I think Western European labour regulations suck and are the single biggest reason Europe doesn’t have more new tech companies. Source: sit on the board of a few companies that have attempted to expand in Europe with different degrees of success.
I was just happy it didn't devolve into jumping on Lina Khan.
Instead, it was a very interesting and educational post but lacked any convenient hook for all of us to pull out our favorite pet rock and argue about which one is bigger.
Too busy this morning. But I appreciate that Matt seems to lately be moderating on his moderate ideology enough to see some complexity rather than just go after progressives. Post-election, he lost his nose for nuance and forgot that a big tent includes the left as well the middle.
I guess the SB commentariat can't conceive of progressives who are pragmatic or reasonable. Sigh.
My point was he pulled back from blaming progressives and focused on the issues and policies. He also noted ways in which anti-monopoly activists are right. If you want to build a big tent full of diverse people, you have to invite them in. Post-election, Matt shouted insults at progressives who came by the tent flaps. Recent posts have felt much more like, "Hey, come on in, let's talk." We can't defeat Trumpism without working together.
The most politically absurd person I know thinks he's reasonable. I don't think anybody who reads SB thinks they're anything other than royalty of rationality. But I definitely think I'm a pragmatic, reasonable progressive. The attacks on progressives read to me as unreasonable and ideological. Maybe Matt realized attacking the people he wants to change isn't an effective strategy. Or maybe I'm so desperate for good news I'm projecting positive change onto an immovable Yglessis.
That’s why I just commented! All I really said was “good job” but want to vote for more stuff like this and less Palestine or factional politics or social issues, even if those draw more engagement (including from me—that stuff is addictive!).
We do! Especially when Matt calls it the Solow-Swan model. I'm Australian so every econ class I ever took called it that and it was disappointing to then find out you Yanks 99% of the time give all the credit to Solow. But I can forgive you for that. What I can't forgive is the Swedes giving Solow the Nobel but not Swan.
Labor laws and bankruptcy laws make entrepreneurial risk taking almost impossible in Europe. Regulatory / competition rules are a big factor in some sectors but I’d say a distant third issue in most.
I need to shut off SB and focus on life, so I won't look this up, but I believe the EU has significantly more new business than the US. My understanding is healthcare and the security net make it easier to start a small business in the EU, but regulatory and labor laws make scale harder.
The reality is that the western European* system of extremely strong protections for employees is quite good if you are on the right side of the insider / outsider dynamic and horrible if you are on the outside, which is a big reason why youth unemployment has been so persistent, especially among those with fewer qualifications and connections. Clearly a plurality of citizens in most countries do think it's good, though.
*The UK has a different system which offers much stronger protections than in most US states but substantially less than in many European countries (although the trend over the past 25 years has been for new laws and jurisprudence to take us closer to European norms).
AWS had an outage yesterday and my local smoothie shop was closed because their POS was down. A lot of your day-to-day runs on US companies infrastructure!
As a European citizen, I can confirm that, yes, this is a terrible thing for those of us that decided to stay in Europe. By moving to the US, I easily earn 2x for the same job (probably much more) compared to my peers who stayed.
Unless you make enormous amounts of money in which case you will probably pay about the same amount of tax here as in Europe. But being really rich in America is way better than being really rich in Europe.
I had a friend who is a software engineer and moved to Germany where his wife is a citizen to have four kids because he thought it would be more affordable to raise a family there. I kept telling him this was not rational, but, well, they’re still in Berlin.
Seems conceivable Europe might on balance work out better if one has children and lives in a sufficiently walkable European city. I'm not familiar with German childcare policy, but it's mind-bogglingly expensive in the US. Oh, and the average new car price in the latter is above $50k. (Cars aren't cheap in Germany, either, but at least there one might plausibly live without one). I've heard universities in America are pretty pricey, too.
My first month in Europe has been an eye-opener: I'm much more open to the "US superiority" case than before (like, I hate having to start worrying at 2pm on a Saturday if there's anything I can't live without until Monday). But there are lots of different situations out there, and for the non-hyper affluent with children, the richer parts of Europe can still be pretty compelling.
I'll answer that again comparing myself with my peers and say that I benefit from lower housing prices in the US, as well. I think groceries are more expensive here, but housing is a larger share of my expenditures each month. Owning and operating a car is also cheaper in the US. Healthcare is much more expensive, but I'm also young and very rarely get sick. I expect that I will return home by the time I'm 50 at the latest.
Now, to properly compare things you need data and not anecdotes, but I think that the US beats many of the rich areas of the EU (Germany, France) even if you include Alabama and Mississippi in your US statistics.
I think the real question being asked in view of salary disparities is what the overall quality-of-life disparity is. The stereotype is that the Europeans earn much less, but they get to take vacations and have basically all of August off, whereas American jobs are, if anything, inclining towards less leisure over time.
Oh, the answer here is an even stronger "It depends on the situation!" and "I only have anecdotes, not data!". I will also say that Americans who make these arguments usually also compare themselves with the French and not with the Romanians.
Some throat clearing: The August stereotype is accurate, and it helps that Americans know about it, because at my current workplace I do use the argument "Oh, you don't expect your European employee to be productive in August, do you? Can I go home for three weeks?". This tactic works! It is still wild to me that we have deadlines for deliverables in August in the US. I've lived here for a while, but I still can't comprehend that.
Some things to balance that: European labor laws make it hard to fire employees. That can make your life pretty miserable if you have a bad coworker (or, even worse, a bad manager), because it's MUCH harder to get rid of that person, so you mostly have to learn to live with this situation. Friends who work in the US (both Americans and non-Americans) have encountered situations where their workplace got rid (usually through a PIP) of coworkers who made the workplace unpleasant. The difficulty in firing people makes hiring also more difficult, so my friends in Europe change jobs less frequently. If you are really unhappy with your work life, it's much harder to do something about it in Europe. These are important quality-of-life advantages of the US, given that you spend much more time working than vacationing each year.
The other thing about quality of life in Europe is that my peers are worried about how long this will last. Europeans don't really have 401ks (non-government pension plans exist, but are rarer and much less comprehensive) and there is a trend of raising the retirement age for government pensions or otherwise "encouraging" people to work after the "official" retirement age (https://www.dw.com/en/germany-news-cabinet-agrees-on-active-pensioner-plans/live-74368075), so I discuss a lot with my friends about retirement-related worries. My friends in the US contribute to their 401ks religiously, and don't even count on Social Security. They usually are much more confident that they won't have to work into their 70s.
Yup! I work in tech and have and have had colleagues from England, France, Germany, Poland and Portugal. My current employer has development offices in Ireland and Poland.
Our customers are all over Europe (and before 2022 even one in Russia).
I think the example of wireless broadband cuts the other way. US cell service is more expensive and less good and less innovative that in other countries. Instead the broadband companies keep trying to acquire media businesses to seem cooler and mismanaging them.
I think the distinction this points to is between sectors where monopoly occurs due to the structure of the business (like electricity or cell service) and competition requires competition policy and markets where monopoly emerges from competitive markets naturally like search engines, where breaking things up is much less needed.
I have Total Wireless. $90 every three months, and they use Verizon's network. Works perfectly, they don't even spam me.
