I want to thank Tim Wu for continuing to engage in a discussion here about his book, The Master Switch, with his various comments to my ongoing rants. After pouring out about 15,000 words over the past 4 days, I suspect I’m beginning to sound a bit like his cyber-stalker! I feel a bit bad about this because I really do like Tim a lot and find him to be one of the all-around coolest and most laid-back guys in the Net policy business. But, as I’ve noted in my ongoing series [see parts 1, 2, 3, & 4], we have profoundly different worldviews when it comes to information history and policy. And some of the recent comments he made to my 3rd post deserve a serious response.
In one of those comments he asks, “The question, then, is how you get, essentially, limited, controlled government in regulatory affairs; how you duplicate, in some sense, the limits imposed on other dangerous gov’t functions like the army. I don’t think this is having things both ways; I think this is trying to learn from what has gone wrong in the past.” In the other, he says: “The question I’m asking in the end of the book is whether we can do better; try to have rules against the worse forms abuse without a creeping regulation that turns into capture. I suspect you think that’s impossible, but I don’t.”
So, here’s my response (and I’m making it a new, dedicated post here instead of just a comment in an old thread because I feel we are getting to the heart of the difference between cyber-libertarians (like myself) and cyber-collectivists (or whatever Tim would call himself).
To be clear, I don’t think corporations are angels or that there is never a time when a market can’t be naturally subject to a great deal of control by one company or a handful of companies. The difference between us comes down to two things primarily.
First, as I have already noted in a couple of these essays (especially this one), I believe regulatory capture, mismanagement, or other shenanigans have more to do with creating and / or maintaining “monopoly” or lasting / harmful “market power” than natural market forces. By definition, a “purely economic laissez-faire approach” does not exist in markets characterized by regulatory capture and bureaucratic mismanagement. And you won’t ever get less regulatory capture and bureaucratic mismanagement by increasing the scope of government control over a market.
Second, to the extent that any company or set of companies is able to achieve “market power” is a largely natural fashion (think IBM in 70s or Microsoft in late 90s), I believe that markets can and do act to evolve around those situations quite rapidly, even more rapidly when the market is built on code.
I spent time developing these points in detail in this two-part debate [1, 2] with Lawrence Lessig, which I hope Prof. Wu will take the time to read since I went to great pains to clearly delineate the differences that separate our worldviews. Ultimately, as I said there in response to Prof. Lessig, what really separates the cyber-libertarian and cyber-collectivist schools of thinking comes down to a belief that “market failures” or “code failures” are ultimately better addressed by voluntary, spontaneous, bottom-up, marketplace responses than by coerced, top-down, governmental solutions. Moreover, the decisive advantage of the market-driven approach to correcting code failure comes down to the rapidity and nimbleness of those response(s).
Does that mean cyber-libertarians believe everything will be all wine and roses in a truly free marketplace? Absolutely not. There will be short term spells of what many of us would regard as excessive market power. The difference between us comes down to the amount of faith we would place in government actors versus market forces / evolution to better solve that problem. We cyber-libertarians would obviously have a lot more patience with markets and technological change, and would be willing to wait and see how things work out. We believe, as I have noted in my previous responses to Wu, that it is during what some regard as a market’s darkest hour when some of the most exciting disruptive technologies and innovation are developing. We are bullish on what I have called experimental, evolutionary dynamism. People don’t sit still; they respond to incentives, including short-term spells of “market power.”
Is this blind faith in the market? I suspect Prof. Wu and others would accuse us of that. But I would argue it isn’t blind faith but informed fact. It’s interesting, for example, that one of the “information empires” Wu doesn’t spend much time on in his book is IBM. Back in the 60s and 70s, (as I have documented here before) IBM was the big, bad dog of the computing world, with significant “market power” in mainframes — the only computers that really counted at the time. Big Blue’s market power was achieved in a fairly natural way, however. Importantly, there isn’t much regulatory capture or interference I could point to that helped cause or maintain the power IBM had. So, it’s certainly a better case study than others Wu uses in his book, most of which were subject to early meddling by government that tipped the balance in unnatural directions.
Anyway, back in the 1960’s, some folks at the time feared IBM might “leverage” their significant market power into new fields. As a result, the Department of Justice opened an antitrust case against Big Blue in 1969 that would become a 13-year quagmire, with little to show for all the legal wrangling by the time the case was abandoned in 1982. Here’s how CNet staff writer Rachel Konrad summarized the fiasco back in 2000:
In January 1969, the government began a sweeping antitrust investigation into IBM’s dominance and attempted to break it into smaller companies that would compete against one another. During the six most critical years of the trial, from 1975 to 1980, the parties called 974 witnesses and read 104,400 pages of transcripts, according to Emerson Pugh’s 1995 book “Building IBM: Shaping an Industry and Its Technology.”
