Antitrust as Self Medication
Reihan Salam, in a characteristically excellent post here at NRO, points to a paper by Michael Mandel, who is one of the most interesting blogospheric commentators on innovation from a “New Democrat” perspective. Mandel makes the basic point that progressives should not be so gung ho about antitrust enforcement, because big organizations like AT&T Bell Labs and Apple are the anchors of business eco-systems that drive innovation.
My experiences – my first job out of grad school was at Bell Labs, and I’ve since started and built a global enterprise software company – lead me to agree with the conclusion, but to be a little more jaded about exactly how big firms contribute to innovation in the kinds of industries he discusses.
Just as Mandel indicates, there is some straight-up development of new technologies in big labs that is then deployed by the parent company (I was involved in some). And further, consciously planned eco-systems of the type he cites – for example, developers building apps for the iPhone and iPad – can help to identify and then scale successful new technologies efficiently. Both of these things matter a lot. But here’s what I have seen big companies actually do to drive innovation that I think is most important for overall job creation and long-term growth:
1. Because innovation can only be partially planned, even the best research labs that create enormous value for the parent company also inevitably discover things that cannot be practically exploited by the parent firm. In the more extreme cases, they produce innovations that would threaten the parent company’s business model. Xerox’s comparatively tiny PARC lab invented the laser printer, which Xerox turned into a multibillion-dollar business. It also developed the graphical user interface, Ethernet computer networking, and most of the other elements of the modern personal computer that Steve Jobs famously exploited to make Apple, not Xerox, a leading personal-computer company.
2. Big companies provide a cash exit for successful start-ups, either before or after IPO. In this way they act as informed allocators of capital that intermediate between general investors and the complex technology landscape. Think of most software start-ups and IBM, Oracle, SAP, Microsoft and HP.
3. Big companies also use partnerships and other vehicles to act as marketing arms and integrators for successful technologies developed by start-ups. Think of biotech and big pharma.
What’s critical about these roles for big companies is that they require that you have lots of entrepreneurial firms to compete with the incumbents. And, in fact, if my characterization is correct, you would expect most of the job creation to happen in the successful new entrants as they grow, which is just what we see. According to the National Venture Capital Association, venture capital–funded firms employ a majority of all workers across many of the most productive and growing sectors of the economy, including the software, biotech, semiconductor, electronics, telecommunications and computer industries.
I’m glad to see somebody on the Left arguing for a modernized view of antitrust, but I think that what is essential if we are to do this is to reduce simultaneously the political power of large companies to stifle competition, as manifest in manipulation of patents, financial regulation, safety rules and the endless list of regulations, subsidies and tax breaks that govern the modern economy. This is similar to what Reihan called in his post “completing the neoliberal revolution.”
The market process is imperfect and takes time, but in my view is preferable to one in which we allow large companies (who will always have an advantage in lobbying and compliance) to use the political process to protect their position, which we then counter-balance with antitrust regulation. No real system of political economy is ever pure, so we will always have some amount of political jockeying and counter-jockeying; but in general, the more we get government out of the way of innovation, the better off we will be.
I think that “de-politcizing” the economy would be an important and powerful component of a Republican presidential campaign in 2012.
(Cross-posted to The Corner)
Jim:
The basic “conservative” case for paying out a large percentage of free cash flow as dividends is that managers are hired to run a business, not to build an investment portfolio, and that, in fact, there are powerful conflicts of interest that get in the way of business managers using stores of cash in a manner that is efficient from the perspective of an investor.
It sounds like you may agree. Your point (1) is that large firms generate positive externalities – they discover or invent things that they cannot (or will not) exploit effectively, but that others can (and will). Your point (2) may note a positive externality as well – if bids from large firms raise the takeout price of startups, the benefit accrues to the owners of the startup, not the purchasing firm. I don’t know what the research shows, but I wouldn’t be shocked to learn that, on average, companies like IBM and Oracle perform worse as investors than do dedicated venture capital firms.
So I guess my question is: to the extent that you think “largeness” has a positive impact on innovation, to what extent do you think this benefit is captured by the large firms themselves?
-Noah
— Noah Millman · Jan 4, 08:10 PM · #
Noah,
I wrote a post at TAS arguing that it’s not obvious that Apple, for example, having a big cash hoard is a bad idea, so I think divide ding depends: http://theamericanscene.com/2011/11/30/nobody-ever-went-broke-with-money-in-the-bank
I think that large firms are an important part of the innovation ecosystem, but sometimes in the way a decomposing tree trunk is important to a forest.
