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Meta

The Magic of Science

Suppose that it were discovered that knocking on wood reduces the incidence of premature death by, say, 10%. Suppose that the provenance of this statistical regularity were impeccable. That it were found not only in data gathered from life, but also in carefully constructed experiments involving millions of subjects observed over decades.

Suppose, further, that a great deal of research were done on the mechanism behind such a connection between a knock-knock-knock and longevity, and that all possible mechanisms were ruled out. Knocking on wood in a vacuum produced the same result. So too did knocking with a mechanical prosthetic rather than knuckles. Even asking someone else to knock for you did the trick.

Science would, then, be forced to conclude that the connection between knocking on wood and longevity is a fundamental law of nature, up there with gravity, albeit an eccentric law given its startling narrowness (suppose that it were only to work for humans—animals knocking on wood were not to live longer) and seeming lack of integrability with the other laws of physics.

Question: would we then be forced to conclude that magic is real, since, in effect, an element of human superstition had been found, in the light of science, to be empirically verifiable? Or would the fact that it had come to be empirically verifiable make it cease to be magic?

In other words, is our disenchantment with the modern world due to the fact that the laws that science has proven are, well, boring, and don’t involve the superpowers we once so hoped were real? Or is our disenchantment caused by science itself, by an orientation to the world that seeks always to shine a light on things instead of to respect the mystery?

Categories
World

The Counterweight that Isn’t

The Muslim World. (Mohsin, OIC Member States, CC BY 3.0)

As the United States comes now to face Russia and China in great power competition, one feels intensely the lack of a unified Muslim world. For one need only take a look at a map to appreciate that it is a dagger at once aimed at the Russian belly and the Chinese back—and has historically been an important antagonist of both empires. There is no question that, were Islam not the geopolitical non-entity that it is today, Russian and Chinese horizons would be badly limited by the need to protect their flanks. Instead, the only threat the Muslim world presents to these countries today is as an enticement to conflict in dividing up its territories in Central Asia.

Categories
World

Atlas Shrugged

After the collapse of the Soviet Union, the United States believed, correctly, that they were the world’s only remaining great power. China was poor. Europe had long been exhausted by its two great 20th century wars, and political collapse in Russia had reduced her to the rank of a middle power—an echo of this view is found in the observation, oft-repeated these days, that the Russian economy is the size of Italy’s. The question then became whether the United States should use its power to police the world, or whether it should allow the lesser powers to mistreat each other or their people.

The first Gulf War seemed to say that, at least when it came to the revision of borders, the United States would police the prevailing territorial status quo. Iraq had annexed Kuwait, and the United States rode in to reverse that outcome. American-led military action also put a stop to Serbian expansionism a few years later, seemingly reinforcing this signal.

The American commitment to protecting individual persons around the world, as opposed to sovereign nations, seemed somewhat weaker, but was by no means non-existent. There was much hand-wringing in Washington about failure to intervene to quell genocide in Rwanda, for example.

The picture of America as sole great power was reinforced over the ensuing decade. The September 11 attacks, carried out by a ragtag group without the backing of any government, suggested that the United States were without any substantial adversary. And the response—the invasion of Afghanistan and the adventure in Iraq—suggested that the United States could strike any nation at will without fear of anything more than a brief tut-tutting from global public opinion.

Then came Russia’s annexation of Crimea in 2014, which challenged America’s claim to sole great power status that had by then prevailed for the past quarter century. The first Gulf War, in 1991, had been a warning to the world: the United States, as sole great power, would not tolerate the revision of borders. Now Russia had chosen to revise a border. Would the United States seek to do to Russia—a country it had treated like a middle power for a quarter century—what it had done to Iraq in 1991?

The response was: crickets. The United States did nothing. And just like that, two new great powers (re)appeared on the world stage: Russia and China.

Things had changed over the past decade or so. First, Russia’s weakness, which had fundamentally been a political weakness caused by the collapse of the Soviet state, was gone; the country had regained political stability and was now once again capable of acting decisively on the world stage. And it still had its nuclear weapons, and plenty of delivery channels, which its Italian-sized economy was more than enough to maintain. Second, breakneck economic growth had vaulted China’s economy into competition with the United States, and her wealth was buying her the military capabilities she would need to be a great power as well.

Great power status is not just about wealth and military power, however. It is a mindset. Britain, France, and Germany could all ramp up military expenditures and challenge the United States. But they do not because they were exhausted mentally by their attempts to maintain their great power status in the 20th century. They are content to play second fiddle to the United States. Russia, however, emerged triumphant from the same wars that exhausted Britain, France, and Germany. And China has waited two centuries to regain what it sees as its rightful place as center of the world. Both countries have the great power mindset.

America’s failure to respond to Crimea suggested that perhaps America had lost it—not the mindset needed to be a great power, but the mindset needed to be the sole great power. For any country that fears war more than it fears loss of status loses its status immediately, and what was at stake was America’s claim to be the guarantor of world order. But America’s stated justification for failing to respond to Crimea was precisely that it feared war.

