Social Engineering by Legal Brief

This article appeared in the Washington Times, November 28, 1999.

If you can’t send in bureaucrats, you can send in lawyers. That seems to be the new strategy of the social engineers. Destroy the tobacco industry and gun makers through liability lawsuits. Ruin Microsoft with federal and state antitrust actions and assorted private cases. Set precedents to apply against any company in any market.

Antitrust law never had much to do with economics. For any law studentwith the slightest economic knowledge, antitrust class was invariablydepressing. Ignorant lawyers importune officious judges to apply stupid legalprecedents to complex economic circumstances. The result was never pretty.

At least by the 1980s, even the Justice Department stopped enforcingthe dumbest laws, such as the Robinson‐​Patman Act, directed against “pricediscrimination,” which almost always reduced competition. Reaganantitrust chief William Baxter dropped the inane suit against IBM.

Indeed, the IBM case well illustrated the foolishness of attempting tomicromanage fast‐​changing economic markets. “Big Blue” soon succumbed toa bevy of new competitors and has even given up producing personal computers. Somuch for supposed monopoly power.

The rise of Microsoft also demonstrates the power of competition. Forinstance, Microsoft launched its Excel spreadsheet in a market dominatedby Lotus 1−2−3. But Excel triumphed. Between 1984 and 1994, Excel collected28 winning polls and reviews compared with one for Lotus, report economistsStan Liebowitz and Stephen Margolis in their book, “Winners, Losers andMicrosoft,” published by the Independent Institute.

Moreover, they write, on average prices dropped four times as fast inthe major consumer software categories where Microsoft competed. Not only isthere no evidence of price‐​gouging by Microsoft, an obvious test of monopolypower, but the company wins kudos for service. In a 1998 Computer Reseller Newspoll, 46 percent of respondents said Microsoft provided the best customertraining; IBM followed with 14 percent, while arch‐​rival Sun Microsystems garneredonly 4 percent.

It is tough to distill Judge Thomas Jackson’s 207‐​page opinion, letalone the entire Justice Department case, into one article. But perhaps mostunappreciated by Microsoft’s critics is the growing competition facingthe company. Not only is there Apple’s iMac, but also Unix and Linux.

In a market as fluid as that for software, Microsoft could also finditself displaced because of changing applications of Java and developments fromthe AOL‐​Netscape merger. Observes software developer turned legal scholarRobert Levy: “Microsoft is behaving not like a monopolist but like a companywhose very survival is at stake. Its prices are down, and its technology isstruggling to keep pace with an explosion of software innovation.”

Where the market is likely to end up no one knows. Certainly PresidentClinton’s antitrust chief Joel Klein has no idea. In its initialcomplaint, the government missed the role of Linux, now running on 8 million computers. The Justice Department warned that Microsoft was going to strengthen itsmonopoly by making deals with Internet providers, which have all turned out to beminor players compared with AOL’s various channels.

The government’s most spectacular misjudgment, say economists ThomasHazlett and George Bittlingmayer, was the belief that Microsoft’s actions wouldsuppress Internet investment. If money is lacking for Web start‐​ups, no one hasnoticed.

The biggest boosters of the Justice Department suit simply want tocripple Microsoft’s ability to compete with them. Fortune magazine headlined onerecent article, “Scott McNealy’s plan to punish Bill Gates.”

Explained Mr. McNealy, head of Sun Microsystems: “All I need is fiveyears,” during which time Microsoft should be barred from making any new businessor product acquisitions. Then, he says, he would be ready to compete. Buta free market does not — or at least should not — work that way.

Microsoft will undoubtedly appeal Judge Jackson’s final ruling, due inFebruary, should it follow his findings of fact. But the judge hasappointed appellate Judge Richard Posner as mediator to facilitate settlementtalks.

The only proper settlement, however, would be for the JusticeDepartmentto drop its case — and for Congress to slash funding for the department’santitrust division.

Until a few years ago, Microsoft proudly refused to open a Washingtonoffice. Oddly, New York Times columnist Thomas Friedman viewed this asdemonstrating contempt for “rules and institutions.” Actually, Microsoft wasdemonstrating appropriate contempt for the sort of political manipulation of rules and institutions evident in the antitrust suit.

The final joke may be on the company’s enemies, however. Joel Kleinsays that the antitrust regulator’s job is to “reallocate resources betweenthe producer and the consumer.” There’s no reason to believe that AOL, or Sun Microsystems, or any number of other Microsoft critics might not next endup in the government’s legal cross hairs.

Rampaging lawyers and meddling judges might enrich businesses desiring special protection. The rest of us inevitably lose.