In 1998, the U.S. government filed antitrust charges against Microsoft. Today, with a new Department of Justice antitrust case filed against Google, it's worthwhile to track the eerie similarities between these cases in order to understand how one informs the other and vice versa. In order to walk us through both cases, we invited two people on the show who were on opposing sides of the Microsoft case: Robert Topel Distinguished Service Professor of Economics from the University of Chicago and expert witness for Microsoft, and David Boies, the lawyer who represented the Government in the 98' case.
David Boies: I don’t think consumer welfare is the only rationale for antitrust enforcement.
Bethany: I’m Bethany McLean.
Speaker 3: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?
Luigi: And I’m Luigi Zingales.
Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.
Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.
Speaker 6: First of all, tell me, is there some society you know that doesn’t run on greed?
Luigi: And, most importantly, what isn’t?
Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.
Luigi: Antitrust very often tends to have small and irrelevant cases, not particularly important cases, and every 20 years there is one big case that tends to shape the view for the next generation. I think the Microsoft case is the last big case that really shaped the view for a generation.
Speaker 8: The Justice Department has charged Microsoft with engaging in anticompetitive and exclusionary practices designed to maintain its monopoly in personal computer operating systems.
Luigi: And it is also the first case that was really applied to a modern tech company. It’s very relevant today.
Speaker 9: Now to the blockbuster antitrust lawsuit against Google. Tonight, the Justice Department accusing the tech giant of being a monopoly gatekeeper for the internet. Google handles nearly 90 percent of what Americans are searching for on the internet.
Luigi: Interest in antitrust against the technology companies is very high today. And so, it’s natural to go back to the last important benchmark.
Bethany: At least superficially, the resemblances between the two cases are striking, right? I mean, Google has 90 percent of the internet search market, just as Microsoft had 90 percent of the operating system market back in 1998 when the government sued it. Google pays billions of dollars each year to distributors, mainly Apple, to secure default status for its search engine, just as Microsoft basically forced manufacturers over Netscape. And so, at least superficially, the similarities are striking.
Speaker 10: Did you send this email, Mr. Gates, “Do we have a clear plan on what we want Apple to do to undermine Sun?”
Bill Gates: I don’t remember sending it.
Luigi: Another similarity is the fact that Microsoft was giving away at least some of their products for free, including the internet browser, as Google gives away many of its products for free to consumers. So, there is this aspect of, can you ever bring an antitrust case against a company that gives away its product?
Bethany: Yeah, that clearly is good for consumers. Or is it clearly good for consumers to have something given away to us for free? I think we would argue now, with the rise of social media, where much of that has been apparently given away to us for free, that the key law of economics, that even I as a journalist know, there’s no such thing as a free lunch. You’re always going to pay for it somehow, right? Or am I oversimplifying?
Luigi: No, you’re not oversimplifying. That, in part, is the core of the issue. In order to tackle this issue, what we have decided to do is to bring two experts. On purpose, the two experts are from two opposite sides. They worked on the Microsoft case, but on two different sides. We start with Robert Topel, who is a professor of economics at the University of Chicago Booth School of Business, so he is a colleague of mine, and he was a consultant for Microsoft back in ’98.
Bethany: We also decided to interview David Boies, the controversial superstar lawyer who was the government’s chief lawyer in the case against Microsoft back in 1998. Luigi, before we go to the interviews, and before we talk about the aftermath of the interviews, let’s just quickly define what the essence of the case was against Microsoft.
Luigi: So, in ’98, there was a company that was producing the first internet browser, Netscape, that felt that Microsoft was driving them out of business by offering Internet Explorer for free. By doing so, it was basically driving Netscape out of business. Netscape brought a case against Microsoft and then, eventually, DOJ took over that case.
So, now that you have a gist of what the case was about, we will turn to Bob Topel, the Isadore and Gladys Brown Distinguished Service Professor of Economics at the Booth School of Business at the University of Chicago, and an expert witness on the Microsoft trial at the time. Bob will help us understand the economics of the case. Due to scheduling, I will do this interview alone. So, if you don’t hear Bethany, it is not because she does not have a lot of questions, but just because she wasn’t there.
Bob, when the DOJ announced the case against Google, people started to look back in their memories and say, oh, but the DOJ had another big case against a large technology company many, many years ago. For us, it’s not that long ago, but for many of the listeners it is before they were born, in 1998. Can you please describe what induced the Department of Justice at the time to bring that case?
Robert Topel: Yeah, a big part of that was the actions that Microsoft allegedly took in competition with Netscape Navigator. Bill Gates sent an email out to the troops that said, a new competitor is born on the internet. The idea of the Department of Justice case was that, somehow, a browser could turn into a form of what came to be called middleware. Back in those days, I’m going to try to remember the number, Windows exposed something like 30,000 APIs, application programming interfaces, that applications developers could call to make things happen on the screen or print or whatever.
The idea was that because Microsoft has so many applications written and it has so many users of its platform, that there was an applications barrier to entry, so called, that made it very difficult for another operating system to come along and compete with Windows.