Russia got the hint immediately, and within the year intervened militarily in the Syrian civil war, propping up a regime that the United States opposed, not least on human rights grounds. With that, Russia had challenged not only America’s commitment to protecting states against states (Ukraine against Russia) but also America’s admittedly much more equivocal commitment to protecting people against human rights violations.

Again, the response was: crickets. The United States was willing to tolerate Russian policing of the very region over which the United States had most asserted its own control over the past 25 years. Americans themselves didn’t seem to notice, but anyone who was paying attention (i.e., the rest of the world) understood this to be a signal humiliation.

Meanwhile, even before Russia’s annexation of Crimea, the Chinese had embarked on a campaign of island building in international waters that China claimed as its own. This was another territorial revision and so another direct challenge to America’s claim to guarantee the territorial status quo.

Here, too, the response was: crickets. And the islands have become a sprawling archipelago.

What we have witnessed over the past ten years is the collapse of the unipolar world order over which the United States presided after the fall of the Berlin Wall. It should be no surprise that Russia would continue to expand territorially in the wake of such a collapse. It will be no surprise when China does as well, not least by retaking Taiwan.

At present, the United States remain the strongest power both economically and militarily. But, particularly in respect of China, that may not continue.

The first question America must answer for herself is: does she want to reestablish her former role as the world’s sole great power? If the answer is yes, then she must fear continued loss of that status more than she fears war. Russia, certainly, values her return to great power status more than she fears war. And that is precisely why she has returned to that status.

So, where do the United States stand on this?

The answer would seem to be: no, America does not want to defend her sole great power status.

And despite enjoying it mightily while it lasted, she perhaps never was willing to suffer anything to protect it. There was, after all, no real risk involved in the first Gulf War; it afforded America the equivalent of “cheap talk” in game theory—an opportunity for empty posturing.

Moreover, if America had wanted the role of sole great power to begin with, she would have exploited the vast nuclear advantage she enjoyed immediately after World War Two to deny Russia the superpower status she later enjoyed.

Having failed to do that, America would, in any event, later have exploited the collapse of the Soviet Union to ensure that Russia never again could pretend to empire.

And America would never have promoted Chinese economic growth in the 1980s, 1990s, and 2000s, for America would have heeded the warning attributed to Napoleon, to wit: “let China sleep, for when she wakes, she will shake the world.”

Categories
Antitrust Monopolization

Victor Hugo: Pro-Trust

[T]he prosperity of [the town] M. sur M. vanished with [its mayor and leading business owner] M. Madeleine; . . . lacking him, there actually was a soul lacking. After this fall, there took place at M. sur M. that egotistical division of great existences which have fallen, that fatal dismemberment of flourishing things which is accomplished every day, obscurely, in the human community, and which history has noted only once, because it occurred after the death of Alexander. Lieutenants are crowned kings; superintendents improvise manufacturers out of themselves. Envious rivalries arose. M. Madeleine’s vast workshops were shut; his buildings fell to ruin, his workmen were scattered. Some of them quitted the country, others abandoned the trade. Thenceforth, everything was done on a small scale, instead of on a grand scale; for lucre instead of the general good. There was no longer a centre; everywhere there was competition and animosity. M. Madeleine had reigned over all and directed all. No sooner had he fallen, than each pulled things to himself; the spirit of combat succeeded to the spirit of organization, bitterness to cordiality, hatred of one another to the benevolence of the founder towards all; the threads which M. Madeleine had set were tangled and broken, the methods were adulterated, the products were debased, confidence was killed; the market diminished, for lack of orders; salaries were reduced, the workshops stood still, bankruptcy arrived. And then there was nothing more for the poor. All had vanished.

Les Miserables
Categories
Antitrust Monopolization

Yet Another Amazon Antitrust Paradox

Amazon paradoxes are proliferating. Here’s another: to the extent that Amazon is engaged in anticompetitive conduct, it is the conduct of opening its website to third-party sellers, not, as Amazon critics hold, the conduct of failing to be even more welcoming to those third-party sellers.

As the Times’ David Streitfeld, who has perhaps done more than anyone else to advance the notion that Amazon is unreasonably severe with third-party sellers, seems slowly to be realizing, Amazon’s third-party sellers are, well, a problem. They sell junk. They sell defective products. They fool their customers. And then they disappear.

As the Wall Street Journal alerted us more than two years ago now: Amazon’s open door policy with respect to third-party sellers, which sellers constitute more than 50% of sales on Amazon.com, has caused Amazon effectively to “cede control of its site,” badly degrading the shopping experience.

Which begs the question: why? Why would Amazon let this happen? The answers is: “dreams of monopoly.”

Every other retailer in the world seems to understand that one of the biggest pieces of value retail can deliver to consumers is: curation. The retailer does the hard work of sifting through the junk and the fakes and the defectives to find the good stuff, so that consumers don’t have to do that themselves. Why do you shop at Trader Joe’s instead of your local supermarket? Because you know that if Trader Joe’s is selling it, it’s probably not only of reasonable quality, but likely tastes great too. That’s the value of curation.

