I can already tell that I am going to enjoy the Cato Unbound series on the Internet and technology. Jaron Lanier’s initial essay is full of provocative claims and ideas; I’ve been mulling over some of them all weekend. He ranges from criticizing the path-dependent nature of the file structure of operating systems to analyzing a category of entities he calls “antigoras”:
Another consequence of digital brittleness and lock-in is that more niches turn out to be natural monopolies than in previous technological eras, with Microsoft once again being a celebrated example. I call these niches “Antigoras,” in contrast with the classical idea of the Agora. An Antigora is a privately owned digital meeting arena made rich by unpaid or marginally paid labor provided by people who crowd its periphery.
Microsoft is an almost ideal example, because users are dependent on its products in order to function in cooperation with each other. Businesses often require Windows and Word, for instance, because other businesses use them (the network effect) and each customer’s own history is self-accessible only through Microsoft’s formats. At the same time, users spend a huge amount of time on such things as virus abatement and glitch recovery. The connectivity offered by Microsoft is valuable enough to offset the hassle.
Traditional stock markets, or even flea markets, are a little like Antigoras, in that they are also private meeting places for business. One obvious difference resulting from the digital quality of the Antigora is a far stronger network effect; Antigoras enjoy natural monopoly status more often than physical marketplaces because it would be almost impossible for locked-in participants to choose new Antigoras.
I’m probably a little more sensitive to the invocation of the concept of “natural monopoly” than most people (and I should point out that the Wikipedia entry incorrectly attributes natural monopoly to economies of scale instead of subadditivity of cost, which is economies of scale over the relevant range of demand, very important distinction). So I’d like to push back a little on Lanier’s discussion here. Just because of the network benefits and associated lock-in that can arise with information technologies, that does not necessarily mean that we will suffer the economic efficiency consequences of deadweight loss from a “natural monopolist” behaving like a monopolist.
Here’s what I mean: contestability can keep these “antigoras” from generating deadweight loss, even if the actual competitive alternatives seem weak. Lanier notes that these network benefits from using Microsoft products outweigh the hassle. If Microsoft were truly a “natural monopoly” (if such a thing exists), it would not have to pay attention to what is going on with Linux or Mac or anything else. But the truth is that it does, and that the threat of those alternatives changes its strategy space, and thus its behavior. When that is the environment, when the threat of competition induces a market leader to change its behavior in ways that are inconsistent with monopoly pricing, can you really call that a natural monopoly? I say no, and that even though Linux and Macintosh have small market shares relative to Microsoft, they still serve to change the strategy space and the behavior of Microsoft in ways that benefit consumers. Thus not a “natural monopoly”.
I thought his statement of the value of individual liberty and its relationship to digital technology was insightful:
The phenomenon of Antigoras exemplifies the intimate and unprecedented relationship between capitalism and digital information. Because of the magic of Moore’s Law and the network effect, the Invisible Hand has come to be understood not just as an ideal distributor, smarter than any possible communist central committee, but as a creative inventor outracing human wits. At the same time, tiny situational advantages, particularly related to timing and code compatibility, are amplified by the exponential growth environment of the Net in such a way that unusual figures can suddenly emerge as successful entrepreneurs. A recent example at the time of this writing is the Baltic crew who started Skype on a shoestring, although it’s still too early to say which firm will win this Antigora prize. The resistance of digital brittleness to interventions by governments, together with the possibility that any clever person can strike it rich with minimal starting capital by being in the right place at the right time to plant the seed that grows a new Antigora, has caused libertarianism to be the house philosophy of the digital revolution.
This is a clever articulation of Schumpeter’s perennial gale of creative destruction, and its 21st-century translation into competition for the platform, as opposed to competition on the platform. Dynamic competition, not just static resource allocation.
I have more to say, but I’m going to let it incubate a little, and incorporate it with comments on the subsequent entries in the series.