American capitalism is on the defensive in this presidential election year and part of the reason is the dominance of its star performers, the Silicon Valley tech giants. Productivity growth has been poor and household incomes stagnant, problems which emerged well before the financial crisis of 2008.

In one of the best business books of 2019, the Financial Times columnist Rana Foroohar traces the dramatic emergence of Facebook, Amazon, Apple and Google, now the biggest companies in the world, bigger than the oil majors and concludes that they have had a malign influence on US economic performance.

Big tech has grown at the expense of the broader American economy

She shares the concerns about data privacy and the surveillance state which have been exercising legislators worldwide but her principal argument is that big tech has grown at the expense of the broader American economy.

It is competition that drives investment and innovation and the Silicon Valley companies have exploited network economies and weak enforcement of antitrust laws, to build near-monopolies in key sectors.

Google and Facebook have gobbled up so much of the world’s advertising spend that the business models of conventional newspapers and broadcasters are threatened

Google dominates internet search, while Facebook and Instagram, which it was permitted to acquire in 2012, have 2.5 billion and 1 billion worldwide users.

Google and Facebook have gobbled up so much of the world’s advertising spend that the business models of conventional newspapers and broadcasters are threatened.

Rising concentration is unwelcome, reflecting takeovers and sizeable barriers to entry. It weakens the incentives to invest and innovate which are often driven by new entrant firms. big tech has been permitted to acquire new companies that might invade its markets in a surprising retreat from America’s tradition of antitrust enforcement.

Competitive capitalism morphs into oligopoly without eternal vigilance on the part of the regulators

Thirty or 40 years ago, many of these acquisitions would have been blocked by regulators and the disease is not confined to Silicon Valley – there is evidence of rising concentration throughout American business, notably in banking and financial services but also in sectors as diverse as airlines and retailing.

Competitive capitalism morphs into oligopoly without eternal vigilance on the part of the regulators and the internet markets have some inbuilt features which make bad outcomes more likely.

Chief among these is the winner-takes-all character of network industries. Membership in the biggest social network is more valuable than joining a smaller competitor and the winners have blown away the competition.

Some, according to Foroohar, have become less innovative, and have insulated themselves, through sheer scale, from the innovations of newcomers

The process is rather like the spread of English as the world’s favourite second language – success feeds on itself and the main players in the various segments have already secured dominant positions.

Some, according to Foroohar, have become less innovative, and have insulated themselves, through sheer scale, from the innovations of newcomers.

Public concern about big tech is a recent phenomenon, spurred by alarm at interference in elections via disguised political advertising, allegedly sponsored by Russia, and the companies’ skill in avoiding tax.

Data is the new oil, extracted silently and legally

But the public love the “free” services. There is no monthly bill from Facebook or Google. The deal is an example of the barter economy in action – the customer receives the free service in exchange for data harvested by software which has turned Facebook and Google into the largest advertising agencies in the world.

Data is the new oil, extracted silently and legally, to be monetised through tailored advertising which no other medium can match.

Receiving a blizzard of unsolicited ads from hotels in some city to which you have just booked a flight is spooky but harmless. Tailored political advertising is more than spooky – it has the potential to distort the political process and, some claim, has already done so.

The tech companies make it possible for parties to use voter profiles acquired surreptitiously

If a political party buys space on a billboard at the forthcoming election, the same message is there to be seen by all voters.

The tech companies make it possible for parties to use voter profiles acquired surreptitiously and to buy the facility to say different things to different people, out of public view.

This hands a powerful advantage to those with the most money and encourages parties and candidates to focus on raising campaign finance, inevitably from people who will expect something in return.

TV advertising

For that reason, the purchase of radio and TV ads is simply banned in most European countries – the parties are rationed some free broadcasts instead.

The result is that politics is less amenable to the moneyed interest in Europe than it is in the USA.

One of the tech companies, Twitter, has banned political advertising, but the bigger platforms have declined to do so, ensuring that targeted advertising can continue out of the public gaze. The shift in opinion against big tech has been a long time coming.

Read more

Harnessing Silicon Valley for farming

Top 10 trending farm terms