But, as Streitfeld correctly notes, Amazon has all but given up on it. Anyone can list products on Amazon. And the company makes almost no effort to flag the best products for you. Ever since that Journal article, the public has known that “Amazon’s Choice” is just an empty label slapped on a piece of third-party seller junk by an algorithm parsing sales trends. No one at Amazon can vouch for the underlying product’s quality, usefulness, or safety.

You might have hoped, as I once did, that at least the products Amazon itself sells under its own brand names, like Amazon Basics, are competently curated. But those, too, have turned out to be no more than the outputs of sloppy and stupid algorithms. The programs troll Amazon’s site for popular third-party products and flag them to Amazon product teams, which then contact the original equipment manufacturer in China, slap on an Amazon Basics logo, and bring the rebranded product back to market. The result is that the Amazon-branded products can blow up in your face, just like the stuff sold by third-party sellers.

What would cause Amazon intentionally to forego delivering curation value to its customers and so risk alienating them from its website? The answer must be that Amazon gets something that it thinks is even more valuable in return for running this risk.

That thing is scale.

By opening its doors to third-party sellers, Amazon was able to bring much of the commercial internet onto its website, ensuring that if a consumer wanted to find something, he didn’t need to search the Internet, he just needed to search Amazon.com. And that in turn ensured that most consumers would do their online shopping on Amazon. And that in turn ensured that if you wanted to sell something online, you wanted to do it as a third-party seller on Amazon. And so on. In econ speak, opening the door to third-party sellers created massive “network effects” for Amazon, effects that make Amazon.com essential for both buyers and sellers.

Curation would destroy that because curation is costly. Algorithms aren’t good enough to curate effectively, as the piles of fakes, defectives, and junk on Amazon.com today shows. So if Amazon were to take curation seriously the company would need to pay people to do it. And even Amazon can only afford so many people. So Amazon would only be able to curate so many products. Which means that Amazon would not be able to offer everything on its website anymore. Which would mean that everyone would no longer shop on Amazon. Which would mean that fewer third parties would need to list their products on Amazon. And so on. Amazon would be better. But it would also be smaller.

And Amazon would face more competition, because now Amazon’s advantage wouldn’t be its network—the fact that Amazon carries everything and so everyone shops there—but rather the quality of its curation. There can only be one retailer that carries everything and at which everyone shops. But there are lots of retailers that curate—and compete on curation.

So, Amazon’s open-door policy toward third-party sellers, and the danger and frustration to which that exposes its customers, is anticompetitive. At least in the sense that it is meant to extract Amazon from the fierce competition based on curation that confronts most retailers, and to put Amazon instead in the unique position of being flea market to the Internet.

Amazon clearly believes that the benefits it gets from avoiding having to compete on curation outweigh the costs to the company of forcing its customers to wade through oceans of junky, fake, or defective products on its website. How could Amazon not, when imposing those costs on consumers makes Amazon indispensable, and hence immune to any consequences associated with alienating those consumers?

Well, not completely immune. There are still other retailers out there. And the more toxic Amazon’s site becomes—the more it really does come to resemble a flea market—the more willing consumers will be to put up with the cost and inconvenience of shopping elsewhere. I personally no longer buy books from Amazon because I hate dodging fakes on its site—buying elsewhere costs more, and sometimes I have to wait weeks longer for my books to arrive. But I’m happier.

The key for Amazon is finding a way to engage in just enough curation to prevent consumers from leaving in droves, but not so much that sellers abandon the platform and it ceases to become indispensable to consumers.

The irony here is that the anti-Amazon zealots, in fighting, under the banner of “self-preferencing,” every attempt by Amazon to impose order on third-party sellers or to curate by promoting its own brands, are effectively pushing Amazon to retain its monopoly position by continuing to welcome the entire commercial Internet onto its website.

Amazon critics: If you really want to make Amazon small, and quickly, help Amazon to engage in more self-preferencing. Ask Amazon to sell only its own branded products on the site, kicking all third-party sellers off. Or ask it to discriminate more heavily against some third-party sellers in favor of others, until Amazon.com becomes like every other retailer: offering a relatively small selection of products that Amazon believes consumers will like the most.

It should be clear that Amazon’s policy of being a flea market, instead of a normal, curating, retailer, is anticompetitive. But just because something is anticompetitive—in the sense that it harms competitors and hence competition—doesn’t make it bad, or an antitrust violation, unless the conduct also harms consumers. So, does it?

The answer must be no. Because, as I have said, Amazon is not completely immune to consumer dissatisfaction. You can find almost everything sold on Amazon elsewhere; it just takes more time and expense to get it. So Amazon today presents the following choice to consumers, who can shop elsewhere: Speed or safety; A low price or the genuine article; One stop shopping or purchases free from defects. And consumers so far have chosen the former, which suggests that they prefer it.

Antitrust cannot eliminate the tradeoff that seems to exist here between scale and quality. But consumers can decide which they prefer. If Amazon doesn’t do something about its site, if it doesn’t strike a better balance between scale and quality, if the junk and the fakes and the defectives continue, consumers will rebel. They will learn that the extra time and expense required to secure curation is worth it. And Amazon will go down; or change to save itself.

