The 2014 Nobel Prize in Economic Sciences was awarded to Jean Tirole, a French economist whose key insight has been that rules that work well to promote competition in one field can be counterproductive in another, and the recent history of governments and cartels shows how complicated the relationship can be. Many foreign businesses operating in China were initially pleased when the government began enforcing antitrust laws there, then dismayed by a series of cartel cases they saw as a covert way of punishing outsiders. In London and Washington, prosecutors are pushing for fines and possible criminal charges after revelations that traders manipulated prices in the $5.3-trillion-a-day foreign-exchange market using instant message groups whose names included “The Cartel.” Six banks had already been fined 1.7 billion euros ($2.3 billion) by the European Union over collusion over the Libor benchmarks used to set interest rates. In October, Saudi Arabia signaled that it was ready to set off a price war rather than cede market share within OPEC. And the potash industry was finally settling down after a split between longtime collaborators led to the brief jailing of a Russian firm’s CEO by Belarus.
The idea is age-old, but formal cartels first emerged in Germany in the 1870s, then spread to other European nations and Japan. The historian Jeffrey Fear has noted that domestic cartels typically emerged in industries with high fixed costs and a record of ruinous competition: steel, coal, salt, paper, fertilizer, aluminum and potash. In the U.S., the years after the Civil War saw a flowering of pools, trusts and other forms of cartels before antitrust laws reined them in. Elsewhere, they were backed by governments as a bulwark against business failures and suffocating monopolies. The predictability of cartel arrangements was also thought to encourage more consistent investments in research and development. International cartels prospered in the 1920s and 1930s in industries ranging from copper to petroleum to rubber. On the eve of World War II, cartels controlled 40 percent of global trade. That conflict destroyed many of the arrangements, as did liberalizing reforms afterward. Cartels continued to flourish in a handful of places, especially Japan, but otherwise began a slow decline. Commodity cartels in emerging economies enjoyed a renaissance in the 1970s. As a consortium of sovereign nations, OPEC stood outside antitrust laws, but its aggressive campaign to control oil prices destroyed the good reputation these cooperative arrangements once had. Recent prosecutions over price-fixing, ranging from cathode-ray tubes ($1.9 billion in fines levied in 2012) and in the international auto parts trade ($1.6 billion in fines through 2013 and more to come), show the continued lure of collaboration.
"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." Adam Smith
The idea that cartels operate to the detriment of consumers dates back to Adam Smith, who described them as conspiratorial combines that have “an interest to deceive and even to oppress the public.” And even defenders of cartels have little good to say about the kind of geopolitical jousting that landed that potash CEO in jail. But for much of the modern history of business, this has been a minority point of view. While cartels face more legal hurdles today, their ubiquity throughout the history of capitalism suggests that attempts to eradicate them entirely will fail. Still, there’s a threat to them that will never go away — cheating on the cartel’s rules by members who can’t entirely suppress their competitive side. EU officials have found that every-man-for-himself spirit useful: UBS and Barclay’s avoided $4.3 billion in fines by being the first to come clean about interest-rate manipulation.
The Reference Shelf
- Business historian Jeffrey Fear provides an overview of cartels over the past century and a half.
- Luis Cabral of NYU’s Stern School describes the history of the De Beers diamond cartel.
- Mark LeClair’s historical study of cartels and antitrust laws in the U.S. and Europe.
- A volume of essays edited by economist Peter Grossman covers cartels past and present.
- Tony Freyer’s study shows how anti-cartel laws in the U.S. paradoxically limited competition.
- Stephen Mihm discusses a century of international potash intrigue.
First Published Jan. 3, 2014