The only downside is that it doesn't work outside the USA but Airalo esims have been flawless and cheap for me in a bunch of places-- Europe, South America, Mexico, Canada, Japan.
Not unlimited for 2eur/month but when I was living there I paid 20eur /month for hundreds of Gb (more than I needed) - this was with free.fr Back home in the US I’m paying a lot more per month for less.
Is that right? My understanding was the the US invested significantly more in 5G rollout, and was ahead of most European countries in mobile data speed. I had previously heard that wireless carriers were a great example of the ideal level of competition; you want 2.5 big providers (Verizon, AT&T, T-Mobile) that are competing with each other, but large enough to make major investments in infrastructure.
I wish we had cell service like I encountered in other countries when I was in the military. In Jordan and the Philippines it was ~10 USD for a physical data-only SIM card that had ~10GB of 4G data good for ~30 days. No documentation, no contract, just give the money to someone at a random corner store, plug the SIM in, and go.
(I was using a VPN 100% of the time when doing this)
I assume there's a regulatory reason this isn't common in the USA.
I haven't read Aghion and Howitt's paper*, but it seems to me that the key to profits from innovation is time. Firms that innovate get a temporary advantage over the competition. Competitors will catch up, but until then the innovators can get some sweet profits. Does the paper more or less say that?
The obvious way this is enforced is with patents, though even then competitors often find a similar solution — Novo creates Ozempic and Lilly follows them with Zepbound. However, not all innovation is patent based. I've worked a lot in consumer packaged goods (CPG) where "innovation" can simply be a new flavor, a new form (pill vs. liquid), or even a new ad campaign. You can't generally patent those, and the competition will catch up if it's popular, but you do get a temporary profit advantage until they do (usually 6-24 months in CPG).
*Academic papers are super dry and I'd much rather read a summary from a good writer like Matt
work in exactly this way. Firms in these models face direct competitors, and they can earn profits when their technology is superior to that of competing firms, who can then try to innovate to catch up. The incentives to innovate depend on how much time it takes (in expectation) for this catch-up to happen.
These models also allow for "imitation" that can circumvent IP law, so that firms can access parts of others' innovations for free. As you point out, imitation is generally detrimental to innovation incentives and growth.
If you get an account on Claude.ai or similar and have it walk you through the paper, you can learn it much more effectively than by reading any one summary.
And yet the CPG sector is incredibly innovative, far more so than if you could patent a new flavor so no one else could make it for 20 years. IP laws are on net a hindrance to innovation.
Right. The fact that you can only profit for a short period of time means you have to constantly innovate and find the next profit source. Having IP protection gets you more time to find the next innovation so you don't have to worry so much about innovation.
At the same time, peptides are an example of how the lack of IP protection can slow down innovation. Nobody is investing money to do research on certain peptides because you can't get any IP protection for them. So there are no new FDA approved peptides because there is no scientific evidence to support that they are safe.
It seems that we need a more targeted approach to IP in certain areas. What works in one industry might not work in another.
I think time to innovate is a key variable here. For pharma companies where the drug development timeline is on the order of decades, having a longer period of patent protection makes sense so there is time to innovate on the next thing. Success rate also relevant. If 20% of your ad campaigns are huge hits and you can pump new ones out every six months, it would seem limited protection is needed, but if 1% of your drugs is a success and it takes 15 years to development then, things are different.
Strong disagree here. The clearest example if pharma, where each successful product has to pay for not only it's own R&D and testing, but all of the many many many other drugs that didn't work out.
If you can't make obscene profits on the 1 that works, then why bother.
I would argue the same applies to other IP heavy things like video games or movies. You simply aren't going to spend a couple hundred million making a movie or video game if you don't expect to make a good profit on it.
I'm biased because I'm a patent attorney, but I agree. I think patents can be misused and US copyright laws have some very stupid features (particularly around duration), but overall these things are a huge benefit.
Even in the age of algorithmic oligopolies, I dodged the cliff-diving reels cartel—and managed to read 3000 words by an independent blogger with no market power.
Strangely, there were no jumping from heights reels in my feed today. Clearly, the algorithm is so good it doesn’t want me horny posting about them on a high leverage site.
I’m old enough to remember the 1970’s and 80’s and how foreign competition disrupted “healthy” US markets in cars and electronics. There was certainly competition among the big US automakers at the time, for example, but there was still sclerosis, poor quality products, and other negative aspects that allowed for more competition.
One thing not mentioned in the piece are cartels, which also negatively impact actual competition.
Strangely, Matt’s point may be least true in his own industry. Ninety percent of the useful innovation in journalism has come from small players— Nate Silver, Vox, dare I say Slow Boring. Fox News and even the Times are just floundering while nimble substacks that spend six or seven figures a year can do a remarkably good job of avoiding groupthink.
I dunno. Doesn’t Slow Boring work because Matt has a monopoly on being Matt? And I’d guess his profit margins are several multiples of Fox or the Times, too.
I still have a hard time getting past the many times I see people mistake the marginal costs of production with the initial costs. To the point that people think competition should reduce the costs of goods down to the marginal production costs. Which often completely neglects maintenance costs, much less research.
This is an area where I feel the abundance crowd should really be able to shine. If you want progress, you have to pay for it. More than just a marginal costs way. You have to dump a lot of money into the research and you need to make sure you are not surprised by emergency maintenance of existing things.
This has to be related to the idea people have that a house is a static thing that somehow saves money for the owner compared to renting. Good luck with that. Especially in the world we have today where you have so many services provided to the home.
I agree in principle, but in practice I have a very hard time imagining how we could develop (e.g.) cancer drugs for less money. You have to pay not only for researchers to do massive trials for the drugs that ultimately do work, but also for the massive trials for the drugs that don't work. Ditto for fancy new medical devices. (People who follow this issue semi-casually will know that MD critics of medical research allege a lot of massaging of data and study results to bring innovations to market that have had lackluster performance in trials.)
Jane - I didn't mean to say cost controls should be imposed. Rather, companies and regulators should be looking for innovative ways to cut costs. One hope would be to use AI to speed the search for eligible molecules, and reduce the number of failed trials.
It would be be a mistake to impose price controls on the drugs that do make it to market; that would limit innovation.
The thesis here is very compelling. I firmly believe that in a perfectly competitive market there would be far less innovation. But I'm curious about what *kind* of monopoly best suits increased innovation. Bell Labs was one of the most important contributors to American economic development in the 20th century.* Bell had a virtually complete monopoly over most telecommunications for most of the century (i.e., not just a "little bit" of monopoly). But it was also highly regulated by the government. In terms of just furthering the cause of innovation, that really seemed to hit the sweet spot. Is that kind of corporate/government cooperation something that should be considered again?
* The book "The Idea Factory" on Bell Labs is fantastic. It makes it clear that Bell Lab's importance went far beyond inventing the transistor and discovering the Big Bang. Its work, especially in the 1920s, was crucial for inventing and propagating all the things that made a nation-wide telecommunications network feasible (e.g., how to propagate calls over long distances without the signal degrading, the dial tone, how to enter phone numbers and on and on -- a million things we take for granted).
“On the other hand, a company with a genuinely impregnable monopoly may have no reason to bother innovating at all. In the later paper, they propose an inverted-U relationship between competition and innovation.”
Is this true? AT&T had an impregnable monopoly and Bell Labs. Wasn’t Google’s max innovative period, when they had all kinds of side projects, the height of their search powers?
"On the other hand, a company with a genuinely impregnable monopoly may have no reason to bother innovating at all." I think that's where we are in the states with the Big Techs: they are virtually utility providers with unchecked power (not as bad overseas in Europe where they've lost antitrust lawsuits). Apple hasn't tested a new product in years, Meta grows via acquisition, Google completely shuts out its competition, Amazon hasn't innovated in a decade, and Microsoft owns a significant portion of Open AI in fear of losing the AI race.
I agree that perfect competition doesn't exist but I would argue Matt that we need a 21st century framework for a new Sherman Anti-Trust law. Conversely, if A.I. turns out to be an underwhelming money-sucking drain, it's possible that we have another Tech Bubble burst where possibly new players advance and overtake the Big Five of today.
I honestly have no idea how people can look at tech at this moment in time and think there's no innovation. Consumer facing LLMs are precisely 3Y old and have billions of users already. Self driving cars are increasing ridership 10x a month. Supply chain robotics is being rolled out in force, consumer robotics is next.
They are facing huge competition from all angles in the above and more. OpenAI and TikTok are barely a few years old and in open competition for billions of users. NVIDIA and private cloud vendors are breaking into the back end market at rapid speed.
The anti trust types look at all of this and say "we need to sacrifice our most successful companies to increase short term parity across firms"
Matt's whole post is about why that is a bad idea!!
I don’t think this is remotely true. There was an NYT article this morning showing how Amazon’s innovations in robotics is fundamentally changing their warehouses. Also they’ve had some huge innovation failures (VR comes to mind) that nonetheless advanced the technology. Also they’ve had big misses that led to other companies innovating- transformers (the tech underlying OpenAI / LLMs) were invented at Google.
Would agree for most of the 2010's, but I'm not sure that's true for this decade. Apple and Meta seem to be competing in the AR/glasses space---rumor is that Apple has stopped work on a new headset product to speed up the production of a product that will compete directly with Meta Ray-Bans. Google seems genuinely terrified that AI will eat the search market, while Microsoft and other players seem to be hoping for the same thing. Apple was pretty obviously caught by surprise when it comes to AI and is quite behind on the model side of things, but from what I've heard is maybe moving its hardware to address the niche of personal/small team model training and running.
Even if AI doesn't pan out, Apple and Google have come under increasing scrutiny for the efforts they take to maintain their respective monopolies (Apple has been forced to allow alternative app stores in the EU, and there's the fallout from the Epic Games litigation in the US as well. I'm not sure what the current state of the suits against Google for paying to be the default search engine are). If the barriers to entry that the two have put up get eroded, there is likely to be more competition.
For the online retail space, I think Shopify was very smart in transferring its commerce platform for businesses into offering order tracking through an app which happens to have shopping built in. The "virtual mall" design of it is quite interesting. I think they probably compete more directly with Etsy than with Amazon, but this space is not dead.
"I agree that perfect competition doesn't exist but I would argue Matt that we need a 21st century framework for a new Sherman Anti-Trust law
How useful is anti-trust work in this day and age in the first place? Anti-trust work seems to fight yesterday's battle. We are finally adjudicating Google's search abuses just as Google is about to be disrupted by new technology. This might have been useful around 2010. The US government tried to anti-trust IBM for a decade, and by the end of the case PCs upended them anyway, they prophylactically broke up Xerox's copier patents and gifted the office market to the Japanese, they intervened with Microsoft and Netscape after the horse had left the barn.
I don’t think this is true. Tech has and continues to improve its algorithms and content production technology to the point where they’ve invented AI to manufacture increasingly higher quality short-form video.
From an innovation standpoint, the changes are staggering. It’s just that the field they are innovating in is bad.
This is very not true. All the big tech companies have innovated extensively and passed those innovations down to the market in the form of commodified technology. AWS is a great example, as are all the programs and OS-level innovations running on AWS or other cloud resources. I’m talking things like Docker, Pytorch, basically all of Python, etc. And that’s not even touching AI.
And these companies are all 20+ years old, which is forever in tech terms. Far fewer recent software companies have been so successful—the three biggest that come to mind are Uber, Shopify, and Spotify. Interestingly the latter two are not American suggesting American tech dominance is in the earlier crop of companies and might just be mostly first-mover advantage?
Sure, AI is an entirely new technology so that changes things. And we’ll still have to see if these AI companies can survive as independent public companies of similar stature to the big incumbents.
Bad Matt!!! While the original Aghion-Howitt paper is an important idea, the U curve of competition and innovation doesn’t hold up. The graph you show is a crazy regression to run. Why are some industries competitive and others not? It’s the equivalent of doing the same exercise for countries. (Eg is it competition or specific regulations that affect both entry and innovation?) There are many reasons why medium-competitive industries are more innovative, and it’s not clear the causal direction runs from one to the other.
It’s definitely true that *appropriability* matters, ie you only innovate if you can reap a reward. My favorite evidence of this is Budish-Roin-Williams on cancer drugs—there’s more innovation in late stage cancers where trials take less time and so patent periods are effectively longer.
But it’s not clear that you need monopoly power to get appropriability—you can get it through things like prizes. And the micro evidence from innovative industries is not on the “monopoly power can be good for innovation” side. The best paper on this IMO is Igami and Uetake on hard drives (https://academic.oup.com/restud/article-abstract/87/6/2672/5568308?redirectedFrom=fulltext) who find no innovation gains from lower competition at plausible levels of competition. And functional increases in monopoly power stifle innovation; see eg Cunningham-Ederer-Ma showing that acquisitions in pharmaceuticals mostly just kill off nascent competitors rather than spur more innovation.
I feel like the Pharmaceuticals industry is not a good model for studying business formation and innovation generally. The regulatory burden of running phase 3 trials and managing intellectual property is essentially beyond the capability of new ventures to handle. As a result, biotech startups function more like external R&D than true competitors for existing Pharma companies. Many of them are explicitly founded with the intention of exiting through an acquisition, rather than going public through an IPO and continuing as an independent corporation.
This isn't to dispute that companies don't sometimes kill competition through acquisition, I just would hesitate to point to a study of the practice in Big Pharma and assume it's representative.
<rant>I'm just coming here to complain about Substack for a second. Please PLEASE make the footnotes linked in the email, not just on substack.com. I subscribe to what, 5-10 newsletters, some of whom (JVL's Triad) contain dozens of footnotes.
I read Matt's post in it's entirety, then either have to scroll back up and find the superscript number then back down to read the footnote and associate the two or have to click the link to the article on substack.com, scroll down to the footnotes, click the footnote number, that takes me back up to where it's noted and I can hover over to read the footnote. </rant>
A tech giant funded the climate tech research lab where I did my PhD. The school itself, a leader in tech, was founded by a wealthy monopolist. Much of the tech that drives the modern world came out of Bell Labs, Google, and other quasi-monopolies that could fund globally competitive research programs with the spare change in their couch cushions.
Indeed, I can't remember the last time some big new innovation came out of the nonprofit sector. Other than creative takes on fraud, such as OAI's attempted conversion...relatedly, people* always use this mirage term of "Little Tech", except nothing of value ever seems to come from there either. Start-ups plan to get bought out...And That's Good, Acktually, because why spend competitive advantage on the doing-business nuts-and-bolts when a mature company could handle that for you. Then you just gotta focus on delivering an innovation. There's a reason every other public transit ad in SF is some new Millenial-branded B2B SaaS for regulatory compliance thing. Never let it be said Big Tech never innovates either: challenging Nvidia's chip dominance is a bold strategy, Cotton. That's actual world-of-atoms stuff, too, not just iterating on some new A-B tested Torment Nexus algorithm. With the regulatory thicket we've stumbled backwards into, it frequently takes fuck-you levels of capital (political and literal) to Just Do Things anymore. [insert standard libertarian talking points about regulations entrenching incumbents here]
Tangent: every time I hear the phrase "neck-and-neck", it reminds me of this old cartoon I can't find the source of but have clear childhood memories anyway. There's a Formula 1 race going on, and the announcer is on the edge of his seat about the tied frontrunners. "They're neck-and-neck, neck-and-neck!" To which his co-host, a vampire, exclaims "Stop, you're making me hungry!"
*curiously often bankrolled by a16z and friends, hmm!
Everyone should read Wootton’s *The Invention of Science* to understand how the 17th century laid the groundwork for the 18th century’s nascent Industrial Revolution, and his *Power, Pleasure, and Profit* to understand the ideology of wealth maximization. Now, to Matt’s piece:
“That’s not because the textbooks are wrong or economists are confused; it’s because perfect competition is a modeling exercise rather than an empirical claim. In a physics class, students learn to solve problems that involve objects moving on a frictionless plane. Frictionless planes don’t actually exist, but understanding how those frictionless systems operate does help you understand the motion of objects in the real world. By the same token, understanding how a basically hypothetical condition of perfect competition would work helps us to understand real world markets, which normally feature non-zero levels of competition and also varying degrees of monopoly power.”
This is a well-meaning but terribly misleading comparison. Physics was invented by Galileo, Newton, and others by observing the movements of planets through space, which really is frictionless to the resolution of the measurements they could make. Galileo’s experiments with a round ball moving on a smooth board really were a step towards understanding the physical, material world. Galileo worked *deductively*, from facts, up towards principles which explained those facts. He built the telescope that showed him the moons of Jupiter that could only be explained by discarding Ptolemiac theories. Newton was an obsessive experimentalist and observer. Conversely, mathematical (not Smithian) economics began by saying “what equations can we write down”, discarding all facts, working *inductively* from postulates. The fact that economics has been dominated by equilibrium models despite no actual industrial economy ever achieving equilibrium by itself should damn economics as an intellectual framework to second-rate status.
Galileo did not invent physics by observing the movements of planets through space. That all came via his earthbound experiments. It was Kepler's Three Laws (describing planetary motions) plus Galileo's earthbound dynamics that led to Newton's great breakthrough of creating a universal physics.
Also, Galileo's discovery of Jupiter's moons may have helped lead to the discarding of the Ptolemaic system (which was increasingly being abandoned at the time anyway) but was totally consistent with the Tychonic system of Tycho Brahe.* Also, while he improved the telescope, it should never be believed that he invented/"built" (?) the telescope.
* Edit: actually, it was Galileo's discovery via the telescope of the phases of Venus that proved that Venus orbited the sun and not the Earth that really drove a nail into the husk of the Ptolemaic system, but again that too was consistent with the Tychonic system (in which all planets except Earth orbit the sun, and the whole shebang then orbits the Earth).
Thanks for the helpful corrections. I was racing through a century of development and oversimplified to the point of inaccuracy — which is why I opened with a request to read a real history. Galileo’s building of his high-resolution telescope (not invention of telescopes per se) really did lead to the discovery of Jupiter’s moons, which really was an important milestone. Wootton agrees with you about Brahe and the phases of Venus. All that said, the larger thrust of my point remains
I think Western European labour regulations suck and are the single biggest reason Europe doesn’t have more new tech companies. Source: sit on the board of a few companies that have attempted to expand in Europe with different degrees of success.
Quiet comment section today! I thought the SB commentariet loved wonky econ explainers.
Only if it's about early Indo-European economics!
I was just happy it didn't devolve into jumping on Lina Khan.
Instead, it was a very interesting and educational post but lacked any convenient hook for all of us to pull out our favorite pet rock and argue about which one is bigger.
If my pet rock isn't bigger, what am I supposed to throw at Charlie Brown in a week?
There's no *reasonable* doubt about who's pet rock is bigger Marc!
Too busy this morning. But I appreciate that Matt seems to lately be moderating on his moderate ideology enough to see some complexity rather than just go after progressives. Post-election, he lost his nose for nuance and forgot that a big tent includes the left as well the middle.
I think "maybe sometimes a little monopoly power is not that bad of a thing" will be perceived by many progressives as him going after progressives.
I guess the SB commentariat can't conceive of progressives who are pragmatic or reasonable. Sigh.
My point was he pulled back from blaming progressives and focused on the issues and policies. He also noted ways in which anti-monopoly activists are right. If you want to build a big tent full of diverse people, you have to invite them in. Post-election, Matt shouted insults at progressives who came by the tent flaps. Recent posts have felt much more like, "Hey, come on in, let's talk." We can't defeat Trumpism without working together.
I think the SB commentariat considers themself to be, by and large, the progressives who are pragmatic and reasonable.
The most politically absurd person I know thinks he's reasonable. I don't think anybody who reads SB thinks they're anything other than royalty of rationality. But I definitely think I'm a pragmatic, reasonable progressive. The attacks on progressives read to me as unreasonable and ideological. Maybe Matt realized attacking the people he wants to change isn't an effective strategy. Or maybe I'm so desperate for good news I'm projecting positive change onto an immovable Yglessis.
Scooped by Noah Smith a couple days ago.
https://www.noahpinion.blog/p/a-nobel-for-thinking-about-long-term
I think Matt's explainer was better though
That’s why I just commented! All I really said was “good job” but want to vote for more stuff like this and less Palestine or factional politics or social issues, even if those draw more engagement (including from me—that stuff is addictive!).
We do! Especially when Matt calls it the Solow-Swan model. I'm Australian so every econ class I ever took called it that and it was disappointing to then find out you Yanks 99% of the time give all the credit to Solow. But I can forgive you for that. What I can't forgive is the Swedes giving Solow the Nobel but not Swan.
Labor laws and bankruptcy laws make entrepreneurial risk taking almost impossible in Europe. Regulatory / competition rules are a big factor in some sectors but I’d say a distant third issue in most.
I need to shut off SB and focus on life, so I won't look this up, but I believe the EU has significantly more new business than the US. My understanding is healthcare and the security net make it easier to start a small business in the EU, but regulatory and labor laws make scale harder.
No A/C and no big tech companies, smh. Good soccer though.