I for one don’t plan on buying any more books from Amazon anytime soon.

Categories
World

Calling His Buffer

It makes sense to annex territory that welcomes you. That’s why Crimea went off without a hitch. And so, perhaps, Donbas, too. But Kiev? There would be an insurgency. And the West would supply it. And who would want that? So it’s the Donbas or just a bit of fun watching the West sweat. Either way, the Orange Revolution will still have left the West way, way ahead on this one, for Russia’s longstanding, historic buffer zone (“krain” is a slavic word for a march, and a march is a borderland) will still mostly be on the West’s side. At least for now.

One is struck by how unlike 1939 the situation really is.

Back then, Russia’s buffers were buffers against Germany, and those same buffers were also Germany’s buffers against Russia. And the West, in the sense of Britain and France, did not border those buffers at all. When Poland (the buffer at issue back then) sided with the West, it had no prospect of support across a land border.

In siding with the West, Poland became of no value to either Germany or Russia, each of which would otherwise have wanted to support it as a buffer against the other. Instead of being a friend of one and a threat to the other, Poland became a threat to both. And so the two powers got together and agreed to divide Poland between themselves via the secret protocol to the Molotov-Ribbentrop Pact.

The West could not oppose this by fomenting trouble in-country—as it certainly can do with Ukraine today—because the West had no land borders with Poland across which to run supplies. To stop it, the West had to go to war. Which it did. Although it never did succeed at saving Poland.

But today, Germany, defeated in the Second World War, is now with the West. And Poland is now with the West. And Russia is down to its last buffers, Belarus and Ukraine. And Ukraine wants out. And has plenty of friends on its western borders.

Categories
Antitrust Monopolization

When You Can Win with Advertising, Why Win in Fact?

By the end of last year, 150 million Chinese were using 5G mobile phones with average speeds of 300 megabits a second, while only six million Americans had access to 5G with speeds of 60 megabits a second. America’s 5G service providers have put more focus on advertising their capabilities than on building infrastructure.

Graham Allison and Eric Schmidt, Opinion: China Will Soon Lead the U.S. in Tech, Wall St. J. (Dec. 7, 2021), https://www.wsj.com/articles/china-will-soon-lead-the-us-in-tech-global-leader-semiconductors-5g-wireless-green-energy-11638915759.

Of course, it’s a bit rich to be reading this in the opinion pages of the Journal, which can usually be found defending laissez-faire commercialism.

The American telecom industry is a marketing-driven oligopoly that colludes tacitly to minimize expensive investment in infrastructure and competes instead for market share via worthless, unproductive advertising.

Things would have been different if we had not broken up the old Ma Bell, an engineering-focused organization that took national defense very seriously. As a monopoly, it knew that it had to serve a public purpose or the pitchforks would come out.

Unfortunately, they came out anyway, and antitrust got it, and we are left with the miserable, middling shards that we have today—shards that quickly replaced their engineering culture with a marketing culture, because once they were small they didn’t need to worry about public scrutiny and were free to work exclusively for themselves.

Categories
Miscellany Philoeconomica

An Economics of False Advertising

The first fundamental theorem of welfare economics states conditions under which any price equilibrium with transfers, and in particular any Walrasian equilibrium, is a Pareto optimum. For competitive market economies, it provides a formal and very general confirmation of Adam Smith’s asserted “invisible hand” property of the market. A single, very weak assumption, the local nonsatiation of preferences . . . , is all that is required for the result. Notably, we need not appeal to any convexity assumption whatsoever.

Andreu Mas-Colell et al., Microeconomic Theory 549 (1995).

Wow. So there is a mathematical proof that a “competitive market economy” is always efficient? And all that is required is “[a] single, very weak assumption, the local nonsatiation of preferences,” which translates into the reasonable assumption that people always tend to want more?

If only.

Page forward 70 pages and you encounter the following proviso:

We have, so far, carried out an extensive analysis of equilibrium equations. A characteristic feature that distinguishes economics from other scientific fields is that, for us, the equations of equilibrium constitute the center of our discipline. Other sciences, such as physics or even ecology, put comparatively more emphasis on the determination of dynamic laws of change. In contrast, we have hardly mentioned dynamics. The reason, informally speaking, is that economists are good (or so we hope) at recognizing a state of equilibrium but are poor at predicting precisely how an economy in disequilibrium will evolve. Certainly, there are intuitive dynamic principles: if demand is larger than supply then the price will increase, if price is larger than marginal cost then production will expand, if industry profits are positive and there are no barriers to entry, then new firm will enter, and so on. The difficulty is in translating these informal principles into precise dynamic laws.

Andreu Mas-Colell et al., Microeconomic Theory 620 (1995).

So, that great proof of the efficiency of competitive markets applies only to an economy in “equilibrium,” but economics has no idea how any economy would actually get into equilibrium?

Yes, that is exactly right.