Best,
Jim
— Jim Manzi · Jan 5, 12:18 AM · #
arge firms are an important part of the innovation ecosystem, but sometimes in the way a decomposing tree trunk is important to a forest.
That is a great line. I’ll steal it if you don’t watch out.
— Noah Millman · Jan 5, 03:15 AM · #
Jim Manzi,
I agree with you. About Microsoft. They stumbled on a near monopoly and made zillions of dollars and spent huge amounts of it on, if not pure research, then developing new products, and they have never really been that innovative. Like you say, they bought smaller companies and used their innovations, but off the top of my head I can’t think of much they developed that was not in repsonse to a similar (and usually better) product.
I also think innovation is only a small part of what you need to consider when you think a company is too big. I totally hate ATT. Most recently they started charging me for the privilidge of being able to make long distance calls. So, although I made no long distance calls I got charged $3 plus another $4 in taxes and “recovery fees”. So I cancelled LD and then got charged two change of service fees. One for local long distance and one for long long distance. Obviously this is a company that feels no heat from competitors. I would love to dump them completely, but there are no alternatives in my area.
But that is just customer service. The most dangerous thing about a huge, secure, wealthy company is, as you mentioned, the power they can wield in washington.
— cw · Jan 5, 05:26 AM · #
Okay, but how much incremental R&D got accomplished because Exxon and Mobil were allowed to become ExxonMobil? Were they too puny separate?
In general, it doesn’t seem like business has had much to complain about in terms of over-zealous antitrust enforcement over the last couple of decades.
— Steve Sailer · Jan 5, 06:44 AM · #
“I think that large firms are an important part of the innovation ecosystem, but sometimes in the way a decomposing tree trunk is important to a forest.”
I’ll second Noah; a great line.
But it begs the question: In the innovation ecosystem, what, if anything, is analogous to nitrogen fixing?
— David Ryan · Jan 5, 01:17 PM · #
… preferable to one in which we allow large companies (who will always have an advantage in lobbying and compliance) to use the political process to protect their position, which we then counter-balance with antitrust regulation.
Of course antitrust regulations does not merely counterbalance the evils of incumbent-lobbying. Even if the playing field were fair, some will hand monopolies to however wins a race to wrap the world up in their network effects. So it seems completely sensible to distrust laissez faire in railroads, telecommunications, operating systems and probably several other fields.
— Adrian Ratnapala · Jan 6, 07:24 AM · #
Adrian,
That’s not so obvious to me, and likely needs to be considered case by case. These networks, orEECo-systems or whatever ,themselves compete with ine another, and it may be the case that sometimes this kind of competition is the best, even if imperfect, way of discipling the market. In the case of operating systems, which is the one of your examples that I know best, I think antitrust would be a terrible method,, for example,
— Jim Manzi · Jan 6, 09:30 AM · #
Jim:
Do you think Microsoft needed to be busted? If so, was there some way other than antitrust?
— jd · Jan 6, 02:21 PM · #
jd,
I think that it has gotten far more thoroughly busted by competition than by any legal action, and that’s a good thing,
Jim
— Jim Manzi · Jan 6, 09:43 PM · #
The market process is imperfect and takes time
LOL!
the “freed” market is an ecophagy. unless we get off planet it will consume all the resources on Earth like grey goo. Look at how under resource starvation (peak oil) the American “freed” market is cannibalizing the middle class and the American education system with for-profit education and college mortgages.
— matoko_chan · Jan 7, 03:17 PM · #
alsotoo. Reihan is a terrible writer and a cobo (colonized brown) that writes creepy apologia for conservative failmemes.
— matoko_chan · Jan 7, 03:33 PM · #
Someone ought to point out the racial shittiness of some ass deigning to call somebody a “colonized brown,” so here I am doing it.
— Kieselguhr Kid · Jan 9, 01:10 AM · #
Thanks a lot for the post! very interesting!
— termpaperwriter.org · Jan 10, 03:31 PM · #
why? its true. And Aziz Poonawalla invented the term, not meh.
its also true that the GOP base is 99.9% white and christian, and the GOP sturm und drang about the candidate field is just White People Problems.
ie…..who should White People vote for?
— matoko_chan · Jan 10, 09:58 PM · #