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Posted by: TEEBONE ®

03/14/2019, 14:04:44

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Elizabeth Warren seeks to regulate that which she does not understand

by Tim Worstall  | March 12, 2019 02:55 PM
6-7 minutes

There's a certain bravura, verging on chutzpah, to 2020 candidate Sen. Elizabeth Warren, D-Mass. She's claiming that Facebook is censoring her advertising, or at least it took some of it down, about the desirability of breaking up Facebook when, in fact, she or her team did not understand the terms and conditions that Facebook places on the use of its logo on its site.

There is that certain bravura in demanding to be allowed to regulate big tech without apparently the first clue of how it is regulated now. Some might even say that rises to chutzpah.

However, it's the details of the actual proposals that require attention, whatever the amusement of pratfalls. The essential contention Warren is making is that regulation is required in order to increase competition in big tech. That is indeed what she's saying here in her public suggestion — the problem being that this is an incorrect assertion. As to why it's incorrect well, sorry, but we need some theoretical detail here.

Competition is generally good. For example, we'd not be all that overjoyed if there was just the one provider of some good or service therefore they could charge what they liked. This is the argument for charter schools, that the local education board should not be the monopoly supplier of schooling to the little ones. It's also one of the arguments for the Second Amendment, that government shouldn't be the only people with guns.

Warren is taking this further and correctly identifying big tech as enjoying network effects. The more people who use Facebook, the more appealing it is to use Facebook, because that's where all the people are. The same is true of Amazon's Marketplace: The consumers are there, so nearly all potential suppliers are, and all the consumers are there because all the suppliers are.

Network effects mean that we have a natural tendency to that monopoly which is the opposite of competition. At first blush, Warren's contention that everyone running such a platform must not be allowed to also play on that platform seems reasonable enough. That is, by the way, her plan and proposal. Amazon should not be allowed to sell directly on the Marketplace, Google should not control search advertising and also search, and so on.

The mistake here, though, is that competition is not the thing that we desire. It's often enough the proximate thing that we do desire, but it's never the endgame.

What we're really after is consumer benefit.

Competition is often the way to gain those benefits to consumers of lower prices, faster delivery, more general loveliness in the things on offer to us. But competition is a way of gaining the desired effect, not the thing or effect itself.

Warren's therefore reifying (making concrete the abstraction) competition, and that's an error. For the very point about those network effects is that when they're present, at least often enough, the consumer benefits by allowing the monopoly. That's just one of the technical things about network effect markets.

It is only if those platforms are exploited in a manner which causes harm to consumers (including but not limited to not allowing the competition which would make things even more exotically better) that regulation is either required or justified. This being something that hasn't happened yet, and no one's really got any proof that it will be either.

Sure, we can all assume that Amazon's going to drive every other diaper-maker out of business, and once they do, they'll surge prices. It's even theoretically true that someone might try this; it's just that economists don't think this ever really does happen. We've no recorded instances of it ever being a profit-making proposition to even try in fact. For as soon as the prices are raised again, then back comes the competition. Don't forget, even Rockefeller's Standard Oil never did raise prices after it had crushed or swallowed that competition; it kept driving them ever further down in fact, just so that competition never did arise again.

The general economic insistence is that in the absence of legal privilege or restriction against competition arising then monopolies, even platform ones, never really do get exploited. Thus, if we have the beneficial parts of network effects in operation and yet none of the worries about platform monopolies, then why would we need to regulate or break up big tech?

That is, unless we're politicians on the stump looking for an issue.

One fun detail here is that this insistence that platforms cannot partake directly is exactly how India regulates Amazon and Flipkart in that country. And America's just itching to take regulatory advice from a country as successful and rich as India, right?

The takeaway here about these regulatory proposals is the same as that from Elizabeth Warren's Facebook advertising adventure. Given that she doesn't really understand the world as it is or works, it's really pretty brave of her to be demanding that we all grant her regulatory power over it, isn't it? Some might even think it transcends the normal politics to rise to that unwarranted chutzpah.

Tim Worstall (@worstall) is a contributor to the Washington Examiner's Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute. You can read all his pieces at The Continental Telegraph.


Democrats wouldn't buy a clue if it was government subsidized.

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