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Just before Christmas, the European Commission published a draft implementing regulation (DIR) of the Digital Markets Act (DMA), establishing procedural rules that, in the Commission’s own words, seek to bolster “legal certainty,” “due process,” and “effectiveness” under the DMA. The rights of defense laid down in the draft are, alas, anemic. In the long run, this will leave the Commission’s DMA-enforcement decisions open to challenge on procedural grounds before the Court of Justice of the European Union (CJEU).

This is a loss for due process, for third parties seeking to rely on the Commission’s decisions, and for the effectiveness of the DMA itself.

Detailed below are some of the significant problems with the DIR, as well as suggestions for how to address them. Many of these same issues have been highlighted in the comments submitted by likely gatekeepers, law firms, and academics during the open-consultation period. You can also read the brief explainer that Dirk Auer & I wrote on the DIR here.

Access to File

The DIR establishes that parties have the right to access files that the Commission used to issue preliminary findings. But if parties wish to access other documents in the Commission’s file, they will need to submit a “substantiated request.” Among the problems with this approach is that the documents cited in the Commission’s preliminary reference will be of  limited use to defendants, as they are likely to be those used to establish an infringement, and thus unlikely to be exculpatory.

Moreover, as the CJEU has stated, it should not be up to the Commission alone to decide whether to disclose documents in the file. The Commission can preclude documents unrelated to the statement of objections from the administrative procedure, but that isn’t the same as excluding documents that aren’t mentioned in the statement of objections. After all, evidence might be irrelevant for the prosecution but relevant for the defense.

Parties’ right to be heard is unnecessarily circumscribed by requiring that they must “duly substantiate why access to a specific document or part thereof is necessary to exercise its right to be heard.” A party might be hard-pressed to argue convincingly that it needs access to a document based solely on a terse and vague description in the Commission’s file. More generally, why would a document be in the Commission’s file if it is not relevant to the case? The right to be heard cannot be respected where access to information is prohibited.

Solution: The DIR should allow gatekeepers full access to the Commission’s file. This is the norm in antitrust and merger proceedings in the EU where:

undertakings or associations of undertakings that receive a Statement of Objections have the right to see all the evidence, whether it is incriminating or exonerating, in the Commission’s investigation file. [bold in original]

 There is little sense in deviating from this standard in DMA proceedings.

No Role for the Hearing Officer

The DIR does not spell out a role for the hearing officer, a particularly jarring omission given the Commission’s history of acting as “judge, jury and executioner” in competition-law proceedings (see here, here and here). Hearing officers are a staple in antitrust (here and here), as well as in trade proceedings more generally, where their role is to enhance impartiality and objectivity by, e.g., resolving disputes over access to certain documents. As Alfonso Lamadrid has noted, an obvious inference to reach is that DMA proceedings before the Commission are to be less impartial and objective.

Solution: Grant the hearing officer a role in, at the very least, resolving access-to-file and confidentiality disputes.

Cap on the Length of Responses

The DIR establishes a 50-page limit on parties’ responses to the Commission’s preliminary findings. Of course, no such cap is imposed on the Commission in issuing its preliminary findings, designation decisions, and other decisions under the DMA. This imbalance between the Commission’s and respondents’ duties plainly violates the principle of equality of arms—a fundamental element of the right to a fair trial under Article 47 of the EU Charter of Fundamental Rights.

An arbitrary page limit also means that the Commission may not take all relevant facts and evidence into account in its decisions, which will be based largely on the preliminary findings and the related response. This lays the groundwork for subsequent challenges before the courts.

Solution: Either remove the cap on responses to preliminary findings or impose a similar limit on the Commission in issuing those findings.

A ‘Succinct’ Right to Speak

The DIR does not contemplate granting parties oral hearings to explain their defense more fully. Oral hearings are particularly important in cases involving complex and technical arguments and evidence.

While the right to a fair trial does not require oral hearings to be held in every case, “refusing to hold an oral hearing may be justified only in rare cases.” Given that, under the DMA, companies can be fined as much as 20% of their worldwide turnover, these proceedings involve severe financial penalties of a criminal or quasi-criminal nature (here and here), and are thus unlikely to qualify (here).

Solution: Grant parties the ability to request an oral hearing following the preliminary findings.

Legal Uncertainty

As one commenter put it, “the document is striking for what it leaves out.”  As Dirk Auer and I point out, the DIR leaves unanswered such questions as the precise role of third parties in DMA processes; the role of the advisory committee in decision making; whether the college of commissioners or just one commissioner is the ultimate decision maker; whether national authorities will be able to access data gathered by the Commission; and whether there is a role for the European Competition Network in coordinating and allocating cases between the EU and the member states.

Granted, not all of these questions needed to be answered in the DIR (although some—like the role of third parties—arguably should have been). Still, the sooner they are resolved, the better for everyone. 

Solution: Clarify the above questions—either with the final version of the implementing regulation or soon thereafter—in a manual of procedures or best-practice guidelines, as appropriate.

Conclusion

Unless substantive changes are made, the DIR in its current form risks running afoul of a well-established line of jurisprudence highlighting the importance of fundamental rights in antitrust law, which is guaranteed to apply in DMA proceedings as well. One of these is the general principle that judicial and administrative promptness cannot be attained at the expense of parties’ right of defense (here). Ignoring this would not only result in a loss for the rights of defense in the EU, but would also drive a wedge in the effectiveness of the DMA—thereby staining the Commission’s credibility.

As 2023 draws to a close, we wanted to reflect on a year that saw jurisdictions around the world proposing, debating, and (occasionally) enacting digital regulations. Some of these initiatives amended existing ex-post competition laws. Others were more ambitious, contemplating entirely new regulatory regimes from the ground up.

With everything going on, it can be overwhelming even for hardcore antitrust enthusiasts to keep pace with the latest developments. If you have the high-brow interests of a scholar but the jam-packed schedule of a CEO, you have come to the right place. This post is intended to summarize who is doing what, where, and what to make of it.

Status of Tech Regulation Around the World

European Union

In the European Union—the patient zero of tech regulation—two crucial pieces of legislation passed this year: the Digital Markets Act (DMA) and the Digital Services Act (DSA).

But notably, the EU is just now—i.e., six months before the act is set to apply in full to all digital “gatekeepers”—launching a consultation on the DMA’s procedural rules (a draft is available here). Many of those procedural questions remain exceedingly fuzzy (substantive ones, too), such as, e.g.—the role of the advisory committee, the role of third parties in proceedings, national authorities’ access to data gathered by the Commission, and the role to be played (if any) by the European Competition Network. Further, only now is a DMA enforcement unit being created within the Commission, although it is also unclear whether it will have the staffing capacity to satisfy the tight deadlines.

Whether or not the implementing regulation ultimately resolves all of these questions, they should have been settled much sooner. But as is becoming customary in tech regulation, it seems that the political urge to “do something” has once again prevailed over careful consideration and foresight.

United Kingdom

In the United Kingdom, legislation to empower the Competition and Markets Authority’s (CMA) Digital Markets Unit (DMU) is set to be brought to Parliament this term, meaning that it may be discussed in the next two months. Of all the “pending” antitrust bills around the world, this is probably the most likely to be adopted. Although it dropped an earlier dubious proposal on mergers, there remain several significant concerns with the DMU (see here and here for previous commentary). For example, the DMU’s standard of review is surprisingly truncated, considering the expansive powers that would be bestowed on the agency. The DMU would apply the strategic market significance (SMS) tag to entire firms and not just to those operations where the firm may have market power. Moreover, the DMU proposal shows little concern for due process.

One looming question is whether the UK will learn from the EU’s example, and resolve substantive and procedural questions well ahead of imposing any obligations on SMS companies. In the end, whatever the UK does or doesn’t do will have reverberations around the globe, as many countries appear to be adopting a DMA-style designation process for gatekeepers but imposing “code of conduct” obligations inspired by the DMU.

United States

Across the pond, the major antitrust tech bills introduced in Congress have come to a standstill. Despite some 11th hour efforts by their sponsors, neither the American Innovation and Choice Online Act, nor the Open App Markets Act, nor the Journalism Competition and Preservation Act made the cut to be included in the $1.7 trillion, 4,155-page omnibus bill that will be the last vote taken by the 117th Congress. With divided power in the 118th Congress, it’s possible that the push to regulate tech might fizzle out.

What went wrong for antitrust reformers? Republicans and Democrats have always sought different things from the bills. Democrats want to “tame” big tech, hold it accountable for the proliferation of “harmful” content online, and redistribute rents toward competitors and other businesses across the supply chain (e.g., app developers, media organizations, etc.). Republicans, on the other hand, seek to limit platforms’ ability to “censor conservative views” and to punish them for supposedly having done so in the past. The difficulty of aligning these two visions has obstructed decisive movement on the bills. But, more broadly, it also goes to show that the logic for tech regulation is far from homogenous, and that wildly different aims can be pursued under the umbrella of “choice,” “contestability,” and “fairness.”

South Africa

As my colleague Dirk Auer covered yesterday, South Africa has launched a sectoral inquiry into online-intermediation platforms, which has produced a provisional report (see here for a brief overview). The provisional report identifies Apple, Google, Airbnb, Uber Eats, and South Africa’s own Takealot, among others, as “leading online platforms” and offers suggestions to make the markets in which these companies compete more “contestable.” This includes a potential ex ante regulatory regime.

But as Dirk noted, there are certain considerations the developing countries must bear in mind when contemplating ex ante regimes that developed countries do not (or, at least, not to the same extent). Most importantly, these countries are typically highly dependent on foreign investment, which might sidestep those jurisdictions that impose draconian DMA-style laws.

This could be the case with Amazon, which is planning to launch its marketplace in South Africa in February 2023 (the same month the sectoral inquiry is due). The degree and duration of Amazon’s presence might hinge on the country’s regulatory regime for online platforms. If unfavorable or exceedingly ambiguous, the new rules might prompt Amazon and other companies to relocate elsewhere. It is notable that local platform Takealot has, to date, demonstrated market dominance in South Africa, which most observers doubt that Amazon will be able to displace.

India

No one can be quite sure what is going on in India. There has been some agitation for a DMA-style ex ante regulatory regime within the Parliament of India, which is currently debating an amendment to the Competition Act that would, among other things, lower merger thresholds.

More drastically, however, a standing committee on e-commerce (where e-commerce is taken to mean all online commerce, not just retail) issued a report that recommended identifying “gatekeepers” for more stringent supervision under an ex ante regime that would, e.g., bar companies from selling goods on the platforms they own. At its core, the approach appears to assume that the DMA constitutes “best practices” in online competition law, despite the fact that the DMA’s ultimate effects and costs remain a mystery. As such, “best practices” in this area of law may not be very good at all.

Australia

The Australian Competition and Consumer Commission (ACCC) has been conducting a five-year inquiry into digital-platform services, which is due in March 2025. In its recently published fifth interim report, the ACCC recommended codes of conduct (similar to the DMU) for “designated” digital platforms. Questions surrounding the proposed regime include whether the ACCC will have to demonstrate effects; the availability of objective justifications (the latest report mentions security and privacy); and what thresholds would be used to “designate” a company (so far, turnover seems likely).

On the whole, Australia’s strategy has been to follow closely in the footsteps of the EU and the United States. Given this influence from international developments, the current freeze on U.S. tech regulation might have taken some of the wind out of the sails of similar regulatory efforts down under.

China

China appears to be playing a waiting game. On the one hand, it has ramped up antitrust enforcement under the Anti-Monopoly Law (AML). On the other, in August 2022, it introduced the first major amendment since the enactment of the AML, which included a new prohibition on the use of “technology, algorithms and platform rules” to engage in monopolistic behavior. This is clearly aimed at strengthening enforcement against digital platforms. Numerous other digital-specific regulations are also under consideration (with uncertain timelines). These include a platform-classification regime that would subject online platforms to different obligations in the areas of data protection, fair competition, and labor treatment, and a data-security regulation that would prohibit online-platform operators from taking advantage of data for unfair discriminatory practices against the platform’s users or vendors.

South Korea

Seoul was one of the first jurisdictions to pass legislation targeting app stores (see here and here). Other legislative proposals include rules on price-transparency obligations and the use of platform-generated data, as well as a proposed obligation for online news services to remunerate news publishers. With the government’s new emphasis on self-regulation as an alternative to prescriptive regulation, however, it remains unclear whether or when these laws will be adopted.

Germany

Germany recently implemented a reform to its Competition Act that allows the Bundeskartellamt to prohibit certain forms of conduct (such as self-preferencing) without the need to prove anticompetitive harm and that extends the essential-facility doctrine to cover data. The Federal Ministry for Economic Affairs and Climate Action (BMWK) is now considering further amendments that would, e.g., allow the Bundeskartellamt to impose structural remedies following a sectoral inquiry, independent of an abuse; and introduce a presumption that anticompetitive conduct has resulted in profits for the infringing company (this is relevant for the purpose of calculating fines and, especially, for proving damages in private enforcement).

Canada

Earlier this year, Canada reformed its abuse-of-dominance provisions to bolster fines and introduce a private right of access to tribunals. It also recently opened a consultation on the future of competition policy, which invites input about the objectives of antitrust, the enforcement powers of the Competition Bureau, and the effectiveness of private remedies, and raises the question of whether digital markets require special rules (see this report). Although an ex-ante regime doesn’t currently appear to be in the cards, Canada’s strategy has been to wait and see how existing regulatory proposals play out in other countries.

Turkey

Turkey is considering a DMA-inspired amendment to the Competition Act that would, however, go beyond even the EU’s ex-ante regulatory regime in that it would not allow for any objective justifications or defenses.

Japan

In 2020, Japan introduced the Act on Improving Transparency and Fairness of Digital Platforms, which stipulates that designated platforms should take voluntary and proactive steps to ensure transparency and “fairness” vis-a-vis businesses. This “co-regulation” approach differs from other regulations in that it stipulates the general framework and leaves details to businesses’ voluntary efforts. Japan is now, however, also contemplating DMA-like ex-ante regulations for mobile ecosystems, voice assistants, and wearable devices.

Six Hasty Conclusions from the Even Hastier Global Wave of Tech Regulation

  • Most of these regimes are still in the making. Some have just been proposed and have a long way to go until they become law. The U.S. example shows how lack of consensus can derail even the most apparently imminent tech bill.
  • Even if every single country covered in this post were to adopt tech legislation, we have seen that the goals pursued and the obligations imposed can be wildly different and possibly contradictory. Even within a given jurisdiction, lawmakers may not agree what the purpose of the law should be (see, e.g., the United States). And, after all, it should probably be alarming if the Chinese Communist Party and the EU had the same definition of “fairness.”
  • Should self-preferencing bans, interoperability mandates, and similar rules that target online platforms be included under the banner of antitrust? In some countries, like Turkey, rules copied and pasted from the DMA have been proposed as amendments to the national competition act. But the EU itself insists that competition law and the DMA are separate things. Which is it? At this stage, shouldn’t the first principles of digital regulation be clearer?
  • In the EU, in particular, multiple overlapping ex-ante regimes can lead to double and even triple jeopardy, especially given their proximity to antitrust law. In other words, there is a risk that the same conduct will be punished at both the national and EU level, and under the DMA and EU competition rules.
  • In light of the above, global ex-ante regulatory compliance is going to impose mind-boggling costs on targeted companies, especially considering the opacity of some provisions and the substantial differences among countries (think, e.g., of Turkey, where there is no space for objective justifications).
  • There are always complex tradeoffs to be made and sensitive considerations to keep in mind when deciding whether and how to regulate the most successful tech companies. The potential for costly errors is multiplied, however, in the case of developing countries, where there is a realistic risk of repelling “dominant” companies before they even enter the market (see South Africa).

Some of the above issues could be addressed with some foresight. That, however, seems to be sorely lacking in the race to push tech regulation through the door at any cost. As distinguished scholars like Fred Jenny have warned, caving to the political pressure of economic populism can come at the expense of competition and innovation. Let’s hope that is not the case here, there, or anywhere.

With just a week to go until the U.S. midterm elections, which potentially herald a change in control of one or both houses of Congress, speculation is mounting that congressional Democrats may seek to use the lame-duck session following the election to move one or more pieces of legislation targeting the so-called “Big Tech” companies.

Gaining particular notice—on grounds that it is the least controversial of the measures—is S. 2710, the Open App Markets Act (OAMA). Introduced by Sen. Richard Blumenthal (D-Conn.), the Senate bill has garnered 14 cosponsors: exactly seven Republicans and seven Democrats. It would, among other things, force certain mobile app stores and operating systems to allow “sideloading” and open their platforms to rival in-app payment systems.

Unfortunately, even this relatively restrained legislation—at least, when compared to Sen. Amy Klobuchar’s (D-Minn.) American Innovation and Choice Online Act or the European Union’s Digital Markets Act (DMA)—is highly problematic in its own right. Here, I will offer seven major questions the legislation leaves unresolved.

1.     Are Quantitative Thresholds a Good Indicator of ‘Gatekeeper Power’?

It is no secret that OAMA has been tailor-made to regulate two specific app stores: Android’s Google Play Store and Apple’s Apple App Store (see here, here, and, yes, even Wikipedia knows it).The text makes this clear by limiting the bill’s scope to app stores with more than 50 million users, a threshold that only Google Play and the Apple App Store currently satisfy.

However, purely quantitative thresholds are a poor indicator of a company’s potential “gatekeeper power.” An app store might have much fewer than 50 million users but cater to a relevant niche market. By the bill’s own logic, why shouldn’t that app store likewise be compelled to be open to competing app distributors? Conversely, it may be easy for users of very large app stores to multi-home or switch seamlessly to competing stores. In either case, raw user data paints a distorted picture of the market’s realities.

As it stands, the bill’s thresholds appear arbitrary and pre-committed to “disciplining” just two companies: Google and Apple. In principle, good laws should be abstract and general and not intentionally crafted to apply only to a few select actors. In OAMA’s case, the law’s specific thresholds are also factually misguided, as purely quantitative criteria are not a good proxy for the sort of market power the bill purportedly seeks to curtail.

2.     Why Does the Bill not Apply to all App Stores?

Rather than applying to app stores across the board, OAMA targets only those associated with mobile devices and “general purpose computing devices.” It’s not clear why.

For example, why doesn’t it cover app stores on gaming platforms, such as Microsoft’s Xbox or Sony’s PlayStation?

Source: Visual Capitalist

Currently, a PlayStation user can only buy digital games through the PlayStation Store, where Sony reportedly takes a 30% cut of all sales—although its pricing schedule is less transparent than that of mobile rivals such as Apple or Google.

Clearly, this bothers some developers. Much like Epic Games CEO Tim Sweeney’s ongoing crusade against the Apple App Store, indie-game publisher Iain Garner of Neon Doctrine recently took to Twitter to complain about Sony’s restrictive practices. According to Garner, “Platform X” (clearly PlayStation) charges developers up to $25,000 and 30% of subsequent earnings to give games a modicum of visibility on the platform, in addition to requiring them to jump through such hoops as making a PlayStation-specific trailer and writing a blog post. Garner further alleges that Sony severely circumscribes developers’ ability to offer discounts, “meaning that Platform X owners will always get the worst deal!” (see also here).

Microsoft’s Xbox Game Store similarly takes a 30% cut of sales. Presumably, Microsoft and Sony both have the same type of gatekeeper power in the gaming-console market that Apple and Google are said to have on their respective platforms, leading to precisely those issues that OAMA ostensibly purports to combat. Namely, that consumers are not allowed to choose alternative app stores through which to buy games on their respective consoles, and developers must acquiesce to Sony’s and Microsoft’s terms if they want their games to reach those players.

More broadly, dozens of online platforms also charge commissions on the sales made by their creators. To cite but a few: OnlyFans takes a 20% cut of sales; Facebook gets 30% of the revenue that creators earn from their followers; YouTube takes 45% of ad revenue generated by users; and Twitch reportedly rakes in 50% of subscription fees.

This is not to say that all these services are monopolies that should be regulated. To the contrary, it seems like fees in the 20-30% range are common even in highly competitive environments. Rather, it is merely to observe that there are dozens of online platforms that demand a percentage of the revenue that creators generate and that prevent those creators from bypassing the platform. As well they should, after all, because creating and improving a platform is not free.

It is nonetheless difficult to see why legislation regulating online marketplaces should focus solely on two mobile app stores. Ultimately, the inability of OAMA’s sponsors to properly account for this carveout diminishes the law’s credibility.

3.     Should Picking Among Legitimate Business Models Be up to Lawmakers or Consumers?

“Open” and “closed” platforms posit two different business models, each with its own advantages and disadvantages. Some consumers may prefer more open platforms because they grant them more flexibility to customize their mobile devices and operating systems. But there are also compelling reasons to prefer closed systems. As Sam Bowman observed, narrowing choice through a more curated system frees users from having to research every possible option every time they buy or use some product. Instead, they can defer to the platform’s expertise in determining whether an app or app store is trustworthy or whether it contains, say, objectionable content.

Currently, users can choose to opt for Apple’s semi-closed “walled garden” iOS or Google’s relatively more open Android OS (which OAMA wants to pry open even further). Ironically, under the pretext of giving users more “choice,” OAMA would take away the possibility of choice where it matters the most—i.e., at the platform level. As Mikolaj Barczentewicz has written:

A sideloading mandate aims to give users more choice. It can only achieve this, however, by taking away the option of choosing a device with a “walled garden” approach to privacy and security (such as is taken by Apple with iOS).

This obviates the nuances between the two and pushes Android and iOS to converge around a single model. But if consumers unequivocally preferred open platforms, Apple would have no customers, because everyone would already be on Android.

Contrary to regulators’ simplistic assumptions, “open” and “closed” are not synonyms for “good” and “bad.” Instead, as Boston University’s Andrei Hagiu has shown, there are fundamental welfare tradeoffs at play between these two perfectly valid business models that belie simplistic characterizations of one being inherently superior to the other.

It is debatable whether courts, regulators, or legislators are well-situated to resolve these complex tradeoffs by substituting businesses’ product-design decisions and consumers’ revealed preferences with their own. After all, if regulators had such perfect information, we wouldn’t need markets or competition in the first place.

4.     Does OAMA Account for the Security Risks of Sideloading?

Platforms retaining some control over the apps or app stores allowed on their operating systems bolsters security, as it allows companies to weed out bad players.

Both Apple and Google do this, albeit to varying degrees. For instance, Android already allows sideloading and third-party in-app payment systems to some extent, while Apple runs a tighter ship. However, studies have shown that it is precisely the iOS “walled garden” model which gives it an edge over Android in terms of privacy and security. Even vocal Apple critic Tim Sweeney recently acknowledged that increased safety and privacy were competitive advantages for Apple.

The problem is that far-reaching sideloading mandates—such as the ones contemplated under OAMA—are fundamentally at odds with current privacy and security capabilities (see here and here).

OAMA’s defenders might argue that the law does allow covered platforms to raise safety and security defenses, thus making the tradeoffs between openness and security unnecessary. But the bill places such stringent conditions on those defenses that platform operators will almost certainly be deterred from risking running afoul of the law’s terms. To invoke the safety and security defenses, covered companies must demonstrate that provisions are applied on a “demonstrably consistent basis”; are “narrowly tailored and could not be achieved through less discriminatory means”; and are not used as a “pretext to exclude or impose unnecessary or discriminatory terms.”

Implementing these stringent requirements will drag enforcers into a micromanagement quagmire. There are thousands of potential spyware, malware, rootkit, backdoor, and phishing (to name just a few) software-security issues—all of which pose distinct threats to an operating system. The Federal Trade Commission (FTC) and the federal courts will almost certainly struggle to control the “consistency” requirement across such varied types.

Likewise, OAMA’s reference to “least discriminatory means” suggests there is only one valid answer to any given security-access tradeoff. Further, depending on one’s preferred balance between security and “openness,” a claimed security risk may or may not be “pretextual,” and thus may or may not be legal.

Finally, the bill text appears to preclude the possibility of denying access to a third-party app or app store for reasons other than safety and privacy. This would undermine Apple’s and Google’s two-tiered quality-control systems, which also control for “objectionable” content such as (child) pornography and social engineering. 

5.     How Will OAMA Safeguard the Rights of Covered Platforms?

OAMA is also deeply flawed from a procedural standpoint. Most importantly, there is no meaningful way to contest the law’s designation as “covered company,” or the harms associated with it.

Once a company is “covered,” it is presumed to hold gatekeeper power, with all the associated risks for competition, innovation, and consumer choice. Remarkably, this presumption does not admit any qualitative or quantitative evidence to the contrary. The only thing a covered company can do to rebut the designation is to demonstrate that it, in fact, has fewer than 50 million users.

By preventing companies from showing that they do not hold the kind of gatekeeper power that harms competition, decreases innovation, raises prices, and reduces choice (the bill’s stated objectives), OAMA severely tilts the playing field in the FTC’s favor. Even the EU’s enforcer-friendly DMA incorporated a last-minute amendment allowing firms to dispute their status as “gatekeepers.” While this defense is not perfect (companies cannot rely on the same qualitative evidence that the European Commission can use against them), at least gatekeeper status can be contested under the DMA.

6.     Should Legislation Protect Competitors at the Expense of Consumers?

Like most of the new wave of regulatory initiatives against Big Tech (but unlike antitrust law), OAMA is explicitly designed to help competitors, with consumers footing the bill.

For example, OAMA prohibits covered companies from using or combining nonpublic data obtained from third-party apps or app stores operating on their platforms in competition with those third parties. While this may have the short-term effect of redistributing rents away from these platforms and toward competitors, it risks harming consumers and third-party developers in the long run.

Platforms’ ability to integrate such data is part of what allows them to bring better and improved products and services to consumers in the first place. OAMA tacitly admits this by recognizing that the use of nonpublic data grants covered companies a competitive advantage. In other words, it allows them to deliver a product that is better than competitors’.

Prohibiting self-preferencing raises similar concerns. Why wouldn’t a company that has invested billions in developing a successful platform and ecosystem not give preference to its own products to recoup some of that investment? After all, the possibility of exercising some control over downstream and adjacent products is what might have driven the platform’s development in the first place. In other words, self-preferencing may be a symptom of competition, and not the absence thereof. Third-party companies also would have weaker incentives to develop their own platforms if they can free-ride on the investments of others. And platforms that favor their own downstream products might simply be better positioned to guarantee their quality and reliability (see here and here).

In all of these cases, OAMA’s myopic focus on improving the lot of competitors for easy political points will upend the mobile ecosystems from which both users and developers derive significant benefit.

7.     Shouldn’t the EU Bear the Risks of Bad Tech Regulation?

Finally, U.S. lawmakers should ask themselves whether the European Union, which has no tech leaders of its own, is really a model to emulate. Today, after all, marks the day the long-awaited Digital Markets Act— the EU’s response to perceived contestability and fairness problems in the digital economy—officially takes effect. In anticipation of the law entering into force, I summarized some of the outstanding issues that will define implementation moving forward in this recent tweet thread.

We have been critical of the DMA here at Truth on the Market on several factual, legal, economic, and procedural grounds. The law’s problems range from it essentially being a tool to redistribute rents away from platforms and to third-parties, despite it being unclear why the latter group is inherently more deserving (Pablo Ibañez Colomo has raised a similar point); to its opacity and lack of clarity, a process that appears tilted in the Commission’s favor; to the awkward way it interacts with EU competition law, ignoring the welfare tradeoffs between the models it seeks to impose and perfectly valid alternatives (see here and here); to its flawed assumptions (see, e.g., here on contestability under the DMA); to the dubious legal and economic value of the theory of harm known as  “self-preferencing”; to the very real possibility of unintended consequences (e.g., in relation to security and interoperability mandates).

In other words, that the United States lags the EU in seeking to regulate this area might not be a bad thing, after all. Despite the EU’s insistence on being a trailblazing agenda-setter at all costs, the wiser thing in tech regulation might be to remain at a safe distance. This is particularly true when one considers the potentially large costs of legislative missteps and the difficulty of recalibrating once a course has been set.

U.S. lawmakers should take advantage of this dynamic and learn from some of the Old Continent’s mistakes. If they play their cards right and take the time to read the writing on the wall, they might just succeed in averting antitrust’s uncertain future.

This post is the third in a three-part series. The first installment can be found here and the second can be found here.

As it has before in its history, liberalism again finds itself at an existential crossroads, with liberally oriented reformers generally falling into two camps: those who seek to subordinate markets to some higher vision of the common good and those for whom the market itself is the common good. The former seek to rein in, temper, order, and discipline unfettered markets, while the latter strive to build on the foundations of classical liberalism to perfect market logic, rather than to subvert it.

This conflict of visions has deep ramifications for today’s economic policy. In his classic text “The Antitrust Paradox,” Judge Robert Bork deemed antitrust law a “subcategory of ideology” that “connects with the central political and social concerns of our time.” Among these concerns, he focused specifically on the eternal tension between the ideals of “equality” and “freedom.” In recent years, that tension has been exemplified in competition-policy debates by two schools of thought: the neo-Brandeisians, whose jurisprudential philosophy draws from the progressive U.S. Supreme Court Justice Louis Brandeis, and another group represented by the Chicago School and other defenders of the consumer-welfare standard.

But this schism resembles similar divides that have played out countless times over the history of liberalism, albeit under different names and banners. Looking back on the past century and a half of economic and philosophical thought can help us to make sense of these fundamentally opposed visions for the future of both liberalism and antitrust. This history can also help us to understand how these ideologies have sometimes failed to live up to their ambitions or crumbled under the weight of their own contradictions. 

In this final piece in the political philosophy series, I explain the genesis, normative underpinnings, and likely outcome of the current “battle for the soul of antitrust.” The broader point that I have tried to make throughout this series is that this confrontation hinges on ethical and deontological considerations, as much as it does on “hard” consequentialist arguments. Put differently, how we decide to resolve foundational and putatively “technical” questions regarding the goals, standards, and enforcement of antitrust law ultimately cannot help but reflect our underlying views about the values and ideals that should guide a liberal society. In this vein, I argue that there are compelling non-utilitarian reasons to prefer a polity with an in-built bias for negative freedom and that is guided by a narrow economic-efficiency criterion, rather than the apparently ascendant alternatives.

The Birth of Neoliberalism

The clearest articulation of the philosophical schism between the two visions of liberalism that we see today came with the 1937 publication of “The Good Society” by American author and journalist Walter Lippmann. Lippman—who, like Brandeis, came out of the American Progressive Movement and had been an adviser to progressive U.S. President Woodrow Wilson—sparked the birth of “neoliberalism” as a separate strand of liberal political philosophical thought. The book invited readers to critically reexamine and, where appropriate, update the tenets of classical liberalism with a view toward “stabilizing and consolidating the course of an intellectual tradition that was otherwise bound to tumble straight into oblivion” (see here).  

This was the objective of the “neoliberal collective,” a loose affiliation of liberally oriented thinkers who convened for the first time at the Walter Lippmann Colloquium in 1938 to discuss Lippmann’s seminal book, and from 1947 onwards more formally under the auspices of the Mont Pelerin Society

Neoliberals grappled with questions that went to the very heart of liberalism, such as how to adapt traditional small-scale human societies to the exigencies of ever-widening markets and economic progress; the causes and consequences of industrial concentration; the appropriate role and boundaries of state intervention; the ability of markets to address the “social question”; the interplay between freedom and coercion; and the tension between the individual and the collective. Like Lippmann, the neoliberals were convinced that the failure to reckon with such fundamental issues would result in the inevitable displacement of liberalism by some form of “authoritarian collectivism,” which they believed provided emotionally appealing (but ultimately illusory) solutions to the full range of liberal problems.

It quickly became apparent, however, that there existed two main currents of neoliberalism.

The first, which I will call “left neoliberalism,” was a relatively conciliatory version that sought to strike a “mostly liberal” balance with socialism and collectivism. It postulated that markets are embedded in a broader social and political context that may include a strong and activist state, aggressive antitrust policy, robust social rights, and an emphasis on positive freedom. In this respect, their views resembled those of the Progressive Movement of Wilson and Brandeis, which was carried on into the mid-20th century in the United States by such figures as President Franklin Roosevelt, historian Arthur M. Schlesinger, and economist John Kenneth Galbraith. The “left neoliberals,” however, were primarily European, and included the likes of Wilhelm Röpke, Walter Eucken, Franz Bohm, Alexander Rüstow, Luigi Einaudi, Louis Rougier, Louis Marlio, and Jacques Rueff (and, arguably, Lippmann himself). 

Adherents to the other strand, “right neoliberalism,” were more conservative and less willing to compromise. They championed a strong but minimal state tasked with (and limited by) facilitating efficient markets, posited a lean antitrust policy, and emphasized negative liberty. Thinkers like Friedrich Hayek, Milton Friedman, Lionel Robbins, James Buchanan and, arguably, the more libertarian Ludwig von Mises and Bruno Leoni would fall into this group.

The Price Mechanism and the State

The two groups of neoliberals shared several basic postulates. 

First and foremost, they agreed that any revision of Adam Smith’’s “invisible hand” had to respect the integrity of the price mechanism (what Wilhelm Röpke referred to as the “sacrosanct core of liberalism”). The argument rested on utilitarian, but also political and ethical grounds. As Friedrich Hayek argued in “The Road to Serfdom,” the substitution of the free market for a centrally planned economy would lead to the loss of economic freedom, and eventually all other freedoms, as well. This meant that neoliberals were, on principle, harsh critics of any type of state intervention that distorted the formation of prices through the forces of supply and demand.

At the same time, however, neither strand of neoliberalism professed a doctrine of statelessness.  To the contrary, the state may, in hindsight, be neoliberalism’s greatest conquest. The question at hand is what kind of state is optimal. 

For the left neoliberals, a strong state was needed to resist capture by interest groups. It also had to exercise good political leadership and discretion in juggling goals and values (markets, after all, had to be “embedded” in the social order). These views were underpinned by a relatively sanguine set of expectations the left neoliberals had of the state’s willingness and capacity to protect the general interest, as well as their shared belief that the core institutions of liberalism (including self-regulating markets) were prone to degeneration and in need of constant public oversight. The state, not the private sector, was the ultimate ordering power of the economy. As Alexander Rüstow said:

I am, indeed, of the opinion that it is not the economy, but the state which determines our fate. 

The right neoliberal position was more ambivalent, due to its heightened skepticism toward state power. The bigger threat to freedom was not unfettered private power, but public power. As Milton Friedman put it in “Capitalism and Freedom”:

Government is necessary to preserve our freedom […] yet by concentrating power in political hands, it is also a threat to freedom. […] How can we benefit from the promise of government while avoiding the threat to freedom? 

The answer was a revamped Smithian nightwatchman that acted more as an umpire determining “the rules of the game” and overseeing free interactions between individuals than as a helmsman tasked with channeling society toward any particular variety of teleological goals. Like the left neoliberal position, this one, too, rests on a set of theoretical underpinnings.

One is that public actors are not any less self-interested than private ones, with the corollary that any extension or deepening of the powers of the state must be well-justified. The idea relied heavily on the public choice theory developed by James M. Buchanan, a member of Mont Pelerin Society and its president from 1984 to 1986. Thus, left and right neoliberals advanced almost completely opposite responses to the problem of capture. While left neoliberals believed in strengthening the state relative to private enterprise, the right’s critique led them to want precisely to limit state power and reshape institutional incentives.

This is not surprising, as right neoliberals were also more optimistic about the potential of markets and deontologically more preoccupied with negative freedom, a combination that added another layer of suspicion to any putatively progressive measures that involved wealth redistribution or meticulous administration of the market by the state.

Economic Concentration and Competition

Another important difference lay in the two sides’ views on economic concentration and competition. Some left neoliberals, particularly in Europe, internalized much of the Marxist and fascist critiques of capitalism, including the belief that markets naturally tended toward economic concentration. They argued, however, that this process could be reversed or prevented with robust antitrust and de-concentration measures. While essentially conceding Marxian arguments about the intrinsic tendency of competition to degenerate into monopoly—thereby fostering inequality and “proletarizing” the masses—they denied the ultimate implications upon which Marx had insisted—i.e., the inevitable “cannibalization” of capitalism through its inherent contradictions.

Right neoliberals, by contrast, insisted that, where economic concentration was not fleeting, it was generally the result of state action, not state inaction. As Mises argued, cartels were a consequence of protectionism and the artificial partitioning of markets through, e.g., tariffs. Similarly, monopolies formed and persisted because of “anti-liberal policies of governments that [created] the conditions favorable” to them. This implied that antitrust had a secondary position in securing competitive markets.

Each strand’s reasoning as to why competition was worthy of protection also differed. For the right neoliberals, who saw the legitimate goals and boundaries of public policy through the lenses of economic efficiency and negative freedom, the case for competition was principally a utilitarian one. As Hayek wrote in “Individualism and Economic Order,” state-backed institutions and laws (including antitrust laws) that “made competition work” (by which he meant, made competition work effectively) were one of the ways in which right neoliberals improved on the classical liberal position. 

Left neoliberals added political, social, and ethical layers to this argument. Politically, they shared the standard Marxian view that concentrated markets facilitated the capture of the state by powerful private interests. Marxists had, e.g., always asserted that Nazism was the product of “monopoly capitalism” and that the Nazis themselves were the tools of big business (the idea of “state monopoly capitalism” stems from Lenin). Left neoliberals largely agreed with this view. They also counseled that a centralized industry was more readily prone to takeover by an authoritarian state. In addition, they rejected “bigness” because they considered it an unnatural perversion of human nature (though such critiques surprisingly did not seem to translate to the state). As Wilhelm Röpke notes in “A Humane Economy”:

Nothing is more detrimental to a sound general order appropriate to human nature than two things: mass and concentration.

“Bigness,” Roepke thought, had come about as a result of one particularly harmful but pervasive trend of modernity: “economism,” a frequent target of left neoliberals that refers to a fixation with indicators of economic performance at the expense of deeper social and spiritual values.

But it would be a mistake to conclude that left neoliberals viewed competition as a panacea. Private property, profit, and competition (the foundations of liberalism) were as socially corrosive as they were beneficial. They were, according to Wilhelm Röpke:

justifiable only within certain limits, and in remembering this we return to the realm beyond supply and demand. In other words, the market economy is not everything. It must find its place within a higher order of things which is not ruled by supply and demand, free prices, and competition.

Competition, in other words, was as Luigi Einaudi put it, a paradox. It was beneficial, but could also be socially and morally ruinous. 

The Goals and Boundaries of Public Policy

The perceived failures of liberalism guided the contrasting notions of what a reformed neoliberalism should look like. On the one hand, European left neoliberals and American progressives thought that liberalism suffered from certain inherent deficiencies that could not be resolved within the liberal paradigm and that called for mitigating policies and social-safety nets. Again, these resonated with familiar criticisms levied by the right and the left, such as, e.g., excessive individualism; the loss of shared values and a sense of community; a lack of “social integration”; worker alienation (in an essay titled “Social Policy or Vitalpolitik (Organic Policy),” Alexander Rüstow starts by citing Friedrich Engels’ 1945 “The Condition of the Working-Class in England”); and the socially explosive elements of competition and markets. These spiritual dislocations arguably weighed more than any material or economic shortcomings, and were at the root of the liberal debacle. As Walter Eucken argued:

Quite obviously, the reasons for the anti-capitalistic attitude of the masses cannot be found in any deterioration of the living conditions brought about by capitalism. […] The turning of the masses against capitalism is rather a phenomenon that can only be understood in terms of the sensibilities of modern man.  

In response, the left neoliberals called for an “organic policy” that would approach markets and competition as not purely an economic, but also a social phenomena (a similar view was expressed by Justice Brandeis). In this new hybrid vision of liberalism, “there would be counterweights to competition and the mechanical operation of prices.” Competition and the market’s other imperatives would be tempered by balancing considerations and subordinated to “higher values” that were beyond the law of supply and demand—and beyond mere economic utility. As Wilhelm Röpke summarizes:

Competition, which we need as a regulator in a free market economy, comes up on all sides against limits which we would not wish to transgress. It remains morally and socially dangerous and can be defended only up to a point and with qualifications and modifications of all kinds.

Conversely, right neoliberals believed that the downfall of liberalism had been the result of a fundamental misunderstanding of its true ethos and an overabundance of conflicting rules and policies. It was not the inevitable upshot of liberalism itself. As Lionel Robbins posited:

It is not liberal institutions but the absence of such institutions which is responsible for the chaos of today.

Classical liberalism had stopped short on the road to exploring the full range of laws and institutions needed to sustain and perfect the “natural order.” But the prevalent social malaise—which had, no doubt, been adroitly instigated and exploited by collectivist demagogues—was not the result of some innate incompatibility between markets and human society. It had instead come about because of the failure to properly adjust the latter to the exigencies of the former. 

Additionally, right neoliberals rejected “organic” or “third way” policies of the sort favored by the left neoliberals, because they believed that it was not within the remit of public policy to answer existential questions or to provide “meaning” or “social integration.”  Granting the state the power to decide on such matters was a slippery slope that required it to override the preferences of some with its own. As such, it got dangerously close to the sort of collectivism that neoliberals rallied in opposition to in the first place. They also doubted the state’s ability to resolve such complex, value-laden questions. It was insights such as these that underpinned Friedrich Hayek’s theory of the gradual march towards serfdom and Ludwig von Mises’ quip that there is no such thing as a “third way” or a mixed economy. 

In consequence, the solution was not to restrain, mollify, or limit the spread or depth of markets in order to align them with some past ideal of parochial life, but to improve markets and to acclimatize societies to their workings through better laws and institutions.

Two Different Visions for Liberalism For Two Different Visions of Antitrust

In keeping with the theme of this series, the prescriptions for antitrust policy made by each strand of neoliberalism are not doctrinally extrapolated from their broader vision of society.

Left neoliberals and American progressives took Marxist and fascist attacks on liberalism seriously, but sought to address them through less radical channels. They wanted a “mostly liberal” third-way social order, in which markets and competition would be tempered by a host of other social and political considerations that were mediated by the state. This meant opposing “big business” as a matter of principle, infusing antitrust law with a host of non-economic goals and values, and granting enforcers the necessary discretion to decide in cases of conflict. 

Right neoliberals, on the other hand, sought to improve on the classical-liberal position through a more robust legal and institutional framework that operated primarily in the service of a single goal: economic efficiency. Economic efficiency—itself not a value-free notion—was, however, seen as a comparatively neutral, narrow, and predictable standard that, in turn, cabined enforcers’  scope of discretion and minimized the instances in which the state could override business decisions (and thus interfere with negative liberty). In the context of antitrust law, this tethered anticompetitive conduct and exemptions to the threshold requirement to find harms to consumers or to total welfare.

Conclusion

The pendulum of neoliberalism has swung in the past, with momentous implications for antitrust. The “Chicagoan” shift of the 1970s, for instance, was a move toward right neoliberalism, as was the “more economic approach” of EU competition law in the late 1990s. Conversely, more recent calls for the condemnation of “big business” on a range of moral and political grounds; “polycentric competition laws” with multiple goals and values; and the widening of state discretion to lead market developments in a socially desirable direction signal a move in the opposite direction. 

How should the newest iteration of the neoliberal “battle for the soul of antitrust” be resolved?

On the one hand, left neoliberalism—or what Americans typically just call “progressivism”—has intuitive and emotional appeal, particularly in a time of growing anti-capitalistic fervor. Today, as in the 1930s, many believe that market logic has overstepped its legitimate boundaries and that the most successful private companies are a looming enemy. From this perspective, a “market in society” approach—in which the government has more leeway to restrain corporate power and reshape markets in accordance with a range of social or political considerations—may sound more humane to some. 

If history teaches us anything, however, this populist approach to regulating competition is problematic for a number of reasons.

First, the overly complex web of mutually conflicting goals and values will inevitably require enforcement agencies to act as social engineers. In this position, they may use their enhanced discretion to decide whom or what to favor and to rank subjective values pursuant to personal moral heuristics. Public-choice theory and historical examples of state-led collectivist projects, however, counsel against assuming that government is able and willing to exercise such far-reaching oversight of society. In addition, as enforcers inevitably prove unfit to discharge their new role as philosopher-kings, and as their contradictory case law increasingly comes under contestation, activist attempts to widen the scope of antitrust law likely will be checked by the courts. 

Second, like the non-economic arguments against concentration raised today by progressives such as Tim Wu and Lina Khan, the left neoliberal position is largely based on aesthetic preference and intuition—not fact. Röpkean complaints about big business ruining the bucolic landscape where men are “vitally satisfied” in their small, tight-knit communities rests on a very idiosyncratic vision of the good life (left neoliberals romanticized Switzerland, for instance), and it’s one many do not share in the 21st century. Equally particular were Justice Brandeis’ own yeoman sensibilities, which led him to reject bigness as a matter of principle (unlike today’s neo-Brandeisians, however, he was also skeptical of big government). 

As to the persistent argument to curb “bigness” on political grounds: this would be more convincing if there was a clear, unambiguous relationship between market concentration or company size and the quality of democracy. This does not appear to be the case. In fact, the case for incorporating democratic concerns into antitrust seems unwittingly to rely on discredited Marxist theories about the relationship between German big business and the rise of Hitler. Unfortunately, these ideas have been so aggressively peddled by Marxists—who had a vested ideological interest in demonstrating that private corporations were the main culprits behind Nazism—during the 1960s and 70s that today they enjoy the status of dogma.

Alternatively, one might argue that the very existence of large concentrations of private economic power is antithetical to democracy because having the potential to exercise private power over another (without any actual interference) is anti-democratic (see here). But this lifts a particularistic vision of democracy—so-called republican democracy—over others. According to the more mainstream notion of liberal democracy, which gives precedence to negative freedom, any such interference with property rights may, in fact, be seen as deeply illiberal and undemocratic, especially as the inherent ambiguity of the “democracy” standard is likely to invite reprisals against political opponents.

Alas, right neoliberalism appears to be falling out of favor, as anti-market rhetoric seeps into the mainstream and politicians and intellectuals look to the past to find alternatives to a neoliberal system seen as too narrow and economistic. Ultimately, however, this may be precisely what we want public policy to be in a liberal world: focused on predictable and quantifiable standards that subject enforcers to the rigorous discipline of economic theory and leave them little space to act as social engineers or to exercise arbitrary authority. More than a century of intellectual effervescence and dangerous intellectual escapades has proven this to be the superior way to achieve both measurable policy outcomes that improve on the classical-liberal position and to avoid the Charybdis of state collectivism. In antitrust law, it has meant embracing economic analysis of the law and a narrow consumer-welfare standard to discern anticompetitive from procompetitive conduct. 

In the end, today’s “battle for the soul” of antitrust is a proxy for a much wider conflict of visions. Changing the consumer-welfare standard and the architecture of antitrust enforcement along lines preferred by progressives and left neoliberals would be both a symptom and a cause of a broader philosophical shift toward a worldview that makes some of the same deleterious mistakes it purports to correct: excessive government discretion in overseeing the economy; the subordination of individual freedom to an array of collectivist goals mediated by a public aristocracy; and the substitution of evidence-based policy for emotional impetus.

While the inherent contradictions and incongruence of that vision mean that the pendulum is likely to eventually swing back in the right direction, the damage will already have been done. This is why we must defend the consumer-welfare standard today more vigorously than ever: because ultimately, much more than the future of a niche field of law is at stake.

[TOTM: The following is part of a digital symposium by TOTM guests and authors on Antitrust’s Uncertain Future: Visions of Competition in the New Regulatory Landscape. Information on the authors and the entire series of posts is available here.]

Early Morning

I wake up grudgingly to the loud ring of my phone’s preset alarm sound (I swear I gave third-party alarms a fair shot). I slide my feet into the bedroom slippers and mechanically chaperone my body to the coffee machine in the living room.

“Great,” I think to myself, “Out of capsules, again.” Still in my bathrobe, I make a grumpy face and post an interoperable story on social media. “Don’t even talk to me before I’ve had my morning coffee! #HateMondays.”

I flick my thumb and get a warm, fuzzy feeling of satisfaction as I consent to a series of privacy-related pop-ups on the official incumbent’s online marketplace website (I place immense importance on my privacy) before getting ready to sit through the usual fairness presentations.

I reach for a chair, grab a notepad and crack my neck sideways as I try to focus my (still) groggy brain on the kaleidoscope of thumbnails before me. “Time to do my part,” I sigh. My eyes—trained by years of practice—dart from left to right and from right to left, carefully scrutinizing each coffee capsule on offer for an equal number of seconds (ever since the self-preferencing ban, all available products within a search category are displayed simultaneously on the screen to avoid any explicit or tacit bias that could be interpreted as giving the online marketplace incumbent’s own products an unfair advantage over competitors).

After 13 brands and at least as many flavors, I select the platforms own brand, “Basic” (it matches my coffee machine and I’ve found through trial and error that they’re the least prone to malfunctioning), and then answer a series of questions to make sure I have actually given competitors’ products fair consideration. Platforms—including the online marketplace incumbent—use sneaky and illegal ways to leverage the attention market and give a leg up to their own products, such as offering lower prices or better delivery conditions. But with enough practice you learn to see through it. Not on my watch!

Exhausted but pleased with myself, I put the notepad down and my feet up on the coffee table. Victory.

Noon

I curse as I stub my toe on the office chair. Still with a pen in my right hand, ink dripping, I whip out my phone and pick Whatsapp to answer (I’ve never felt the need to use any of the other, newer apps—since everything is interoperable now). “No, of course I didn’t forget to do the groceries,” I tell my girlfriend with a tinge of deliberate frustration. But, of course, she knows that I know that she knows that I did.

I grab my notepad and almost fall over as I try to slide into my jeans and produce a grocery itinerary (like a grocery list, but longer) at the same time. “Trader Pete’s for fruits and vegetables, Gracey’s for canned goods, HTS for HTS frozen pizza,” I scribble, nerves tense.

(Not every company has gone the way of the online marketplace incumbent and some have decided they would be better off if they just sold their own products. After all, you can’t be fined for self-preferencing if you’re only selling your own stuff. Of course, the strategy is only viable in those industries in which vertical integration hasn’t been banned).

I finish getting dressed and dash down the stairs. I instinctively glance at my phone before getting in the car and immediately regret it, as I dismiss a bunch of notifications about malware infections. “Another app store that I’m striking from the list,” I think to myself as I turn on the ignition.

Late Afternoon

My girlfriend has already ordered a soda as I sit down at the table. “Sorry I’m late,” I mumble. We talk about her day and I tell her about the capsules I ordered (she nods approvingly) before we finally decide to order. I wave to the waiter and ask about the specials. A lanky young man no older than 19 fumbles through his (empty) pad and lists a couple of dishes.

He blurts out “homemade” and immediately turns pale. I look at my girlfriend nervously, and she stares back blankly—dazed. “Do you mean to say that it was made here, in this restaurant?” I ask in disbelief, dizzy. He comes up with some sorry excuse but I’m having none of it. I make my way to the toilet—sickened—and pull out my phone with a shaky hand. I have the Federal Trade Commission on speed-dial. I call and select number one: self-preferencing. They immediately put me through with someone. Sweating, I explain that the Italian restaurant on the corner between the 5th and Madison avenues just recommended me a special dish made by them—and barely even mentioned any of the specialties offered by the kebab joint next door. I assure the voice at the other end of the line that I had nothing to do it, and that I have not ordered—let alone tasted—the dish.

