12The one major piece of patent legislation enacted by Congress over thelast half-century, one which favored the patent bar, was the product ofunustial circumstances. See Shapiro, Supreme Court and AdministrativeAgencies, pp. 204-13.

Graham v. John Deere Co., 383 U.S. 1 (1966).14Marcus A. Hollabaugh, "The Scott Amendments v. The Second Patent Crusade,"Antitrust Law Journal, 39 (1970), pp. 780-90.In a typical vote, the Senate in 1962 rejected a bill opposed by thepatent bar, 28-53; Northern Democrats favored the bill, 23-7, while otherCongressmen opposed it, 5-48.See Abe Fortas, "The Patent System in Distress," Idea, 14 (Winter, 1971),pp. 571-79.

F. A CRITIQUE

BUSINESS REGULATION: THE SYSTEM IS THE PROBLEMAlan Stone

Rutgers University

Since the publication in 196 5 of Ralph Nader's Unsafe atAny Speed, the tradition—dormant since the onset of the SecondWorld War—was revived of critically examining deficiencies inperformance, costly externalities, and thoroughgoing irrespon-sibility on the part of America's business firms and the corre-lative failures of government regulation in preventing suchresults. Subsequent to 1965 a veritable avalanche of popularliterature has been published. While most of these studiesare of individual industries or regulatory agencies, theyaggregate to the damning indictment that the private enterprisesystem is satisfying neither the individual consumer nor publiceconomic goals. Moreover, many of the costs of the businesssystem are externalized without public acquiescence in the formof such burdens as defaced landscapes or pollutants. Virtuallyevery major industry is shown to have failed the public incrucial ways: dangerous and wasteful cars from the automobileindustry, pollution from the paper and pulp industries, ques-tionable additives from the food industry, startlingly lowreturns from the health industries for dollars expended, in-adequate output and capacity from energy industries, veritableprice gouging of especially vulnerable consumers such as theaged by the pharmaceutical and nursing home industries, etc.,etc.

These studies taken as a whole ineluctably demonstratethat crucial decision—and failures to act--affecting thepublic are made by a relatively few corporate officials whosepolicies and decision-making processes are effectively beyondpopular control. They make public decisions, which have theforce of law over our lives even though we are not given theopportunity to debate effectively their policies or vote forthese officials.! Moreover, government regulation has beenshown in every instance examined to have failed in obtainingappropriate performance from industry. For example. FederalTrade Commission regulation of advertising has persistentlyfailed to diminish the flood of false and misleading advertising—and this failure continues even after widespread adverse pub-licity of the agency's malperformance.^

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The crisis occasioned by the widely held view that publicregulation of business conduct has been a marked failure hasled to a debate in which three fundamental positions have beenadvanced. First, there are those who advocate new laws andregulations or new regulatory officials which the proponentsinsist will compel the business community to respond moreadequately to the "public interest." Secondly, there are thosewho advocate a structural reorganization of American industryinto smaller units so that the competitive model will be moreclosely approached. Finally, there is the view associated withthe so-called "Chicago School" that economic performance isimpeded by regulation and would be greatly improved if govern-mental policies were restricted to the interdiction of fraudand a few other practices which interfere with the bargainingprocess.

One examining the debate is led to conclude that propo-nents of each position have successfully punctured deep holesinto the opposing views without at the same time rescuing theirown views. Yet, in spite of the inadeqpaacy of positions con-sistent with private ownership of the means of production, dis-tribution and exchange, the participants in the debate will noteven begin to examine the plausibility of public ownership asthe most sensible solution to the problem of regulatory mal-performance and corporate irresponsibility. In a word,socialism continues to remain a "no-no" for "serious" discus-sion in the United States. I do not suggest that this resultsfrom a conspiracy of silence but, rather from the widespreadbelief that socialism is an "unrealistic" solution and thatserious people should confine themselves to realistic ones.Yet, if the solutions compatible with capitalism will not meetthe problems raised, socialism may be the only realisticsolution.