Maybe Euro A/C adoption will improve if we play up Willis Carrier's French Huguenot ancestry.
Willis Le Carriér, air conditioneé extraordinaire!
Spotify and SAP are the biggest European tech companies, and they aren't that big compared to many American ones.
And my understanding of SAP is that it basically exists as a legacy software provider…
If you look at what most tech companies actually do (sell advertising) is that such a terrible thing for the citizens of Europe?
The reality is that the western European* system of extremely strong protections for employees is quite good if you are on the right side of the insider / outsider dynamic and horrible if you are on the outside, which is a big reason why youth unemployment has been so persistent, especially among those with fewer qualifications and connections. Clearly a plurality of citizens in most countries do think it's good, though.
*The UK has a different system which offers much stronger protections than in most US states but substantially less than in many European countries (although the trend over the past 25 years has been for new laws and jurisprudence to take us closer to European norms).
This is also a big reason immigration has been so disruptive in Europe. The economic system doesn't integrate incoming labor.
Global spend on advertising: $900 billion, a great deal of which is non-“tech“ (TV, print, etc)
Global spend on technology: $5.2 trillion.
"Most tech companies just sell advertising" is pretty hilarious to anyone who's in the broader field or even adjacent to it.
AWS had an outage yesterday and my local smoothie shop was closed because their POS was down. A lot of your day-to-day runs on US companies infrastructure!
As a European citizen, I can confirm that, yes, this is a terrible thing for those of us that decided to stay in Europe. By moving to the US, I easily earn 2x for the same job (probably much more) compared to my peers who stayed.
>By moving to the US, I easily earn 2x for the same job (probably much more) compared to my peers who stayed.<
Yes. But you'll also pay less in taxes in the US.
/s
Unless you make enormous amounts of money in which case you will probably pay about the same amount of tax here as in Europe. But being really rich in America is way better than being really rich in Europe.
I had a friend who is a software engineer and moved to Germany where his wife is a citizen to have four kids because he thought it would be more affordable to raise a family there. I kept telling him this was not rational, but, well, they’re still in Berlin.
Seems conceivable Europe might on balance work out better if one has children and lives in a sufficiently walkable European city. I'm not familiar with German childcare policy, but it's mind-bogglingly expensive in the US. Oh, and the average new car price in the latter is above $50k. (Cars aren't cheap in Germany, either, but at least there one might plausibly live without one). I've heard universities in America are pretty pricey, too.
My first month in Europe has been an eye-opener: I'm much more open to the "US superiority" case than before (like, I hate having to start worrying at 2pm on a Saturday if there's anything I can't live without until Monday). But there are lots of different situations out there, and for the non-hyper affluent with children, the richer parts of Europe can still be pretty compelling.
But how does it compare on a purchasing power basis as the US becomes more expensive?
I'll answer that again comparing myself with my peers and say that I benefit from lower housing prices in the US, as well. I think groceries are more expensive here, but housing is a larger share of my expenditures each month. Owning and operating a car is also cheaper in the US. Healthcare is much more expensive, but I'm also young and very rarely get sick. I expect that I will return home by the time I'm 50 at the latest.
Now, to properly compare things you need data and not anecdotes, but I think that the US beats many of the rich areas of the EU (Germany, France) even if you include Alabama and Mississippi in your US statistics.
I think the real question being asked in view of salary disparities is what the overall quality-of-life disparity is. The stereotype is that the Europeans earn much less, but they get to take vacations and have basically all of August off, whereas American jobs are, if anything, inclining towards less leisure over time.
Oh, the answer here is an even stronger "It depends on the situation!" and "I only have anecdotes, not data!". I will also say that Americans who make these arguments usually also compare themselves with the French and not with the Romanians.
Some throat clearing: The August stereotype is accurate, and it helps that Americans know about it, because at my current workplace I do use the argument "Oh, you don't expect your European employee to be productive in August, do you? Can I go home for three weeks?". This tactic works! It is still wild to me that we have deadlines for deliverables in August in the US. I've lived here for a while, but I still can't comprehend that.
Some things to balance that: European labor laws make it hard to fire employees. That can make your life pretty miserable if you have a bad coworker (or, even worse, a bad manager), because it's MUCH harder to get rid of that person, so you mostly have to learn to live with this situation. Friends who work in the US (both Americans and non-Americans) have encountered situations where their workplace got rid (usually through a PIP) of coworkers who made the workplace unpleasant. The difficulty in firing people makes hiring also more difficult, so my friends in Europe change jobs less frequently. If you are really unhappy with your work life, it's much harder to do something about it in Europe. These are important quality-of-life advantages of the US, given that you spend much more time working than vacationing each year.
The other thing about quality of life in Europe is that my peers are worried about how long this will last. Europeans don't really have 401ks (non-government pension plans exist, but are rarer and much less comprehensive) and there is a trend of raising the retirement age for government pensions or otherwise "encouraging" people to work after the "official" retirement age (https://www.dw.com/en/germany-news-cabinet-agrees-on-active-pensioner-plans/live-74368075), so I discuss a lot with my friends about retirement-related worries. My friends in the US contribute to their 401ks religiously, and don't even count on Social Security. They usually are much more confident that they won't have to work into their 70s.
"American jobs are, if anything, inclining towards less leisure over time."
IIRC evidence suggests that the only group this is true for is very high achieving men. Everyone else has seen their labor hours trend down over time.
Yes because American companies are still selling advertising in Europe, but the extremely high profits wages are just all going to Americans.
That’s what Google and Facebook do. But Microsoft, Amazon, and Apple provide other goods and services for money.
Yup! I work in tech and have and have had colleagues from England, France, Germany, Poland and Portugal. My current employer has development offices in Ireland and Poland.
Our customers are all over Europe (and before 2022 even one in Russia).
I'm guessing you have stories.
I think the example of wireless broadband cuts the other way. US cell service is more expensive and less good and less innovative that in other countries. Instead the broadband companies keep trying to acquire media businesses to seem cooler and mismanaging them.
I think the distinction this points to is between sectors where monopoly occurs due to the structure of the business (like electricity or cell service) and competition requires competition policy and markets where monopoly emerges from competitive markets naturally like search engines, where breaking things up is much less needed.
Remember when cell service providers used to compete on price and this was a big enough impact for Janet Yellen to attribute overall low inflation to it: https://www.nytimes.com/2017/06/14/upshot/janet-yellen-and-the-case-of-the-missing-inflation.html. Those were good times, we should do that again. I don’t notice any innovations we’ve gotten for the 3x more we pay now.
Why are you paying 3x more now? My cellphone bill has gone down, resellers for the win!
The budget carriers without the bells and whistles are great. $30 per month unlimited.
I have Total Wireless. $90 every three months, and they use Verizon's network. Works perfectly, they don't even spam me.
The only downside is that it doesn't work outside the USA but Airalo esims have been flawless and cheap for me in a bunch of places-- Europe, South America, Mexico, Canada, Japan.
My cell phone SIM card in Europe is 2 euros a month.
Does that include data? I'm paying *way* more than that here in France.