What the perceived threat from Navigator was, was that Navigator, as a piece of middleware that would sit on top of multiple operating systems, could expose APIs of its own, those applications programming interfaces, and then software developers could, as the term went, write once, run anywhere. The perceived threat, whether they meant it or not, or it was just meant to whip the troops into competing harder, was that the underlying operating system would become, as the word was, commoditized.
And so, there would be no differentiation among operating systems. It would all be on the piece of middleware that sat on top of the operating systems. Some of the things they did, even if they didn’t have immediate anticompetitive impact, in other contexts they could. I sometimes tell my students that Gates and Ballmer saw the bogeyman coming out of the closet and they pulled out their shotgun and they opened fire. What the Department of Justice found out, or what the courts found out, is that Microsoft had a shotgun, and they were willing to use it.
In other situations, that kind of behavior might have had anticompetitive conduct. The main thing they were aimed at was this so-called threat from middleware. Well, a middleware threat turned out to be not a threat. But the fact that they viewed it as a threat and they took certain actions, for example, commingling the code for Internet Explorer with Windows, that was found to be anticompetitive. Requiring that OEMs put the Internet Explorer icon on the desktop and that it couldn’t be removed. That was found to be anticompetitive.
Other allegations that came up in the case were things like, you’re developing IE, was thought to be anticompetitive. Giving away IE for free was thought to be . . . it was argued by plaintiffs’ experts was predatory pricing. Ultimately, the court said no. Making a competitive product and giving it away for free was not anticompetitive. If you look at the way browsers are distributed, and what the revenue model is today, it’s still free. Not just for IE, but for all of them.
Luigi: If you drive out competition through pricing below marginal cost, and then you recoup not by increasing prices but by lowering quality and lowering innovation, which is a way to recoup money, because if you’re not threatened by competition you can recoup that, then that’s not predatory pricing according to US law?
Robert Topel: I don’t know where they would come out on the innovation front. Innovation, as you know, is really hard to measure, and to say what innovation would have been in some but-for world had they charged $15 or $20 for IE is just making stuff up. But in this case, the last refuge of hand-waving seems to be, in this case and many others, that innovation was lower. Well, you don’t know that innovation was lower. Innovation might have been high. After all, all the money that they put into IE was a matter of innovation. Eventually, after the first couple of versions came out, IE in consumer tests or technical tests was found to be as good as or a superior product to Navigator.
Luigi: So, in your view, if you have a platform, and this platform expands, this platform with a large market share, let’s say in excess of 80 to 90 percent, and that platform vertically incorporates other features, expanding, as long as the prices remain low, there is no case to be made against the . . . on an antitrust count.
Robert Topel: If you want to make a case that some course of procompetitive conduct that would have happened even if it couldn’t have anticompetitive conduct, in the end has some undesirable social outcome. When I hear you talk, I think you really are thinking about some undesirable social outcome that’s different than antitrust. Then the laws of our country can try to deal with that via regulation or whatever. But trying to shoehorn everything into the antitrust laws, I think is a major policy mistake.
Luigi: When would you feel that US antitrust could intervene?
Robert Topel: When the conduct, under Section 2, has clear anticompetitive impact and no offsetting . . . and insufficient procompetitive justification or procompetitive benefits. Because that’s the whole thing of the rule of reason, that you have to balance the procompetitive impact against any possible anticompetitive impact.
Luigi: But now, going back to Microsoft, so what was Microsoft eventually convicted for?
Robert Topel: Well, they were enjoined. They were told that there are certain business practices they couldn’t do anymore. So, for example, they couldn’t integrate middleware software into the operating system the way they had done with IE. They couldn’t require that a middleware icon be irremovable from the desktop as a condition for their distribution contracts with OEMs. Those were thought not to have had anticompetitive impact, but that kind of conduct had the potential to have anticompetitive impact, if, per chance, some source of middleware came along that might provide a competitor in terms of exposing APIs and functionality to the Windows operating system.
Nobody ever said it did. In the 20 years of history that have gone by subsequently, we say, no, that wasn’t going to happen. That’s why I referred to the bogeyman coming out of the closet, when they took out their shotgun. They took away the shotgun, they enjoined certain types of conduct that might have anticompetitive impact. But the way the market has played out, even that conduct would not have had anticompetitive impact. The middleware might have evolved into something. And, certainly, if you believe the statements from some people at Microsoft, they thought that middleware might evolve into something. So, enjoining that conduct was not a waste of time, even if, ex post, it turns out that it probably didn’t have much impact on competition.
Luigi: So, you refer to a potential shotgun that Microsoft had and was taken away. Do you think that Google has a similar shotgun?
Robert Topel: I read the complaint. I have to say, it’s pretty thin gruel. One of the ones they make the most out of is that Google is paying, say, Apple, the example that they make prominently, to be the preferred search engine or the default search engine on Apple phones. So, I invite you, take out your Apple phone, go to Safari, then settings and search. In four seconds, you can change the default search engine from Google to Bing, to Yahoo, to DuckDuckGo. Takes no time whatsoever.
