The digital revolution and the State

William Janeway, 26 February 2018

William Janeway began his talk by claiming that the relationship between the US Government and technical innovation has reversed with the advent of digital technology. In the cold war days, and even before that, during World War II, the U.S. Department of Defense was the largest funder of scientific research and technological development. In fact it was the patronage of the US military which allowed the formation of what we would call “research universities.” In addition to funding R&D the Department of Defense was the “lead purchaser” of early computing equipment. Having the government as a customer is inherently different from producing for the wider population of consumers, as the government is interested in maximum effectiveness over the long term rather than short-term affordability.

Along with funding technological innovation, the government controlled the environment in which it would occur. Entities funded by The Department of Defense had to license any patents they produced to all competitors, and all technology being produced had to have at least two manufacturers to maintain competition and to ensure supply in case one producer went bankrupt. This weak intellectual property environment almost certainly allowed for accelerated innovation, however as digital technology progressed, it outgrew its fertile but limiting origins.
The period from 1980 to 1983 saw the shift of computing from a vertical to horizontal market, with the popularization of the personal computer. During this same period the Department of Defense launched VHSIC (very high speed integrated circuits) which was a program incentivizing companies to produce its namesake. IBM refused to participate in this program: the government’s objective of maximum speed by any means necessary did not align with IBM’s goal of making personal computers attractive and affordable for the average consumer. As we all know, the consumer appeal of digital technology has increased exponentially from the 80s onwards; innovation and mass production of digital technology happens today without any need for government support. The growth of the tech industry has been so great that, where it once relied on government support, with the advent of the internet, it now threatens government power.

The internet was created by the Department of Defense as a mode of connection between far-flung government-funded labs. Once it was built, the system was handed over to the National Science Foundation, which received much pressure from tech companies wishing to use it commercially. In the mid-90s a greater awareness of the potential economic implications of the internet emerged as people became aware of the wider array of technical expertise the internet would necessitate as well as the potential for openly sharing information and code, as well as the potential for economic transactions to occur over the internet. This expectation fueled the dotcom bubble of the 1990s. Though investors may have been overeager in the late 90s, their vision of a future awash in digital, internet-reliant technology was correct as can be seen from the post-2008 growth of Silicon Valley. Some claim that with the trend of transaction and communication becoming constantly easier even when the two concerned parties are on opposite sides of the planet, we are approaching a “frictionless” age. Janeway does not go so far, pointing out that in the real world friction will always exist. In support of this view he notes that even Uber drivers must live in the area where they work. He also points out that government regulation will inevitably also become a source of friction.

There has been much talk among regulators about the view that Google, Facebook, and others are monopolies. For Janeway, however, placing anti-monopoly regulations on these companies is not straightforward because they constitute an new type of monopoly. Janeway proposes that in addition to monopolies created by economies of scale, economies of scope, and network externality, there is a fourth source of monopoly: data. Search engines and social media platforms rely on algorithms which predict what information their users would most like to see based on the behavior of past users. This means that the platform with the most users, and therefore the most data on said users, will be more effective at predicting what its current users would most like to see. This feedback loop means that it is incredibly difficult to establish oneself in this market and once one is established there is a tendency for all consumers to converge on a single producer. Regulating a market which has such an inherent monopolistic tendency, and which also holds so much power over what information the average person is presented with, is a challenge which regulators have only just begun to tackle.
by Solomon La Piana