In a 2012 campaign speech, former U.S. President Barack Obama correctly pointed out that the market economy relies on cooperation and the division of labor. Anyone familiar with Adam Smith’s discussion of the division of labor would view that comment, at face value, as uncontroversial. Adam Smith had written (1976, p. 30),
In civilised society he stands at all times in need of the co-operation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons.
President Obama, however, was scoring a political point, not making an economic argument. He would have been entirely correct if he had stated, “Somebody else helped make that happen.”
The fact remains that the notion of individuals cooperating under the division of labor is not controversial in economics. What Adam Smith had argued is that individuals cooperated even in the absence of conscious control and intentional planning: “he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.” This latter notion, however, is somewhat controversial. It is widely believed that in the absence of planning and some conscious control, market economies will under-provide some goods and services such as education and roads: the very things President Obama was referring to. There is a large, unresolved, empirical, and theoretical literature that addresses the issue of so-called public goods.
This chapter addresses a special case of the public goods literature that extends beyond the state having to provide basic education and roads, and generally accepted public goods such as courts of law and enabling regulation and standards. Even economists such as Friedrich Hayek had argued these goods and services were appropriately within the power of the state (Hayek, 1960, ch. 15). An argument promoted by Mariana Mazzucato (2013), however, suggests a far greater role for government in the market economy. We do not intend to provide a critique of her original contribution (see McCloskey & Mingardi, 2020) but rather to provide a critique of an extension to the notion of the entrepreneurial state theory. That is to address a question posed by Mazzucato (and others) in a 2021 essay: how should the entrepreneurial state regulate the platform economy?
Innovation policy has always operated at the intersection of both industrial and growth policy (i.e., in the Schumpeterian tradition, which emphasizes the value or necessity of monopoly to create incentives to private investment in innovation) and antitrust or competition policy, which by construction seeks to resolve the economic problems caused by monopoly or imperfect competition. Joseph Schumpeter (1942, p. 91) was himself particularly clear about the nature of this trade-off:
There is no general case for indiscriminate ‘trust-busting’ or for the prosecution of everything that qualifies as a restraint of trade. Rational as distinguished from vindictive regulation by public authority turns out to be an extremely delicate problem which not every government agency, particularly when in full cry against big business, can be trusted to solve.
But the platform economy—and platform economics—which is an innovation that we mostly owe to the digital economy, brings a new angle to this trade-off. Platforms (Rochet & Tirole, 2003) are in almost all cases firms, and when successful they are very large firms. For instance, in early 2021, of the ten largest firms in the world, seven are platforms (Apple, Microsoft, Amazon, Alibaba, Alphabet, Facebook, Tencent). This represents a relatively recent structural shift. Just two decades ago, most of the world’s largest companies were industrials, with only a handful of platforms (e.g., Visa). The central reason for this transformation is that digitalization lowers transaction costs (Goldfarb & Tucker, 2019). Following Coasean’s reasoning, this lowers levels of vertical scope, resulting in vertical disintermediation as those wanting things, for instance, can be matched by the platform directly with those supplying things, where the platform is able to be sufficiently attractive to both sets of economic agents, often by engineering side payments or creating the institutional conditions to incentivize all the relevant parties to turn up. A platform, in this sense, is a business that does not so much produce things, like a factory, but rather produces coordination, getting everyone together and reducing barriers and costs to transactions. Digital technologies thus reduce transaction costs, which sets in motion a competitive innovative process leading to the disintegration of industries and the rise of platforms. Those platforms are now, in some instances, the size of the industries they vertically disintegrated and disintermediated. But at the same time, they are no less competitive, as platforms also compete with each other and continually seek to displace each other. For instance, MySpace, an early pioneer of social media, was disrupted by a startup called Facebook, which grew into one of the largest companies in the world but is now under threat from a range of new platforms that include photo-sharing websites and online gaming companies. In each instance, platforms seem like monopolies, but as Schumpeter (1939, p. 107) explained, “practically every enterprise [is] threatened and put on the defensive as soon as it comes into existence” and especially so when that business earns huge profits that can be competed away through further innovation.