So, in what sense is paying a royalty to Apple something that’s preventing competition from those other entities? Anybody, if they are really making better search engines than Google, then people could switch instantaneously to that stuff. There’s no barrier whatsoever. The other thing to take into account is that this is a direct payment to Apple. Net cost always affects prices, even for firms that have market power. Apple users are getting lower prices for their iPhones because Google is paying Apple for the right to be the default search engine.
Now, you might believe that there are other reasons, those social reasons that I talked about that you seem fond of, that become worse when Google has that reach over to Apple. Well, fine, but that’s not an antitrust issue.
Luigi: But, actually, you answered the question about the particular case of the DOJ. My question was broader and it was about . . . Maybe I should have put it hypothetically, do you fear that Google might have a shotgun? Because you said that Microsoft had a shotgun, it ended up not using it, but potentially it was a risk. I personally think that preventively taking away shotguns is a good idea, especially when somebody is powerful and threatening. Do you think that Google potentially might have a shotgun that needs to be taken away?
Robert Topel: If they show evidence that they have a shotgun that needs to be taken away, then it can be taken away. But nothing . . . You’ve not given me any examples of some power that Google has or some business conduct that Google has engaged in that you think falls within Section 2, because it has to be unilateral conduct under the antitrust laws that’s anticompetitive.
Luigi: So, you think that the ability to rank different competitors differently, for example, is not a potential shotgun? Certainly, at least what I’ve seen in the European case, is that they did show evidence that they were hurting competitors by ranking them differently.
Robert Topel: If it can be shown, and I don’t know the details of their ranking algorithms and the like, if it can be shown that doing so has anticompetitive consequences and benefits Google relative to some competitor in some way that I don’t envision as I sit here, then that would fall under the rubric of Section 2. We’ve got the tools and the antitrust laws to deal with that. We don’t need new antitrust laws to deal with that, we can apply what we have.
Luigi: There is evidence, this is experimental evidence, that depending on the way Google ranks news regarding a candidate, you’re more or less likely to vote for that candidate. They don’t alter the news, but if Hunter Biden news is coming up first in the search for Biden, you’re more likely to vote for Trump. If you have some negative story about Trump coming first, you’re more likely to vote for Biden. The example is not done with Trump and Biden, but that’s to make it relevant in today’s world. Certainly, Google has this power. That doesn’t mean they use it, but it has this power. Are you concerned by that power?
Robert Topel: I’m more concerned by folks who are concerned with that power, because then they want to regulate what independent businesses and entities can do or say. I mean, there’s a lot of people out there who can be influenced to vote some way, to use your example, by something that someone says. I don’t want to come along and then tell that someone that they can’t say those things because it influences the way people vote. I’m much more fearful of the reach of government than I am of the reach of Google. But the last thing we want is the Ministry of Information and Public Enlightenment, if you catch my drift.
Luigi: Of course, and I fear that as well.
Bethany: We also wanted to get someone else’s point of view on these cases, namely, the government’s point of view. So, we’re also going to talk to David Boies, the controversial and powerful lawyer who represented the US government in the case against Microsoft.
Luigi: So, what was the allegation of the government vis-à-vis the monopoly power and the anticompetitive behavior of Microsoft in ’98?
David Boies: One of the primary arguments that the government had was that Microsoft had a monopoly over commercial operating systems for personal computers. The Windows operating system comprised, depending on how you counted, somewhere between 80 and 95 percent of the market. That by itself is very strong evidence of monopoly power. It’s not conclusive. It can be rebutted, but it is an important starting point.
Now, with respect to the conduct, there was a company called Netscape. It was the first really effective and popular browser. There began to be a trend of applications developers writing applications for the Netscape browser, because the Netscape browser could be used on multiple operating systems. That allowed portability of applications from operating system to operating system. Microsoft recognized there was a danger that Netscape, by becoming a platform for applications developers, could erode the protection for Microsoft’s market position. The government’s claim was Microsoft then did a variety of acts that were improper to try to stifle Netscape.
Luigi: Like what kind of acts?
David Boies: For example, entering into contracts with PC manufacturers that would induce the PC manufacturer not to include the Netscape browser or not to include it as the default browser. Entering into contracts with developers that gave developers better deals if they didn’t develop products for Netscape. The reason that this is complicated is because, depending on the market circumstances, these contracts can be perfectly legal and, indeed, can enhance consumer welfare at various points. But you’ve got to look at it in the context of a particular industry. What the government’s claim was, in the context of that particular industry, this kind of conduct was significantly contributing to the maintenance of Microsoft’s monopoly power.
Luigi: So, even if those contracts may have benefited consumers, in the sense that one of the defenses that I have heard so many times is, after all, Internet Explorer was given for free to consumers. So, the consumers were benefiting from receiving something for free. Even if this was beneficial to consumers, this was in violation of antitrust because it was used to maintain the monopoly power of Microsoft?
