Paul Krugman’s recent New York Times column on Amazon’s alleged market power reads like countless pro-antitrust articles, essays, and court opinions from the mid-20th century. Here’s the thrust of the dominant narrative from many decades ago about antitrust :
A currently big, successful, and well-known company that admittedly has pioneered great efficiency-enhancing production or distribution procedures – procedures that have, in turn, increased consumers’ choices and lowered the prices of those choices – is continuing to be an intrepid competitor. This firm (as Krugman himself admits about Amazon) “has not tried to exploit consumers” – yet. But don’t let it fool you! The firm will one day turn on consumers unless the government breaks it up or otherwise restricts its ability to engage in consensual capitalist acts with other firms, including its suppliers.
There are many problems with the above narrative, not least of which is the fact that such warnings have almost never proven correct, even in those many instances when the government refused to unleash the vigorous interventions that those who warn of the coming monopoly monsters insist are necessary to slay the monsters before they turn on consumers. (Indeed, I likely do not need to qualify the previous claim with the word “almost.”)
I’ve not now the time to write a post outlining the specifics of all that is wrong with the above narrative. We can all be grateful, though, that this narrative – while still popular with pundits, politicians, and professors who are insufficiently knowledgeable of economic history and the history of antitrust – is no longer the dominant narrative among antitrust scholars. Not even close. It was the dominant narrative until sometime in the 1970s. Then, the “new learning” revealed this narrative to be historically uninformed and theoretically weak. (The “new learning” on antitrust came mostly from scholarship produced at the University of Chicago and at U.C.L.A., but the Austrians also were on the same job. The brilliant work of the late Donald Dewey, at Duke then Columbia, must also be mentioned, as must that of Ken Elzinga and the late Bill Breit at the University of Virginia, and Oliver Williamson at Penn, Yale, and Berkeley.) Krugman’s column reads as if he is utterly unaware of this revolution in antitrust. It’s fine if he doesn’t accept its conclusions – many people don’t – but Krugman writes about such matters as if he fell asleep in 1960 and awakened only in 2014.
One substantive issue: Tyler Cowen likes Krugman’s point about how sales at Amazon help create “buzz” for a book. I agree with Tyler that this point is relevant. But I disagree with Krugman that Amazon’s unusual capacity to create buzz for a book is a good reason for government to intervene into Amazon’s dealings with publishers. It’s true that a book that Amazon refuses to carry, or carries only on terms less favorable to its publisher than are terms given to other books, will be less likely to get the important Amazonian “buzz.” But riddle me this: to whom does the buzz belong? Or asked a bit differently: to whom does the buzz-making capacity belong?
My answer is: Amazon. Amazon’s capacity to create or to amplify buzz for a book did not descend upon it by happenstance, like rain falling from the sky upon a pedestrian unprepared with an umbrella or raincoat. The very buzz that Amazon generates for books is a product of Amazon’s own entrepreneurial efforts – its creativity, its risk-taking, its investments, its skill at staying on top of the modern retailing world, its success at building enormous trust with consumers over the past couple of decades. Krugman, while conceding Amazon’s entrepreneurial innovativeness, nevertheless treats the capacity to create that buzz as something that somehow belongs, not to Amazon, but to the public – or to any book publisher who believes that it is being mistreated by Amazon.
Even if we ignore the immorality of forcing a company to supply on terms that it thinks unattractive a valuable good or service (here, the capacity to generate buzz) that admittedly would not exist were it not for that company’s entrepreneurial efforts, there remains the reality that such government interventions will (1) reduce Amazon’s ability to maintain its buzz-generating capacity, and (2) dampen similar entrepreneurial efforts, by other firms, in the future.
Paul Krugman apparently believes that his academic credentials and perch at the New York Times enable him to detect which business practices are and which are not best, or at least acceptable, over the long-run for consumers. But in fact Krugman is no more able to successfully assess such matters than he is able to successfully perform cardiovascular surgery or to rebuild the transmission in my car. He knows next to nothing about any of the all-important details of this market. Ditto for politicians, antitrust bureaucrats, judges, juries, and even antitrust scholars – and ditto for me, too: none of these people has enough knowledge to successfully second-guess the actual outcomes of the process of actual voluntary contracting in markets.
A final word about the careless and misleading use of the word “power” when discussing the actions of successful firms. Amazon has no power of the sort that any government has. Amazon does not coerce anyone to deal with it. Amazon’s so-called “power” is in reality its unusually great capacity to bestow economic benefits on consumers and on suppliers.
Consider an analogy: Smith invests ten billion dollars in a very risky venture to find a cure for cancer. He succeeds. He invents a pill that, taken once, cures cancer and protects against any future occurrence of any kind of cancer. The pill has no ill side effects. Once the costly work of figuring out the chemistry of the pill is completed, producing the pill for market costs a mere $1.00 per 1,000 pills produced and distributed. And even if Smith doesn’t patent his pill, it is so complex that he is correctly confident that it’ll be at least ten years before anyone else succeeds in developing a competitive product.
No one was prevented by any man-made force from doing what Smith did – either before he did it, while he was doing it, or after he succeeded in discovering the formula for a pill that cures cancer.
Smith, seeking to make as much money as possible, sells his pill at a price of $10,000 each. He refuses all entreaties from newspaper columnists, professors, preachers, and politicians to lower his price. Does Smith have “too much power”? Should Smith be forced to sell his pill on terms that Nobel laureate economists or government officials think are appropriate even when Smith thinks those terms to be inappropriate? Only someone with severe myopia and the ethics of an armed robber would answer yes.