Or broken trust.

Mr. Armentano is professor emeritus in economics at the University of Hartford (Connecticut) and the author of Antitrust and Monopoly (Independent Institute). He lives in Vero Beach, Florida.

MOST economists support antitrust law because their theories teach that monopolies misallocate resources and reduce economic welfare. In addition, many economists share the view expressed by Sen. Orrin Hatch (R., Utah) in regard to the Microsoft case: that antitrust is a less dangerous antidote to the monopoly problem than, say, utility-style regulation. Thus, they accept antitrust as a reasonable governmental policy that occupies the middle ground between complete laissez-faire and a more "heavy-handed" regulatory apparatus.

But the reality is that antitrust's basic theories are faulty or irrelevant and its alleged case evidence nonexistent. The reality is that private and political interests often drive antitrust enforcement and shape its final judgments.

Microsoft's decade-long difficulties with the antitrust authorities illustrate the laws' fundamental defect: successful firms that innovate and lower prices -- and that meet with overwhelming consumer acceptance of their product -- are the primary antitrust targets. Indeed, the more successful the innovation, the greater a firm's antitrust liability. Since enthusiasts for antitrust agree that its only legitimate mission is to improve consumer welfare, the screaming contradiction is that the laws punish firms that improve consumer welfare.

But then, antitrust laws generally were never meant to promote the competitive process; they were meant to protect competitors and inefficient market structures. Antitrust is a lot like protectionism in international trade: since efficient business organizations always threaten less efficient ones, shelter from the storm is sought in antitrust law. That's why more than 90 per cent of all antitrust litigation is private, one firm suing another. The glee of Microsoft's rivals in the current dispute fits precisely this understanding of antitrust.

A more fundamental problem lies in the theory of monopoly which rationalizes the laws. That theory basically assumes that a monopoly (or a firm with "monopoly power") can restrict production, increase prices, and operate inefficiently relative to some competitive firm. This is why society objects to monopoly power and passes legislation to restrict it.

But as Joseph Schumpeter noted decades ago, orthodox monopoly theory is inherently static and takes no direct account of the dynamic process of innovation -- of its actual sources or its overall beneficial effect on society. New products and new technologies are often developed by dominant firms or by firms that will grow to be dominant. If the benefits of innovation are overwhelming and the risks of output restriction small, then antitrust law is a bad bargain for society.

Besides, textbook monopoly theory, strictly speaking, really applies only to monopolies created and protected by government power. Only legal monopolies can restrict production, raise prices, and repress innovation with impunity, knowing that government will bar the door to more efficient rivals. When Adam Smith condemned monopoly, he mostly had inefficient state-sanctioned monopoly in mind. (He also rejected antitrust law as inconsistent with "liberty and justice.")

Free-market business organizations face entirely different incentives and behave very differently. They must continually expand their production, reduce costs and prices, and successfully innovate; else they lose their customer base and market position. In short, they must engage in precisely the sort of behavior that we associate with rivalry and competition. To call these organizations (whatever their alleged market share) "monopolies" and then to punish their superior performance with regulation is to turn the alleged intent of antitrust law upside down.

BUT what of the concern that dominant firms exclude competitors and thus stifle competition -- a key complaint against Microsoft? Don't dominant firms have economic advantages that create barriers to the entry of newer firms with new technologies? And isn't this a restraint of trade that antitrust regulation should address?

Yes, successful business organizations can have advantages that may exclude particular competitors and make market entry difficult for new firms; but, no, this is emphatically not a problem that requires any trustbuster meddling.

Competition is not a matter of reaching equilibrium in some arbitrarily defined market; it is an open-ended process of discovering the most efficient means of meeting consumer demands. The most efficient means may involve many firms, or few, and may involve cooperation as well as rivalry, depending on the characteristics of the market in question. Thus the entry of new firms into a market may not "increase competition" but waste resources. A high cost of entry, then, is simply a sign that a firm deserves to be excluded from the market; the existing market structure better serves consumers.

Some critics assert that dominant suppliers can leverage their "monopoly power" from one market to another and thereby injure consumers. This fear, too, is misplaced. Assume that a dominant firm has two products to sell. The first product is very important to consumers and they're willing to pay dearly for it. If the firm is already charging the highest price consistent with maximizing its profits, then by logic it cannot charge more than a competitive price for the other product. Indeed, the dominant firm may even give away the second product. This action may exclude companies that might wish to offer a higher-priced version of the second product, but it does not unfairly exclude competitors or injure consumer welfare.

Unfortunately, the antitrust authorities have not always agreed. Almost all the landmark anti-monopoly cases, from Standard Oil to IBM, involved dominant firms (none were monopolies) that rapidly innovated and lowered prices to consumers. In Alcoa (1945), the Supreme Court determined that Alcoa's "superior skill, foresight, and industry" were exclusionary of less efficient firms. In United Shoe Machinery (1953) it was decided that United's "long line" of superior shoe machines and low leasing rates illegally excluded higher-cost rivals. In Procter-Clorox (1967), the FTC and the Supreme Court agreed that a merger "so productive of efficiencies" would heighten the barriers to entry into the bleach industry and exclude potential competitors. And the list goes on.

Antitrust enthusiasts are forever apologizing for this history of silly cases while constantly inventing "new" theories of enforcement that lead to still more silly cases. The currently fashionable "new" theories -- actually recycled from decades earlier -- attempt to justify regulation of the computer software market by invoking "increasing returns" and "economies of scale." Larger firms have unfair advantages over smaller firms, goes the argument, because larger outputs (or larger numbers of users or larger networks) lead to enhanced consumer benefits or lower costs.

Of course network effects can create demand-side advantages for larger firms and increasing benefits for their customers. And economies of scale can provide cost-side advantages for larger firms and make it difficult for smaller firms to compete. But there is nothing economically unfair about any of this.

In the first place, increasing returns and low marginal costs are no guarantee of long-term success; business history is filled with "first mover" firms (IBM, Apple) that dramatically lost market share because of changes in consumer tastes and in technology. Secondly, low costs and increasing advantages for consumers are the benefits of the competitive process; why regret them? Competition is supposed to generate low costs and increasing benefits for consumers and to punish low-value and high-cost rivals. The competitive process is supposed to reward firms that innovate first, that build integrated systems, and that expand before their rivals do.

One reason trustbusters are forever tilting at windmills is their obeisance to a textbook model of "pure competition" that places inordinate importance on the number of competitors and condemns firms with large market shares. The theory is irrelevant in real-world situations, but its analysis of "competitive" behavior still dominates -- and confuses -- antitrust law. Antitrust is doubly cursed: its theories of competition and of monopoly both tend to lead regulators astray. Neither should be dragged into the twenty-first century.