Antitrust Regulation And The 2016 Party Platform Debates
Having never been a fan of antitrust protectionism, I found it interesting that (according to Bloomberg) while Democrats are highlighting antitrust in their party platform, they may yet give a pass to Silicon Valley powerhouses and the tech sector generally.
That Apple AAPL -0.64%, Amazon and Google GOOGL +0.60% and the like give three times the cash to Democrats as they do Republicans was hinted at as explanation. But it’d be good for both parties to back off tech and non-tech alike. Alas, even the Republican platfrom (p. 37) seeks to expand antitrust to now-exempt insurance companies.
Antitrust intervention does not, as the reporter asserts, “deliver on promises to preserve market competition.” Rather, antitrust is anti-competitive in its own right, protecting certain connected competitors rather than properly understood competitive processes.
Real competition is creating unique new wealth, and profiting “monopolistically” from it. Paypal co-founder Peter Thiel, who speaks tonight at the Republican convention in Cleveland, Ohio before nominee Donald Trump, articulated it better than anyone in “Competition is for Losers”: a profitable, sustained “monopoly” is “reward for creating greater abundance, not artificial scarcity.”
The conceptual problem Thiel notes is that to the economist with only the textbook hammer, everything looks like a nail: “To an economist, every monopoly looks the same, whether it deviously eliminates rivals, secures a license from the state or innovates its way to the top.”
With respect to the latter, inefficient lock-in just doesn’t happen. That requires government exclusive franchises.
Unfortunately, “competition” and what qualifies still creates consternation among economists in part because the word has remained the same since Adam Smith’s Wealth of Nations day while the analytical rigor of economics has accelerated, jargon has exploded, and creative academics find new ways to see sinister “restraint of trade” (tenure somehow not among them).
For Smith, the essence of competition seemed contained in the verb “to compete,” referring to active rivalry, perhaps by innovating, or constantly striving to price one’s product lower than a competitor (in the old days, price was a variable rather than the parameter students get taught in Econ 101).
There is some evidence that this rivalrous notion of competition was dominant even during the beginning of the antitrust period (late 1800s) given an absence of economists from antitrust proceedings and evidence that antitrust’s very origins were interest-group based and inherently anti-competitive given output expanding and prices falling in targeted sectors (see Thomas J. DiLorenzo).
As University of Chicago Nobel Laureate George Stigler pointed out, there were some notions of “perfect” competition to be found in Adam Smith (dealing with active, fluid markets) but by no means the flat demand curves that came later. The laying-out, if you will, of a definition for perfect competition came in Frank Knight’s Risk, Uncertainty and Profit, but Knight did not mean that these terms characterized actual markets—he went on to discuss the inherent uncertainty that prevailed, something far removed from perfect information.
Economists, however, perhaps in an effort to be more “scientific” began to use this perfectly competitive framework as a standard by which to judge the efficiency of actual markets. This is the unfortunate basis of antitrust regulation. (Thiel commented that economists wished to use the mathematics of physics and treat people like atoms rather than wealth producers.)
The Sherman Antitrust Act sought to prevent monopolies or conspiracies in restraint of trade, and as the “perfectly competitive” model gained favor, economists got on board.
Early objections came from Friedrich A. Hayek’s “The Meaning of Competition” (“A monopoly based on superior efficiency, on the other hand, does comparatively little harm”) and other process-oriented economists. Such economists insist that competition should designate, well, rivalrous competition, not price-taking among clone producers.
That’s true, yet Thiel wants us to acknowledge that on a certain level, the monopolist doesn’t have to compete, and that this is good.
The threat of potential competitors can suffice to make non-government-protected enterprises behave likes competitors—but the “barrier to entry” complaints and refutations go back and forth forever. The problem is that aside from the skeletal definition of monopoly as a non-price taker, different groups throw on other qualifying characteristics: barriers to entry, is there market power, do competitors exist, or are there enough competitors and such. It matters because, like it or not, these definitions are used in public policy, which affects everyone. We need new shades of meaning.
Monopoly just means the demand curve isn’t flat, in the simplest formulation. Firms have some control over price, and therefore allegedly the potential exists to restrict output, the chief offense of standard monopolization; but in actual competitive free enterprise, new wealth rather than a restriction is what’s at hand.
The magnet of achieving transitory “monopoly” power attracts those who also wish to find new ways to accumulate capital and create new value, and Thiel-style, to capture a large part of that value like a Google, rather than a little bit of it, like a restaurant or an airline.
Both political parties, since they have invoked antitrust in their 2016 platforms, should recognize that when they screw up, the antitrust laws themselves, not the businesses they target, are guilty of decreasing efficiency and social welfare.
Competition policy is a much-needed discussion in today’s still-limping economy. So if we can get both Democrats and Republicans united on questioning antitrust during this presidential campaign season, that’d be real progress. Democrats can give tech a pass–and keep going from there.
Originally posted to Forbes.