Let us first examine the "free-market" solution, the mostcompelling argument for which is still contained in Adam Smith'sfamous "invisible hand" passage.^ Smith argued that each indi-vidual relentlessly pursuing his own selfish interest wouldmost effectually promote society's interest and optimally al-locate resources'; public direction of a firm's decisions can-not be trusted since the entrepreneur himself knows best howto advance his firm. Thus, Smith argued that the system offree competition (in itself a critical premise) was self-regulatory and would render the entrepreneur accountable to theconsumer interest and responsible to public goals. That thedesired results, while they may have occurred at the time Smithwrote, have not been fulfilled in either the atomistic indus-tries such as health services or in oligopolistic industriesis eminently clear. As Professor Eli Ginzburg, summarizingfindings on health services, has recently shown, the industry,both before and after public intervention, has not providedessential outputs, has failed as an allocative mechanism andhas frequently produced dangerous products and unnecessaryservices.4

When we turn from atomistic industry to most of the impor-tant sectors in the American economy—steel, autos, petroleum,etc.—we enter the realm of oligopoly. As economists have con-cluded, under the conditions of oligopoly, price competitionhas largely come to an end and been replaced by coordinationin price setting, often in the form of an implicit system ofprice leadership.5 And as recent experience shows, oligopolies

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have acquired immense power to resist price cuts in responseto declines in effective demand so that we are presented withthe unpleasant alternatives of permanent inflation or with-drawal of goods from the market until target prices are met.

Competition shifts to cost-cutting and the sales effort."With the demise of price competition and the significant in-crease in scale and importance of the sales effort, firms finda substitute for price attractiveness in the drive for profitin consumer manipulation. Differentiation of largely similarproducts becomes a way of life, and aided by product complexity,concealment of pertinent information, puffing and irrelevantinformation, the consumer's capability to judge product qualityor to distinguish between competing brands on rational groundscomes to a virtual end. Moreover, as the automobile safetydevice history shows, firms are loathe to add cost-addingdevices unless their competitors will do the same contemporane-ously. This is especially the case where devices or featureswhich will enhance the life of the product—and thus harmrepeat sales—are involved. Indeed, oligopolies adopt an un-written law that they will "live-and-let-live" in a world ofdiminished standards subject only to the extraordinary situa-tion in which one can gain a decisive long-standing advantagethrough innovation.

The failure of the free market to perform even remotelynear expectations in meeting public goals has inevitably ledsome observers to advocate either "effective" regulation or avast scheme of industrial deconcentration in order to compelcorporate adherence to such goals. While some reformers arecontent to rest their findings of corporate irresponsibility onthe shallow ground of the venality of corporate leaders, themore astute students of the problem point out that two majorconstraints inherent in the capitalist system inevitably leadin this direction. In Professor Neil Chamberlain's words:"First, it must show a profit that compares favorably with theprofit positions of other major corporations . . . . [and]Second, a corporation must maintain a size (preferably a rateof growth) that permits it to continue those facilitatingactivities—advertising, research and development, personnelpolicies, public relations—on at least the scale that hasbrought it to its present position."7

The more precise question then becomes whether publicregulation can overcome the irresistible tendency inherent inthe capitalist system for corporations to follow the path ofprofit and growth to the virtual exclusion of all other values— n o matter how adversely this might affect us. While it isreadily conceded by those who wish to reform regulation thatgovernmental intervention in the market process has thus farbeen a failure, Nader and his followers attribute this to suchcauses as bad personnel or "capture" of agencies by the regu-lated, advocating the restaffing of agencies with public-spirited personnel and some such new regulatory technique asfederal chartering of corporations.^ Yet, if the "capture"theory is correct—and there is doubt that it is—why shouldfederal chartering change the situation?^ Nor has there everbeen a showing of widespread incompetence among bureaucrats,although specific instances of this may readily be conceded.

What then are the underlying reasons for the persistentfailure of regulation to direct corporate America to public

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goals? What accounts for the persistent failure of regulationto control corporate America? Here, again. Chamberlain sup-plies realism in place of the naive zeal of Nader and. his fol-lowers. In the first place there is usually a limitation ofresources—both staff and money—to effectively carry out thedesignated task. Second, there is the difficulty in obtainingcompliance with administrative orders which require virtualperpetual policing. Third, there is the great difficulty ofdiscovering transgressions; only occasionally, for example, doprice-fixers leave uncovered tracks. Fourth, when one considersthe large number of activities undertaken by corporations inconnection with a multitude of products, the task of super-vision seems well-nigh impossible. Fifth, regulators usuallydepend on the regulated firms to supply necessary informationwhich we can assume will be done most selectively. Sixth,inherent in the bureaucratic-administrative system is thecapacity for enormous delay of which transgressors takeadvantage.1^

All of the above may be described as the administrativereasons why regulation is usually doomed to failure. We havenot yet examined the more imposing political ones which resultfrom the fact that the setting in which regulation takes placeis a capitalist society. First, we note the well-known factthat the principal resource in American elections is money andthat wealthy contributors with obvious interests in regulatoryand other governmental decisions make a very large proportionof the contributions to most campaigns. The persons selectedby elected officials to appointive posts will then usually be"safe." But as Senator Fred Harris, among others, has observed,political influence of corporations doesn't end there. Day-by-day lobbying activities for which only business has the requi-site resources, the promise of future lucrative jobs in indus-try to public officials—and sometimes outright bribery—greatly aid the corporate elite in obtaining public policies totheir advantage much of the time.

