Monday, May 28, 2018

Frank Pasquale: "Tech Platforms and the Knowledge Problem"

From American Affairs Journal, :

About the Author
Frank Pasquale is professor of law at the University of Maryland and an affiliate fellow at Yale Law School’s Information Society Project. He also served as a member of the Council for Big Data, Ethics, and Society. 
In an era of artificial intelligence and mass surveillance, however, the possibility of central planning has reemerged—this time in the form of massive firms. Having logged and analyzed billions of transactions, Amazon knows intimate details about all its customers and suppliers. It can carefully calibrate screen displays to herd buyers toward certain products or shopping practices, or to copy sellers with its own, cheaper, in-house offerings. Mark Zuckerberg aspires to omniscience of consumer desires, by profiling nearly everyone on Facebook, Instagram, and WhatsApp, and then leveraging that data trove to track users across the web and into the real world (via mobile usage and device fingerprinting). You don’t even have to use any of those apps to end up in Facebook/Instagram/WhatsApp files—profiles can be assigned to you. Google’s “database of intentions” is legendary, and antitrust authorities around the world have looked with increasing alarm at its ability to squeeze out rivals from search results once it gains an interest in their lines of business. Google knows not merely what consumers are searching for, but also what other businesses are searching, buying, emailing, planning—a truly unparalleled matching of data-processing capacity to raw communication flows.

Nor is this logic limited to the online context. Concentration is paying dividends for the largest banks (widely assumed to be too big to fail), and major health insurers (now squeezing and expanding the medical supply chain like an accordion). Like the digital giants, these finance and insurance firms not only act as middlemen, taking a cut of transactions, but also aspire to capitalize on the knowledge they have gained from monitoring customers and providers in order to supplant them and directly provide services and investment. If it succeeds, the CVS-Aetna merger betokens intense corporate consolidations that will see more vertical integration of insurers, providers, and a baroque series of middlemen (from pharmaceutical benefit managers to group purchasing organizations) into gargantuan health providers. A CVS doctor may eventually refer a patient to a CVS hospital for a CVS surgery, to be followed up by home health care workers employed by CVS who bring CVS pharmaceuticals—all covered by a CVS/Aetna insurance plan, which might penalize the patient for using any providers outside the CVS network. While such a panoptic firm may sound dystopian, it is a logical outgrowth of health services researchers’ enthusiasm for “integrated delivery systems,” which are supposed to provide “care coordination” and “wraparound services” more efficiently than America’s current, fragmented health care system.

The rise of powerful intermediaries like search engines and insurers may seem like the next logical step in the development of capitalism. But a growing chorus of critics questions the size and scope of leading firms in these fields. The Institute for Local Self-Reliance highlights Amazon’s manipulation of both law and contracts to accumulate unfair advantages. International antitrust authorities have taken Google down a peg, questioning the company’s aggressive use of its search engine and Android operating system to promote its own services (and demote rivals). They also question why Google and Facebook have for years been acquiring companies at a pace of more than two per month. Consumer advocates complain about manipulative advertising. Finance scholars lambaste megabanks for taking advantage of the implicit subsidies that too-big-to-fail status confers.

Can these diverse strands of protest and critique coalesce into something more durable and consistent? In what follows, I explore two channels for the social and economic discontent likely to intensify over the next few decades. I start by giving an account of where we are: a hierarchical, centralized regime, in which corporate power is immense, and in which large national apparatuses of regulation seem to be the only entities capable of reining it in. Against this economic reality, I can at present discern two vital lines of politico-economic critique.

Populist localizers want a new era of antitrust enforcement to break up giant firms. These Jeffersonian critics of big tech firms, megabanks, and health care behemoths are decentralizers. They believe that power is and ought to be distributed in a just society. They promote strong local authorities to counterbalance the centripetal accumulation of wealth and power in multinational firms.
Others have promoted gigantism as inevitable or desirable, and argue that we simply need better rules to cabin abuses of corporate power. Today’s Hamiltonians argue that massive stores of data are critical to the future of artificial intelligence—and thus to the productive dynamism of the economy. They focus on improving the regulation of  leading firms rather than on breaking them up.
Jeffersonians and Hamiltonians express very different views on what an optimal economy looks like. In the long run, their visions are probably irreconcilable. In the short run, however, both sets of reformers offer important lessons for policymakers grappling with the power of massive tech, finance, and health care firms. This essay explores these lessons, specifying where each vision has comparative advantage.
The Jeffersonian/Hamiltonian Divide
The tech policy landscape is often bleak. Corporate-funded think tanks strive to keep reform options within a relatively narrow window of tweaks and minor changes to existing law. The curse of overspecialization in the academy also keeps many law and policy professors on a short leash. Nevertheless, there are pockets of vision, scholars and researchers who offer big-picture approaches. Clashes among centralizers and decentralists can be particularly illuminating.

The Jeffersonian school has coalesced around the problem of lax antitrust enforcement in the United States, and competition promotion more generally. The Open Markets Institute (OMI), kicked out of the New America foundation for being too hostile to Google, has led the charge. Leaders at OMI, like Matt Stoller and Barry Lynn, argue that the Federal Trade Commission (FTC) should break up Facebook and establish Instagram and WhatsApp as competing social networks. Lina Khan, also at OMI, has written an exhaustive critique of Amazon’s gigantism that is already one of the Yale Law Journal’s most downloaded articles. The emphasis on subsidiarity in Catholic Social Thought is also a font of decentralist theory, often invoked by conservatives to protect the autonomy of local authorities and civil society institutions.

