Monday, February 04, 2008

This Is Not Capitalism

Yesterday, Google began an effort to lobby government to forcefully prevent Microsoft from acquiring Yahoo. Over the weekend, Microsoft had announced an offer to acquire Yahoo. The offer price was a generous one, amounting to a 61% premium for holders of Yahoo stock. This is a serious, attractive offer for Yahoo shares by a serious, deep-pocketed acquiror. Yahoo investors would receive either cash or stock in the new combined company.

Google wants to step in between this pending marriage-by-choice between Microsoft and Yahoo's shareholders. How do they intend to do it? Are they going to offer a higher price? Are they going to attempt to persuade Yahoo's shareholders that the deal is not in their interest?


Google's first stop wasn't to its bankers to make a better offer to Yahoo shareholders or to its public relations experts to make the case to shareholders why the acquisition was not in their interest.

Google's first stop was to Washington. Google immediately instructed its lobbyists to concoct arguments against the merger that would persuade congressmen and regulators to scuttle the deal. This type of "persuasion" hardly costs Google anything. For the price of some hundreds of thousands of dollars in lobbyists' fees, fees that legally bribe congressmen in the form of campaign contributions, wine-and-dine them over dinners and soirees at expensive restaurants or through more nefarious contributions to designated "charities" and honoraria for "speaking engagements," Google can scuttle the potential Microsoft-Yahoo deal on the cheap. Certainly for a lot less money than having to top Microsoft's $42 billion offer for Yahoo.

Google will wrap all of this in some sort of argument about how a Microsoft-Yahoo combination will hurt "the public." That argument is expensive hogwash concocted by mercenary economists and lawyers. Even if Microsoft and Yahoo merged, their combined market share in Internet search would be a fraction of Google's. Google is the big gorilla in Internet search (a position they did earn legitimately) and they would remain the big gorilla even after a Microsoft-Yahoo merger. (Actually, it doesn't matter what Microsoft-Yahoo's market share would be. Even if it would far exceed Google's, it represents no harm to anyone. Such market share was earned in the marketplace and would have to be defended in the marketplace.)

Google earned its impressive leadership in Internet search and advertising by aggressively offering a more valuable service than its competitors. I use Google everyday and I marvel at the elegance and power of how they make the Internet useful to me. Google earned their position, but instead of keeping it through further entrepreneurship, they will use the same method the Mafia uses to keep its "market share": the pointed end of a gun.

The fact that this gun is legally held by the chairman of the Federal Trade Commission or by the Speaker of the House does not change its nature.

Capitalism is the system based on the opposite principle to the Google principle used against Microsoft and Yahoo. Capitalism is not based on force, but on voluntary trade. It is based on a person's right to his own life and the corollary of that right, his right to property. No one has the right to violate another's rights through the use of force.

That is exactly what Google wants to do. It wants to use the government's policing power to violate the rights of Microsoft's and Yahoo's shareholders to associate or not as they see fit.

Remember that Google's actions, in their essence, are no different than a Mafia chieftain who hires a street gang to tear up and destroy businesses that refuse to pay him protection money.

This is not capitalism; this is hooliganism.


SN said...

Shame on Google for wanting to use political force against a competitor.

Galileo Blogs said...

Yes, just as Microsoft did the same earlier to Google with its attempted purchase of DoubleClick.

When are these people going to get a clue? Or, are they going to keep cutting each other up with swords while the ship goes down around them?

To the extent it is ignorance of the nature of capitalism, I wish them enlightenment. All of us will benefit because it will re-focus their efforts on production, not on trying to find ways to kneecap their competitors.

To the extent they do it knowingly, I condemn them, just as I would condemn Tony Soprano.

Starling said...

There is nothing inherently "uncapitalistic" about this move by Google. Firms compete in the non-market environment as fiercely as they do on the market environment. David Baron, a strategy professor at Stanford University, has written an entire textbook and produced much research on the nature of non-market competition.

In short he reminds us that the rules of the game ar defined in the non-market sector, especially but not exclusively, regulatory and legal institutions. He argues compellingly that the integration of non-market and market strategy are essential to achieving and maintaining sustained competitive advantage.

Galileo Blogs said...


I will make two points in response to your comment.

First, you have to properly understand what capitalism is. Capitalism is not whatever system happens to exist right now in the United States, Europe or Japan.