David Boies: Well, the issue as to whether simply distributing the browser by itself for free, would or would not have been a violation of antitrust laws, is something that we didn’t have to reach, because Microsoft did more than simply give the browser away for free. There are arguments under the antitrust laws about what is called predatory behavior or predatory pricing, where a defendant can be accused of pricing its product so low in the interim that it allows the company to gain monopoly power and then raise prices later.
Microsoft tried to deal with this issue by promising that Internet Explorer would always be available for free. The argument then became, if you’re making Internet Explorer available for free, but you’re charging for the operating system of which it is a part, does that really mean that it’s free, or does it simply mean that it’s being made available without additional charge? I think that would have been a complicated legal and economic issue. However, that was not necessary to be addressed in the Microsoft case, because in the Microsoft case, you had this other conduct that supplemented Microsoft simply giving Internet Explorer away for free.
Luigi: So, what was the government eventually able to prove? What you describe, if I understand correctly, are the allegations. What was proven in court?
David Boies: The judge issued a very, very detailed set of findings of fact. The judge held that Microsoft possessed monopoly power in the operating system market and that Microsoft had undertaken a variety of exclusionary conduct acts that did not have a legitimate economic justification but did have the effect of excluding the Netscape browser. The judge found both of the elements of monopolization: Microsoft possessed power and Microsoft had engaged in anticompetitive or exclusionary conduct.
Bethany: Do you feel that those findings . . . All these years later, did those findings solve the problem?
David Boies: I think that the findings did not solve the problem. The remedy contributed to the development of competition. If you had Microsoft completely free to do whatever it wanted with respect to the operating system, for example, free to exclude competitive search engines, Google might not ever have achieved the critical mass that it needed to be an effective competitor. One of the ironies is that Google greatly benefited from the antitrust laws in the sense that the antitrust laws limited what Microsoft could do to advantage its search engine and disadvantage the Google search engine. Now, Google is being held to account to determine whether Google has used its power to exclude competitors or unfairly deal with consumers.
Luigi: I wouldn’t call it an irony. I think that this is a feature of the system, it’s not a bug. We want to have a system that keeps people accountable. And so, if you are a startup, you are protected by the rules. If you are a monopoly that takes advantage, you are subject to those rules.
Bethany: But it’s a fascinating observation that we wouldn’t be here at all with Google had it not been for the Microsoft case. And, in a way, that’s a little different than we were thinking about it beforehand, that Google itself may never have come into power were it not for what the government did with Microsoft.
Luigi: Can you be a little bit more specific about what the remedy was and what you would have liked the remedy to be?
David Boies: One of the remedies that we had . . . We proposed a couple of different approaches. One, we had proposed a structural approach, where Microsoft really had, in some senses, two dominant positions. One was in operating systems and the other was in certain applications programs like Office. We had recommended as one remedy the separation of those two. I think that if you had separated them, each would have grown into a company offering a full set of both applications like Office and operating systems.
Now, reasonable people can differ as to whether that would have been a good idea, because what might have happened is that these two former Microsoft companies might have simply dominated the business. But at least you would have had two. That structural relief is always something that courts are dubious about. Courts do not order structural relief easily. Additional relief was to end the exclusionary conduct. That is the much more typical relief, where you eliminate the ability of the company to restrict what other players in the marketplace, whether they’re developers or PC manufacturers or others, actually do.
So, I think that was the more typical relief, and as I say, I think it was reasonably effective with respect to Microsoft, not only in how it dealt with the browser war, which was basically over at that point, but how it used its power to deal with additional competitive incursions, like that of Google.
Bethany: Looking back at this, is there anything that the government should have done differently, given where we are now with big tech? Are there precedents that you wish had been established during Microsoft, or that arguably should have been established during Microsoft, that might also have changed the course of history in ways that would have encouraged more competition?
David Boies: One of the things that was unfortunate and, from my perspective, maybe doubly unfortunate, was that while the case was ongoing, the administration in Washington changed. The Clinton antitrust division was replaced by a George W. Bush antitrust administration. The Bush administration entered into settlement agreements with Microsoft. I think there was a perception that the Bush Justice Department had given too generous a settlement. I think that encouraged the EU to take a more aggressive and, from my perspective, unfortunately, more regulatory approach to Microsoft.
We had extensive discussions with antitrust enforcers in the European Community during the case. I think if we had gone down the road that we were going down, which was really not a regulatory regime, but a regime that relied on opening up markets, the EU could very well, and I think probably would have, not gone down the regulatory path that they did with Microsoft. The ultimate result in terms of remedy, I think left something to be desired, although, as I say, I think it also made some progress. But I think the important part of the Microsoft case is not the remedy, but it is the recognition and finding that the antitrust laws apply to big tech companies and some progress, some important progress, in defining how that application should occur.
Luigi: So, when you were reviewing the conditions for Microsoft, et cetera, I was, of course, thinking about Google. Google now, not back then, but now. You say, monopoly power, check, because it’s hard to argue, they have 90 percent of the search market. Then, exclusionary contracts, I’m not an expert, but what I read from the DOJ case is that they went after the fact that Google actually pays Apple to exclude or to prefer one over the other. So, it seems to me like an open-and-shut comparison. Is that so obvious?
