Mr. Thiel, meet Mr. Manoilescu…

Monopoly continues to be a debatable topic and a multi-faceted, confusing notion. The well-written pean to monopoly by Peter Thiel in the WSJ (“Competition is for Losers”, 12 Sep. 2014) is not excepted, although he does seem to perceive in depth several of those facets. Valid enough, any CEO worth his Piketty-ian “unequal”, non-“market” driven pay should spend his time finding ways to thwart the leveling laws of economics, i.e., avoid competition. And insofar as those people can influence the government, they will, to the effect of obtaining legal protection to enforce against “competitors”—Milton Friedman has said this much. This revelation Thiel had (not original, as Richard Epstein, a fellow libertarian, may show him) is impactful in surprising ways and forms the backbone of his new, heavily un-footnoted yet trenchant and declamatory book, Zero to One.

There is no questioning the idea that one important aspect of business is the appropriability of the fruits of labor and innovation by a company. There is a fundamental questioning of the idea that capitalism is defined by the accumulation of capital—that is necessary but not sufficient, since feudal lords also accumulated capital (land). The differentia specifica is quite…different. As a financier, Thiel should realize that, but this need not detain us.

The innovation aspect can be treated more easily, as “one of [the government’s] departments works hard to create monopolies (by granting patents to new inventions) even though another part hunts them down (by prosecuting antitrust cases).” Glossing over the changing of the topic in the middle of the sentence (monopoly as contrasted with antitrust, which is not the same thing yet tends to be bundled in even by Epstein), the concept is understood in law and practice.

New ideas are granted temporary exclusivity (“monopoly” in the etimological sense of “single seller of a good”) power to develop new products and services to benefit society by also handsomely benefitting themselves, if they can pull it off. Note that this is anchored in the core principle of forming “a more perfect union…[and] promote the general Welfare,” to benefit the entrepreneur and society at large. On the contrary, the efforts to build and enforce a trust/ cartel are prosecuted as attempts at price fixing/ market cornering—not because the companies involved have innovated. Unless, of course, one agrees with Schumpeter’s fifth type of innovation, “the carrying out of the new organization of any industry, like the creation of a monopoly position (for example through trustification) or the breaking up of a monopoly position,” constitutes innovation. This has been doubted by, at least, Nicholas Georgescu-Roegen.

With that, Thiel sees monopolistic success as an expense to society necessitated by innovation “but only in a world where nothing changes” because “monopolies aren’t just good for the rest of society; they’re powerful engines for making it better” in a world that changes. We’ll come back to this, but that Apple created the opportunity for “customers to have the choice of paying higher prices for a smartphone that actually works” is quite a venturesome statement, to say the least, and reflects a peculiar understanding of abundance as opposed to scarcity. By the same logic, the sick now have the choice (?) to pay exorbitant prices, like $1000/ Sovaldi pill or $120,000/ three months of Yervoy, for medicine that actually works?

The other factor mentioned at the outset, labor, causes more complications than protecting innovation by law (yes, the two are related “dialectically”). Thiel follows closely (and probably unawares) Mihail Manoilescu’s argument in his National Productive Forces and International Commerce: Theory of Protectionism. Thiel builds a case by observing the “value” created by a business like Google compared to one similar to a British-food (“cuisine” would perhaps by pushing it) restaurant and implies the conclusion that a commodity or commodity-like business will create much less value than one based on “innovation.”

The author leaves open the question on whether he could live without his morning coffee or whether his friend’s Tesla would work if businesses dealing in commodities such as oil or coal (no typo here) would not exist. If it turns out these businesses do indeed build advantage and profit in some manner, then that defeats the point of the argument strictly speaking which is the all-encompassing virtues of innovation—unless, of course, “innovation” is defined so broadly that it covers any change/ move in the business environment.

The issue is not that some businesses deal in commodities; rather, the issue is the status and the granting of monopoly. Friedman’s contention was that monopoly power is granted or rescinded by the government, and the author agrees with the former power and grudgingly mentions the second. An oil company gets monopoly status in a country or on an oilfield, while the British-food restaurant does not—the issue is not the product itself but the protection awarded.

Recognizing that revenue alone is an ambiguous metric, the author approximates the concept of value by that of profit, and finds that Google makes much more of that than the airlines. Further, a case can be made that Google has fewer employees per dollar or revenue or, so to speak, higher labor productivity. The comparison with regard to capital productivity is probably interesting too, as the airlines are capital intensive, something a search engine company is not. This approach is similar to Manoilescu’s idea of “net product” of an enterprise. Net product is a “result of economic equilibrium” at a certain point in time and, in contrast to the usual notion of profit, includes salaries/wages alongside interest, taxes and the entrepreneur’s profit. The author intuits this when he states that the more “productive” enterprise has “wider latitude to care about its workforce.”

However, in Manoilescu’s construct, a relative ranking of industries can be conducted as a matter of national policy to protect the most productive industries/ businesses that benefit society. In the confines of the US patent system that the author considers, the granting of protection is based on an effort to “ensure that the Intellectual Property system contributes to a strong global economy, encourages investment in innovation, and fosters entrepreneurial spirit.” Nothing is said here about that “more perfect union” or “the general Welfare”—on the contrary, the goal is to build a strong global economy (what Thiel calls in his book a horizontal and substitutive direction of development as opposed to the vertical one predicated on innovation).

