On Fast Firms, Slow Regulators, Antitrust & the Digital Economy

by on July 6, 2012 · 4 comments

I liked the title of this new Cecilia Kang article in the Washington Post: “In Silicon Valley, Fast Firms and Slow Regulators.” Kang notes:

As federal regulators launch fresh ­investigations into Silicon Valley, their history of drawn-out cases has companies on edge. In taking on an industry that moves at lightening speed, federal officials risk actions that could appear to be too heavy-handed or embarrassingly outdated, some analysts and antitrust experts say.

For example, she cites ongoing regulatory oversight of Microsoft and MySpace, even though both companies have fallen from the earlier King of the Hill status in their respective fields. Kang notes that some “want the government to aggressively pursue abusive practices but question whether antitrust laws are too dated to rein in firms that are continually redefining themselves and using their dominance in one arena to press into others.”

Simply put, antitrust can’t keep up with an economy built on Moore’s Law, which refers to the rule of thumb that the processing power of computers doubles roughly every 18 months while prices remain fairly constant. This issue has been the topic of several of my Forbes columns over the past year, as well as several other essays I’ve written here and elsewhere. [See the list at bottom of this essay.]  Moore’s Law has been a relentless regulator of markets and has helped keep the power of “tech titans” in check better than any Beltway regulator ever could. As I noted here before in my essay, “Antitrust & Innovation in the New Economy: The Problem with the Static Equilibrium Mindset“:

modern tech markets are highly dynamic. There is no static end-state, “perfect competition,” or “market equilibrium” in today’s information technology marketplace. Change and innovation are chaotic, non-linear, and paradigm-shattering. Schumpeter said it best long ago when he noted how, “in capitalist reality as distinguished from its textbook picture, it is not [perfect] competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization… competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives. This kind of competition is as much more effective than the other,” he argued, because the “ever-present threat” of dynamic, disruptive change “disciplines before it attacks.”

Once we recognize the power of Moore’s Law to naturally regulate markets—and the corresponding danger of leaving Washington’s laws on the books too long—it should be clear why it is essential to align America’s legal and regulatory policies with the realities of modern tech markets. One way policymakers could do so, I argued in this old Forbes essay, is by literally applying the logic of Moore’s Law to all current and future laws and regulations through two simple principles:

  • Principle #1 – Every new technology proposal should include a provision sunsetting the law or regulation 18 months after enactment. Policymakers can always reenact the rule if they believe it is still sensible.
  • Principle #2 – Reopen all existing technology laws and regulations and reassess their worth. If no compelling reason for their continued existence can be identified and substantiated, those laws or rules should be repealed within 18 months. If a rationale for continuing existing laws and regs can be identified, the rule can be re-implemented and Principle #1 applied to it.

What should be the test for determining when technology laws and regulations are retained? That bar should be fairly high. Conjectural harms and boogeyman scenarios can’t be used in defense of new rules or the reenactment of old ones. Policymakers must conduct a robust cost-benefit analysis of all tech rules and then offer a clear showing of tangible harm or actual market failure before enactment or reenactment of any policy.

Of course, this doesn’t leave much room for antitrust law since it almost never moves that fast. But if you think that there is truth in Kang’s “Fast Firms, Slow Regulators” headline, what option do we have but to largely abandon the effort–especially when Moore’s Law and Schumpeterian “creative destruction” do such a better job of keep markets competitive and innovative?

Of course, some academic and regulatory activists like Columbia’s Tim Wu favor a very different sort of regime based on “agency threats” and a preemptive dismantling of the digital economy through the imposition of a “Separations Principle.” The Separations Principle would divide and strictly quarantine the various elements of the tech world — networks, devices, and content — such that vertical integration would become per se illegal.  That’s certainly one way of dealing with the “Fast Firms, Slow Regulators” problem!  Of course, it would handle that problem by essential decimating much of what makes the digital economy so dynamic and innovative. (I have a new paper coming out shortly that will documented why Wu’s remedy would be such a disaster in practice.)

In any event, it’s good that people are acknowledging that there is a problem here–that antitrust cannot keep pace with the pace of innovation we see in the tech economy–but we must be cautious that this insight does not lead to new or more destructive forms of regulatory adventurism. As I noted in last week’s Forbes column, “The Rule Of Three: The Nature of Competition In The Digital Economy,” there exists a tendency among many to take static snapshots of a sector at any given time and then leap to conclusions about “market power” or “oligopoly.” But competition is a process, not an end-point, and a more sophisticated understanding of the digital economy recognizes how often the borders between sectors are blurred or obliterated by dynamic, disruptive change. Churn is rampant and relentless. Thus, short-term measures of market power are often meaningless since firms can get very big very fast, but they can stumble and fall just as rapidly.

Anyway, if you care to read the very best papers written recently on this topic, you’ll want to check out:

Als0 make sure to check out these classic works from ‘Austrian School’ economists:

  • Israel Kirzner, Discovery and the Capitalist Process (University of Chicago Press, 1985).
  • F.A. Hayek, “Competition as a Discovery Procedure,” in New Studies in Philosophy, Politics, Economics and the History of Ideas (Chicago, IL: University of Chicago Press, 1978).
  • Gerald P. O’Driscoll, Jr. & Mario J. Rizzo, “Competition and Discovery,” in The Economics of Time and Ignorance (London: Routledge, 1985, 1996).

Finally, here are a few other essays I have penned on this issue:

Previous post:

Next post: