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Why Peter Thiel is wrong about monopolies

Why Peter Thiel is wrong about monopolies

A few weeks ago Sam Roggeveen quoted PayPal founder Peter Thiel, who argued that competition is over-rated and monopoly would enhance innovation. We shouldn't be surprised that business people are in favour of monopoly. In 1776 Adam Smith observed:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

For Adam Smith's invisible hand to work, self-interest has to be disciplined by competition. It's a routine observation that the very same business people who extol competition (often in loaded terms such as 'free markets') can simultaneously direct their business efforts towards monopoly. The unusual thing about Thiel is that he makes the argument in favour of monopoly publicly and identifies so explicitly the unattractiveness of the competitive business model (you only make 'normal' profits).

The argument that monopoly enhances innovation doesn't fit with Thiel's own experience. Three decades ago, the payments system in just about every country was a heavily regulated monopoly. To make a payment you either had to use cash or deal with a bank. The rationale was to protect consumer transactions from fraud. With financial deregulation, these restrictions to competition were removed, producing a torrent of innovation, including PayPal.

Who could argue that this competition has not been beneficial? Should the pace of future innovation now be placed, once again, in the hands of incumbent monopolies? [fold]

This is a big topic. For a taste, dip into the 300-page draft report of the Harper Inquiry into competition in Australia, which raises one issue germane to international relations: the global monopoly on ideas embodied in intellectual property (IP) rights. Here's what the report says:

IP rights can help to break down barriers to entry but can also, when applied inappropriately, reduce exposure to competition and erect long-lasting barriers to entry that fail to serve Australia's interests over the longer term. This risk is especially prevalent in commitments entered into as part of international trade agreements. 

As the Productivity Commission (PC) notes, the proposed Trans-Pacific Partnership Agreement (is)...specifically considering intellectual property issues. The PC suggests that Australia is likely incurred net costs from the inclusion of some IP provisions in trade agreements, pointing to analysis of extensions in the duration of copyright protection required by the Australia-United States Free Trade Agreement which imposed net costs on Australia through increased royalty payments. As Australia is, and will continue to be, a net importer of IP, these costs are potentially significant.

Earlier posts have identified the dangers here. Unlike trade-enhancing agreements (which are win-win for all participant countries), the TPP is a rule-setting arrangement, with winners and losers. The IP rules should be set to maximise global consumer welfare and encourage innovation, but in practice they are hammered out between the various vested interests (Silicon Valley versus Hollywood; pharmaceutical manufacturers, etc). Australia, as a small player in the TPP negotiations, can complain, but in the end has to accept the rules set by countries which are net IP producers.

Photo courtesy of Flickr user urbanwide.

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