Rather, capitalism is a political/economic system based on the individual right to life and property. Those rights are absolute. This means that no one has the right to abridge or interfere with those rights, regardless of whether that entity is a government or an individual.

So, just as I do not have the right to mug another person and take his wallet, neither does the government have the right to regulate or tax an individual or business.

Our American system is not capitalism. Rather, it is a mixed economy. It is a mixture of capitalist elements along with growing statist elements.

America is a combination of free market elements and socialist or fascist elements. The elements of this mixture exist at the same time. Thus, America is a mixed economy, not a capitalist economy.

Reflecting the capitalist element, anyone can start a business and make profits. But, reflecting the statist element, he is subject to taxation of those profits and arbitrarily changing regulations affecting every aspect of how he runs his business. This includes the random threat of antitrust lawsuits from competitors.

In the context of Microsoft and Google, this means that when either company is developing a product and selling it in the open market, it is acting in a capitalist manner. But, when either company invokes government to *forcefully* prevent a competitor from engaging in business, it is acting contrary to the principles of capitalism. It really doesn't matter whether their action is legally-sanctioned, for example under antitrust laws, or whether it involves hiring a criminal gang. In either case, it involves using force to violate the rights of the competitor.

As for whether it is in either company's self-interest to engage in this behavior, consider how much Microsoft has suffered from the antitrust laws. It has had to pay billions of dollars in fines, turn over confidential programming code to competitors, and it has had to step away from advantageous mergers.

Given how much Microsoft has suffered from the antitrust laws, would it have been in Microsoft's self-interest to fight antitrust on principle? Or was it in Microsoft's self-interest to use the same laws that hobbled them to prevent Google from acquiring DoubleClick, as an example?

The former is true. Microsoft would have been much better off if it had fought the antitrust laws on principle. If Microsoft had fought the antitrust laws as being *immoral*, it is likely they would have suffered much less under them. For example, if Microsoft had fought the original American prosecutions in the 1990s in a self-confident, principled manner, it is unlikely that the Europeans would have been able to get away with so much subsequent harrassment of the company. Instead, today the Europeans have virtual carte blanche to harrass Microsoft (and other American and European companies) at will.

Instead of fighting the antitrust laws in a principled manner, Microsoft morally sanctioned those laws by using them in its opposition to Google's acquisition of DoubleClick. Thus, the underpinning of the antitrust laws was strengthened, Microsoft's hypocrisy was exposed, and now Microsoft faces Google doing the same thing to them with their proposed purchase of Yahoo.

Google should learn from Microsoft's sorry history with antitrust. By picking up that tool to hammer Microsoft, Google is empowering sundry future companies to hammer them with antitrust. Consider that Google only recently has achieved its dominant position in the brand-new industry of Internet search and advertising. With respect to the Internet, Google is at the same level of visibility to the antitrust "cops" as Microsoft was in the early 1990s. Given Google's dominant position in this new industry, how long will it be before Google begins to get hamstrung by the U.S. and European antitrust enforcers?

By using antitrust to bugger each other, Google, Microsoft and other companies only end up strengthening the power and moral sanction of the state to bugger them with these laws. In essence, each time one of these companies invokes antitrust against a competitor, it is really buggering itself.

David Baron at Stanford has an approach that might achieve short-run gains for the companies willing to aggressively compete in the "non-market" (i.e., government-sanctioned force) domain, but it only does so at the cost of medium-term and long-term harm to the companies that employ these "non-market" methods.

What these companies and business school professors every need to understand is that for our society to truly achieve freedom and prosperity, all forms of "non-market competition" must be outlawed. Property rights must be properly defined and stringently enforced. The only form of competition that should exist is market -- i.e., capitalist -- competition.

But to do this, all parties must first understand what capitalism is. With all due respect, that is what you need to do.

To summarize, understand what capitalism really is, and thereby recognize that antitrust, et al., -- i.e., all the government-sanctioned uses of force -- is contrary to capitalism and therefore self-destructive for the firms that use these methods.

For further elaboration including good articles on the nature and history of capitalism, I commend to you the book, "Capitalism: The Unknown Ideal" by Ayn Rand.

To get a quick glance of these ideas, take a look at the online "Ayn Rand Lexicon" which contains extensive quotes from the above book and others. It can be found here:

Look up the entries under "capitalism", "interventionism" and "mixed economy".

Another excellent fictional description of a world where "non-market competition" runs rampant is "Atlas Shrugged" by the same author.