Finally, we should note a pervasive fact of capitalistpolitical culture: To all but socialists there is a congruitybetween the well-being of corporations, and national well-being.Public policies must therefore be arranged so as to encouragecorporate investment and to assure the "well-being" of suchenterprises the definitions of which are supplied by corporateofficials.li Thus, attitudes favoring big business in publicofficials—which are usually there in the first place—becomeingrained and reinforced.

If regulatory reform does not appear to be a fruitfulalternative, what of breaking up America's industrial structureinto smaller units? Robert Heilbronner has supplied as suc-cinct an answer to this proposal as one is apt to find: highlycompetitive industries characterized by small units " . . . havealso been the models of industrial backwardness, characterizedby low research and development, low wages and long hours, anti-unionism, company towns, etc. I see no reason to believe thatan IBM cut down to size would spend its fragmented profits ina more socially beneficial manner than its master company. . . .The power of the corporation to work social good or evil wouldnot be lessened by fragmenting it. It would only be made lessvisible and hence, in the end, less accountable or controllablethan by bringing it out into the open at the top."12 Moreover,breaking up large corporations into economically viable unitswould still result in extremely large firms. Breaking up the

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standard Oil Company in 1911 did not exactly result in smallscale enterprises.

This observer, then, is compelled to conclude that onlyunder a democratic system of public ownership of the means ofproduction, distribution and exchange can the vast area of eco-nomic policy-making be made responsible to the public. Underdemocratic socialism, motives to undertake economic acts inconflict with the public interest in order to improve profitsand sales disappear. Thus, a more fruitful line of inquirythan better styles of regulation under capitalism is how cansocialism be instituted without the repressive apparatus withwhich so-called socialist regimes have so frequently beensaddled.

FOOTNOTES

See Adolph A. Berle, Jr. & Gardiner Means, The Modern Corporation and Pri-vate Property (New York: The Macmillan Co., 1932); and Kenneth Prewittand Alan Stone, The Ruling Elites (New York: Harper & Row, 1973), pp. 69-73.

2See U.S. Congress, House, Subcommittee on Commerce and Finance, Committeeon Interstate and Foreign Connnerce, The Federal Trade Commission—1974,Staff Report, 1974; Richard A. Posner, Regulation of Advertising by theFTC (Washington: American Enterprise Institute, 1973); and Alan Stone,"The F.T.C. and Advertising Regulations," Public Policy, XXI (1973),pp. 203-234.

Adam Smith, The Wealth of Nations (rep. New York: Random House ModemLibrary, 1938), p. 423.

Eli Ginzburg, "The Health Services Industry: Realism in Social Control,"Journal of Economic Issues, VIII (1973), p. 392.

Almarin Phillips, Market Structure, Organization and Performance (Cam-bridge: Harvard University Press, 1962), p. 73; and Samuel Loescher,Imperfect Collusion in the Cement Industry (Cambridge: Harvard UniversityPress, 1959). That antitrust policies directed toward the lack of pricecompetition have been a failure is shown in George Stigler and JamesKindahl, The Behavior of Industrial Prices (National Bureau of EconomicResearch, 1970), pp. 92-93.

See Paul Baran and Paul Sweezy, Monopoly Capital (New York: MonthlyReview Press, 1966), Ch. 2 and 3.

Neil Chamberlain, The Limits of Corporate Responsibility (New York: BasicBooks, 1973), pp. 5, 6.

Q

See, for example, Ralph Nader's contributions in Ralph Nader and MarkGreen, Corporate Power in America (New York: Grossman, 1973).9Simon Lazarus in Nader and Green, p. 228; and James Q. Wilson, "The Dead

Hand of Regulation," Public Interest, 25 (Fall 1971), p. 47.

Chamberlain, pp. 17-20.

See Morton Baratz, "Corporate Giants and The Power Structure," WesternPolitical Quarterly (June 1956).

12Robert Heilbronner, et al.. In The Name of Profits (New York: Doubleday,1972), p. 210.

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