Economics has shown that if buyers and sellers happen to trade at competitive prices in all markets, then the invisible hand will work great. But economics has never been able to show that buyers and sellers will actually bargain their way to competitive prices, even in “competitive market economies,” and even if they are rational profit-maximizers and all that.

Actually, even this proviso is false advertising. Because economics has actually gone and nearly proved the opposite of the proposition that buyers and sellers will always bargain their way to competitive prices: that buyers and sellers in competitive market economies can bargain their way to almost any set of prices—not just competitive prices—and, moreover, that they can bargain prices in circles forever, never achieving any equilibrium set of prices at all, much less the efficient competitive equilibrium set.

The entire project of free market economic theory is, in other words, a failure, and has been since these results appeared in the 1970s.

But you wouldn’t know it from reading the canonical graduate textbook in economics.

Categories
Miscellany

The Peril of Reasonable Inferences

Cortes goes to Mesoamerica, discovers a great empire, and plunders it.

Pizarro goes to South America, discovers a great empire, and plunders it.

Soto, who was with Pizarro in Peru, infers that there must be a great empire to plunder in North America.

He leads a military expedition through Florida, Georgia, Alabama, Mississippi, and probably Arkansas, finds no great empire to plunder, and dies of fever on the banks of the Mississippi.

Postscript:

The Spanish therefore give up on North America, more or less. No native empire had done the hard work of finding and extracting the continent’s gold for them. And no native empire had done the hard work of marshaling the population into labor units that could be exploited from the top by invaders. It seemed obvious that the hemisphere would be most easily dominated from the places at which native civilization was most advanced.

What saved North Americans from the slavery that befell Mesoamericans and South Americans in the 16th century was that they had not been brought under the centralized control of their own native emperor prior to the European invasions. In the language of James C. Scott, they, unlike their Aztec or Inca neighbors, had not yet been domesticated; they were still free. And that made it impossible for the tiny groups of Spaniards who were carrying out the colonial project to dominate them. For those groups operated by killing the native emperor and substituting themselves at the top of a pre-existing power structure.

Categories
Antitrust Monopolization

To Produce Is to Self-Preference

When you first enter antitrust from the left, you are struck by what appears to be a travesty: that a firm that monopolizes an input can get away with denying that input to downstream competitors.

One thinks to oneself: A monopoly using its power to smash a competitor. How is that not an antitrust violation? An antitrust that fails to prohibit that is a perverse, hollowed-out thing captured by the evil it was constituted to destroy. It is the equivalent of the criminal law not prohibiting killing with malice aforethought. Or the contract law not enforcing promises.

And then you get over it, because actually prohibiting monopolists from denying essential inputs to their competitors makes no sense. (I will explain momentarily.)

The trouble with antitrust today is that those setting the agenda from the left haven’t been in the field long enough to get over it.

And so we are left with the embarrassing legislation against “self-preferencing” that is currently making its way through Congress.

Self-preferencing as a concept is nothing new. It is denial of an essential input to a competitor, something that antitrust has, at various times, called a “refusal to deal,” “denial of an essential facility”, and “monopoly leveraging.”

The tech giant that “self-preferences” owns an essential input—its platform—that it denies to firms that compete with it in selling things on the platform. When Amazon uses its control over its website to prioritize advertisements for Amazon-branded products over those of third-party sellers, it denies full access to the platform input to those third-party-seller competitors.

The reason you cannot ban all denials of access to essential inputs—can’t ban self-preferencing—is that every single product produced and sold in the United States is a vast agglomeration of denials of access to essential inputs, as I point out in a recent paper. To ban all denials of essential inputs is, therefore, to ban production. Full stop.

And so the proposed legislation, which would ban self-preferencing by all firms that have websites with more than 50 million users and a market capitalization in excess of $600 billion, would simply make it illegal to have more than 50 million users and a market capitalization in excess of $600 billion.

The Make or Buy or Market Decision and Input Denial

To understand why all products are agglomerations of denials of essential inputs, it is useful to reflect that a company can go about adding a component to a product in only three possible ways.

The firm can make the product itself. The firm can buy the product. And the firm can let consumers buy the component on their own and attach it themselves. I call this the firm’s “make or buy or market” decision.

The first two options—to make or to buy—are what we conventionally mean when we say that a particular component has been incorporated into a product, and the decision whether to “make or buy” has long been a famous one in law and economics.

What has not been properly understood about these two options is that both always involve the denial of an essential input to competitors. Only the market option is consistent with an antitrust that would prohibit input denial as a blanket matter.

It follows immediately that production—the process of making or buying components and adding them together to generate a product—is impossible without input denial, and that a blanket antitrust ban on input denial would make production impossible.

Consider, for example, the act of adding an eraser tip component to a pencil.

The pencil maker can add this component in three basic ways. First, the pencil maker can manufacture the eraser itself from its basic components. It can buy the chemicals needed to make the eraser dough and then bake the dough in molds to produce the erasers. Of course, the firm would then need to solve the problem of how to acquire the precursors (and the oven, molds, and labor services required to run the operation), so making is in the end always buying. But for purposes of showing that making or buying both involve input denial, that doesn’t matter.