I rush out of the bathroom with blinders on and pull my girlfriend by the elbow. Her coat is on and she’s clearly impatient to get the hell out of there. As I reach for my jacket by the exit, an older man with a moustache approaches us with a bowed head and literally begs us to take a bottle of wine (no doubt a bribe for my silence). He assures us that the wine is not “della casa” (made by the restaurant), and that it’s, in fact, a French wine made by a competitor. I’m not having any of it: I bid him good day and slam the door behind us.

After years of debate and negotiations, European Lawmakers have agreed upon what will most likely be the final iteration of the Digital Markets Act (“DMA”), following the March 24 final round of “trilogue” talks. 

For the uninitiated, the DMA is one in a string of legislative proposals around the globe intended to “rein in” tech companies like Google, Amazon, Facebook, and Apple through mandated interoperability requirements and other regulatory tools, such as bans on self-preferencing. Other important bills from across the pond include the American Innovation and Choice Online Act, the ACCESS Act, and the Open App Markets Act

In many ways, the final version of the DMA represents the worst possible outcome, given the items that were still up for debate. The Commission caved to some of the Parliament’s more excessive demands—such as sweeping interoperability provisions that would extend not only to “ancillary” services, such as payments, but also to messaging services’ basic functionalities. Other important developments include the addition of voice assistants and web browsers to the list of Core Platform Services (“CPS”), and symbolically higher “designation” thresholds that further ensure the act will apply overwhelmingly to just U.S. companies. On a brighter note, lawmakers agreed that companies could rebut their designation as “gatekeepers,” though it remains to be seen how feasible that will be in practice. 

We offer here an overview of the key provisions included in the final version of the DMA and a reminder of the shaky foundations it rests on.

Interoperability

Among the most important of the DMA’s new rules concerns mandatory interoperability among online platforms. In a nutshell, digital platforms that are designated as “gatekeepers” will be forced to make their services “interoperable” (i.e., compatible) with those of rivals. It is argued that this will make online markets more contestable and thus boost consumer choice. But as ICLE scholars have been explaining for some time, this is unlikely to be the case (here, here, and here). Interoperability is not the panacea EU legislators claim it to be. As former ICLE Director of Competition Policy Sam Bowman has written, there are many things that could be interoperable, but aren’t. The reason is that interoperability comes with costs as well as benefits. For instance, it may be worth letting different earbuds have different designs because, while it means we sacrifice easy interoperability, we gain the ability for better designs to be brought to the market and for consumers to be able to choose among them. Economists Michael L. Katz and Carl Shapiro concur:

Although compatibility has obvious benefits, obtaining and maintaining compatibility often involves a sacrifice in terms of product variety or restraints on innovation.

There are other potential downsides to interoperability.  For instance, a given set of interoperable standards might be too costly to implement and/or maintain; it might preclude certain pricing models that increase output; or it might compromise some element of a product or service that offers benefits specifically because it is not interoperable (such as, e.g., security features). Consumers may also genuinely prefer closed (i.e., non-interoperable) platforms. Indeed: “open” and “closed” are not synonyms for “good” and “bad.” Instead, as Boston University’s Andrei Hagiu has shown, there are fundamental welfare tradeoffs at play that belie simplistic characterizations of one being inherently superior to the other. 

Further, as Sam Bowman observed, narrowing choice through a more curated experience can also be valuable for users, as it frees them from having to research every possible option every time they buy or use some product (if you’re unconvinced, try turning off your spam filter for a couple of days). Instead, the relevant choice consumers exercise might be in choosing among brands. In sum, where interoperability is a desirable feature, consumer preferences will tend to push for more of it. However, it is fundamentally misguided to treat mandatory interoperability as a cure-all elixir or a “super tool” of “digital platform governance.” In a free-market economy, it is not—or, it should not—be up to courts and legislators to substitute for businesses’ product-design decisions and consumers’ revealed preferences with their own, based on diffuse notions of “fairness.” After all, if we could entrust such decisions to regulators, we wouldn’t need markets or competition in the first place.

Of course, it was always clear that the DMA would contemplate some degree of mandatory interoperability – indeed, this was arguably the new law’s biggest selling point. What was up in the air until now was the scope of such obligations. The Commission had initially pushed for a comparatively restrained approach, requiring interoperability “only” in ancillary services, such as payment systems (“vertical interoperability”). By contrast, the European Parliament called for more expansive requirements that would also encompass social-media platforms and other messaging services (“horizontal interoperability”). 

The problem with such far-reaching interoperability requirements is that they are fundamentally out of pace with current privacy and security capabilities. As ICLE Senior Scholar Mikolaj Barczentewicz has repeatedly argued, the Parliament’s insistence on going significantly beyond the original DMA’s proposal and mandating interoperability of messaging services is overly broad and irresponsible. Indeed, as Mikolaj notes, the “likely result is less security and privacy, more expenses, and less innovation.”The DMA’s defensers would retort that the law allows gatekeepers to do what is “strictly necessary” (Council) or “indispensable” (Parliament) to protect safety and privacy (it is not yet clear which wording the final version has adopted). Either way, however, the standard may be too high and companies may very well offer lower security to avoid liability for adopting measures that would be judged by the Commission and the courts as going beyond what is “strictly necessary” or “indispensable.” These safeguards will inevitably be all the more indeterminate (and thus ineffectual) if weighed against other vague concepts at the heart of the DMA, such as “fairness.”

Gatekeeper Thresholds and the Designation Process

Another important issue in the DMA’s construction concerns the designation of what the law deems “gatekeepers.” Indeed, the DMA will only apply to such market gatekeepers—so-designated because they meet certain requirements and thresholds. Unfortunately, the factors that the European Commission will consider in conducting this designation process—revenues, market capitalization, and user base—are poor proxies for firms’ actual competitive position. This is not surprising, however, as the procedure is mainly designed to ensure certain high-profile (and overwhelmingly American) platforms are caught by the DMA.

From this perspective, the last-minute increase in revenue and market-capitalization thresholds—from 6.5 billion euros to 7.5 billion euros, and from 65 billion euros to 75 billion euros, respectively—won’t change the scope of the companies covered by the DMA very much. But it will serve to confirm what we already suspected: that the DMA’s thresholds are mostly tailored to catch certain U.S. companies, deliberately leaving out EU and possibly Chinese competitors (see here and here). Indeed, what would have made a difference here would have been lowering the thresholds, but this was never really on the table. Ultimately, tilting the European Union’s playing field against its top trading partner, in terms of exports and trade balance, is economically, politically, and strategically unwise.

As a consolation of sorts, it seems that the Commission managed to squeeze in a rebuttal mechanism for designated gatekeepers. Imposing far-reaching obligations on companies with no  (or very limited) recourse to escape the onerous requirements of the DMA would be contrary to the basic principles of procedural fairness. Still, it remains to be seen how this mechanism will be articulated and whether it will actually be viable in practice.

Double (and Triple?) Jeopardy

Two recent judgments from the European Court of Justice (ECJ)—Nordzucker and bpost—are likely to underscore the unintended effects of cumulative application of both the DMA and EU and/or national competition laws. The bpost decision is particularly relevant, because it lays down the conditions under which cases that evaluate the same persons and the same facts in two separate fields of law (sectoral regulation and competition law) do not violate the principle of ne bis in idem, also known as “double jeopardy.” As paragraph 51 of the judgment establishes:

  1. There must be precise rules to determine which acts or omissions are liable to be subject to duplicate proceedings;
  2. The two sets of proceedings must have been conducted in a sufficiently coordinated manner and within a similar timeframe; and
  3. The overall penalties must match the seriousness of the offense. 

It is doubtful whether the DMA fulfills these conditions. This is especially unfortunate considering the overlapping rules, features, and goals among the DMA and national-level competition laws, which are bound to lead to parallel procedures. In a word: expect double and triple jeopardy to be hotly litigated in the aftermath of the DMA.

Of course, other relevant questions have been settled which, for reasons of scope, we will have to leave for another time. These include the level of fines (up to 10% worldwide revenue, or 20% in the case of repeat offenses); the definition and consequences of systemic noncompliance (it seems that the Parliament’s draconian push for a general ban on acquisitions in case of systemic noncompliance has been dropped); and the addition of more core platform services (web browsers and voice assistants).

The DMA’s Dubious Underlying Assumptions

The fuss and exhilaration surrounding the impending adoption of the EU’s most ambitious competition-related proposal in decades should not obscure some of the more dubious assumptions which underpin it, such as that:

  1. It is still unclear that intervention in digital markets is necessary, let alone urgent.
  2. Even if it were clear, there is scant evidence to suggest that tried and tested ex post instruments, such as those envisioned in EU competition law, are not up to the task.
  3. Even if the prior two points had been established beyond any reasonable doubt (which they haven’t), it is still far from clear that DMA-style ex ante regulation is the right tool to address potential harms to competition and to consumers that arise in digital markets.

It is unclear that intervention is necessary

Despite a mounting moral panic around and zealous political crusading against Big Tech (an epithet meant to conjure antipathy and distrust), it is still unclear that intervention in digital markets is necessary. Much of the behavior the DMA assumes to be anti-competitive has plausible pro-competitive justifications. Self-preferencing, for instance, is a normal part of how platforms operate, both to improve the value of their core products and to earn returns to reinvest in their development. As ICLE’s Dirk Auer points out, since platforms’ incentives are to maximize the value of their entire product ecosystem, those that preference their own products frequently end up increasing the total market’s value by growing the share of users of a particular product (the example of Facebook’s integration of Instagram is a case in point). Thus, while self-preferencing may, in some cases, be harmful, a blanket presumption of harm is thoroughly unwarranted

Similarly, the argument that switching costs and data-related increasing returns to scale (in fact, data generally entails diminishing returns) have led to consumer lock-in and thereby raised entry barriers has also been exaggerated to epic proportions (pun intended). As we have discussed previously, there are plenty of counterexamples where firms have easily overcome seemingly “insurmountable” barriers to entry, switching costs, and network effects to disrupt incumbents. 

To pick a recent case: how many of us had heard of Zoom before the pandemic? Where was TikTok three years ago? (see here for a multitude of other classic examples, including Yahoo and Myspace).

Can you really say, with a straight face, that switching costs between messaging apps are prohibitive? I’m not even that active and I use at least six such apps on a daily basis: Facebook Messenger, Whatsapp, Instagram, Twitter, Viber, Telegram, and Slack (it took me all of three minutes to download and start using Slack—my newest addition). In fact, chances are that, like me, you have always multihomed nonchalantly and had never even considered that switching costs were impossibly high (or that they were a thing) until the idea that you were “locked-in” by Big Tech was drilled into your head by politicians and other busybodies looking for trophies to adorn their walls.

What about the “unprecedented,” quasi-fascistic levels of economic concentration? First, measures of market concentration are sometimes anchored in flawed methodology and market definitions  (see, e.g., Epic’s insistence that Apple is a monopolist in the market for operating systems, conveniently ignoring that competition occurs at the smartphone level, where Apple has a worldwide market share of 15%—see pages 45-46 here). But even if such measurements were accurate, high levels of concentration don’t necessarily mean that firms do not face strong competition. In fact, as Nicolas Petit has shown, tech companies compete vigorously against each other across markets.

But perhaps the DMA’s raison d’etre rests less on market failure, but rather on a legal or enforcement failure? This, too, is misguided.

EU competition law is already up to the task

As Giuseppe Colangelo has argued persuasively (here and here), it is not at all clear that ex post competition regulation is insufficient to tackle anti-competitive behavior in the digital sector:

Ongoing antitrust investigations demonstrate that standard competition law still provides a flexible framework to scrutinize several practices described as new and peculiar to app stores. 

The recent Google Shopping decision, in which the Commission found that Google had abused its dominant position by preferencing its own online-shopping service in Google Search results, is a case in point (the decision was confirmed by the General Court and is now pending review before the European Court of Justice). The “self-preferencing” category has since been applied by other EU competition authorities. The Italian competition authority, for instance, fined Amazon 1 billion euros for preferencing its own distribution service, Fulfilled by Amazon, on the Amazon marketplace (i.e., Amazon.it). Thus, Article 102, which includes prohibitions on “applying dissimilar conditions to similar transactions,” appears sufficiently flexible to cover self-preferencing, as well as other potentially anti-competitive offenses relevant to digital markets (e.g., essential facilities).

For better or for worse, EU competition law has historically been sufficiently pliable to serve a range of goals and values. It has also allowed for experimentation and incorporated novel theories of harm and economic insights. Here, the advantage of competition law is that it allows for a more refined, individualized approach that can avoid some of the pitfalls of applying a one-size fits all model across all digital platforms. Those pitfalls include: harming consumers, jeopardizing the business models of some of the most successful and pro-consumer companies in existence, and ignoring the differences among platforms, such as between Google and Apple’s app stores. I turn to these issues next.