Not unlimited for 2eur/month but when I was living there I paid 20eur /month for hundreds of Gb (more than I needed) - this was with free.fr Back home in the US I’m paying a lot more per month for less.
Unlimited? Which country?
Is that right? My understanding was the the US invested significantly more in 5G rollout, and was ahead of most European countries in mobile data speed. I had previously heard that wireless carriers were a great example of the ideal level of competition; you want 2.5 big providers (Verizon, AT&T, T-Mobile) that are competing with each other, but large enough to make major investments in infrastructure.
Looking for references and best one I found was this: https://www.allconnect.com/blog/global-mobile-speeds
I wish we had cell service like I encountered in other countries when I was in the military. In Jordan and the Philippines it was ~10 USD for a physical data-only SIM card that had ~10GB of 4G data good for ~30 days. No documentation, no contract, just give the money to someone at a random corner store, plug the SIM in, and go.
(I was using a VPN 100% of the time when doing this)
I assume there's a regulatory reason this isn't common in the USA.
I don't know if there is a regulatory reason, but from an ease of use perspective, having to get a new sim every month is a pain.
I haven't read Aghion and Howitt's paper*, but it seems to me that the key to profits from innovation is time. Firms that innovate get a temporary advantage over the competition. Competitors will catch up, but until then the innovators can get some sweet profits. Does the paper more or less say that?
The obvious way this is enforced is with patents, though even then competitors often find a similar solution — Novo creates Ozempic and Lilly follows them with Zepbound. However, not all innovation is patent based. I've worked a lot in consumer packaged goods (CPG) where "innovation" can simply be a new flavor, a new form (pill vs. liquid), or even a new ad campaign. You can't generally patent those, and the competition will catch up if it's popular, but you do get a temporary profit advantage until they do (usually 6-24 months in CPG).
*Academic papers are super dry and I'd much rather read a summary from a good writer like Matt
"Quality ladder" models like this one (by Aghion, Howitt, and coauthors):
https://academic.oup.com/restud/article-abstract/68/3/467/1537966?redirectedFrom=fulltext
work in exactly this way. Firms in these models face direct competitors, and they can earn profits when their technology is superior to that of competing firms, who can then try to innovate to catch up. The incentives to innovate depend on how much time it takes (in expectation) for this catch-up to happen.
These models also allow for "imitation" that can circumvent IP law, so that firms can access parts of others' innovations for free. As you point out, imitation is generally detrimental to innovation incentives and growth.
If you get an account on Claude.ai or similar and have it walk you through the paper, you can learn it much more effectively than by reading any one summary.
And yet the CPG sector is incredibly innovative, far more so than if you could patent a new flavor so no one else could make it for 20 years. IP laws are on net a hindrance to innovation.
Right. The fact that you can only profit for a short period of time means you have to constantly innovate and find the next profit source. Having IP protection gets you more time to find the next innovation so you don't have to worry so much about innovation.
At the same time, peptides are an example of how the lack of IP protection can slow down innovation. Nobody is investing money to do research on certain peptides because you can't get any IP protection for them. So there are no new FDA approved peptides because there is no scientific evidence to support that they are safe.
It seems that we need a more targeted approach to IP in certain areas. What works in one industry might not work in another.
I think time to innovate is a key variable here. For pharma companies where the drug development timeline is on the order of decades, having a longer period of patent protection makes sense so there is time to innovate on the next thing. Success rate also relevant. If 20% of your ad campaigns are huge hits and you can pump new ones out every six months, it would seem limited protection is needed, but if 1% of your drugs is a success and it takes 15 years to development then, things are different.
I think you might still innovate even if you could keep making profit off the old innovation because now you can profit off both.
However if patents never expired then it would be hard for _others_ to build on _your_ success, and overall innovation would be slower.
"IP laws are on net a hindrance to innovation."
Strong disagree here. The clearest example if pharma, where each successful product has to pay for not only it's own R&D and testing, but all of the many many many other drugs that didn't work out.
If you can't make obscene profits on the 1 that works, then why bother.
I would argue the same applies to other IP heavy things like video games or movies. You simply aren't going to spend a couple hundred million making a movie or video game if you don't expect to make a good profit on it.
I'm biased because I'm a patent attorney, but I agree. I think patents can be misused and US copyright laws have some very stupid features (particularly around duration), but overall these things are a huge benefit.
Even in the age of algorithmic oligopolies, I dodged the cliff-diving reels cartel—and managed to read 3000 words by an independent blogger with no market power.
Post a link to the young ladies diving off a cliff, the people want to know
Open Instagram, search “cliff diving”…
Strangely, there were no jumping from heights reels in my feed today. Clearly, the algorithm is so good it doesn’t want me horny posting about them on a high leverage site.
You can have both, that’s the beauty of internet bounty
I’m old enough to remember the 1970’s and 80’s and how foreign competition disrupted “healthy” US markets in cars and electronics. There was certainly competition among the big US automakers at the time, for example, but there was still sclerosis, poor quality products, and other negative aspects that allowed for more competition.
One thing not mentioned in the piece are cartels, which also negatively impact actual competition.
Strangely, Matt’s point may be least true in his own industry. Ninety percent of the useful innovation in journalism has come from small players— Nate Silver, Vox, dare I say Slow Boring. Fox News and even the Times are just floundering while nimble substacks that spend six or seven figures a year can do a remarkably good job of avoiding groupthink.
I dunno. Doesn’t Slow Boring work because Matt has a monopoly on being Matt? And I’d guess his profit margins are several multiples of Fox or the Times, too.
But not an impregnable monopoly given the off-brand Matts such as Stoller and Breuning.
But at least there's more differentiation in Matts whereas Nates are interchangeable commodities who can only talk about polling
G Elliott Morris is a worse substitute for nate than margarine is for butter.
I suspect lots of people could write in Matt’s voice if they tried, they just could hack the volume.
Well at least no one has a monopoly on Davids...
I’m sure someone is training up an AI Matt right now.
Matt YglAIsias.
Thick profit margins do indicate market control and are an incentive for new entrants…
Matt does opinion, not journalism. People conflating these is one reason journalism is doing so poorly.
Is the Times floundering? Not only are they raking in huge amounts of revenue, they've tried a lot of innovative things since they went on-line.
(The New York Times, of course. If you mean the Times of London, I don't have a clue.)
Slow Boring doesn't have things like a Beijing bureau office or a dedicated sports section though.
Are Fox and the NYT actually floundering though? They seem to be doing fine to me.
Concentration has no implications for the degree of competition. See below.
https://www.nathanhmiller.org/hhiregs.pdf
I still have a hard time getting past the many times I see people mistake the marginal costs of production with the initial costs. To the point that people think competition should reduce the costs of goods down to the marginal production costs. Which often completely neglects maintenance costs, much less research.
This is an area where I feel the abundance crowd should really be able to shine. If you want progress, you have to pay for it. More than just a marginal costs way. You have to dump a lot of money into the research and you need to make sure you are not surprised by emergency maintenance of existing things.
This has to be related to the idea people have that a house is a static thing that somehow saves money for the owner compared to renting. Good luck with that. Especially in the world we have today where you have so many services provided to the home.
