26 March 2018

The case against breaking up Google


The European Union Commission is once again mulling the idea of breaking up Google. The move is in keeping with the EU’s instinctive suspicion of the tech giants and the fact that they are far more worried about managing that which exists rather than leaving well alone in order that new tech might arrive.

But the Commission’s consideration of the idea that Google should be broken up is evidence that they also misunderstand how antitrust really works.

It is indeed entirely possible that some actors in the economy gain “too much” economic power to the detriment of the rest of us. It’s a reasonable enough use of government to prevent or regulate that. The deployment of such power leads to the gaining of economic rents, that’s cash taken out of your and my wallet. Yes, sure, let’s stop that happening.

However, the Commission appears to have fallen into the trap of thinking that the question of whether intervention is wise or not is simply a matter of whether that economic power exists. But that is an insufficient justification. There also needs to be a misuse of that power.

This is not to go quite as far as Robert Bork and some of the Austrian economists and insist that all monopolies, all centres of economic power, eventually get killed off by technological change. They’re right but eventually can mean a very long time. Instead our test comes in three parts, an economic equivalent of Tony Benn’s questions for politicians. Is there economic power? If so, is it being used? Finally, is the use of it detrimental to consumers? It is only if we’ve three affirmatives lined up in a row there, as with the ducks above the mantlepiece, that the shotgun of state power needs to be used.

To switch examples consider the story of Chinese rare earths. Back in 2009 the country produced some 97 per cent of these interesting minerals. That’s the existence of potential economic power. They then decided to try and exercise it, limiting exports in the hope of raising prices and also attracting the processing industry into China. This didn’t work – rare earths aren’t earths nor rare so two mines opened up outside China. That economic power was broken and rare earths are cheaper today than in 2009.

China’s position of economic power was illusory. It couldn’t be exercised without attracting the competition that quickly undermined it.

As a result, there was no need for regulation. The market took care of it as it does many other matters.

Then there’s the third step. Imagine that the power exists, is exercised and works. We still need to prove that this is to the detriment of consumers. That isn’t something we can say about the tech companies as yet. That Google favoured its own shopping search, as the EU found last year, but did that harm consumers? No, not did it harm competitors, but consumers? To take a more recent claim, does Android usage requiring the loading of Google’s search engine do anything to harm consumers?

The Commission doesn’t make much of an effort to demonstrate that harm.

The difficulty comes from the fact that the EU’s antitrust position is a century out of date. Economic power must be curtailed – that’s what led to the breaking up of Standard Oil. That Standard hugely benefited consumers was ignored. The same mistake is being made now.

No, we cannot just call network effects into contention and thus insist upon intervention. If there are these networks effects, another description being ever increasing economies of scale, then the naturally efficient size of a business will be a monopoly – or near to one at least. At which point the activists swing into action and insist upon state control. But the very fact of a monopoly being the efficient size tells us that consumers aren’t being harmed by the mere existence. They could be, sure, by the exercise of the power to consumer detriment, but that’s the part we have to prove to justify action. That’s not the part that these threats to break up Google are even considering let alone proving.

The Commission is some 100 years out of date in its analysis of monopoly and antitrust. If they can prove consumer harm then fair enough, let’s discuss what is to be done. But until then their toughening stance on Google is just an expression of a failed idea.

Tim Worstall works at the Adam Smith Institute and Continental Telegraph.