Denaturalising digital capitalism

One of the most pressing issues we confront when analysing the digital economy is a pronounced tendency towards oligopoly which makes a lie of an earlier generation’s utopian embrace of the Internet as a sphere of free competition and a driver of disintermediation. There are important lessons we can learn from platform studies about the reasons for this, concerning the architecture of platforms and the logic of their growth. But it’s important we don’t lose sight of how these dynamics are reliant upon existing legal and economic processes which predate the ‘digital revolution’. As Jonathan Taplin points out in Move Fast and Break Things, their competitive advantage was reliant upon a specific regulatory environment that was far from inevitable. From pg 79:

The economist Dean Baker has estimated that Amazon’s tax-free status amounted to a $ 20 billion tax savings to Bezos’s business. Baker notes, “In a state like New York, where combined state and local sales taxes average over 8.0 percent, Amazon could charge a price that was 1.0 percent below its brick and mortar competition, and still have an additional profit of 7 percent on everything it sold. That is a huge deal in an industry where profits are often just 2–3 percent of revenue.” Bezos, eager to preserve this subsidy, went to work in Washington, DC, and got Republican congressman Christopher Cox and Democratic senator Ron Wyden to author the Internet Tax Freedom Act. The bill passed and was signed by President Bill Clinton on October 21, 1998. Although not barring states from imposing sales taxes on ecommerce, it does prevent any government body from imposing Internet-specific taxes.

This is only one example. An adequate understanding of the digital economy requires that we identify the regulatory environments within which each category of tech firm operates and how this has contributed to their thriving or  struggling. When we combine this institutional analysis with platform dynamics, we can begin to account for the level of market concentration which Taplin summarises on pg 119-120:

In antitrust law, an HHI score —according to the Herfindahl-Hirschman Index, a commonly accepted measure of market concentration —is calculated by squaring the market share of each firm competing in a given market and then adding the resulting numbers. The antitrust agencies generally consider markets in which the HHI is between 1,500 and 2,500 to be moderately concentrated; markets in which the HHI is in excess of 2,500 are highly concentrated. The HHI in the Internet search market is 7,402. Off the charts.

He goes on to argue on pg 121-122 that this situation helps generate a cash glut with serious systemic consequences:

The problem is that the enormous productivity of these companies, coupled with their oligopolistic pricing, generates a huge and growing surplus of cash that goes beyond the capacity of the economy to absorb through the normal channels of consumption and investment. This is why Apple has $ 150 billion in cash on its balance sheet and Google has $ 75 billion. These enterprises cannot find sufficient opportunities to reinvest their cash because there is already overcapacity in many areas and because they are so productive that they are not creating new jobs and finding new consumers who might buy their products. As former treasury secretary Lawrence Summers has put it, “Lack of demand creates lack of supply.” Instead of making investments that could create new jobs, firms are now using their cash to buy back stock, which only increases economic inequality.

In other words: the inequality which digital capitalism generates is only contingently a function of technology.

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