The second way the pencil company can add eraser tips to its pencils would be for it to buy them from an eraser supplier. The company would go out into the eraser tip supply market, find the supplier that offers the best quality at the lowest price, and do a deal.

The third and final way the pencil company can add eraser tips to its pencils—or, better put, can ensure that eraser tips are added to its pencils—would be for the company simply to sell eraser tips to consumers and leave it to consumers to affix them to pencils. The firm might sell eraser-less pencils and also separate eraser caps that consumers can buy and affix to the pencils. Or the firm might put a special ferrule on each of its pencils, perhaps like the one currently included with Palomino Blackwings, that would allow consumers to snap in a properly-shaped eraser that they could purchase separately from the pencil company.

Now, when a firm makes its own eraser tips to place on its pencils, the firm denies access to an input—its pencils—to outside manufacturers of eraser tips who would like their own eraser tips to be included on the firm’s pencils. The firm is in effect competing against those other eraser manufacturers in the market to supply eraser tips for the firm’s pencils, and in choosing to make its own eraser tips, the firm uses its control over pencils—an essential input from the perspective of eraser tip makers who have no way to get their products into the hands of consumers other than attached to pencils—to favor its own homemade product in the eraser tip market relative to those of competitors.

In the language of platforms and self-preferencing, the firm’s pencils are the platform that eraser tip manufacturers need in order to reach consumers, and in choosing to use only its own homemade eraser tips on its pencils, the firm engages in self-preferencing in the eraser tip market.

This is equally true when a firm chooses to buy rather than to make.

When the firm chooses a particular third-party supplier of eraser tips, the firm denies the pencil input to all of the other eraser-tip makers in the market. Once the firm has placed its order, none of the others can reach consumers, at least until the firm places a new order for more eraser tips.

Is Buying Really Input Denial?

There seem at first to be two problems with this argument that buying components is input denial. The first is that the third party supplier whose erasers are not picked by the pencil company at least had a chance to have them picked when the pencil company was still deciding which supplier to use. The supplier presumably lost out in some potentially competitive bidding process, which cannot necessarily be said for the case in which the firm chooses to make erasers in-house.

Be that as it may, it has nothing to do with the basic concept of input denial. A firm is no less forced from a market by denial of an essential input when the input holder thought it would not be profitable to supply the input than when the input holder thought that it would be profitable to supply the input. Indeed, one would expect that the underlying motive for input denial would always be the determination that supplying the input would be less profitable than denying it.

Where Is the Downstream Competition When You Refuse to Buy?

The second problem is that the pencil company does not seem to be competing against the eraser suppliers at all. Unlike in the first case, the pencil company does not actually manufacture any erasers of its own, much less sell them. But if the pencil company is no longer competing with eraser suppliers—just buying from them—then the pencil company cannot be said to be denying essential inputs to competitors.

But that is to miss what really bothers us about input denial. What we dislike about it is not that a product that is manufactured in-house by the denier benefits from the denial, but rather that competitors are harmed and the denier somehow benefits from that harm.

And here we can be sure that the denier does benefit.

For the denier would not choose a particular third-party supplier over others unless the denier stood to benefit from buying from that supplier rather than others. This benefit might come in the form of a discount on the price of erasers. Or it might come in the form of willingness of the supplier more faithfully to execute the instructions of the pencil company with respect to the specifications of the erasers. It might even involve a profit-sharing agreement without the pencil company formally owning the operations of the third-party supplier.

Whatever it may be, the pencil company benefits, and as a result of that benefit it is possible to say that, through the third-party supplier chosen by the pencil company the pencil company does in fact compete in the eraser market, and indeed favors its avatar at the expense of competing eraser suppliers.

In the language of platforms and self preferencing, the firm’s pencils are again the platform, and in choosing to buy from one supplier only—a supplier that necessarily offers some special benefit to the firm otherwise the firm would not buy from it—the platform self-preferences, in the sense that it puts the interests of a favored supplier above those of competitors.

Thus the only two ways in which a firm can incorporate a component into a product—making the component itself or buying the component—are both instances of input denial.

Only Selling Components Directly to Consumers Avoids Input Denial

Only the third means of adding a component to a product—that of selling the component directly to consumers and allowing them to add the component on themselves—manages not to be input denial. Indeed, only this “market” case corresponds to what we mean when we speak of the sort of freely competitive market that antitrust is meant to promote.

Only when the pencil company chooses neither to make the component itself nor purchase it and incorporate it into the pencil, but instead merely makes its pencils available for any consumer to use to affix erasers, does the pencil company make its input—its pencils—freely available for any and all eraser manufacturers to use as a vehicle for delivering their erasers to consumers. For now the question which eraser manufacturer’s erasers should appear on the pencil company’s pencils is no longer answered by the pencil company at all. It is answered only by downstream consumers, who have complete freedom to decide which erasers win out in the eraser market.

That is precisely the world antitrust seeks to create: a world in which firms that control inputs do not decide who wins in the market but rather consumers themselves decide.

