Is There A Tragedy of The Commons In Big Tech?

The tragedy of the commons is a situation in a shared-resource system where individual users acting independently according to their own self-interest behave contrary to the common good of all users by depleting or spoiling that resource through their collective action.

We have seen “winner take all” in a lot of big tech.  The companies most often cited when we think about “winner take all” are Google, Amazon, Twitter and Facebook.  Apple to a certain extent though they have plenty of competition from both Google and others.  Both political tribes in the country are talking about regulation and antitrust to reign them in.  From the right side of the aisle, it is mainly because the Big Tech companies internal corporate culture is so discriminatory which has given rise to groups like The Lincoln Network.  On the left, they are so ticked off that Trump utilized Big Tech to beat Hillary they don’t want any chance of it happening again.

My friend Glenn Reynolds wrote a book  The Social Media Upheaval about it.  Here is an excerpt about Twitter that he released on his blog today.  What is interesting about this excerpt is he quotes Columbia Law Professor Tim Wu, who I just heard speak with Tyler Cowen at the Stigler Institute.  Wu said, “I am a Democrat”, and made some very good points about regulating Big Tech.  Cowen made some excellent counterpoints about not regulating Big Tech.  Wu and Cowen have books out about it and Wu’s quote that Glenn pulled is this one about how industry concentration leads to political corruption:

‘Big monopolies aren’t just an economic threat: they’re a political threat. Because they’re largely free of market constraints, they don’t have to put all their energy into making a better product for less money. Instead, they put a lot of their energy into political manipulation to protect their monopoly.’

Looking through the notes I made at the conference will give you some flavor of the topics.  Professor Wu made the point that current antitrust laws are too focused on price effects and not worried about bigger issues.  He would like to reboot antitrust to look at data, and to look at concentrated private power.  He thinks social media and big tech is a threat to democracy and government.

On the other side, Cowen remarked he wasn’t concerned at all. Consumers aren’t being harmed, they are actually being advantaged because Big Tech is giving them the stuff they want at a cheaper price.  Consumer surplus is being generated.  There is also the problem of trying to create a “digital regulatory agency” that has the brainpower and depth of knowledge inside of it to regulate a rapidly fast-moving marketplace.  After all, the SEC didn’t stop Enron or Bernie Madoff.

There is also another outside problem.  Big Tech is made up of US companies.  Do we want to break them up or inhibit them since we are in a nation-state technological race with countries like China?  If we inhibit them, will we lose battles on things like artificial intelligence that would compromise our ability to win on a military battlefield?  Would inhibiting them make the US less able to use social media technology to influence the psychology, hearts, and minds of the enemy with electronic propaganda?

As the onion is peeled, there are certain practices that tech companies engage in that would make any free market libertarian with no political ideology squeamish.

For example, if we look at lobbying spending you might shift a little in your chair.

I tried to take a good photo of this slide but it didn’t come out that great.  The yellow highlighted ones are the Big Tech companies.  Amazon, Facebook and Google spent roughly $49MM on political lobbying last year.  The other big ones are pharmaceutical and defense contractors.  Don’t think for a moment that they aren’t trying to help write policy that will protect their businesses.  Google spent almost double Facebook, but they are a conglomerate so they have more issues at the moment.

The platforms also spent a combined $39MM on political donations to candidates.  That’s outside of their lobbying expenditures which were to different groups who work for them to contact both regulatory and legislative bodies.  The bulk of their donations are federal but they do participate in state elections too.

Glenn makes an excellent point that transcends any business or societal structure; the early blogosphere was a ‘loosely coupled’ system, one where changes in one part were not immediately or directly transmitted to others. Loosely coupled systems tend to be resilient, and not very subject to systemic failures, because what happens in one part of the system affects other parts only weakly and slowly. Tightly coupled systems, on the other hand, where changes affecting one node swiftly affect others, are prone to cascading failures. Usenet was one such system, where an entire newsgroup could be ruined by a spreading ‘flamewar’. If a blogger flamed, people could just ignore the blog; when a Usenet user flamed, others got sucked in until the channel was filled with people yelling at each other. As Nick Denton wrote, the blogosphere ‘routes around idiots’ in a way that Usenet didn’t, because the blogosphere doesn’t depend on the common channel that a Usenet group did.

You might say the early blogosphere was decentralized, and the now more organized internet with huge centrally planned nodes is centralized.  If it sounds familiar, capitalist societies are more decentralized than socialist/communist societies.

By the way, financial markets have devolved from loosely coupled communities into markets with big centralized market makers.  This isn’t just an issue in social media.

Given that there are negative externalities, what should we do?  After all, you don’t have to use any of the platforms.  They are opt-in.  But, as Glenn cites, going off them you lose your influence.  At the Stigler Center when I made that point Yale economics Professor Fiona Morton said her daughter wasn’t on Facebook but the college she is going to created a Facebook group and she felt like she had to join to make a connection with future classmates.  Hey, you still don’t have to be on the platform but there are powerful psychological factors that tip in favor of you joining up.

Nobel prize winning economist Glenn Romer just wrote a piece saying because there is a negative externality, we should tax that externality. If you are a fan of Ronald Coase, this solution ought to resonate with you.  Property rights are clearly assigned.  You don’t have to go on the platforms.  When you go on, there are both positive and negative externalities that occur.  The cost versus opportunity costs to society of the negative ones are great enough that society ought to charge a tax to “fix” the externality.  Taxing it ought to mean we get less of it.  Romer writes,

It is the job of government to prevent a tragedy of the commons. That includes the commons of shared values and norms on which democracy depends. The dominant digital platform companies, including Facebook and Google, make their profits using business models that erode this commons. They have created a haven for dangerous misinformation and hate speech that has undermined trust in democratic institutions. And it is troubling when so much information is controlled by so few companies.

What is the best way to protect and restore this public commons? Most of the proposals to change platform companies rely on either antitrust law or regulatory action. I propose a different solution. Instead of banning the current business model — in which platform companies harvest user information to sell targeted digital ads — new legislation could establish a tax that would encourage platform companies to shift toward a healthier, more traditional model.

The tax that I propose would be applied to revenue from sales of targeted digital ads, which are the key to the operation of Facebook, Google and the like. At the federal level, Congress could add it as a surcharge to the corporate income tax. At the state level, a legislature could adopt it as a type of sales tax on the revenue a company collects for displaying ads to residents of the state.

This is for targeted ads only.  The tax would be progressive. States could also charge the tax and the way Romer is designing it, it would fall directly on the companies.  The companies could certainly try to innovate to avoid it.  They won’t be passive that is for sure.  Of course, all corporations pass taxes on to customers in one way or another.  It’s not clear to me how that tax will be passed on.  The state of Illinois will, and the city of Chicago already does, assess a tax on streaming which is simply passed along.  Romer’s tax idea seems stickier than that.

I have seen calls from many people to use antitrust legislation to break the companies up.  Make Facebook divest Instagram and What’s App.  That sort of logic doesn’t sit well with me because it doesn’t do anything about the tragedy of the commons that Romer points out.  It just dilutes things into several centralized platforms.  That might create a higher opportunity cost for the public.

I would tread lightly and wade into the regulatory/antitrust water slowly.  It’s pretty clear there is a problem.  It’s very unclear how big it is and what we should do about it.  Romer’s tax seems like a good idea on the surface to engage in a slower process and will be a start that everyone can actively measure.