First posted May 28, 2018.
From American Affairs Journal,
Summer 2018 / Volume II, Number 2:
By Frank Pasquale
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.
Friedrich von Hayek, the preeminent
theorist of laissez-faire, called the “knowledge problem” an insuperable
barrier to central planning. Knowledge about the price of supplies and
labor, and consumers’ ability and willingness to pay, is so scattered
and protean that even the wisest authorities cannot access all of it. No
person knows everything about how goods and services in an economy
should be priced. No central decision-maker can grasp the idiosyncratic
preferences, values, and purchasing power of millions of individuals.
That kind of knowledge, Hayek said, is distributed.
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