But Selling Directly to Consumers Is Not Production

The trouble is: that is not a world that is consistent with the production of products that incorporate multiple components. And because all products incorporate an infinite number of components—it all depends on how you define component; if each molecule is a component of a pencil, then how many components does a pencil have?—it is therefore not consistent with the production of anything at all.

It is a world in which everything is pulled apart and atomized, and the atoms are presented to consumers in a vast menu from which no sane consumer would ever be able to choose because choice would require infinite knowledge regarding how to assemble every single product that we have today from individual atoms on up.

What those setting the antitrust agenda today miss is that banning self-preferencing by, for example, Amazon, does not merely prevent Amazon from favoring its own Amazon-branded products over those of third parties.

It also prevents Amazon from choosing the look and feel of its own website, for Amazon.com is a platform upon which web designers notionally compete in selling web design services for Amazon, and when Amazon designs its own website in-house it necessarily denies access to that input to competitors.

A rule against self-preferencing would require that Amazon enable Amazon users to buy Amazon site design from third party software developers and apply it to the Amazon website, so that every Amazon customer could, in theory, choose his preferred look and feel for the Amazon website.

It doesn’t stop there.

Amazon would also be required to allow customers to choose each and every employee who works at the company, for each of these employees is, in a sense, a labor component of Amazon, and in making hiring decisions on its own, Amazon necessarily prevents other competing workers from using the Amazon platform to supply their labor services to Amazon’s customers.

If this seems absurd, that is because it is.

The market approach to adding components cannot work as a blanket matter, and so antitrust, which is tasked with insisting upon the market approach, cannot be applied in blanket fashion to everything, or even just to everything that has more than 50 million users and $600 billion in assets. It can work only if applied sparingly, severing a component of one product here, a component of another product there, when doing so is thought to be in the best interests of consumers, whose preferences are the ultimate measure of the value of production.

That is why the actual rule antitrust applies, the rule of reason, can be summarized as the rule that input denial is illegal when it fails to improve the product that is ultimately sold to consumers.

Self-preferencing is not, in other words, something that can become the subject of a right, as in: “consumers have a right against self preferencing.” It is instead fundamentally about the best way to organize production in individual markets. The question it poses is whether the input denier can be relied upon to choose the component supplier that will make the product as good as possible for consumers, or whether consumers can instead be relied upon to make that decision.

Because consumers do not want to have to decide how everything they purchase is made, it follows that in almost every case the best answer is to let the input denier make that decision—by denying its input to downstream competitors that the denier believes will do a poor job.

Is Every Input Really Essential?

One might object that while every make-or-buy decision might well involve input denial, it does not involve denial of an essential input—it is not denial of an input by a monopolist of that input, not self-preferencing by a platform monopolist as opposed to any old platform—and so is not the sort of behavior that outrages the antitrust neophyte’s intuition that antitrust should ban input denial.

The pencil company’s effective denial of its pencil to third party eraser tip makers when the company makes its own erasers in-house is not input denial, the argument would go, unless there is only one manufacturer of pencils in the pencil market. Only then would eraser tip makers have no way of getting their wares to consumers other than through the medium of supplying eraser tips to that particular pencil company.

This argument would be good enough were all pencil companies to make the exact same pencil—same size, same wood, same graphite, same barrel color, same name, and so on. Only then would it be a matter of complete indifference to eraser tip makers whether they were to supply tips to our pencil company or another.

But, in fact, save for a few standardized commodities, like Class C crude oil, every company’s product is different from every other, even if only in brand name. The result is that every firm will prefer some inputs to others—find some more profitable to use relative to others—and so input denial will always deprive a firm of something that it cannot get anywhere else. In that sense, all input denials deny essential inputs and every maker of an input monopolizes that input.

Dixon Ticonderoga pencils are different from Palomino Blackwings are different from Faber-Castells, and so putting Acme Eraser Tips on each produces a slightly different finished eraser-tipped pencil, one that may be more or less desirable to consumers and indeed more or less profitable for Acme Eraser Tips. If Acme’s preferred pencil company—let’s say it’s Dixon—stops sourcing from Acme, Acme will end up worse off, even if Acme is able to supply Palomino or Faber-Castell instead. In this sense, Dixon is essential to Acme.

Of course, if there were only Dixon, then the consequences of rejection for Acme would be more severe—not just a hit to the bottom line but perhaps bankruptcy—but is it the magnitude of the harm that bothers us about input denial, or is it that a particular business opportunity has been put off limits?

Product differentiation makes of every input, in other words, a mini monopoly. In the “market definition” analysis that antitrust undertakes in merger and monopolization cases, antitrust has traditionally dealt with this by defining a company as a monopoly only if its products are very different from others’—in the lingo, only if they are not “close substitutes”—choosing an arbitrary cutoff between “too different” and “not different enough”.

But here’s the interesting thing: antitrust does not take this approach in deciding whether an input is essential or not. It does not do this in deciding whether a firm monopolizes an input. Instead, antitrust does this only in considering whether the input denier has a monopoly in the downstream market to which the firm is denying the input (another quirk of antitrust law that will not be considered further here because blanket bans on self-preferencing would not require such a downstream inquiry into monopoly power).

