Wednesday, April 10, 2019

Economics: No, Senator Warren, Big Tech Companies Aren’t Too Powerful

(Drivebycuriosity) - Big tech companies are getting a lot political headwinds these days.  Senator Elizabeth Warren and others want to break up technology giants like Google, Facebook, Apple & Amazon (stratechery). Sen. Warren claims: "Today’s big tech companies have too much power — too much power over our economy, our society, and our democracy. They’ve bulldozed competition, used our private information for profit, and tilted the playing field against everyone else. And in the process, they have hurt small businesses and stifled innovation" (teamwarren).

Do the tech giants really have too much power? I gave up Facebook 2 years ago. Did I get arrested? Nope. Did I have to pay a fine? Neither. People can use Facebook or cease the social network as they please. Zuckerberg can force nobody to use his services. People may purchase at Amazon.com or they may buy at Walmart.com and any other e-commerce company. Neither Amazon nor Walmart can coerce people to shop there. And nobody is obliged to buy the newest iPhone or MacBook.

That separates Big Tech from governments. Governments have state authority and they use armies and police to enforce their power. Companies don´t. Governments are collecting taxes and they impose penalties. Corporations don`t. Government are passing laws and are setting rules for many things in life (regulations). Companies don´t.

Milton Friedman said once: "There is no way in which General Motors can get a dollar from you unless you agree to give it to the company. That’s a voluntary exchange. It can only get money from you by providing you with something you value more than the money you give it. If it tries to force something on you that you don’t want, ask Mr. Henry Ford what happened when Ford tried to introduce the Edsel. On the other hand the government can get money from you without your consent. They can send policemen to take it out of your pocket. General Motors doesn’t have that power. And that is all the difference in the world. It is the difference between a society in which exchange is voluntary and a society in which exchange is not voluntary. It’s the reason why the government, when it is in the saddle, produces poor quality at high cost, while industry, when it’s in the saddle, produces quality at low cost. The one has to satisfy its customers and the other does not" (hoover).

The power of companies is constrained by competition. When a corporation has success, her rising profits attract automatically others who want a share from the pie.  Amazon´s success has been animating a legion of copycats who also want to benefit from the ascent of e-commerce. Today Amazon is competing against WalMart, who owns Jetcom, and online buyers can also shop at Target, Best Buy and a legion of other E-commerce companies. Even Google & Facebook opened their own online shops and are trying to get a piece of Amazon´s pie. The Internet makes it very easy to compare prices and to switch to other shops, sharpening the competition. Customers can choose the company which has the best quality, the best service and/or the lowest price which gives them a lot power. As a result, customers have more power than the corporations.

If we believe Warren & Co. big companies are evil. Are they? Big Tech doesn`t need to be our friend, but the tech giants have to behave friendly otherwise they would go out of business. Adam Smith declared “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest”. That is also true for Big Tech. If Amazon would treat their customers unfriendly, if they would sell too expensive, deliver too slow & unreliable, customers would buy at Walmart or elsewhere. That is the magic of competition. Because Big Tech has to compete against others they have to behave like friends. And competition is fierce as the recent growth numbers of Walmart show.

We all are benefiting a lot from Big Tech. People use Facebook to communicate with relatives & friends for free, they use Instagram to spread their photographs without paying for it. I use Google maps and other services without getting charged. I use Twitter to promote this blog and to get a lot of information & entertainment for free. Amazon translates their experience & efficiency into low prices which forces the competitors also to sell cheaper. As a result Amazon and other e-commerce companies are keeping inflation at bay which translates into low interest rates (amazon-effect). I am really happy to buy Kindle e-books for a relatively low prices, why is that a problem for Sen. Warren? Amazon is also a platform which allows even tiny businesses - including many unknown book authors - to sell their products globally. And the cloud services by Amazon, Microsoft and Google - who all are fiercely competing against each other - allow other companies, including tiny startups,  to reduce their expenses for information technologies and to expand their businesses. All these services & products benefit the whole economy and the society.

A study by William Nordhaus confirms these arguments. The Nobel Prize winner & Yale University economist comes to the result that "“only a minuscule fraction of the social returns from technological advances over the 1948-2001 period was captured by producers, indicating that most of the benefits of technological change are passed on to consumers rather than captured by producers.” (nber.org).

Warren claims that Big Tech companies "have hurt small businesses and stifled innovation". Did she ever hear of Uber,  Lyft, Arbnb & Pinterest?  These so-called unicorns were founded just years ago and are already valued $20 billion and more (nypost). Casper, who sells mattresses online, became a brand name almost over night.  WeWork, a company that provides shared workspaces, was founded in 2010 — just nine years ago — and may be valued at $45 billion to $50 billion (nypost).

Apparently the success of Amazon, Google, Facebook & Co. is stimulating talents to start new & disrupting (innovative) businesses and is animating venture capital funds to finance them. It seems we are experiencing a Cambrian explosion. There are so many new & rising companies which are changing society & economy - on the coat-tails of Big Tech.

Did Warren & Co. ever notice that there is world outside of the US? If the US  government would curb her tech giants ore break them up they would support the global competitors.  China already has tech giants like Alibaba, Baidu & Tencent;  Latin America`s e-commerce is ruled by Mercado Libre  and Russia´s Internet is dominated by Yandex.  These giants would be happy to inherit the turf of Google, Amazon & Co. and to overtake the global markets.


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