When Monopolies Work

1 May 2015
When Monopolies Work - Featured image

When one of the leading participants in the development of the digital economy writes a book about the essences of business management, entrepreneurship, and innovation in the modern world, it pays to sit up and take notice of what he is writing.

When the author happens to be Peter Thiel—the billionaire Paypal founder, investor in Facebook, LinkedIn, SpaceX and Airbnb, and philanthropist to such causes as sea steading (permanent dwellings at sea, out of reach of government interference)—the book promises to be most instructive.

Thiel’s book Zero to One: Notes on Startups, or How to Build the Future certainly does not disappoint on that score.

Thiel’s central idea is that it takes more than the mere replication of existing goods and services available to durably extend the bounds of an economy.

For all the controversy globalisation elicits, Thiel sees it as merely facilitating an act of replication, albeit on a massive scale:

Taking things that work somewhere and making them work everywhere … The Chinese have been straightforwardly copying everything that has worked in the developed world: 19th century railroads, 20th century air conditioning, and even entire cities.

But to truly lift economic performance to another level, we need new productive ventures which provide previously unanticipated goods and services.

Or, in Thiel’s words, it is the transformative, disequilibrium leap from ‘zero to one’ and the provision of new goods and services which makes our lives prosperous and enables flourishing.

From conventional to cloud computing through to the hypothesised technologies to extend human lifespans, Thiel’s book puts technological developments front and centre as the single enabling thread that makes it possible for big economic leaps to take place.

Thiel is thus a full-throated supporter of monopolistic positions in the market, as created by entrepreneurial efforts that win the approval of consumers. This support for monopoly stands in sharp contrast to the elegant— though unrealistic—model of perfect competition pervading our economics textbooks, which envisions a world of fully knowledgeable price-taking suppliers supplying the market with homogenous products.

The underlying basis for Thiel’s support for monopoly, however, is the fundamental virtue of economic transformation. As Thiel states it, ‘creative monopoly means new products that benefit everybody and sustainable profits for the creator. Competition means no profits for anybody, no meaningful differentiation, and a struggle for survival’.

The key here is that markets must remain sufficiently open to new entrants, so at least contestability pressures ensure that innovators who secure monopoly positions— such as the initial stages of Rockefeller’s Standard Oil or Gates’ Microsoft—are kept on guard to keep delivering quality, affordable products for the buying public.

Given the need for Schumpetarian innovation (new products, markets, managerial techniques) to outrun government stupidity (taxes, regulations, wasteful spending), it is somewhat surprising that Zero to One devotes little attention as to how public sector intervention, more often than not, harms market-led betterment ventures.

But what Thiel does say about government is vitally important. Specifically, he refers to the changing nature of government that increasingly prioritises keeping up with short-time horizon redistributional concerns:

The government mainly just provides insurance; our solutions to big problems are Medicare, Social Security, and a dizzying array of other transfer payment programs … To increase discretionary spending we’d need definite plans to solve specific problems. But according to the indefinite logic of entitlement spending, we can make things better just by sending out more checks.

The ultimate consequence of this strategy adopted by governments worldwide is a rapid increase in public sector indebtedness, implying future tax increases which would destroy the very private capital needed to ensure the unique innovations and robust economic growth that Thiel praises.

In a particularly interesting contribution, Zero to One describes the pitfalls surrounding the emergence of the renewable energy investment bubble, mainly induced by government subsidies and regulatory holidays.

Thiel makes the poignant observation that Clean tech companies effectively courted government and investors, but they often forgot about customers. They learned the hard way that the world is not a laboratory: selling and delivering a product is at least as important as the product itself.

Now, Peter Thiel considers that meeting our future energy needs will ultimately depend upon a judicious mixture of technological developments and of market adaptations, but these need to be strictly of small, incremental scales and backed by hard-headed business plans and cost-benefit analyses.

Perhaps the most outstanding feature of Peter Thiel’s Zero to One is not so much its content, but the sheer fact that a private sector entrepreneur has taken the effort to write anything about the keys to economic success in the modern world at all.

The tenets of modern socialism— loosely characterised by a set of beliefs such as tax confiscation from creative entrepreneurs, subsidy privileges for renewable energy capitalists and public sector workers, regulatory shelters for unionists, and Nanny State interference in the lifestyle choices by individuals— have innumerable defenders in the academic and media spheres.

Defenders of the right to exercise economic liberties—provided those liberties are exercised honestly and with due regard to the rule of law— are few and far between.

This disparity in the relative numbers of troops in the battle of ideas, as it were, is unfortunate, though perhaps understandable for the business community given the threat of adverse tax and regulatory changes if business leaders step out of the politically correct line.

Nonetheless, we need business leaders and entrepreneurs to stick their necks out, at least once in a while, to defend the merits of producing goods and services, at great cost and under uncertain conditions, for the masses, and receiving a profit as reward for efforts.

More than simply a business management self-help book, Zero to One is an original contribution which rightly sings the praises of the often profound and radical market tested innovations enhancing every aspect of our lives. It is deserving of the widest reading audience.

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