The 13-year investigation, which required IBM to retain 200 attorneys at one point, fizzled in the early ’80s as the computing landscape shifted from mainframes to personal computers. The government abandoned the tainted effort entirely in 1982, as clones of the IBM PC eroded Big Blue’s dominance. But the company, still fearful of the watchful eye of the Justice Department, took pains to avoid the appearance of a monopoly long after it relinquished its hold on the market. People who worked for IBM in the ’80s and early ’90s said the company routinely fell victim to “pricing death strategy”–a reluctance to lower prices below cost, even on products that weren’t selling–to avoid what the government would call predatory pricing. By the mid-’80s, the company was in bad shape. The antitrust troubles, combined with ill-timed product failures such as the Future System, pinched revenues. The company began a nearly decade-long financial slide. In retrospect, the antitrust case against IBM seemed laughable.
IBM had become the victim of a classic “disruptive technology” paradigm shift that few could have foreseen in 1969. As Peter Pitsch noted in his 1996 PFF book The Innovation Age, “In 1981 the Department of Justice was still pressing their case against IBM while market forces were about to lay waste to the company.” Pitsch continued:
IBM certainly did not expect to see PCs erode the market share and profitability of its venerable mainframe computers, but the fall of the old “big iron” machines was rapid and spectacular. The revenue of IBM’s mainframe unit fell from roughly $9 billion in 1990 to an estimated $4.5 billion in 1994… [T]he parties destined to become players in the PC revolution were unknown when the PC was introduced, and the experts’ predictions of a much-ballyhooed computer face-off between IBM and AT&T never materialized. Innovative companies that did not exist at the beginning of the revolution rose rapidly. Few people had ever heard of a small company named Microsoft. Nor had they heard of Intel, Novell, Compaq, Dell, or Netscape.
Pitsch went on to summarize how IBM’s manufacturing capacity was slashed in the years that followed and also notes that, astonishingly, “in the space of five years after 1987, IBM lost two thirds of its market value — more than $70 billion.” In sum, new marketplace innovation and competition handled the short-term market power concern that antitrust regulators had about Big Blue. Pitsch goes on to explain what the antitrust regulators missed:
A dominant firm can lose its “King of the Hill” status in two ways. First, if it does not continually improve, it will lose market share and profits to low-cost imitators. For example, the ability of low-end PC manufacturers to make IBM clones fostered robust price competition in the PC market. Second, today’s market leaders must worry that some established and well-financed competitor or possibly an upstart produce a technical breakthrough that will displace them. This situation reflects [the] fact that gains from innovation are so powerful and beneficial to consumers that they outweigh the higher prices dominant firms can charge. Indeed, attempts to eliminate these high profits by regulating prices would almost certainly disserve consumers even if the regulations dampened the incentives for innovation only slightly.
What Pitsch is talking about here is dynamic competition, not the static competition. And what the history of IBM shows is the power of evolutionary dynamism in action. Markets are a learning experience; a “discovery process” as Austrian economists have taught us. Those of us who believe in dynamic competition and evolutionary dynamism see markets in a constant state of flux and expect that sub-optimal market developments or configurations are exactly the spark that incentivizes new form of market entry, innovation, price competition, and so on. Experimentation and evolution happen if you let them happen.
Others, however – and I suspect this includes Prof. Wu – would argue that’s not good enough. They want action, and they want it now! Every short-term hiccup deserves a policy response in the name of protecting “the public interest,” however they define it through regulation. But what about the costs and trade-offs associated with early, preemptive, or prescriptive regulation? What of the danger of regulation steering markets in unnatural or inefficient directions? The possibility of picking technological winners and losers, or technological lock-in? The possibility of regulatory capture and the creation of a special interest, lobbying hell inside the Beltway?
Somehow these factors often go out the window for those who subscribe to the more static, snapshot-oriented view of markets and competition that is so prevalent in cyber-collectivist circles. But the cyber-libertarian can’t let those go. Those factors lie at the core of the problem, we would argue. Actions have consequences. Regulations have costs. And those costs typically outweigh the benefits of preemptive strikes by the State.
And that, at root, is what separates the cyber-libertarian and cyber-collectivist worldviews when it comes to concerns about “market power” and what to do about it.