Ex ante regulation probably isn’t the right tool

Even if it were clear that intervention is necessary and that existing competition law was insufficient, it is not clear that the DMA is the right regulatory tool to address any potential harms to competition and consumers that may arise in the digital markets. Here, legislators need to be wary of unintended consequences, trade-offs, and regulatory fallibility. For one, It is possible that the DMA will essentially consolidate the power of tech platforms, turning them into de facto public utilities. This will not foster competition, but rather will make smaller competitors systematically dependent on so-called gatekeepers. Indeed, why become the next Google if you can just free ride off of the current Google? Why download an emerging messaging app if you can already interact with its users through your current one? In a way, then, the DMA may become a self-fulfilling prophecy. 

Moreover, turning closed or semi-closed platforms such as the iOS into open platforms more akin to Android blurs the distinctions among products and dampens interbrand competition. It is a supreme paradox that interoperability and sideloading requirements purportedly give users more choice by taking away the option of choosing a “walled garden” model. As discussed above, overriding the revealed preferences of millions of users is neither pro-competitive nor pro-consumer (but it probably favors some competitors at the expense of those two things). 

Nor are many of the other obligations contemplated in the DMA necessarily beneficial to consumers. Do users really not want to have default apps come preloaded on their devices and instead have to download and install them manually? Ditto for operating systems. What is the point of an operating system if it doesn’t come with certain functionalities, such as a web browser? What else should we unbundle—keyboard on iOS? Flashlight? Do consumers really want to choose from dozens of app stores when turning on their new phone for the first time? Do they really want to have their devices cluttered with pointless split-screens? Do users really want to find all their contacts (and be found by all their contacts) across all messaging services? (I switched to Viber because I emphatically didn’t.) Do they really want to have their privacy and security compromised because of interoperability requirements?Then there is the question of regulatory fallibility. As Alden Abott has written on the DMA and other ex ante regulatory proposals aimed at “reining in” tech companies:

Sorely missing from these regulatory proposals is any sense of the fallibility of regulation. Indeed, proponents of new regulatory proposals seem to implicitly assume that government regulation of platforms will enhance welfare, ignoring real-life regulatory costs and regulatory failures (see here, for example). 

This brings us back to the second point: without evidence that antitrust law is “not up to the task,” far-reaching and untested regulatory initiatives with potentially high error costs are put forth as superior to long-established, consumer-based antitrust enforcement. Yes, antitrust may have downsides (e.g., relative indeterminacy and slowness), but these pale in comparison to the DMA’s (e.g., large error costs resulting from high information requirements, rent-seeking, agency capture).

Conclusion

The DMA is an ambitious piece of regulation purportedly aimed at ensuring “fair and open digital markets.” This implies that markets are not fair and open; or that they risk becoming unfair and closed absent far-reaching regulatory intervention at EU level. However, it is unclear to what extent such assumptions are borne out by the reality of markets. Are digital markets really closed? Are they really unfair? If so, is it really certain that regulation is necessary? Has antitrust truly proven insufficient? It also implies that DMA-style ex ante regulation is necessary to tackle it, and that the costs won’t outweigh the benefits. These are heroic assumptions that have never truly been seriously put to the test. 

Considering such brittle empirical foundations, the DMA was always going to be a contentious piece of legislation. However, there was always the hope that EU legislators would show restraint in the face of little empirical evidence and high error costs. Today, these hopes have been dashed. With the adoption of the DMA, the Commission, Council, and the Parliament have arguably taken a bad piece of legislation and made it worse. The interoperability requirements in messaging services, which are bound to be a bane for user privacy and security, are a case in point.

After years trying to anticipate the whims of EU legislators, we finally know where we’re going, but it’s still not entirely sure why we’re going there.

This post is the second in a three-part series. The first installment can be found here and the third can be found here.

In just over a century since its dawn, liberalism had reshaped much of the world along the lines of individualism, free markets, private property, contract, trade, and competition. A modest laissez-faire political philosophy that had begun to germinate in the minds of French Physiocrats in the early 18th century had, scarcely 150 years later, inspired the constitution of the world’s nascent leading power, the United States. But it wasn’t all plain sailing, as liberalism’s expansion eventually galvanized strong social, political, cultural, economic and even spiritual opposition, which coalesced around two main ideologies: socialism and fascism.

In this post, I explore the collectivist backlash against liberalism, its deeper meaning from the perspective of political philosophy, and the main features of its two main antagonists—especially as they relate to competition and competition regulation. Ultimately, the purpose is to show that, in trying to respond to the collectivist threat, successive iterations of neoliberalism integrated some of collectivism’s key postulates in an attempt to create a synthesis between opposing philosophical currents. Yet this “mostly” liberal synthesis, which serves as the philosophical basis of many competition systems today, is afflicted with the same collectivist flaws that the synthesis purported to overthrow (as I will elaborate in subsequent posts).

The Collectivist Backlash

By the early 20th century, two deeply illiberal movements bent on exposing and demolishing the fallacies and contradictions of liberalism had succeeded in capturing the imagination and support of the masses. These collectivist ideologies were Marxian socialism/communism on the left and fascism/Nazism on the right. Although ultimately distinct, they both rejected the basic postulates of classical liberalism. 

Socially, both agreed that liberalism uprooted traditional ways of life and dissolved the bonds of solidarity that had hitherto governed social relationships. This is the view expressed, e.g., in Karl Polanyi’s influential book The Great Transformation, in which the Christian socialist Polanyi contends that “disembedded” liberal markets would inevitably come to be governed again by the principles of solidarity and reciprocity (under socialism/communism). Similarly, although not technically a work on political economy or philosophy, Knut Hamsun’s 1917 novel Growth of the Soil perfectly captures the right’s rejection of liberal progress, materialism, industrialization, and the idealization of traditional bucolic life. The Norwegian Hamsun, winner of the 1920 Nobel Prize in Literature, later became an enthusiastic supporter of the Third Reich. 

Politically and culturally, Marxist historical materialism posited that liberal democracy (individual freedoms, periodic elections, etc.) and liberal culture (literature, art, cinema) served the interests of the economically dominant class: the bourgeoisie, i.e., the owners of the means of production. Fascists and Nazis likewise deplored liberal democracy as a sign of decadence and weakness and viewed liberal culture as an oxymoron: a hotbed of degeneracy built on the dilution of national and racial identities. 

Economically, the more theoretically robust leftist critiques rallied around Marx’ scientific socialism, which held that capitalism—the economic system that served as the embodiment of a liberal social order built on private property, contract, and competition—was exploitative and doomed to consume itself. From the right, it was argued that liberalism enabled individual interest to override what was good for the collective—an unpardonable sin in the eyes of an ideology built around robust nodes of collectivist identity, such as nation, race, and history.

A Recurrent Civilizational Struggle

The rise of socialism and fascism marked the beginning of a civilizational shift that many have referred to as the lowest ebb of liberalism. By the 1930s, totalitarian regimes utterly incompatible with a liberal worldview were in place in several European countries, such as Italy, Russia, Germany, Portugal, Spain, and Romania. As Austrian economist Ludwig Von Mises lamented, liberals and liberal ideas—at least, in the classical sense—had been driven to the fringes of society and academia, subject of scorn and ridicule. Even the liberally oriented, like economist John Maynard Keynes, were declaring the “end of laissez-faire.” 

At its most basic level, I believe that the conflict can be understood, from a philosophical perspective, as an iteration of the recurrent struggle between individualism and collectivism.

For instance, the German sociologist Ferdinand Tonnies has described the perennial tension between two elementary ways of conceiving the social order: Gesellschaft and Gemeinschaft. Gesellschaft refers to societies made up of individuals held together by formal bonds, such as contracts, whereas Gemeinschaft refers to communities held together by organic bonds, such as kinship, which function together as parts of an integrated whole. American law professor David Gerber explains that, from the Gemeinschaft perspective, competition was seen as an enemy:

Gemeinschaft required co-operation and the accommodation of individual interests to the commonwealth, but competition, in contrast, demanded that individuals be concerned first and foremost with their own self-interest. From this communitarian perspective, competition looked suspiciously like exploitation. The combined effect of competition and of political and economic inequality was that the strong would get stronger, the weak would get weaker, and the strong would use their strength to take from the weak.

Tonnies himself thought that dominant liberal notions of Gesellschaft would inevitably give way to greater integration of a socialist Gemeinschaft. This was somewhat reminiscent of Polanyi’s distinction between embedded and disembedded markets; Karl Popper’s “open” and “closed” societies; and possibly, albeit somewhat more remotely, David Hume’s distinction between “concord” and “union.” While we should be wary of reductivism, a common theme underlying these works (at least two of which are not liberal) is the conflict between opposing views of society: one that posits the subordination of the individual to some larger community or group versus another that anoints the individual’s well-being as the ultimate measure of the value of social arrangements. That basic tension, in turn, reverberates across social and economic questions, including as they relate to markets, competition, and the functions of the state.

 Competition Under Marxism

Karl Marx argued that the course of history was determined by material relations among the social classes under any given system of production (historical materialism and dialectical materialism, respectively). Under that view, communism was not a desirable “state of affairs,” but the inevitable consequence of social forces as they then existed. As Marx and Friedrich Engels wrote in The Communist Manifesto:

Communism is for us not a state of affairs which is to be established, an ideal to which reality [will] have to adjust itself. We call communism the real movement which abolishes the present state of things. The conditions of this movement result from the premises now in existence.

Thus, following the ineluctable laws of history, which Marx claimed to have discovered, capitalism would inevitably come to be replaced by socialism and, subsequently, communism. Under socialism, the means of production would be controlled not by individuals interacting in a free market, but by the political process under the aegis of the state, with the corollary that planning would come to substitute for competition as the economy’s steering mechanism. This would then give way to communism: a stateless utopia in which everything would be owned by the community and where there would be no class divisions. This would come about as a result of the interplay of several factors inherent to capitalism, such as the exploitation of the working class and the impossibility of sustained competition.

Per Marx, under capitalism, owners of the means of production (i.e., the capitalists or the bourgeoisie) appropriate the surplus value (i.e., the difference between the sale price of a product and the cost to produce it) generated by workers. Thus, the lower the wages and the longer the working hours of the worker, the greater the profit accrued to the capitalist. This was not an unfortunate byproduct that could be reformed, Marx posited, but a central feature of the system that was solvable only through revolution. Moreover, the laws, culture, media, politics, faith, and other institutions that might ordinarily open alternative avenues to nonviolent resolution of class tensions (the “super-structure”) were themselves byproducts of the underlying material relations of production (“structure” or “base”), and thus served to justify and uphold them.

The Marxian position further held that competition—the lodestar and governing principle of the capitalist economy—was, like the system itself, unsustainable. It would inevitably end up cannibalizing itself. But the claim is a bit more subtle than critics of communism often assume. As Leon Trotsky wrote in the 1939 pamphlet Marxism in our time:

Relations between capitalists, who exploit the workers, are defined by competition, which for long endures as the mainspring of capitalist progress.

Two notions expressed seamlessly in Trotsky’s statement need to be understood about the Marxian perception of competition. The first is that, since capitalism is exploitative of workers and competition among capitalists is the engine of capitalism, competition is itself effectively a mechanism of exploitation. Capitalists compete through the cheapening of commodities and the subsequent reinvestment of the surplus appropriated from labor into the expansion of productivity. The most exploitative capitalist, therefore, generally has the advantage (this hinges, of course, largely on the validity of the labor theory of value).

At the same time, however, Marxists (including Marx himself) recognized the economic and technological progress brought about through capitalism and competition. This is what Trotsky means when he refers to competition as the “mainspring of capitalist progress” and, by extension, the “historical justification of the capitalist.” The implication is that, if competition were to cease, the entire capitalist edifice and the political philosophy undergirding it (liberalism) would crumble, as well.

Whereas liberalism and competition were intertwined, liberalism and monopoly could not coexist. Instead, monopolists demanded—and, due to their political clout, were able to obtain—an increasingly powerful central state capable of imposing protective tariffs and other measures for their benefit and protection. Trotsky again:

The elimination of competition by monopoly marks the beginning of the disintegration of capitalist society. Competition was the creative mainspring of capitalism and the historical justification of the capitalist. By the same token the elimination of competition marks the transformation of stockholders into social parasites. Competition had to have certain liberties, a liberal atmosphere, a regime of democracy, of commercial cosmopolitanism. Monopoly needs as authoritative government as possible, tariff walls, “its own” sources of raw materials and arenas of marketing (colonies). The last word in the disintegration of monopolistic capital is fascism.

Marxian theory posited that this outcome was destined to happen for two reasons. First, because:

The battle of competition is fought by cheapening of commodities. The cheapness of commodities depends, ceteris paribus, on the productiveness of labor, and this again on the scale of production. Therefore, the larger capital beats the smaller.

In other words, competition stimulated the progressive development of productivity, which depended on the scale of production, which depended, in turn, on firm size. Ultimately, therefore, competition ended up producing a handful of large companies that would subjugate competitors and cannibalize competition. Thus, the more wealth that capitalism generated—and Marx had no doubts that capitalism was a wealth-generating machine—the more it sowed the seeds of its own destruction. Hence:

While stimulating the progressive development of technique, competition gradually consumes, not only the intermediary layers but itself as well. Over the corpses and the semi-corpses of small and middling capitalists, emerges an ever-decreasing number of ever more powerful capitalist overlords. Thus, out of “honest”, “democratic”, “progressive” competition grows irrevocably “harmful”, “parasitic”, “reactionary” monopoly.