With respect to the question whether an input is monopolized, antitrust instead takes a holistic approach, sometimes asking whether the input is an “essential facility,” for example. Indeed, the proposed self-preferencing legislation eschews the market definition approach, instead prohibiting self-preferencing by those who are a “critical trading partner,” defined to mean those who have “the ability to restrict or impede . . . the access of a business user to a tool or service that it needs to effectively serve its users or customers.”

That’s pretty broad language.

The reason antitrust has always been so vague about what constitutes an essential input is that antitrust recognizes that because every input is unique, every input has a downstream firm for which it is essential.

Must an Input Be Something that You Buy?

One might also object that I have been using “input” in rather a peculiar way here, because I have called the buyer the input supplier whereas an input ought to be something that is sold, not bought. The eraser tip suppliers in my example do not buy the pencil company’s pencils. They sell eraser tips to the pencil company and are paid for doing so. In what sense does a pencil company’s refusal to buy eraser tips from some suppliers count as denial of the pencil input to those suppliers?

The answer is that the proper definition of input—the one that corresponds best to our intuition regarding the injustice of input denial—is not “a thing you buy to use in production” but rather “a thing that is necessary for you to do business.”

This broader definition is necessary to prevent clever changes in the locus of product assembly from undermining the antitrust laws. Consider eraser tips again.

I could equally have told the story of an eraser-tip company that purchases pencils, adds eraser tips to them, and then sells the bundle to consumers. In this case, it would be crystal clear that the pencil is the input and the pencil company’s decision not to supply pencils to the eraser tip company would be input denial. In this telling, the eraser tip company would be injured, just as before, by the fact that the pencil company decided either to make eraser tips in-house or to supply pencils to other eraser tip companies seeking to sell eraser-tipped pencils downstream to consumers.

Why should the pencil company be considered any less of an input denier if it were instead to decide to assemble eraser-tipped pencils itself and to start buying eraser tips from eraser tip manufacturers, though not from the eraser tip manufacturer that it targeted before for input denial? The harm to the eraser tip maker is the same, because either way that company is prevented from getting its eraser tips to consumers on the ends of pencils manufactured by that pencil company.

What matters to antitrust here is not how the eraser-tipped pencil makes it to consumers—whether by being assembled by the pencil company or the eraser tip company—but only that a decision of the pencil company not to do business with a particular eraser tip manufacturer harms the eraser tip manufacturer.

The Inevitability of Power and Suffering in Production and Life

And harm the eraser tip manufacturer it does.

But, as I have explained, that does not matter—indeed, cannot matter—unless it makes for a worse end product served up to consumers, because every act of combining two components to make a new product involves a choice regarding which components to join and which not, and so involves a decision to exclude some component makers from the business and not others. Thus the process of product design, production, and creation is always an exercise of power and the infliction of harm.

This, I think, is why it is so difficult to come to antitrust from the left.

Because progressives are uncomfortable with power and the infliction of harm. Progressives want that to go away. But it turns out that everything—everything—they have is inescapably a product of the exercise of power and the infliction of harm.

You cannot build, you cannot create, you cannot make, without choosing—rejecting some additions and embracing others—and each such decision destroys someone’s business (at least to a small extent) and leaves someone out in the cold, if not physically, then socially and mentally.

It would be nice to be able to avoid this ugly scene in which private firms make private decisions about how to make things, hurting each other along the way, and instead to commit all such decisions to the public—here the market, meaning consumers. This is the market option—to just sell all the components directly to consumers and let them decide which should be used and which not.

But the public has trouble enough selecting a President every four years. It does not want, nor does it have the intellectual capacity, to decide how everything is to be made.

And even then harm and the exercise of power could not be avoided, for the public would still have to decide. Consumers might not like Acme Eraser’s eraser tips and so not buy them to put on their pencils. And so Acme would be denied an essential input—a market—and wither as a result. We might, for the moment, think it more just that the public carry out these executions, as opposed to private firms.

But if you really are concerned about the wielding of power and the infliction of harm, then you should not much care who is doing the wielding and the inflicting, but abjure it all.

Thus input denial forces on the progressive the need to come to terms with the inevitability and pervasiveness of power and suffering in business, and, indeed, once one comes to think of it, in life. For all human behaviors involve choices regarding what to prefer and what to reject, with whom to spend time and with whom not, and so all involve input denial and the infliction of pain to a greater or lesser degree.

The really important question then appears to be not whether to condemn power and suffering but rather how to regulate their deployment and infliction. The question is: who should have the power and who should suffer?

In antitrust, the answer the law currently gives is that firms that make inferior products should suffer, and private firms should decide what combinations of components (i.e., what products) are inferior and what not, except in a relatively small set of cases in which consumers, despite their limited cognitive bandwidth, would do a better job of designing their products.

That, it seems to me, is the right approach, and one that leaves progressives plenty of scope to do good by taking authority from firms and giving it to consumers in cases in which firms produce junk.