Capitalism Vs. Competition

Peter Thiel is one of our smartest investors. He helped build Pay Pal and was the first real outside investor in Facebook. He’s also an uber libertarian. He has a plan to build islands outside the range of any government to house his enterprises. He’s about to publish a book which says that we should embrace monopoly digital capitalism.

Nevertheless, devaluing competition is a central theme of Thiel’s new book. He asserts that “capitalism and competition are opposites,” because “under perfect competition, all profits get competed away.” He exhorts entrepreneurs to seek out monopolies, concluding, “All happy companies are different: Each one earns a monopoly by solving a unique problem. All failed companies are the same: They failed to escape competition.”

I wrote, what for me was a fairly scholarly article on this idea of digital monopoly capitalism last spring. But now I realize why Thiel and Sergey Brin and Mark Zuckerberg are libertarians. They like monopolies like Facebook and Google and they don’t want the government regulating them. It may very well be that certain types of digital firms are natural monopolies. The contrast with the movie, TV or Music business, where there is ample competition, couldn’t be more stark.

This tends to be the case in industries where capital costs predominate, creating economies of scale that are large in relation to the size of the market, and hence creating high barriers to entry; examples include public utilities such as water services and electricity. While in other situations a monopoly can lead to restricted output, higher-than-necessary prices, and production that is inefficient (at higher average cost) than would occur with many producers, a firm that is a natural monopoly produces at lower average cost than would be possible with multiple firms.

Certainly one could argue that both search engines and Broadband ISP’s fall under this model. At the start of the American communications revolution we decided that both telegraph and telephone services were natural monopolies, because having hundreds of wireline providers was ridiculously inefficient.

New York City-1890

New York City-1890

What we did do was regulate both Western Union and AT&T. The result was an age of extreme innovation. As I have written before, all you have to do is look at the AT&T Research Lab during it’s most regulated era.

Bell Labs was a subsidiary of the monopoly telephone company, A T & T. Because A T & T didn’t have to spend billions on advertising (A T & T spent almost $2 Billion last year), they could dedicate a huge budget to their R & D Lab. As written in The Idea Factory: Bell Labs and the Great Age of American Innovation  the transistor, the microchip, the solar cell, the microwave, the laser, cellular telephony all were invented along with myriad other things we take for granted.

As a society we are going to have to decide fairly soon whether Comcast, Google, Facebook and Amazon are some sort of natural monopoly that needs to be regulated or whether we are going to pretend that competition and capitalism can exist in harmony in the digital age. Peter Thiel knows that’s a fantasy, but do the regulators in Washington?

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