David Boies: I want to be careful here, because my firm and I personally represent some of the plaintiffs against Google. So, I don’t want to talk in too much detail about that case. I want to be sure anybody who’s listening to this understands where I’m coming from. My perspective has always been for strong antitrust enforcement. Effective antitrust enforcement is the alternative to regulation. I think if you believe in free markets, which I do, you have to enforce those markets.
That doesn’t mean that you go after everybody who has monopoly or dominant position. You don’t want to penalize success when people invent a better product, a better service. Even if they capture almost all of the market, you don’t want to penalize them. What you want to do is you want to be sure that that power is not used in an unfair way to prevent the next person who has a better idea from coming along and being able to succeed. Without commenting on the Google case itself, the idea of paying suppliers not to do business with potential competitors is something that the antitrust laws have generally found to be pretty problematic.
Now, you do have situations where every competitor, large or small, sometimes has exclusive dealing arrangements. But you need to look at those in the context of a particular industry to determine whether or not those are going to be significantly and unfairly exclusionary.
Bethany: What is the ideal balance between antitrust laws and better regulation?
David Boies: That’s a great question. For me, I believe that the balance ought to tip heavily in favor of free markets. Now, you need to look at whether the conditions for a free market to work are or are not present. One of the conditions for the free market to work is competition. Including, in particular, ease of entry and exit. It’s very difficult to have ease of entry if you don’t have ease of exit. Another requirement of free markets is reasonable consumer information. Consumers must be in a position to understand the choices they’re making.
Now, I happen to think that consumers are probably more sophisticated than they’re given credit for. But I think that you always need to look at whether, in a particular market, the knowledge requirement is being met. You also have to look at whether there is conduct that a dominant firm is doing that inhibits that knowledge. A dominant firm can engage in exclusionary conduct, not only by directly excluding competitors, but also by depriving consumers of the ability to effectively choose among competitors.
Luigi: One last question, if I may. You buy into the so-called consumer welfare standard, right?
David Boies: I think consumer welfare is a critical part of the antitrust analysis except in extraordinarily unusual circumstances. You should never adopt an antitrust remedy that will be harmful to consumer welfare over the long term. However, I don’t think consumer welfare is the only rationale for antitrust enforcement. Consumer welfare is certainly what courts have focused on, particularly from the early 1980s. Even before then, there was a trend in that direction, but it’s certainly accelerated since the 1980s.
But if you look back at the cases under prior administrations, over many decades after the antitrust laws were enforced, you see that while consumer welfare was always a critical element, another important element was preserving freedom of entry. Not merely because freedom of entry is important to preserving competition, which is in turn important to preserving consumer welfare, but also because we believe that, as a society, the dispersion of economic power is desirable. We tolerate concentrations of economic power because we believe in free markets. We believe that the most efficient firms ought to succeed, we want to incent them to succeed.
But, at the same time, we recognize that concentrations of economic power are undesirable in a democratic society. That’s true whether the concentration of power is in the government or whether it’s in large corporations. And so, I think that the antitrust laws also have a function of trying to preserve the dispersion of economic power. That is a principle that I think is probably a minority view today. It was, I think, well accepted some decades ago. But I think the pendulum is swinging back. So, I think it is very likely that courts will, again, go back to the roots of the antitrust laws, which are about consumer welfare, to be sure, but also about preserving an economy in which economic power is not unduly and unnecessarily concentrated.
Luigi: The thing I like a lot about David Boies is the fact that he says that he likes free markets, he wants free markets, and between regulation and antitrust, he prefers antitrust. That’s the point that a young Stigler made in 1952 in a piece that most people don’t know, but it’s titled, “The Trouble with Big Business,” where he actually advocates to break up big business. The reason is that breaking it up is not only the right solution, it is also the conservative solution. Then people say, wait a minute, what is conservative about breaking it up? He said, because the alternative is to regulate business, and regulation is much worse.
Now, to be fair, Stigler changed his view over the years, in light of the discovery that big business was more efficient. But I think that this idea that antitrust is a substitute for regulation remains in his views, and the fact that also antitrust is less likely to be captured because it’s not industry-specific. Every kind of regulation is industry-specific. The regulators tend to be experts in that industry and tend to be captured by the industry. Antitrust is supposed to be across the board and so less likely to be captured by experts in a particular industry.
Bethany: It’s fascinating, because this also hearkens back to Nick Lemann’s book, and it’s been a long-standing tension in the American business world and, indeed, in American society. Because for a long time, people did believe, through the 1950s, and Stigler was early in changing this, people did believe that big business could be limited by big government. In other words, that regulation was the way to go. Then, that began to change. One of the things that I find really interesting about all of this is the way in which both our approach to antitrust regulation, our views of the Sherman Act and our views of big business, how big is too big, have really evolved over the previous . . . the past century-plus.
