Breaking up Monopolies

In a comment to a recent post on monopolies, Viveka wrote, “I will cheer the day a Google or Amazon is broken up into a bunch companies. That day is not far off.”

As the old witticism goes, be careful what you wish for because you may get it. Don’t assume that the breaking up of very large corporations because they have market dominance is necessarily a  good thing. Large corporations are large for reasons that we may not appreciate — especially if we think like engineers. Engineering is a fine and necessary profession, and engineers have enriched the world in countless ways. But it has its limitations.

Thinking like an engineer works wonders in designing and inventing machines. Thanks to engineers and inventors, we have washing machines, commercial jetliners and smartphones. Those have to be engineered from inanimate matter. But engineering of society is a different matter altogether. Society is not a machine that is amenable to design and engineering.

The problem is that society is composed of people, and people are not just animate but they also have their own will and volition. The curious task of economics, as Friedrich August von Hayek pointed out, is to demonstrate to men how little they really know about what they imagine they can design. A passing familiarity with the fundamental “laws” of economics would do wonders in moderating the infinite arrogance that social engineers have in their ability to reform society.

Society evolves via a process that most closely reflects biological evolution. That involves innumerable trials none of which are consciously designed to improve the system and most of which end up badly. Through sheer luck, a few of the trails work out for the best and the results are transmitted to the succeeding generations. In the words of Adam Fergusson, the advances of society “were the result of human action but not the execution of human design.” (1782)

The core idea is of un-designed order. Order emerging without orders.

What’s the relevance of that idea in the context of what if anything should be done to break up monopolies? It is simply this: let monopolies and market-dominant firms alone. Don’t try to improve the situation by breaking them up. Trust the processes which brought them into existence to take them out when the time is right for them to go out of existence.

What justifies our trust? First, monopolies die. They always have. But just because they have done so in the past doesn’t guarantee that they will die in the indefinite future. Here we have to not just rely on empirical evidence but have to explain that empirical fact. Our explanation of the past demise of monopolies will provide the justification for the claim that monopolies of the future will not persist indefinitely.

The explanation turns on the fact that the system is dynamic, not static. The world is contingent and therefore fundamentally unpredictable. Novel technologies emerge. Those novel technologies disrupt and create opportunities for entrants that challenge the dominance of the incumbents. Those disruptions are external shocks to the system. They are unpredictable. We cannot predict what they will be but we can be confident that they will occur because that’s the nature of the universe. It’s the nature of the natural universe and also of human society.

The dinosaurs appeared 200 million years ago and ruled the earth for 135 million years. One day roughly 66 million years ago, a 10-km wide asteroid hit the earth and created the Chicxulub crater in the Yucatán Peninsula in Mexico. That was unpredictable.

The climate changed and that led to the Cretaceous–Paleogene (K-Pg) extinction event which saw the mass extinction of 75% of plant and animal species on Earth. Until then, the dinosaurs had “market domination” and then all the non-avian dinosaurs died for no fault of their own. Thanks to that K-Pg event, mammals began to flourish, and eventually we humans are geo-engineering the earth now.

The earth received an external shock. After a shock, the system settles down to a new equilibrium — until the next shock. Something similar happens to the order that generally prevails in our economic system. Small firms become big and some even dominate the sector. But eventually, technological advances deliver the external shock that take them out. Just like the non-avian dinosaurs.

Should governments not take them out by design and not wait for unpredictable “external shocks”? The simple answer is no because governments are not superhumanly wise and foresighted. They actually do more harm than good.

(This is long enough and I will continue the rest later.)



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