My notes on Pasquale, F. A. (2018). Tech Platforms and the Knowledge Problem. American Affairs, 2(2)

The most philosophically important aspect of Hayek’s work was his epistemological objection to central planning. He argued that the market was indispensable because it permitted distributed knowledge of a sort which a centralised decision maker couldn’t possibly hope to reconstruct. In this short paper, Frank Pasquale considers the renewed possibility of centralised planning which emerges when private tech giants have a gods eye view of consumer and business activity within their domains. As the examples he cites illustrate, this involves business-to-business as well as business-to-consumer insight:

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.

There is a parallel integration taking place in finance and insurance who increasingly operate in the manner of the platform. As he writes, “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”.

We now confront “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”. What he calls populist localizers, Jeffersonians,  want a new era of antitrust to break up the tech giants, whose concentration they see as impeding new entrants and further technological innovation. In contrast the Hamiltonians argue that scale is essential to technological development (e.g. machine learning) and that we simply need to update our regulatory frameworks to take account of these new developments. Though Pasquale’s suggestion interoperability standards could address their concern is an interesting one e.g. by allowing diverse social networks to interconnect in the manner of mobile telephone networks.

This doesn’t follow a left/right divide. As he notes, a critic like Evgeny Morozov frames tech giants as natural monopolies which “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”. This is a reason to socialise them rather than to break them up into smaller fragments which couldn’t cope close to replicating their functionality at scale. In contrast, the Jeffersonians existing within the boundaries of contemporary statism, calling on the Federal Trade Commission to break up a firm like Facebook. For Jeffersonians concentration of data seems like a private data monopoly. For Hamiltonians it seems like a necessary measure to secure the data and mitigate the risks it generates. Understanding the basis of this disagreements rests on what a platform is:

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 casts them in the role of policing the platform and adjudicating disputes, described by Pasquale as functional sovereignty when a private firm takes on functions previously confined to the nation state. They tend to assume these issue can be resolved through automation and generally take an absentee approach to what they manage. But this doesn’t matter under current antitrust law which seeks to protect competition, not competitors. The only concern is whether prices are going up or down. As Pasquale explains, this short-termism fails to take account of how superior offerings might have been in existence were it not for the competitive advantage of big tech:

To see the practical effects of this obsession with the short-term, imagine searching for “weather” in Google, and instantly seeing its own weather forecast filling your mobile screen. Had it linked to three forecasting sites in that precious screen space, it might have directed more exposure and advertising revenue to sites with diverse interfaces, more or less information, or other variations. For example, the site WeatherSpark used to give a beautifully precise image of storms’ movement over time—the perfect visual analogue to AccuWeather’s minute-by-minute forecasts of rain or clear skies. But WeatherSpark no longer offers that service, and who knows how many other start-ups gave up on occupying this space. To establishment antitrust authorities, there is no ground to intervene—consumers get the basics of weather from Google’s interface, and it is free. It’s a short-termist outlook that omits long-run considerations in the name of a presentist scientism. In their worldview, there is no room for argument about whether better or worse alternatives do or should exist. Antitrust is supposed to protect “competition, not competitors”—and a singular lack of concern for quality translates into profound lack of interest in whether current or future competitors could do a better job than a digital behemoth. But how can we know if there is competition, if there are no competitors to provide it?

For Hamiltonians the solution is not breaking up these firms but treating them as public utilities which can facilitate others. Regulators accepted the massiveness of power generation and phone networks but with the necessity of offering a countervailing power which could control their operations. In fact the centralisation of big tech could even be a beneficial thing in the move towards taking public control:

In a recent podcast, the socialists of Chapo Trap House joked that they were happy to see Amazon consolidate power. Once it takes over every business in the country, it will be easy to “cut off the head” and simply impose government control over the economy. “Free Whole Foods hot bar for everyone!” was the imagined denouement. Similarly, if all the private health insurers in the United States merged, the stage would finally be set for “single payer”: the government need only take over the one insurer left standing.

The Hamiltonian vision “can be the economic equivalent of geoengineering—an embrace of the radically new and large-scale, arising out of the sense that inequalities and climate change are such massive problems that only rapid technological advances can solve them”. In contrast to the precautionary principle of the Jeffersonians who question “whether any entity should accumulate the power necessary to, say, compare everyone’s genomes, convert millions of workers’ movements to patterns of behavior programmable in robotics, or maintain social credit scores on all citizens”. Interestingly, Pasquale places some of the blame on the expectations of investors:

Investors demand a fantasy of monopolization: that their firm not merely occupy a field, but develop “moats” against entrants in order to guarantee both present returns and future growth. The day-to-day reality of operational budget constraints, however, pushes the same firms toward the pathologies of absentee ownership.