The second reason Marxists believed the downfall of capitalism was inevitable is that the capitalists squeezed out of the market by the competitive process would become proletarians, which would create a glut of labor (“a growing reserve army of the unemployed”), which would in turn depress wages. This process of proletarianization, combined with the “revolutionary combination by association” of workers in factories would raise class consciousness and ultimately lead to the toppling of capitalism and the ushering in of socialism.

Thus, there is a clear nexus in Marxian theory between the end of competition and the end of capitalism (and therefore liberalism), whereby monopoly is deduced from the inherent tendencies of capitalism, and the end of capitalism, in turn, is deduced from the ineluctable advent of monopoly. What follows (i.e., socialism and communism) are collectivist systems that purport to be run according to the principles of solidarity and cooperation (“from each according to his abilities, to each according to his needs”), where there is therefore no place (and no need) for competition. Instead, the Marxian Gemeinschaft would organize the economy around rationalistic lines, substituting cut-throat competition for centralized command by the state (later, the community) that would rein in hitherto uncontrollable economic forces in a heroic victory over the chaos and unpredictability of capitalism. This would, of course, also bring about the end of liberalism, with individualism, private property, and other liberal freedoms jettisoned as mouthpieces of bourgeoisie class interests. Chairman Mao Zedong put it succinctly:

We must affirm anew the discipline of the Party, namely:

1. The individual is subordinate to the organization;

2. The minority is subordinate to the majority.

Competition Under Fascism/Nazism

Formidable as it was, the Marxian attack on liberalism was just one side of the coin. Decades after the articulation of Marxian theory in the mid-19th century, fascism—founded by former socialist Benito Mussolini in 1915—emerged as a militant alternative to both liberalism and socialism/communism.

In essence, fascism was, like communism, unapologetically collectivist. But whereas socialists considered class to be the relevant building block of society, fascists viewed the individual as part of a greater national, racial, and historical entity embodied in the state and its leadership. As Mussolini wrote in his 1932 pamphlet The Doctrine of Fascism:

Anti-individualistic, the Fascist conception of life stresses the importance of the State and accepts the individual only in so far as his interests coincide with those of the State, which stands for the conscience of the universal, will of man as a historic entity. It is opposed to classical liberalism […] liberalism denied the State in the name of the individual; Fascism reasserts.

Accordingly, fascism leads to an amalgamation of state and individual that is not just a politico-economic arrangement where the latter formally submits to the former, but a conception of life. This worldview is, of course, diametrically opposed to core liberal principles, such as personal freedom, individualism, and the minimal state. And surely enough, fascists saw these liberal values as signs of civilizational decadence (as expressed most notably by Oswald Spengler in The Decline of the West—a book that greatly inspired Nazi ideology). Instead, they posited that the only freedom worthy of the name existed within the state; that peace and cosmopolitanism were illusory; and that man was man only by virtue of his membership and contribution to nation and race.

But fascism was also opposed to Marxian socialism. At its most basic, the schism between the two worldviews can be understood in terms of the fascist rejection of materialism, which was a centerpiece of Marxian thought. Fascists denied the equivalence of material well-being and happiness, instead viewing man as fulfilled by hardship, war, and by playing his part in the grand tapestry of history, whose real protagonists were nation-states. While admitting the importance of economic life—e.g., of efficiency and technological innovation—fascists denied that material relations unequivocally determined the course of history, insisting instead on the preponderance of spiritual and heroic acts (i.e., acts with no economic motive) as drivers of social change. “Sanctity and heroism,” Mussolini wrote, are at the root of the fascist belief system, not material self-interest.  

This belief system also extended to economic matters, including competition. The Third Reich respected private property rights to some degree—among other reasons, because Adolf Hitler believed it would encourage creative competition and innovation. The Nazis’ overarching principle, however, was that all economic activity and all private property ultimately be subordinated to the “common good,” as interpreted by the state. In the words of Hitler:

I want everyone to keep what he has earned subject to the principle that the good of the community takes priority over that of the individual. But the State should retain control; every owner should feel himself to be an agent of the State. […] The Third Reich will always retain the right to control property owners.

The solution was a totalitarian system of government control that maintained private enterprise and profit incentives as spurs to efficient management, but narrowly circumscribed the traditional freedom of entrepreneurs. Economic historians Christoph Buchheim and Jonas Scherner have characterized the Nazis’ economic system as a “state-directed private ownership economy,” a partnership in which the state was the principal and the business was the agent. Economic activity would be judged according to the criteria of “strategic necessity and social utility,” encompassing an array of social, political, practical, and ideological goals. Some have referred to this as the “primacy of politics over economics” approach.

For instance, in supervising cross-border acquisitions (today’s mergers), the state “sought to suppress purely economic motives and to substitute some rough notion of ‘racial political’ priority when supervising industrial acquisitions or controlling existing German subsidiaries.” The Reich selectively applied the 1933 Act for the Formation of Compulsory Cartels in regulating cartels that had been formed under the Weimar Republic with the Cartel Act of 1923. But the legislation also appears to have been applied to protect small and medium-sized enterprises, an important source of the party’s political support, from ruinous competition. This is reminiscent of German industrialist and Nazi supporter Gustav Krupp’s “Third Form”: 

Between “free” economy and state capitalism there is a third form: the economy that is free from obligations, but has a sense of inner duty to the state. 

In short, competition and individual achievement had to be balanced with cooperation, mediated by the self-appointed guardians of the “general interest.” In contrast with Marxian socialism/communism, the long-term goal of the Nazi regime was not to abolish competition, but to harness it to serve the aims of the regime. As Franz Böhm—cofounder, with Walter Eucken, of the Freiburg School and its theory of “ordoliberalism”—wrote in his advice to the Nazi government:

The state regulatory framework gives the Reich economic leadership the power to make administrative commands applying either the indirect or the direct steering competence according to need, functionality, and political intent. The leadership may go as far as it wishes in this regard, for example, by suspending competition-based economic steering and returning to it when appropriate. 

Conclusion

After a century of expansion, opposition to classical liberalism started to coalesce around two nodes: Marxism on the left, and fascism/Nazism on the right. What ensued was a civilizational crisis of material, social, and spiritual proportions that, at its most basic level, can be understood as an iteration of the perennial struggle between individualism and collectivism. On the one hand, liberals like J.S. Mill had argued forcefully that “the only freedom which deserves the name, is that of pursuing our own good in our own way.” In stark contrast, Mussolini wrote that “fascism stands for liberty, and for the only liberty worth having, the liberty of the state and of the individual within the state.” The former position is rooted in a humanist view that enshrines the individual at the center of the social order; the latter in a communitarian ideal that sees him as subordinate to forces that supersede him.

As I have explained in the previous post, the philosophical undercurrents of both positions are ancient. A more immediate precursor of the collectivist standpoint, however, can be found in German idealism and particularly in Georg Wilhelm Friedrich Hegel. In The Philosophy of Right, he wrote:

A single person, I need hardly say, is something subordinate, and as such he must dedicate himself to the ethical whole. Hence, if the state claims life, the individual must surrender it. All the worth which the human being possesses […] he possesses only through the state.

This broader clash is reflected, directly and indirectly, in notions of competition and competition regulation. Classical liberals sought to liberate competition from regulatory fetters. Marxism “predicted” its downfall and envisioned a social order without it. Fascism/Nazism sought to wrest it from the hands of greedy self-interest and mold it to serve the many and the fluctuating objectives of the state and its vision of the common good

In the next post, I will discuss how this has influenced the neoliberal philosophy that is still at the heart of many competition systems today. I will argue that two strands of neoliberalism emerged, which each attempted to resolve the challenge of collectivism in distinct ways. 

One strand, associated with a continental understanding of liberalism and epitomized by the Freiburg School, sought to strike a “mostly liberal” compromise between liberalism and collectivism—a “Third Way” between opposites. In doing so, however, it may have indulged in some of the same collectivist vices that it initially sought to avoid— such as vast government discretion and the imposition of myriad “higher” goals on society. 

The other strand, represented by Anglo-American liberalism of the sort espoused by Friedrich Hayek and Milton Friedman, was less conciliatory. It attempted to reform, rather than reinvent, liberalism. Their prescriptions involved creating a strong legal framework conducive to economic efficiency against a background of limited government discretion, freedom, and the rule of law.

The Autorità Garante della Concorenza e del Mercato (AGCM), Italy’s competition and consumer-protection watchdog, on Nov. 25 handed down fines against Google and Apple of €10 million each—the maximum penalty contemplated by the law—for alleged unfair commercial practices. Ultimately, the two decisions stand as textbook examples of why regulators should, wherever possible, strongly defer to consumer preferences, rather than substitute their own.

The Alleged Infringements

The AGCM has made two practically identical cases built around two interrelated claims. The first claim is that the companies have not properly informed users that the data they consent to share will be used for commercial purposes. The second is that, by making users opt out if they don’t want to consent to data sharing, the companies unduly restrict users’ freedom of choice and constrain them to accept terms they would not have otherwise accepted.

According to the AGCM, Apple and Google’s behavior infringes Articles 20, 21, 22, 24 and 25 of the Italian Consumer Code. The first three provisions prohibit misleading business practices, and are typically applied to conduct such as lying, fraud, the sale of unsafe products, or the omission or otherwise deliberate misrepresentation of facts in ways that would deceive the average user. The conduct caught by the first claim would allegedly fall into this category.

The last two provisions, by contrast, refer to aggressive business practices such as coercion, blackmail, verbal threats, and even physical harassment capable of “limiting the freedom of choice of users.” The conduct described in the second claim would fall here.

The First Claim

The AGCM’s first claim does not dispute that the companies informed users about the commercial use of their data. Instead, the authority argues that the companies are not sufficiently transparent in how they inform users.

Let’s start with Google. Upon creating a Google ID, users can click to view the “Privacy and Terms” disclosure, which details the types of data that Google processes and the reasons that it does so. As Figure 1 below demonstrates, the company explains that it processes data: “to publish personalized ads, based on your account settings, on Google services as well as on other partner sites and apps” (translation of the Italian text highlighted in the first red rectangle). Below, under the “data combination” heading, the user is further informed that: “in accordance with the settings of your account, we show you personalized ads based on the information gathered from your combined activity on Google and YouTube” (the section in the second red rectangle).

Figure 1: ACGM Google decision, p. 7

After creating a Google ID, a pop-up once again reminds the user that “this Google account is configured to include the personalization function, which provides tips and personalized ads based on the information saved on your account. [And that] you can select ‘other options’ to change the personalization settings as well as the information saved in your account.”

The AGCM sees two problems with this. First, the user must click on “Privacy and Terms” to be told what Google does with their data and why. Viewing this information is not simply an unavoidable step in the registration process. Second, the AGCM finds it unacceptable that the commercial use of data is listed together with other, non-commercial uses, such as improved quality, security, etc. (the other items listed in Figure 1). The allegation is that this leads to confusion and makes it less likely that users will notice the commercial aspects of data usage.

A similar argument is made in the Apple decision, where the AGCM similarly contends that users are not properly informed that their data may be used for commercial purposes. As shown in Figure 2, upon creating an Apple ID, users are asked to consent to receive “communications” (notifications, tips, and updates on Apple products, services, and software) and “Apps, music, TV, and other” (latest releases, exclusive content, special offers, tips on apps, music, films, TV programs, books, podcasts, Apple Pay and others).

Figure 2: AGCM Apple decision, p. 8

If users click on “see how your data is managed”—located just above the “Continue” button, as shown in Figure 2—they are taken to another page, where they are given more detailed information about what data Apple collects and how it is used. Apple discloses that it may employ user data to send communications and marketing e-mails about new products and services. Categories are clearly delineated and users are reminded that, if they wish to change their marketing email preferences, they can do so by going to appleid.apple.com. The word “data” is used 40 times and the taxonomy of the kind of data gathered by Apple is truly comprehensive. See for yourself.

The App Store, Apple Book Store, and iTunes Store have similar clickable options (“see how your data is managed”) that lead to pages with detailed information about how Apple uses data. This includes unambiguous references to so-called “commercial use” (e.g., “Apple uses information on your purchases, downloads, and other activities to send you tailored ads and notifications relative to Apple marketing campaigns.”)

But these disclosures failed to convince the AGCM that users are sufficiently aware that their data may be used for commercial purposes. The two reasons cited in the opinion mirror those in the Google decision. First, the authority claims that the design of the “see how your data is managed” option does not “induce the user to click on it” (see the marked area in Figure 2). Further, it notes that accessing the “Apple ID Privacy” page requires a “voluntary and eventual [i.e., hypothetical]” action by the user. According to the AGCM, this leads to a situation in which “the average user” is not “directly and intuitively” aware of the magnitude of data used for commercial purposes, and is instead led to believe that data is shared to improve the functionality of the Apple product and the Apple ecosystem.