The Hamiltonians include traditional centrists (like Rob Atkinson, who recently coauthored Big Is Beautiful with Michael Lind), as well as voices on both ends of the political spectrum. Recapitulating Schumpeter’s praise of monopoly as a spur to growth, Peter Thiel’s Zero to One is a paean to monopoly power, justifying its perquisites as the just and necessary reward for dramatic innovation. On the left, Evgeny Morozov does not want to see the data stores of the likes of Google and Facebook scattered to a dozen different versions of these services. Rather, he argues, they are natural monopolies: they get better and better at each task they take on when they have access to more and more pooled data from all the tasks they perform. The ultimate Left logic here is toward fully automated luxury communism, in which massive firms use machine learning and 3-d printing to solve hunger, save the environment, and end the problem of scarcity. Left centralizers also argue that problems as massive as climate change can only be solved by a Hamiltonian approach.

The Jeffersonian and Hamiltonian visions lead to very different policy recommendations in the tech space. Jeffersonians want to end Google’s acquisition spree, full stop. They believe the firm has simply gotten too powerful. But even some progressive regulators might wave through Google’s purchase of Waze (the traffic monitoring app), however much it strengthens Google’s power over the mapping space, in hopes that the driving data may accelerate its development of self-driving cars. The price of faster progress may be the further concentration of power in Silicon Valley. To Jeffersonians, though, it is that very concentration (of power, patents, and profits) in megafirms that deters small businesses from taking risks to develop breakthrough technologies.

Facebook’s dominance in social networking raises similar concerns. Privacy regulators in the United States and Europe are investigating whether Facebook did enough to protect user data from third-party apps, like the ones that Cambridge Analytica and its allies used to harvest data on tens of millions of unsuspecting Facebook users. Note that Facebook itself clamped down on third-party access to data it gathered in 2013, in part thanks to its worries that other firms were able to construct lesser, but still powerful, versions of its famous “social graph”—the database of intentions and connections that makes the social network so valuable to advertisers.

For Jeffersonians, the Facebook crackdown on data flows to outside developers is suspicious. It looks like the social network is trying to monopolize a data hoard that could provide essential raw materials for future start-ups. From a Hamiltonian perspective, however, securing the data trove in one massive firm looks like the responsible thing to do (as long as the firm is well regulated). Once the data is permanently transferred from Facebook to other companies, it may be very hard to ensure that it is not misused. Competitors (or “frenemies,” in Ariel Ezrachi and Maurice Stucke’s terms) cannot access data that is secure in Facebook’s servers—but neither can hackers, blackmailers, or shadowy data brokers who are specialists in military-grade psyops. To stop “runaway data” from creating a full-disclosure dystopia for all of us, “security feudalism” seems necessary.

Policy conflict between Jeffersonians and Hamiltonians, “small-isbeautiful” democratizers and centralist bureaucratizers, will heat up in coming years. To understand the role of each tendency in the digital sphere, it is helpful to consider their approaches in more detail.
The Jeffersonian Critique of Absentee Ownership
The largest, most successful firms of digital capitalism tend to serve as platforms, ranking and rating other entities rather than directly providing goods and services. This strategy enables the platform to outsource risk to vendors and consumers, while it reliably collects a cut from each transaction. Just as a financial intermediary profits from transaction fees, regardless of whether particular investments soar or sour, the platform pockets revenues on the front end, regardless of the quality of the relationships it brokers.

This intermediary role creates numerous opportunities for platforms. For example, they police transactions and adjudicate disputes—actions that used to be the preserve of governments. I call this powerful new role of platforms “functional sovereignty,” to denote the level of power a private firm reaches when it is no longer one of many market participants, but instead the main supervisor and organizer of actual market participants. Platforms like Amazon and Google are functionally sovereign over more and more markets, playing a quasi-governmental role as they adjudicate conflicts between consumers, marketers, content providers, and an expanding array of third and fourth parties.

Personalization is a mantra for the platforms’ digital strategists, who tend to assume it is a “win-win” proposition. For example, tailored search results both guard Google’s users against distraction and tend to connect them to products they want. Yet online markets premised on ever-greater knowledge of our desires, “pain points,” income level, and wealth can easily tip toward exploitation. Platforms have an interest in intensively monitoring and shaping certain digital spheres in order to maximize their profits (and, secondarily, to maintain their own reputations). In their ceaseless quest to annex ever more sectors into their own ecosystems, however, they all too often bite off more than they can chew. They tend to overestimate automation’s ability to process all the demands that modern marketplaces generate.

This tendency has led to another problem, familiar from the history of monopolistic enterprise: absentee ownership. When a massive firm buys a store thousands of miles away from its headquarters, it owns the store and will seek profit from it, but it usually only assesses its performance in crude terms, with little interest in the community in which the store is embedded. Once under new ownership, the store may neglect traditional functions it had previously served, in order to maximize revenue in accordance with its absentee owner’s demands. In contrast, a present owner, resident in the community, is more likely to run the store in a way that comports with community interests and values, since the present owner will himself experience any improvement or deterioration in the community....MORE