernment to take antitrust action against theU.K. grocery chain Tesco. Whenever a firm nearsa 30 percent share of any market, Scott said,"there is a point where government is compelledto intervene." Now, Wal-Mart has never beenshy about using antitrust for its own purposes. Inaddition to the Toys R Us case, the firm wasalso the instigator of a Sherman Act suit againstVisa and MasterCard. And so such a statement,by the CEO of a firm that already controls upwardof 30 percent of many markets and has an-nounced plans to more than double its sales, setsa new standard for hubris. It also sets a simplegoalfor us-elect representatives who will take Cit-izen Scott at his word. _