Luigi: Yeah, absolutely. I think they change, and also, they change because of who we perceive to be the biggest threat. The reason why George Stigler and Milton Friedman were in favor of antitrust early on is because they identified monopolies as the first step toward socialism. John Galbraith was of the view that big monopolies are good as long as they are controlled by the government, are part of the government. That’s great. That’s where Milton Friedman and George Stigler were fighting back aggressively. Once that line of left-leaning thinking disappeared, the more conservatives became much more in love with big business and much less aggressive on antitrust grounds.
Bethany: Not just the conservatives, but the new Democratic Party, as the friend of big business, also became much more in love with big business. So, we had both political parties falling in love with big business, right?
Luigi: Oh, absolutely. Everybody talks about the Reagan years as the important years of change. But I think the Clinton years, we have to specify the Bill Clinton years, were even worse on that dimension.
Bethany: Where do you think we are relative to the original intent of the Sherman Act? I was going back and rereading the original language of the law. Obviously, it was changed over the decades. But it seemed that back then there really was just a fear that big, in and of itself, was bad. That we didn’t want monopolies because we didn’t want monopolies. Forget about any other effects. Forget about the idea that monopoly could actually be good because the company earned it. That seems to me, but I might be reading it incorrectly, not consistent with the original language of the Sherman Act.
Luigi: There is no doubt that the Sherman Act was written at a time when our economic understanding was not that deep. I don’t think that the reason why it was written was because we understood the distortion of monopolies the way economists now understand them. I think it was very much in the tradition that if you want to have a democratic country, you have to have some ability to earn an independent living. In the age of the Founding Fathers, it was having a piece of land. At the end of the 19th century, beginning of the 20th century, clearly this society was disappearing. People were asking the question, can you have a democracy when you have the famous company town?
Remember, one of my favorite movies is It’s a Wonderful Life. That’s exactly a company town where it’s difficult to actually express your opinion even, because there is one guy, the evil Potter, who owns everything except the Bailey Building and Loan. This view disappeared for the better part of the 20th century, and now I think it is coming back, because many of the jobs that were independent jobs are disappearing. The question is, can we be a democracy if we are all employees of Amazon?
Fragmentation of economic power in a democracy is important. The part that we should recognize that the Chicago School did, which I think was valid, is, at some point in the middle of the 20th century, antitrust was used in a very incoherent way. It was used in a very incoherent way because the objective was not very clear. One of the questions that the Chicago School raised is how to make antitrust administrable by judges who are not super-expert in economics and were not gods.
Economics, especially at the time, gave a very useful framework to attack one problem. And, in a very economic way, a very narrow and very precise way, we should recognize that the precisioin can lead to a lot more consistency, but, as often is the case, the precision also gave away a lot of side aspects which are equally important.
Bethany: I would say, not just equally important, I would say almost more important than in the precision and the narrow application of economic thinking to antitrust, we lost sight of the bigger picture, which is that antitrust laws are fundamental to our democracy, because they are fundamental to the ability of people to earn a living. Have you read the book Homeland Elegies?
Bethany: It’s worth reading because the author comes to the point that Bork’s real danger was that he really undermined antitrust laws and that that actually led to the destruction of the Black middle class.
Luigi: Actually, now, yes, I did not read the book, but my wife made me listen to an excerpt from it, which is exactly that passage. Now it rings a bell. It is the first time that I heard that connection with, for example, Black business, and I thought it was fascinating.
Bethany: Me, too. I thought exactly the same thing. And so, I thought, as we’re talking about antitrust laws, this really . . . Actually, it’s one of the many instances in which a narrow focus, which is meant to make things coherent and meant to make things clear, in itself an admirable goal, can also distract us from the larger picture of why these rules are so important, which is that they’re societal, they’re about our democracy.
Luigi: But this is the challenge that I’ve been struggling with and many people have been struggling with. Imagine you want to apply a different kind of antitrust. How do you make sure that this different antitrust is not used as a weapon by whoever is in power in that moment? Stepping down after four years of Trump, you can relate to that very clearly. I think that the problem with not having a good infrastructure to analyze this aspect is making it difficult to have a consistent application. But I think one of the top goals that political scientists and economists should aim at now is to create this infrastructure so that this does become applicable in a consistent and coherent way.
Bethany: I agree with you. I think it’s an incredibly important task confronting us. I also agree with you about the other point, which is that the broader things are, the more principle-based they are, the more they can be weaponized and the more they can be twisted to be anybody’s interpretation. And so, there’s a danger in both overly prescriptive rules and a danger in overly broad rules. But one of the things thinking about this issue has made me aware of is just how critical antitrust law is to American society and our democracy as a whole in ways that I had never thought of before.
Luigi: What I find interesting, given our conversation with Bob Topel, is his lack of worry about a world in which Google can control the information you get. I appreciate that he said, I worry that the government can get that power. If you have that power in a competitive market, that’s not a big issue. But if you have that power in a monopoly market, then you have no alternative. I have to say, between a private monopoly and a government monopoly, I think that at the end of the day, I prefer a government monopoly, because at least there is a political way to address it. In a private monopoly, there is not even that.
