Conservatives and liberals interminably debate the merits of “the free market” versus “the government.” Which one you trust more delineates the main ideological divide in America.
In reality, they aren’t two separate things and there can’t be a market without government. Legislators, agency heads and judges decide the rules of the game. And, over time, they change the rules.
The important question, too rarely discussed, is who has the most influence over these decisions and in that way wins the game.
Two centuries ago slaves were among the nation’s most valuable assets, and a century ago, perhaps the most valuable asset was land. Then came another shift as factories, machines, railroads and oil transformed America. By the 1920s most Americans were employees, and the most contested property issue was their freedom to organize into unions.
In more recent years, information and ideas have become the most valuable forms of property. This property can’t be concretely weighed or measured, and most of the cost of producing it goes into discovering it or making the first copy. After that, the additional production cost is often zero.
Such “intellectual property” is the key building block of the new economy. Without government decisions over what it is, and who can own it and on what terms, the new economy could not exist.
But as has happened before with other forms of property, the most politically influential owners of the new property are doing their utmost to increase their profits by creating monopolies that must eventually be broken up.
The most valuable intellectual property are platforms so widely used that everyone else has to use them, too. Think of standard operating systems like Microsoft’s Windows or Google’s Android; Google’s search engine; Amazon’s shopping system; and Facebooks’ communication network.
Google runs two-thirds of all searches in the United States. Amazon sells more than 40 percent of new books. Facebook has nearly 1.5 billion active monthly users worldwide. This is where the money is.
Despite an explosion in the number of websites over the last decade, page views are becoming more concentrated. While in 2001, the top 10 websites accounted for 31 percent of all page views in America, by 2010 the top 10 accounted for 75 percent.
Google and Facebook are now among the first stops for many Americans seeking news — while Internet traffic to national newspapers, network television and other news gathering agencies has fallen well below 50 percent of all traffic. Meanwhile, Amazon is now the first stop for almost a third of all American consumers seeking to buy anything. Talk about power.
Whenever markets become so concentrated, consumers end up paying more than they otherwise would, and innovations are squelched. Sure, big platforms let creators showcase and introduce new apps, songs, books, videos and other content. But most of the profits go to the platforms’ owners, who have all bargaining power. Which is why writers, musicians, visual artists, photographers, videographers, journalists and other content creators are receiving less and less for their work.
Contrary to the conventional view of an American economy bubbling with innovative small companies, the reality is quite different. Big Tech’s sweeping patents, standard platforms, fleets of lawyers to litigate against potential rivals and armies of lobbyists have created formidable barriers to new entrants.
This is one reason the rate that new businesses have formed in the United States has slowed markedly. Between 1978 and 2011, as the new giants gained control, that rate was nearly halved.
The patent system is crucial to this slowing of innovation. The law gives 20 years of patent protection to inventions that are “new and useful,” as decided by the Patent and Trademark Office. But the winners are big enough to game the system. They make small improvements warranting new patents, effectively making their intellectual property permanent.
They also lay claim to whole terrains of potential innovation including ideas barely on drawing boards and flood the system with so many applications that lone inventors have to wait years. The White House intellectual property adviser, Colleen V. Chien, noted in 2012 that Google and Apple were spending more money acquiring patents (not to mention litigating them) than on doing research and development.
Antitrust laws used to fight this sort of market power. In the 1990s, the federal government accused Microsoft of illegally bundling its popular Windows operating system with its Internet Explorer browser to create an industry standard that stifled competition. Microsoft settled the case by agreeing to share its programming interfaces with other companies. But since then Big Tech has been almost immune to antitrust, even though the largest tech companies have more market power than ever.
Maybe these tech companies have actually avoided wrongdoing as they accumulate unprecedented market share. Or maybe they’ve accumulated enough political power to keep antitrust regulators at bay.
In 2012, the staff of the Federal Trade Commission’s Bureau of Competition submitted to the commissioners a 160-page analysis of Google’s dominance in the search and related advertising markets, and recommended suing Google for conduct that “has resulted — and will result — in real harm to consumers and to innovation.”
But the commissioners chose not to pursue a case. Investigators also found evidence that Google was pushing it’s own products ahead of competitors’ on search results, though they did not recommend a lawsuit on this point.
It’s unusual for commissioners not to accept staff recommendations, and they didn’t give a full explanation. The FTC noted a competing internal report that recommended against legal action, but another plausible reason has to do with Google’s political clout. Google is now among the largest corporate lobbyists in the United States. Around the time of the investigation the company poured money into influencing both the commissioners and the commission’s congressional overseers.
Google is heading into a major fight with antitrust officials in the European Union for some of the same reasons the F.T.C. staff went after it. Not incidentally, Europe is also investigating Amazon for allegedly stifling competition in e-books, and Apple for doing the same in music. Many on this side of the Atlantic believe Europe is taking on these tech giants because they’re American. Another possible explanation is that Google, Amazon and Apple lack as much political clout in Europe as they have here.
Economic and political power can’t be separated because dominant corporations gain political influence over how markets are maintained and enforced, which enlarges their economic power further. One of the original goals of antitrust law was to prevent this.
“The enterprises of the country are aggregating vast corporate combinations of unexampled capital, boldly marching, not for economical conquests only, but for political power,” warned Edward G. Ryan, the chief justice of Wisconsin’s Supreme Court, in 1873. Antitrust law was viewed as a means of breaking this link. “If we will not endure a king as a political power,” Senator John Sherman of Ohio thundered, “we should not endure a king over the production, transportation and sale” of what the nation produced.
Sherman’s Antitrust Act passed the Senate with just a single vote against, passed the House unanimously, and was signed into law by President Benjamin Harrison on July 2, 1890. Twelve years later, President Teddy Roosevelt used it against Edward H. Harriman’s giant Northern Securities Company, which dominated rail transportation in the Northwest. In 1911, President William Howard Taft broke up John D. Rockefeller’s sprawling Standard Oil empire.
The underlying issue has little to do with whether one prefers the “free market” or government. The real question is how government organizes the market, and who has the most influence over its decisions.
We are now in a new gilded age similar to the first Gilded Age, when the nation’s antitrust laws were enacted. As then, those with great power and resources are making the “free market” function on their behalf. Big Tech — along with the Big Pharma, giant health insurance companies, Big Agriculture, and the largest banks on Wall Street — dominate our economy and our politics.
Yet as long as we remain obsessed by the debate over the relative merits of the “free market” and “government,” we have little hope of seeing what’s occurring and taking the action that’s needed to make our economy work for the many, not the few.
[This originally appeared in the September 20 edition of the New York Times. It’s drawn from my forthcoming book “Saving Capitalism: For the Many, Not the Few.”]
See this story on Robert Reich’s blog.
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