The recent Great Recession has shaken the nation’s faith in free markets and inspired various forms of actual or proposed regulatory intervention displacing free competition. Proponents of such intervention often claim that such interference with free-market outcomes will help foster economic recovery and thus macroeconomic stability by, for instance, enhancing the “purchasing power” of workers or reducing consumer prices. Such arguments for increased economic centralization echo those made during the Great Depression, when proponents of regulatory intervention claimed that such interference with economic liberty and free competition, including suspension of the antitrust laws, was necessary to foster economic recovery. Indeed, this view has even left its mark on constitutional law, with several modern Supreme Court justices claiming that protection for economic liberty and free competition deepened and prolonged the Depression, thereby justifying judicial repudiation of liberty of contract and requiring an expansive reading of Congress’s Commerce power.

Using the Great Depression as a case study, the Article examines the link between free competition—and generally applicable regulation that ensures such competition—and macroeconomic stability. The results of this study shed important light on claims that protection for economic liberty and free competition exacerbated the Depression as well as modern arguments that coercive interference with free-market outcomes can speed the ongoing recovery from the recent Great Recession.

Many equate “competition policy” with antitrust law. However, this Article widens the focus beyond antitrust. This wider focus reveals that, at least before the Depression, there were two other important sources of competition policy. Thus, while antitrust regulation, particularly the Sherman Act, protected free competition from undue private restraint, the Dormant Commerce Clause and Due Process Clauses prohibited undue state and federal restraints on economic liberty and thus free competition. As of 1929, then, these three sources of law combined to create and enforce a unified and doctrinally symbiotic commitment to free competition as the norm governing American economic life.

Unfortunately, relaxation of antitrust’s anti-collusion standards in the late 1920s and early 1930s paved the way for the 1933 National Industrial Recovery Act (NIRA), FDR’s stimulus plan. In particular, the NIRA fostered collective wage and price setting and banned forms of normal competition, thereby protecting incumbent firms from more efficient rivals. Antitrust’s surprising embrace of collusive practices also presaged judicial repudiation of due process protection for economic liberty in Nebbia v. New York, 291 U.S. 502 (1934), repudiation which the Supreme Court confirmed in the late 1930s.

While the Court unanimously overturned the NIRA in Schechter Poultry v. United States, 295 U.S. 495 (1935) Congress and many states, apparently emboldened by Nebbia, responded by enacting various statutes interfering with free competition, some of which survive to this day. In particular, the 1935 National Labor Relations Act (NLRA) mandated collective bargaining with labor cartels known as unions, thereby displacing free competition in wage setting, while the 1938 Fair Labor Standards Act further displaced such competition by imposing minimum wages. Shortly thereafter, the Supreme Court invoked Nebbia-like reasoning when holding that neither the antitrust laws nor the dormant Commerce Clause prevents states from organizing and enforcing cartels that would otherwise unreasonably restrain interstate commerce and thus violate the Sherman Act. See Parker v. Brown, 317 U.S. 341 (1943). This “state action” exemption applied, the Court said, even though California producers exported nearly all their raisins to other states. As a result, the rest of the nation bore the brunt of such collusive output reduction.

By the mid-1940s the pre-Depression commitment to free-market competition was a thing of the past. While the antitrust laws still banned private restraints interfering with free competition, states and the federal government were entirely free to displace free-market outcomes by statute, or for that matter, exempt private conduct from antitrust regulation. While proponents advocated the NIRA and other coercive interference with free markets as recovery measures, both theory and empirical evidence establish that these policies, including cartelization of labor via collective bargaining mandated by the NLRA, in fact deepened and lengthened the Depression. If history is any guide, then, free competition did not cause the recent Great Recession and displacing free competition will only slow recovery.

This paper ends by sketching various lessons from the New Deal experience and advocating a return to the pre-Depression commitment to free-market competition. While important, antitrust regulation of private markets cannot ensure the primacy of such competition if states and the national government are left free to exempt large sectors from such regulation and impose price and output restrictions that would be felonies if imposed by private parties. Restoration of free competition as the national norm requires a new symbiosis, whereby state and federal efforts to displace market outcomes are tested by the same skepticism as similar efforts by private parties. Antitrust experts can assist in developing this new symbiosis by devoting more intellectual energy to expanding the domain of antitrust by, for instance, advocating the elimination of various exemptions, particularly Parker’s state action exemption that currently shelters state-created cartels from the Sherman Act.

This is not to say that competition should be completely unrestrained by private contract or regulation. Even before the New Deal, courts properly upheld numerous examples of police power regulation that interfered with contractual liberty while counteracting market failure by combating externalities and monopoly pricing. Contractual restrictions on freedom of action, even those that appear “exclusionary,” can have similar beneficial effects, furthering free competition and enhancing economic welfare. Like other proposals to interfere with free competition, recent calls for antitrust to ban certain wealth creating restraints simply because they reduce short run rivalry and raise prices in a particular market are therefore misguided.

Document Type


Publication Date

Winter 2013

Publication Information

23 Cornell Journal of Law and Public Policy 255-336 (2013)