What's Behind the War on Big Tech? Rent seekers are trying to use government to hamper Google, Amazon, Apple, and others.

• Author: Lambert, Thomas A.

For the major digital platforms, a perfect storm is brewing. Policymakers across the ideological spectrum maintain that these Big Tech platforms--especially those operated by Google, Facebook, Amazon, and Apple--have grown too large and powerful. Different groups emphasize different harms. Progressives complain that the firms exercise excessive political power, hurt small businesses and workers, threaten privacy, spread misinformation, and exacerbate wealth inequality. Conservatives contend that the firms are biased against their values and wrongly censor their speech. Both sides agree, though, that the government should step in. Thus, strange bedfellows like progressive U.S. Sen. Elizabeth Warren (D-MA) and her culturally conservative colleague Josh Hawley (R-MO) continually call for the major digital firms to be broken up and stringently regulated.

Anti-Big Tech fervor has moved beyond political posturing. In June, the House Judiciary Committee advanced four bills that would radically restructure the tech landscape. And in July, the U.S. Federal Trade Commission revoked its prior commitment to pursue only consumer welfare in policing "unfair methods of competition." That opens the door for the FTC to impose rules forbidding practices it deems unfair to small businesses, even if the practices benefit consumers. President Biden recently issued an executive order encouraging the FTC to use its now-expanded rulemaking power to rein in Big Tech.

The primary (though not the sole) concern of those calling for additional restrictions on these firms is their market power--i.e., their ability to impose contract terms (prices or non-price terms governing matters like user privacy, data use, or terms of service) that they could not profitably impose if they faced the threat of losing business to more accommodating rivals. Market power is a well-known market failure that may result when there is a lack of competition in a market. Because many digital markets feature economies of scale and network effects, successful firms often grow so large that they satisfy the bulk of market demand and thus face little rivalry.

The degree of market power enjoyed by the major digital platforms is a matter of dispute, but even if it is significant, a governmental fix is not automatically warranted. Policymakers should balance the welfare gains from an intervention (in terms of market failure losses averted) against any welfare losses it is likely to occasion. As scholars associated with the "public choice" school of economics have recognized, one set of predictable losses from government interventions arises because government's unique right to coerce--what sociologist Max Weber called its "monopoly on the legitimate use of force within a given territory"--may be exploited to secure private benefits.

PUBLIC CHOICE AND RENT SEEKING

Public choice uses the tools of economics to analyze political behavior. Nobel laureate James Buchanan described it as "politics without romance." In the romantic vision of democratic politics, citizens inform themselves of political candidates' plans for exercising governmental power and then vote for those candidates whose plans they believe will be most beneficial. Those elected then enact legislation they believe will provide the greatest benefit to the citizenry as a whole. Unelected bureaucrats, who answer to an elected executive (who also seeks to maximize the citizenry's welfare), enforce the laws and implement the programs the legislature has enacted, with an eye toward maximizing their effectiveness for the good of society.

Rejecting the romantic vision of politics, public choice theory assumes that people act in the political arena as they do in other contexts: they pursue their own interests in a logical, internally consistent fashion. Citizens "vote their pocketbooks" and, given the low probability that any individual vote will sway an election outcome, they invest little in educating themselves on the candidates and issues at stake. People running for office take reasonable steps to secure their election, embracing positions that are popular with voters generally or are favored by, and salient to, individuals or groups that are especially likely to provide campaign financing. Non-elected bureaucrats make decisions that will expand their agency's turf and budget and enhance their own prestige, authority, income, and future job prospects.

Public choice theory also makes a prediction about business organizations: that they will engage in "rent seeking." In economics, the term "rent" means the payment to a factor of production in excess of the amount required to keep it in its current use. Rent seeking refers more narrowly to efforts to capture above-normal returns, not by creating additional value or bargaining with one's transacting partner for a greater share of the surplus generated by a deal, but by harnessing the government's unique right to coerce.

Rent seeking reduces social welfare in several ways. First, it diverts resources away from the creation of wealth and toward its redistribution, as the resources a firm expends on persuading government officials to do its bidding are not available for creative activities like research and product development. Second, to the extent rent seeking reduces market competition (e.g., as rent seekers hobble their rivals with regulations or tariffs), it causes the sort of "deadweight loss" that results when there is insufficient competition to channel productive resources to their highest and best ends. Finally, when rent seeking drives rivals from the market, it squanders their non-recoverable investments. For example, if a firm has installed specialized equipment but then finds itself driven out of business by some sort of protectionist regulation, the value of its equipment is wasted.

Even though the policies and rules sought by rent seekers routinely reduce social welfare, they are frequently enacted. One reason for this is that voters, who have the power to punish legislators and bureaucrats that employ government's coercive power in a welfare-reducing manner, are often unaware of how those officials' decisions have harmed overall welfare--and the officials know it. Because any individual's vote is so unlikely to sway an election, the marginal benefit of additional information on how to vote is quite low, so voters reasonably expend little to become informed.

Voters' "rational ignorance" interacts with another dynamic that bolsters rent-seeking initiatives. The policies sought by rent seekers concentrate special benefits on their proponents, who therefore have an incentive to lobby for their adoption. At the same time, the costs of the initiatives are often distributed broadly throughout society as a whole. A tariff, for example, concentrates a benefit on the domestic producers of an item--usually a small group--but imposes costs in the form of slightly higher prices on all the domestic consumers of that item--typically a larger group. The total cost of the tariff may well exceed the benefit to the domestic firms it favors, but because each consumer bears just a tiny portion of that cost, no one is willing to incur the cost of counter-lobbying against the tariff.

Of course, lobbying for a special benefit at the expense of the general public is difficult. Consumers may withhold business from firms they think are abusing government power and, despite voters' rational ignorance, government officials will want to avoid any appearance that they are favoring the interests of a few over those of the public at large. Rent seekers may therefore seek to hide behind groups that share their policy goals--but for public-spirited, rather than self-interested, reasons. Economist Bruce Yandle has dubbed this dynamic the "bootleggers-and-Baptists" syndrome, in honor of the two groups that push hardest for liquor prohibition: Baptists, who make the public "pro-social" case for prohibition, and bootleggers, who promote prohibition behind the scenes to secure the private benefits of monopoly profits on alcohol sales...