Bethany: I was actually surprised to hear you agree with Topel on that point, when he said that he was afraid of the government of the Department of whatever he called it basically regulating what people think instead of a company like Google, because I’m not sure which one I prefer. But I sure don’t like the idea of a company like Google being able to overtly or covertly manipulate what we all think.
Luigi: No, I share the worries. I am worried about a state of the world in which the government decides what you can see and what you cannot see. But I am equally worried and probably even slightly more about a state of the world in which one company, one private company, has that power.
Bethany: One complaint I have heard, or one observation I’ve heard about the government’s case against Google, which very much ties into the conversation we’re having right now, is, did the government bring the right case against Google? In other words, perhaps the case arguing that Google pays Apple for preference on its search engine is an issue. But it seems to me the real issues are perhaps quite bigger and much deeper, such as the way in which Google orders its search results and arguably the influence that Google has. Do you think the government brought the right case?
Luigi: Personally, I think that the case of altering the ranking of competitors is the best case you can make. I don’t think that Topel was ready to admit that yet, but he was less resistant on that point, in the sense that, if I could prove that Google is ranking competitors in a different way, simply to damage the competitors, there is that evidence of anticompetitive conduct that Topel is requiring to have a case. I think that is very hard to argue why you alter the rankings of other people, especially, I think this is the out of the European case, but there is a case of, I think it’s a British shopping network, that saw its searches drop dramatically the moment Google entered with its own shopping product. That seems to be a very clear evidence of anticompetitive conduct in a way that we understood is crucial to have a good case.
But there are two aspects I would like to elaborate on. The first one is what I understood very clearly from Topel. There was, in the Microsoft case, evidence that Microsoft was willing to use its power to stop competition. He claims that what they did really did not have any effect. But this is a bit of a counterfactual. So, let’s drop that part, but let’s focus on the fact that Microsoft showed a willingness to use its monopoly power to block competition. That’s what made the DOJ case win.
My concern is that, in many situations, and, clearly, Google is an example, this opportunity does exist. But the only way to know whether it’s actually been used or not is to monitor these companies constantly. Because how do you know that Google is not abusing its power to rank things? So, I saw on Twitter an economist, Valletti, who was showing, if he Googled “best economist,” who would appear on his feed. Then everybody else started to Google on their computer “best economist” and showed who appeared on their search results. The results were quite different across different people.
So, what you see and what I see is very different. How do we know that Google is not targeting the more-influential voters with some particular form of discrimination in the information that we see? I think that there is no way to know unless there is constant monitoring by an independent authority. That’s the reason why the Stigler Center report advocates for a digital authority, because without a supervisor, you cannot know.
Bethany: Although, there is a second option, which is interesting in light of Microsoft. The outcome, the actual technical outcome of the Microsoft trial, is still quite debatable. What isn’t debatable is that Microsoft lost an enormous amount of market share and lost its clout after that. At least Microsoft’s argument for that has been that they had to view every single action they took through the prism of antitrust law and through the prism of the possibility that the government would come after them again for violating antitrust law.
And so, the mere fact that they worried their conduct was under scrutiny forced them to scrutinize their own conduct. And so, that could be the alternative to the government monitoring of Google that you’re suggesting, is that the company is freaked out enough that it monitors itself.
Luigi: Yeah, but we’re basically saying the same thing, because in order to get the company to freak out, you need to make a case against them and to have an antitrust investigation. In order to make an antitrust investigation, you need to document at least some form of the abuses. In the Microsoft case, maybe that’s a big difference, the Microsoft case was easier to see, because you see, for example, the fact that they were trying to integrate the Internet Explorer into the suite so that it was difficult to separate the two. So, that was clearly a case in which they’re making it difficult for competition to continue. So, this stuff was easier to monitor ex post. In the case of the search results, for example, unless you have a constant monitoring system, you can’t tell. I think that that’s part of the problem.
Bethany: To be clear, I’m not sure I’m arguing whether self-monitoring could be effective or not, and whether it’s the right approach, I don’t know. But they still are very different possibilities out there.
Luigi: I might be inclined to believe that self-monitoring might work under the shadow of a big threat. My point is that if you don’t have some form of constant monitoring, you don’t even have the big threat, because the big threats come from a big antitrust suit. But the big antitrust suit is not going to be very effective unless you do the monitoring. So, comparing the case against Facebook and against Google, in the case against Facebook, they have plenty of evidence of emails and stuff that is pretty compromising.
Google is much more disciplined in not discussing this in front of audiences, in not doing this. So, it’s much more difficult to bring a case against Google. My expectation is, this particular DOJ case against Google might fail miserably or might even be dropped.
Bethany: But does it matter, in the end, if there is a parallel to Microsoft, in the sense that the outcome of the Microsoft trial, the judge actually ruled that Microsoft should be broken up? Then the Bush Justice Department came in and basically squashed that ruling, and the remedy ended up being much softer. It ultimately didn’t matter. The mere fact that the government had brought a case and it came down heavily and Microsoft ended up changing its behavior. So, could you say that there’s a parallel and that even though the government has arguably brought the wrong case against Google, there still could be an outcome that could get us closer to where we want, or is it just so the wrong case that it doesn’t matter?