Also, the criteria for granting patents (U.S. Patent Act, Section 101) are meant to be objective, more or less, without regard to a desired structure of the US economy, however defined and constructed. This preserves to some extent the natural randomness, so to speak, of the occurrence of patentable ideas and makes it more challenging for a government to chart a non-stochastic path for an economy. This is probably as expansive a meaning of “limited governing” within the bounds of the “Blessings of Liberty” as could be given outside of von Mises or Friedman.

Note that even in this set up, governments may try to structure an economy by providing incentives to specific industries considered of national importance–how that is not hamstrung by the “global” mandate of the USPTO is not exactly clear; until, that is, one begins to imagine that all the world’s a stage (for economic…plays [sic!]) and begins to strut and fret thereupon full of sound and fury.

Thiel’s ideas are very similar to Manoilescu’s but the latter’s are placed in a context of a controlled economic environment both internally and with regard to international trade. Manoilescu’s economic product and productivity measures include salaries, financing payments and taxes alongside entrepreneurial profit, so it is conceivable for the latter to be reduced even as society (through the employees’ salaries and the establishment of an internal producer of strategic goods at an internal (perhaps lower) price) benefits.

While indeed outlining entrepreneurs’ profit motive as very important, Manoilescu shows that is not the critical dimension for economic policy-making both with regard to internal commerce and foreign trade. Clearly his environment is substantially more interventionist/ dirigiste and Thiel would likely protest such an arrangement if the current monopoly-granting power were to move in that direction in the limit. In Thiel’s view, the residual claim of the entrepreneur is paramount and drives everything else—there may be some truth to that; in Manoilescu’s, while acknowledged as important, it is the first to go when economic conditions worsen, i.e., it is…residual. Won’t this last scenario drive the entrepreneur away from the business and spur him to innovation again?…

Without an overall framework, the author’s recommendations may lead to economic anomalies, especially since monopolists may not play by the rules. Indeed, they may even change them to their benefit–something Thiel excludes from consideration—if these self-serving gentlemen and gentlewomen leading “some of the world’s largest companies” are any indication. Perhaps all liberal/ libertarian economic models, qua descriptions or predictors of real economies, fail at this point—assuming away critical pieces of reality, in this case, that the monopolists are…gentlemen.

The author builds a case for Silicon Valley-type high tech businesses, for which his conclusions are likely to be plausible even if “by construction.” The high power business models such as those based on the network effect occur there more often than elsewhere. These business models may have the trappings of a “monopoly” naturally. Yet the issue is not to couterweigh monopoly with competition—Thiel is correct in assessing the notion of perfect competition as a construct with mostly theoretical bearing.

Manoilescu had a community view of economics in which both monopoly and competition are balanced by an overarching goal of betterment for that particular society and also included protectionism in foreign trade. Thiel may diss Rawls and perhaps lionize someone like Thatcher, for whom there was no such thing as society, but the fond commendation of his tight group of PayPal friends throughout the book would belie such a train of thought. Even if committed to the idea of mimetism in order to salve individualism, i.e., it is not a “society” but just individuals imitating each other  (Thiel admires Girard’s views) and/or each others’ “innovations” (Tarde, in the ch. 1 of his Laws: “socially, everything is either innovation or imitation”), one cannot help but think, with Veblen, why that “gregarious instinct” exists and, with Moscovici (no, not that one—his father), how do minorities such as venture capitalists gain unsizeable influence. Can society really be reduced to a discarnate digital “social media”? Or to that which always resolves itself in the actions of its components, namely, individuals? Then why is the author now distancing himself from that and focusing on investing in companies that do “real” things, e.g., biofabrication?

Furthermore, time, that great equalizer, is not patient. As economic activity helps us pursue and achieve a “joy of life”, in Georgescu-Roegen’s terms, and since “in the long run we are all dead” as Keynes keenly knew, the impacts of monopolies are probably best contained and curtailed by the same entity that grants them. Every day happens…every day—the service or product of an entrepreneur should aim to benefit society and his community alongside him and, as capitalism is essentially an open loop system, at best, and a positive loop system, at worst, some feedback, negative if need be, must be imposed. And even this enforcer needs a feedback loop, since a strong, economy-driving government is only worthwhile if “we are already agreed upon the values it serves,” as Mircea Vulcănescu showed in the 1930’s.

— Alin Voicu

References

  1. Richard Epstein. “Justified Monopolies: Regulating Pharmaceuticals and Telecommunications” and “Monopoly Dominance or Level Playing Field – The New Anti-Trust Paradox”, University of Chicago Law School, 2005
  2. Mihail Manoilescu. Forțele naționale productive și comerțul exterior: Teoria protecționismului și a schimbului internațional, Ed. Științifică și Enciclopedică, Bucharest, 1986
  3. Milton Friedman. On Monopoly, http://www.youtube.com/watch?v=tdLBzfFGFQU
  4. Joseph Schumpeter, “The Instability of Capitalism”, 1928
  5. Joseph Schumpeter. The Theory of Economic Development, 1911/1982
  6. Nicholas Georgescu-Roegen. “Dynamic models and economic growth”, 1975
  7. Alan Murray, “CEOs Call for Less Regulation, Better Infrastructure”, The Wall Street Journal, 8 Sep. 2011
  8. Mircea Vulcănescu. “Cele două Românii”, 1932, in Opere, II, 2005
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