There’s a wonderful piece in the Atlantic talking about the accumulating scandals through which “the tech industry has gone from bright young star to death star”, with increasing public knowledge leading to a recognition that “Silicon Valley companies turned out to be roughly as dirty in their corporate maneuvering as any old oil company or military contractor”. It raises a crucial question: what happens if the controversies continue to accumulate while people remain inclined to use products upon which they have become profoundly dependent? How will these firms come to be seen if widespread rejection of their business practices co-exists with widespread use of their services? As Alex Madrigal puts it, “what if the news stays bad, but the people using their products can’t extract themselves from the platforms tech has built?” It’s a fascinating question for anyone interested in the politics of Silicon Valley and we could see this collapse of the tech mythology as facilitating a repoliticisation of (big) tech: things which were successfully framed as unalloyed social goods, so obviously beneficial to society as to be outside dispute, come to be contested and debated, as well as (we hope) subject to legal intervention and the construction of regulatory regimes.

Madrigal draws a fascinating parallel with the railroad network, using the work of the historian Richard White. The hyperbole with which the internet was greeted was once matched by a transcontinental rail network which opened up a seemingly infinite vista of possibilities to Americans, expanding the scope of social life and coming to define many people’s sense of the age in which they lived. However as controversies accumulated in the face of their novel practices (particularly the formation of their monopolies and the political lobbying operations used to defend them), they came to be widely recognised as detrimental to social life and this once lauded system was increasingly despised. The collapse of the mythology surrounding them “helped create an entire political ideology: the progressivism of the late 19th and early 20th centuries”. Much as the railroads generated the richest men of the time while being the object of vast political opposition, big tech increasingly finds itself the object of resistance while its founders enjoy the fruits of the “world-historic empires” they have built. The question this leaves is how we can ensure the collapse of the tech mythology goes hand-in-hand with a reining in of the apparatus that has been built and the defensive elites who have made their fortunes from it.

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.

A great analysis of a hugely important case being heard in the near future:

The immediate threat takes the form of an antitrust class action lawsuit against its co-founder and CEO, Travis Kalanick, which will be litigated in the Manhattan courtroom of Federal District Judge Jed Rakoff starting on November 1. At issue is Uber’s mobile app, through which customers order on-demand car rides, and which customer Spencer Meyer alleges amounts to a price-fixing conspiracy. The question is whether independent Uber drivers using the app, all charging the same price and implementing “surge pricing” at the same time, are violating the Sherman Antitrust Act’s prohibition against any “combination … or conspiracy … in restraint of trade.”

The lawsuit puts Uber and other companies in the online economy on a collision course with antitrust law. It also raises fundamental questions about how American companies treat their workers. It’s not surprising that tech companies can make a great deal of money by skirting employment, antitrust, and even anti-discrimination laws. But do we want them to? Some argue that the Uber conundrum calls for the creation of a third “independent worker” category of employment that gives it the control it needs to make its business model work, while safeguarding the flexibility its drivers prize. If courts and policymakers agree, it would effectively carve out a tech-sector exception to the regulatory principles governing the economy since the New Deal and the Gilded Age.

http://prospect.org/article/uber’s-antitrust-problem

The questions asked at the end are precisely the ones currently preoccupying me:

 Are the new behemoths of the tech sector innovators that make the economy more efficient by “disrupting” antiquated business models? Or are they just the trusts of a second Gilded Age, their new-fangled apps the equivalent of the railroad networks that monopolized commerce and access to markets 126 years ago, when the Sherman Act first took effect?

http://prospect.org/article/uber’s-antitrust-problem

From Humans Need Not Apply, by Jerry Kaplan, pg 101-102:

there’s another reason the financial markets value the company at more than six hundred times earnings (2013), when the average is around twenty times earnings: they look forward to the inevitable time when the company extracts monopoly prices after locking in its customers and scorching the earth of competitors. And this is as it should be. Shoppers aren’t stupid; they will go where they get the best all-around deal, including convenience, service, and other factors. They aren’t concerned with whether their short-term purchasing behavior may restructure the retailing landscape to the detriment of future consumers any more than the original residents of Easter Island worried about whether the trees they chopped down for firewood might contribute to a desolate, bleak landscape for their descendants.