Isn’t the point of patents a temporary monopoly, and this prize a mathematical proof of that?
The temporary patents are supposed to overcome the “market failure” where the first pill costs $1B, and the second costs $0.50.
Without the patents, no company could afford to bring a new drug to market.
The obvious thing to pursue is ways to reduce the cost.
I agree in principle, but in practice I have a very hard time imagining how we could develop (e.g.) cancer drugs for less money. You have to pay not only for researchers to do massive trials for the drugs that ultimately do work, but also for the massive trials for the drugs that don't work. Ditto for fancy new medical devices. (People who follow this issue semi-casually will know that MD critics of medical research allege a lot of massaging of data and study results to bring innovations to market that have had lackluster performance in trials.)
Jane - I didn't mean to say cost controls should be imposed. Rather, companies and regulators should be looking for innovative ways to cut costs. One hope would be to use AI to speed the search for eligible molecules, and reduce the number of failed trials.
It would be be a mistake to impose price controls on the drugs that do make it to market; that would limit innovation.
> One hope would be to use AI to speed the search for eligible molecules, and reduce the number of failed trials.
Oh believe me, EVERYONE is trying.
Yeah, sure, that makes sense!
Or am I interpreting this wrong
The thesis here is very compelling. I firmly believe that in a perfectly competitive market there would be far less innovation. But I'm curious about what *kind* of monopoly best suits increased innovation. Bell Labs was one of the most important contributors to American economic development in the 20th century.* Bell had a virtually complete monopoly over most telecommunications for most of the century (i.e., not just a "little bit" of monopoly). But it was also highly regulated by the government. In terms of just furthering the cause of innovation, that really seemed to hit the sweet spot. Is that kind of corporate/government cooperation something that should be considered again?
* The book "The Idea Factory" on Bell Labs is fantastic. It makes it clear that Bell Lab's importance went far beyond inventing the transistor and discovering the Big Bang. Its work, especially in the 1920s, was crucial for inventing and propagating all the things that made a nation-wide telecommunications network feasible (e.g., how to propagate calls over long distances without the signal degrading, the dial tone, how to enter phone numbers and on and on -- a million things we take for granted).
Enthusiastic second for The Idea Factory! Fantastic book.
“On the other hand, a company with a genuinely impregnable monopoly may have no reason to bother innovating at all. In the later paper, they propose an inverted-U relationship between competition and innovation.”
Is this true? AT&T had an impregnable monopoly and Bell Labs. Wasn’t Google’s max innovative period, when they had all kinds of side projects, the height of their search powers?
AT&T was highly regulated, so it's arguable that it "had an impregnable monopoly."
Google Labs did some amazing things (and still does; Waymo is cool), as did Xerox PARC.
AT&T was making monopoly rents though, they were just agreed on with the regulators, right?
The government regulated its rates (along with other restrictions) which presumably reduced the monopoly rents it might have gained otherwise.
"On the other hand, a company with a genuinely impregnable monopoly may have no reason to bother innovating at all." I think that's where we are in the states with the Big Techs: they are virtually utility providers with unchecked power (not as bad overseas in Europe where they've lost antitrust lawsuits). Apple hasn't tested a new product in years, Meta grows via acquisition, Google completely shuts out its competition, Amazon hasn't innovated in a decade, and Microsoft owns a significant portion of Open AI in fear of losing the AI race.
I agree that perfect competition doesn't exist but I would argue Matt that we need a 21st century framework for a new Sherman Anti-Trust law. Conversely, if A.I. turns out to be an underwhelming money-sucking drain, it's possible that we have another Tech Bubble burst where possibly new players advance and overtake the Big Five of today.
I honestly have no idea how people can look at tech at this moment in time and think there's no innovation. Consumer facing LLMs are precisely 3Y old and have billions of users already. Self driving cars are increasing ridership 10x a month. Supply chain robotics is being rolled out in force, consumer robotics is next.
They are facing huge competition from all angles in the above and more. OpenAI and TikTok are barely a few years old and in open competition for billions of users. NVIDIA and private cloud vendors are breaking into the back end market at rapid speed.
The anti trust types look at all of this and say "we need to sacrifice our most successful companies to increase short term parity across firms"
Matt's whole post is about why that is a bad idea!!
I specifically said Big Tech doesn’t innovate. Not tech companies writ large don’t innovate.
I don’t think this is remotely true. There was an NYT article this morning showing how Amazon’s innovations in robotics is fundamentally changing their warehouses. Also they’ve had some huge innovation failures (VR comes to mind) that nonetheless advanced the technology. Also they’ve had big misses that led to other companies innovating- transformers (the tech underlying OpenAI / LLMs) were invented at Google.
Would agree for most of the 2010's, but I'm not sure that's true for this decade. Apple and Meta seem to be competing in the AR/glasses space---rumor is that Apple has stopped work on a new headset product to speed up the production of a product that will compete directly with Meta Ray-Bans. Google seems genuinely terrified that AI will eat the search market, while Microsoft and other players seem to be hoping for the same thing. Apple was pretty obviously caught by surprise when it comes to AI and is quite behind on the model side of things, but from what I've heard is maybe moving its hardware to address the niche of personal/small team model training and running.
Even if AI doesn't pan out, Apple and Google have come under increasing scrutiny for the efforts they take to maintain their respective monopolies (Apple has been forced to allow alternative app stores in the EU, and there's the fallout from the Epic Games litigation in the US as well. I'm not sure what the current state of the suits against Google for paying to be the default search engine are). If the barriers to entry that the two have put up get eroded, there is likely to be more competition.
For the online retail space, I think Shopify was very smart in transferring its commerce platform for businesses into offering order tracking through an app which happens to have shopping built in. The "virtual mall" design of it is quite interesting. I think they probably compete more directly with Etsy than with Amazon, but this space is not dead.
"I agree that perfect competition doesn't exist but I would argue Matt that we need a 21st century framework for a new Sherman Anti-Trust law
How useful is anti-trust work in this day and age in the first place? Anti-trust work seems to fight yesterday's battle. We are finally adjudicating Google's search abuses just as Google is about to be disrupted by new technology. This might have been useful around 2010. The US government tried to anti-trust IBM for a decade, and by the end of the case PCs upended them anyway, they prophylactically broke up Xerox's copier patents and gifted the office market to the Japanese, they intervened with Microsoft and Netscape after the horse had left the barn.
I don’t think this is true. Tech has and continues to improve its algorithms and content production technology to the point where they’ve invented AI to manufacture increasingly higher quality short-form video.
From an innovation standpoint, the changes are staggering. It’s just that the field they are innovating in is bad.
This is very not true. All the big tech companies have innovated extensively and passed those innovations down to the market in the form of commodified technology. AWS is a great example, as are all the programs and OS-level innovations running on AWS or other cloud resources. I’m talking things like Docker, Pytorch, basically all of Python, etc. And that’s not even touching AI.
And these companies are all 20+ years old, which is forever in tech terms. Far fewer recent software companies have been so successful—the three biggest that come to mind are Uber, Shopify, and Spotify. Interestingly the latter two are not American suggesting American tech dominance is in the earlier crop of companies and might just be mostly first-mover advantage?