The Second Claim

The AGCM’s second claim contends that the opt-out mechanism used by both Apple and Google “limits and conditions” users’ freedom of choice by nudging them toward the companies’ preferred option—i.e., granting the widest possible consent to process data for commercial use.

In Google’s case, the AGCM first notes that, when creating a Google ID, a user must take an additional discretionary step before they can opt out of data sharing. This refers to mechanism in which a user must click the words “OTHER OPTIONS,” in bright blue capitalized font, as shown in Figure 3 below (first blue rectangle, upper right corner).

Figure 3: AGCM Google decision, p. 22

The AGCM’s complaint here is that it is insufficient to grant users merely the possibility of opting out, as Google does. Rather, the authority contends, users must be explicitly asked whether they wish to share their data. As in the first claim, the AGCM holds that questions relating to the commercial use of data must be woven in as unavoidable steps in the registration process.

The AGCM also posits that the opt-out mechanism itself (in the lower left corner of Figure 3) “restricts and conditions” users’ freedom of choice by preventing them from “expressly and preventively” manifesting their real preferences. The contention is that, if presented with an opt-in checkbox, users would choose differently—and thus, from the authority’s point of view, choose correctly. Indeed, the AGCM concludes from the fact that the vast majority of users have not opted out from data sharing (80-100%, according to the authority), that the only reasonable conclusion is that “a significant number of subscribers have been induced to make a commercial decision without being aware of it.”

A similar argument is made in the Apple decision. Here, the issue is the supposed difficulty of the opt-out mechanism, which the AGCM describes as “intricate and non-immediate.” If a user wishes to opt out of data sharing, he or she would not only have to “uncheck” the checkboxes displayed in Figure 2, but also do the same in the Apple Store with respect to their preferences for other individual Apple products. This “intricate” process generally involves two to three steps. For instance, to opt out of “personalized tips,” a user must first go to Settings, then select their name, then multimedia files, and then “deactivate personalized tips.”

According to the AGCM, the registration process is set up in such a way that the users’ consent is not informed, free, and specific. It concludes:

The consumer, entangled in this system, of which he is not aware, is conditioned in his choices, undergoing the transfer of his data, which the professional can dispose of for his own promotional purposes.

The AGCM’s decisions fail on three fronts. They are speculative, paternalistic, and subject to the Nirvana Fallacy. They are also underpinned by an extremely uncharitable conception of what the “average user” knows and understands.

Epistemic Modesty Under Uncertainty

The AGCM makes far-reaching and speculative assumptions about user behavior based on incomplete knowledge. For instance, both Google and Apple’s registration processes make clear that they gather users’ data for advertising purposes—which, especially in the relevant context, cannot be interpreted by a user as anything but “commercial” (even under the AGCM’s pessimistic assumptions about the “average user.”) It’s true that the disclosure requires the user to click “see how your data is managed” (Apple) or “Privacy and Terms” (Google). But it’s not at all clear that this is less transparent than, say, the obligatory scroll-text that most users will ignore before blindly clicking to accept.

For example, in registering for a Blizzard account (a gaming service), users are forced to read the company’s lengthy terms and conditions, with information on the “commercial use” of data buried somewhere in a seven-page document of legalese. Does it really follow from this that Blizzard users are better informed about the commercial use of their data? I don’t think so.

Rather than the obligatory scroll-text, the AGCM may have in mind some sort of pop-up screen. But would this mean that companies should also include separate, obligatory pop-ups for every other relevant aspect of their terms and conditions? This would presumably take us back to square one, as the AGCM’s complaint was that Google amalgamated commercial and non-commercial uses of data under the same title. Perhaps the pop-up for the commercial use of data would have to be made more conspicuous. This would presumably require a normative hierarchy of the companies’ terms and conditions, listed in order of relevance for users. That would raise other thorny questions. For instance, should information about the commercial use of data be more prominently displayed than information about safety and security?

A reasonable alternative—especially under conditions of uncertainty—would be to leave Google and Apple alone to determine the best way to inform consumers, because nobody reads the terms and conditions anyway, no matter how they are presented. Moreover, the AGCM offers no evidence to support its contention that companies’ opt-out mechanisms lead more users to share their data than would freely choose to do so.

Whose Preferences?

The AGCM also replaces revealed user preferences with its own view of what those preferences should be. For instance, the AGCM doesn’t explain why opting to share data for commercial purposes would be, in principle, a bad thing. There are a number of plausible and legitimate explanations for why a user would opt for more generous data-sharing arrangements: they may believe that data sharing will improve their experience; may wish to receive tailored ads rather than generic ones; or may simply value a company’s product and see data sharing as a fair exchange. None of these explanations—or, indeed, any others—are ever contemplated in the AGCM decision.

Assuming that opt-outs, facultative terms and conditions screens, and two-to-three-step procedures to change one’s preferences truncate users’ “freedom of choice” is paternalistic and divorced from the reality of the average person, and the average Italian.

Ideal or Illegal?

At the heart of the AGCM decisions is the notion that it is proper to punish market actors wherever the real doesn’t match a regulator’s vision of the ideal—commonly known as “the Nirvana fallacy.” When the AGCM claims that Apple and Google do not properly disclose the commercial use of user data, or that the offered opt-out mechanism is opaque or manipulative, the question is: compared to what? There will always be theoretically “better” ways of granting users the choice to opt out of sharing their data. The test should not be whether a company falls short of some ideal imagined practice, but whether the existing mechanism actually deceives users.

There is nothing in the AGCM’s decisions to suggest that it does. Depending on how precipitously one lowers the bar for what the “average user” would understand, just about any intervention might be justified, in principle. But to justify the AGCM’s intervention in this case requires stretching the plausible ignorance of the average user to its absolute theoretical limits.

Conclusion

Even if a court were to buy the AGCM’s impossibly low view of the “average user” and grant the first claim—which would be unfortunate, but plausible — not even the most liberal reading of Articles 24 and 25 can support the view that “overly complex, non-immediate” opt-outs, as interpreted by the AGCM, limit users’ freedom of choice in any way comparable to the type of conduct described in those provisions (coercion, blackmail, verbal threats, etc.)

The AGCM decisions are shot through with unsubstantiated assumptions about users’ habits and preferences, and risk imposing undue burdens not only on the companies, but on users themselves. With some luck, they will be stricken down by a sensible judge. In the meantime, however, the trend of regulatory paternalism and over-enforcement continues. Much like in the United States, where the Federal Trade Commission (FTC) has occasionally engaged in product-design decisions that substitute the commission’s own preferences for those of consumers, regulators around the world continue to think they know better than consumers about what’s in their best interests.

This post is the first in a three-part series. The second installment can be found here and the third can be found here.

The interplay among political philosophy, competition, and competition law remains, with some notable exceptions, understudied in the literature. Indeed, while examinations of the intersection between economics and competition law have taught us much, relatively little has been said about the value frameworks within which different visions of competition and competition law operate.

As Ronald Coase reminds us, questions of economics and political philosophy are interrelated, so that “problems of welfare economics must ultimately dissolve into a study of aesthetics and morals.” When we talk about economics, we talk about political philosophy, and vice versa. Every political philosophy reproduces economic prescriptions that reflect its core tenets. And every economic arrangement, in turn, evokes the normative values that undergird it. This is as true for socialism and fascism as it is for liberalism and neoliberalism.

Many economists have understood this. Milton Friedman, for instance, who spent most of his career studying social welfare, not ethics, admitted in Free to Choose that he was ultimately concerned with the preservation of a value: the liberty of the individual. Similarly, the avowed purpose of Friedrich Hayek’s The Constitution of Liberty was to maximize the state of human freedom, with coercion—i.e., the opposite of freedom—described as evil. James Buchanan fought to preserve political philosophy within the economic discipline, particularly worrying that:

Political economy was becoming unmoored from the types of philosophic and institutional analysis which were previously central to the field. In its flight from reality, Buchanan feared economics was in danger of abandoning social-philosophic issues for exclusively technical questions.

— John Kroencke, “Three Essays in the History of Economics”

Against this background, I propose to look at competition and competition law from a perspective that explicitly recognizes this connection. The goal is not to substitute, but rather to complement, our comparatively broad understanding of competition economics with a better grasp of the deeper normative implications of regulating competition in a certain way. If we agree with Robert Bork that antitrust is a subcategory of ideology that reflects and reacts upon deeper tensions in our society, the exercise might also be relevant beyond the relatively narrow confines of antitrust scholarship (which, on the other hand, seem to be getting wider and wider).

The Classical Liberal Revolution and the Unshackling of Competition

Mercantilism

When Adam Smith’s The Wealth of Nations was published in 1776, heavy economic regulation of the market through laws, by-laws, tariffs, and special privileges was the norm. Restrictions on imports were seen as protecting national wealth by preventing money from flowing out of the country—a policy premised on the conflation of money with wealth. A morass of legally backed and enforceable monopoly rights, granted either by royal decree or government-sanctioned by-laws, marred competition. Guilds reigned over tradesmen by restricting entry into the professions and segregating markets along narrow geographic lines. At every turn, economic activity was shot through with rules, restrictions, and regulations.

The Revolution in Political Economy

Classical liberals like Smith departed from the then-dominant mercantilist paradigm by arguing that nations prospered through trade and competition, and not protectionism and monopoly privileges. He demonstrated that both the seller and the buyer benefited from trade; and theorized the market as an automatic mechanism that allocated resources efficiently through the spontaneous, self-interested interaction of individuals.

Undergirding this position was the notion of the natural order, which Smith carried over from his own Theory of Moral Sentiments and which elaborated on arguments previously espoused by the French physiocrats (a neologism meaning “the rule of nature”), such as Anne Robert Jacques Turgot, François Quesnay, and Jacques Claude Marie Vincent de Gournay. The basic premise was that there existed a harmonious order of things established and maintained by means of subconscious balancing of the egoism of the individual and the greatest welfare for all.

The implications of this modest insight, which clashed directly with established mercantilist orthodoxy, were tremendous. If human freedom maximized social welfare, the justification for detailed government intervention in the economy was untenable. The principles of laissez-faire (a term probably coined by Gournay, who had been Turgot’s mentor) instead prescribed that the government should adopt a “night watchman” role, tending to modest tasks such as internal and external defense, the mediation of disputes, and certain public works that were not deemed profitable for the individual.

Freeing Competition from the Mercantilist Yoke

Smith’s general attitude also carried over to competition. Following the principles described above, classical liberals believed that price and product adjustments following market interactions among tradesmen (i.e., competition) would automatically maximize social utility. As Smith argued:

In general, if any branch of trade, or any division of labor, be advantageous to the public, the freer and more general the competition, it will always be the more so.

This did not mean that competition occurred in a legal void. Rather, Smith’s point was that there was no need to construct a comprehensive system of competition regulation, as markets would oversee themselves so long as a basic legal and institutional framework was in place and government refrained from actively abetting monopolies. Under this view, the only necessary “competition law” would be those individual laws that made competition possible, such as private property rights, contracts, unfair competition laws, and the laws against government and guild restrictions.

Liberal Political Philosophy: Utilitarian and Deontological Perspectives on Liberty and Individuality

Of course, this sort of volte face in political economy needed to be buttressed by a robust philosophical conception of the individual and the social order. Such ontological and moral theories were articulated in, among others, the Theory of Moral Sentiments and John Stuart Mill’s On Liberty. At the heart of the liberal position was the idea that undue restrictions on human freedom and individuality were not only intrinsically despotic, but also socially wasteful, as they precluded men from enjoying the fruits of the exercise of such freedoms. For instance, infringing the freedom to trade and to compete would rob the public of cheaper goods, while restrictions on freedom of expression would arrest the development of thoughts and ideas through open debate.

It is not clear whether the material or the ethical argument for freedom came first. In other words, whether classical liberalism constituted an ex-post rationalization of a moral preference for individual liberty, or precisely the reverse. The question may be immaterial, as classical liberals generally believed that the deontological and the consequentialist cases for liberty—save in the most peripheral of cases (e.g., violence against others)—largely overlapped.

Conclusion

In sum, classical liberalism offered a holistic, integrated view of societies, markets, morals, and individuals that was revolutionary for the time. The notion of competition as a force to be unshackled—rather than actively constructed and chaperoned—flowed organically from that account and its underlying values and assumptions. These included such values as personal freedom and individualism, along with foundational metaphysical presuppositions, such as the existence of a harmonious natural order that seamlessly guided individual actions for the benefit of the whole.

Where such base values and presumptions are eroded, however, the notion of a largely spontaneous, self-sustaining competitive process loses much of its rational, ethical, and moral legitimacy. Competition thus ceases to be tenable on its “own two feet” and must either be actively engineered and protected, or abandoned altogether as a viable organizing principle. In this sense, the crisis of liberalism the West experienced in the late 19th and early 20th centuries—which attacked the very foundations of classical liberal doctrine—can also be read as a crisis of competition.

In my next post, I’ll discuss the collectivist backlash against liberalism.