Luigi: No, I think that the difference is in the Microsoft case, the government won the case. And then, because there was a change in the administration, because of a number of things, the penalty was incredibly soft for the crime. But there was no doubt that it won the case, and that set a very important precedent. My big fear is, in the Google case, the government is going to lose. And so, it’s going to set the wrong precedent and it’s going to let Google do everything they want.
My expectation is that Facebook is going to be the sacrificial lamb, because everybody hates Facebook. So, there is going to be a winning case against Facebook, and everybody else is going to continue unaffected, in fact probably strengthened.
Bethany: That frightens me. I think I might agree with you there. I think what you’re arguing effectively is that, in this case, victory is important. It’s not just scrutiny that matters.
Luigi: Absolutely. Absolutely.
Bethany: Actually, as we discussed this, and as I listened to Topel and to Boies, I’m actually wondering if I do agree with them after all, because they both do have a big overriding and obvious thing in common, which is that they both believe big isn’t necessarily bad. I wonder, back to our thoughts about how critical antitrust law is for American society and democracy. I wonder if we’d be better off if we started . . . Instead of starting with a presupposition, big isn’t necessarily bad and then let’s try to figure out how it can be bad, what if we started with the presupposition of big is bad and you have to show us why it isn’t bad? In other words, would we be better off if we flip the argument on its head?
Luigi: Yes. The question is, what is the evidence? We were talking earlier about the young Stigler. Young Stigler did believe that big was bad, because in his article, he said, there was no evidence that bigger business was more efficient. Today, we do know that bigger business tends to be more efficient. The question is, how much are you willing to give up in terms of efficiency for freedom? I think that the answer is nonzero but not everything. We don’t want to be starving just to be free, but on the margin, do you want one less gadget but more economic freedom? At least I would vote in favor of it.
So, the difficult thing is that we need to have some guidelines of how to intervene politically and pay political costs. Ironically, we’re giving up this. I find it funny that I, as an economist, have to make this point, because most economists are on the other side of the fence. But think about Brexit. There is no doubt in my view that there is an economic cost of Britain leaving the European Union. Now, a country should be free to make that choice.
Think about Brexit as a divorce. So, divorces aren’t about economic issues, in the sense that you’re clearly worse off after a divorce economically. The reason why you divorce is not economic. In fact, you are willing to take a hit from an economic point of view for a different principle. The fact that, as economists, we’re not willing to recognize that in the case of Brexit, or in the case of antitrust, I think is a fundamental problem.
Bethany: So, you think Brexit, and I default to real-estate brokers, because I have several friends who are real-estate brokers. I always think, I’m actually willing to take a hit and have an economic cost to having a real-estate broker, because that real-estate broker provides so much of value in a human context in terms of bringing knowledge of the city in which you’re living, the companionship and, importantly, jobs for people who might otherwise struggle to find a way to make a living. I think that’s worth some cost and efficiency. So, you go to Brexit, I go to real-estate brokers.
I can’t help thinking that we would be better off if the onus was on big business to show why big isn’t bad rather than the onus having to be on the government to show why it is bad.
Luigi: I’m afraid of too powerful a government. I know that living in the United States today, this fear seems to be completely unjustified, because our government is so ineffective and incompetent that it is not really frightful. But move to China and then the story is completely different. I don’t know if you read recently that the Chinese government has decided that they’re going to issue a digital yuan in order to basically reduce the power of Alipay and Ant Financial and all the tech industry.
The Communist Party in China is very smart in understanding that business can become more powerful than them. And so, they are so afraid that they’re going to enter into business. They basically massacred Jack Ma, they suspended the most important IPO of the decade, the Ant Financial IPO, just to prove that they have bigger balls. Sorry for my French. That is the fear that I have. The US government is one extreme, the Chinese government the other extreme. I would like something in between.
Bethany: Maybe that’s the fundamental issue here that we’re all actually discussing, is which do you prefer? Do you want business to be more powerful than government, or do you want government to be more powerful than business? Because we have lived through an era over the last bunch of decades where, you’re right, business has become, especially as it’s become global and enormous and, in the case of Google and Facebook, with the ability to manipulate public opinion and all sorts of subtle ways. Business, I think, now is more powerful than government, and is that the dynamic we want? If it’s not the dynamic we want, what should we do to fix it? Maybe that’s the fundamental question of our time.
Luigi: Yeah, but the secret, as we discussed in our previous podcast on democracy, the secret is in the balance. Intellectuals like us should be the one who switch gears, seeing what is the biggest worry in that particular moment.
Bethany: I have a final question for you. Are you going to stop using Google as your search engine?
Luigi: That’s a very good question. I think that I started to use DuckDuckGo, at least in some of the stuff I do. I am sorry to admit that Google is better. But I think at least keeping a bit of searches in some other engine is useful to maintain some diversity.
Bethany: Balance. Once again, balance.