OpenAI is double the market cap of Uber / Shopify and Anthropic is basically at parity.
Sure, AI is an entirely new technology so that changes things. And we’ll still have to see if these AI companies can survive as independent public companies of similar stature to the big incumbents.
This list begs to differ: https://instapage.cbinsights.com/research-unicorn-companies
Bad Matt!!! While the original Aghion-Howitt paper is an important idea, the U curve of competition and innovation doesn’t hold up. The graph you show is a crazy regression to run. Why are some industries competitive and others not? It’s the equivalent of doing the same exercise for countries. (Eg is it competition or specific regulations that affect both entry and innovation?) There are many reasons why medium-competitive industries are more innovative, and it’s not clear the causal direction runs from one to the other.
It’s definitely true that *appropriability* matters, ie you only innovate if you can reap a reward. My favorite evidence of this is Budish-Roin-Williams on cancer drugs—there’s more innovation in late stage cancers where trials take less time and so patent periods are effectively longer.
But it’s not clear that you need monopoly power to get appropriability—you can get it through things like prizes. And the micro evidence from innovative industries is not on the “monopoly power can be good for innovation” side. The best paper on this IMO is Igami and Uetake on hard drives (https://academic.oup.com/restud/article-abstract/87/6/2672/5568308?redirectedFrom=fulltext) who find no innovation gains from lower competition at plausible levels of competition. And functional increases in monopoly power stifle innovation; see eg Cunningham-Ederer-Ma showing that acquisitions in pharmaceuticals mostly just kill off nascent competitors rather than spur more innovation.
I feel like the Pharmaceuticals industry is not a good model for studying business formation and innovation generally. The regulatory burden of running phase 3 trials and managing intellectual property is essentially beyond the capability of new ventures to handle. As a result, biotech startups function more like external R&D than true competitors for existing Pharma companies. Many of them are explicitly founded with the intention of exiting through an acquisition, rather than going public through an IPO and continuing as an independent corporation.
This isn't to dispute that companies don't sometimes kill competition through acquisition, I just would hesitate to point to a study of the practice in Big Pharma and assume it's representative.
<rant>I'm just coming here to complain about Substack for a second. Please PLEASE make the footnotes linked in the email, not just on substack.com. I subscribe to what, 5-10 newsletters, some of whom (JVL's Triad) contain dozens of footnotes.
I read Matt's post in it's entirety, then either have to scroll back up and find the superscript number then back down to read the footnote and associate the two or have to click the link to the article on substack.com, scroll down to the footnotes, click the footnote number, that takes me back up to where it's noted and I can hover over to read the footnote. </rant>
A tech giant funded the climate tech research lab where I did my PhD. The school itself, a leader in tech, was founded by a wealthy monopolist. Much of the tech that drives the modern world came out of Bell Labs, Google, and other quasi-monopolies that could fund globally competitive research programs with the spare change in their couch cushions.
Indeed, I can't remember the last time some big new innovation came out of the nonprofit sector. Other than creative takes on fraud, such as OAI's attempted conversion...relatedly, people* always use this mirage term of "Little Tech", except nothing of value ever seems to come from there either. Start-ups plan to get bought out...And That's Good, Acktually, because why spend competitive advantage on the doing-business nuts-and-bolts when a mature company could handle that for you. Then you just gotta focus on delivering an innovation. There's a reason every other public transit ad in SF is some new Millenial-branded B2B SaaS for regulatory compliance thing. Never let it be said Big Tech never innovates either: challenging Nvidia's chip dominance is a bold strategy, Cotton. That's actual world-of-atoms stuff, too, not just iterating on some new A-B tested Torment Nexus algorithm. With the regulatory thicket we've stumbled backwards into, it frequently takes fuck-you levels of capital (political and literal) to Just Do Things anymore. [insert standard libertarian talking points about regulations entrenching incumbents here]
Tangent: every time I hear the phrase "neck-and-neck", it reminds me of this old cartoon I can't find the source of but have clear childhood memories anyway. There's a Formula 1 race going on, and the announcer is on the edge of his seat about the tied frontrunners. "They're neck-and-neck, neck-and-neck!" To which his co-host, a vampire, exclaims "Stop, you're making me hungry!"
*curiously often bankrolled by a16z and friends, hmm!
Everyone should read Wootton’s *The Invention of Science* to understand how the 17th century laid the groundwork for the 18th century’s nascent Industrial Revolution, and his *Power, Pleasure, and Profit* to understand the ideology of wealth maximization. Now, to Matt’s piece:
“That’s not because the textbooks are wrong or economists are confused; it’s because perfect competition is a modeling exercise rather than an empirical claim. In a physics class, students learn to solve problems that involve objects moving on a frictionless plane. Frictionless planes don’t actually exist, but understanding how those frictionless systems operate does help you understand the motion of objects in the real world. By the same token, understanding how a basically hypothetical condition of perfect competition would work helps us to understand real world markets, which normally feature non-zero levels of competition and also varying degrees of monopoly power.”
This is a well-meaning but terribly misleading comparison. Physics was invented by Galileo, Newton, and others by observing the movements of planets through space, which really is frictionless to the resolution of the measurements they could make. Galileo’s experiments with a round ball moving on a smooth board really were a step towards understanding the physical, material world. Galileo worked *deductively*, from facts, up towards principles which explained those facts. He built the telescope that showed him the moons of Jupiter that could only be explained by discarding Ptolemiac theories. Newton was an obsessive experimentalist and observer. Conversely, mathematical (not Smithian) economics began by saying “what equations can we write down”, discarding all facts, working *inductively* from postulates. The fact that economics has been dominated by equilibrium models despite no actual industrial economy ever achieving equilibrium by itself should damn economics as an intellectual framework to second-rate status.
Galileo did not invent physics by observing the movements of planets through space. That all came via his earthbound experiments. It was Kepler's Three Laws (describing planetary motions) plus Galileo's earthbound dynamics that led to Newton's great breakthrough of creating a universal physics.
Also, Galileo's discovery of Jupiter's moons may have helped lead to the discarding of the Ptolemaic system (which was increasingly being abandoned at the time anyway) but was totally consistent with the Tychonic system of Tycho Brahe.* Also, while he improved the telescope, it should never be believed that he invented/"built" (?) the telescope.
* Edit: actually, it was Galileo's discovery via the telescope of the phases of Venus that proved that Venus orbited the sun and not the Earth that really drove a nail into the husk of the Ptolemaic system, but again that too was consistent with the Tychonic system (in which all planets except Earth orbit the sun, and the whole shebang then orbits the Earth).
Thanks for the helpful corrections. I was racing through a century of development and oversimplified to the point of inaccuracy — which is why I opened with a request to read a real history. Galileo’s building of his high-resolution telescope (not invention of telescopes per se) really did lead to the discovery of Jupiter’s moons, which really was an important milestone. Wootton agrees with you about Brahe and the phases of Venus. All that said, the larger thrust of my point remains
This is the second rec for The Invention of Science I’ve got in the past week. Clearly the universe is telling me to read it. Thanks!
Oh good, I have become slightly obsessed about getting it popular, to the point of wanting to start reading groups for it. Have fun!