But platforms are critical economic infrastructure for the digital economy, providing economic foundations such as markets and matching, search, money and payments, and identity and distributed communication (i.e., social media). These large digital platform firms provide services that were often provided by governments in the industrial economy or were heavily regulated when privately held. So while many digital economy platform firms are large, the relevant comparison is not just to the industrials of the past, but to the comparative size of economic infrastructure organizations, many of which were utilities, often government owned. All the new platforms are the result of a highly competitive Schumpeterian innovation process and operate in contestable markets, in the sense that none hold monopoly licenses or patents, or Royal charters, or are designated and protected national champions. This situation is not true everywhere, for example, in China.)
However, as platforms, they are undeniably big. And that bigness has made them targets of new variants of progressive innovation and competition policymaking. There are two overarching forms of this: the new mission-oriented and broadly Schumpeterian innovation policy, as led by Mariana Mazzucato, and the so-called hipster antitrust policy, as led by Lena Kahn. We shall consider these in turn.
1.1 The Entrepreneurial State as a Regulator
In a 2021 Project Syndicate essay, Mazzucato, Kattel, O’Reilly, and Entsminger set out arguments for regulating the “platform” economy. Readers are told,
There is a growing consensus that platforms have been abusing their power, driving profits by exploiting consumer privacy, crushing the competition, and buying up potential rivals.
Yet, there is no evidence that consumer welfare is being compromised. Therefore,
Regulators therefore need to look at the other side of the equation, particularly the supplier marketplace. Even if consumers are not being harmed directly, there is the question of how Google treats content creators, how Amazon treats sellers, how Uber treats drivers, and how Facebook treats merchants. …
Because digital platforms tend to fall outside of the existing antitrust framework, we need a new tool kit, with new metrics of market power, and a clear definition of platform power in particular.
But outdated theories are only one part of the story. When modified to account for new realities, market power arguments tend to conclude that the major platforms should be broken up, and key mergers rolled back. But if we push these new theories further, it also follows that some digital services should be considered social infrastructure.
At face value this is an unusual argument. Mazzucato et al. immediately concede that there is no argument that these platforms are outside the scope of existing antitrust laws and concede that these platforms do not appear to harm consumers (not too much, anyway). Yet they still argue that antitrust, of some description, should apply to these organizations. It seems these platforms may be harming other players in the economy: suppliers, contractors, and the like.
It is true that the platform organizational form is somewhat new. Historically, they have not obviously dominated the economy as they now do. Mind you, banks and media firms are identifiable as platform organizations, but economists have only taken notice of the unique features of this organization form since Rochet and Tirole (2003). It is intriguing that Mazzucato et al. make no effort to argue that this organizational form may disadvantage consumers.
But with Google, Amazon, Facebook, and others offering ‘free’ services to their users, the calculus has changed. Even if the leading platforms were to pay their users, they could still end up ahead, because one of the main sources of value in these markets lies in amassing user-generated data with which to sell or drive targeted advertising.
The benefits of their business model are so great that consumers cannot be at a disadvantage. At best, it can be argued that consumers get too little from the exchange, but not that they are worse off for the exchange. This leaves Mazzucato et al. having to introduce a different set of arguments to justify (increased) regulatory control over platform organizations. Having already determined that the large digital platforms should be either broken up or, in some instances, nationalized—that is how we interpret the notion that they are “social infrastructure”—Mazzucato et al. correctly point out that platform organizations are a different form of organization to those policymakers are used to dealing with. Quite rightly, policymakers should re-evaluate their assumptions and expectations relating to the regulation of these different organizational forms. Yet Mazzucato et al. never provide that analysis. They declare platforms organizations to be different, concede they do not harm consumers, and proceed to evaluate them as if they did cause harm and were in the need of additional regulation.
In the first instance, they argue that platforms have some market power over suppliers and merchants. This is an argument about unequal bargaining power. They also argue that many of the profits earned by these platforms are “rent” in an Adam Smith sense; that they are not earning returns from adding to the productive capacity of the economy (i.e., profit) but that they are extracting value from their consumers. Mazzucato et al. also appear hostile to the notion of advertising:
If personal data is used for micro-targeted advertising, we should ask whether the platform is in the business not only of identifying but of creating consumer desires through subtle forms of psychological manipulation.
Finally, it should not be overlooked that the European Union (and the United Kingdom) would like to increase the tax burden placed on (predominately) U.S. organizations. While Mazzucato et al. do not explicitly discuss taxation, it is clear that increased taxation forms part of the general agenda. The European Union, for example, is attempting to use competition policy to increase Apple’s tax burden in Ireland.