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Peter Thiel: Competition is for losers (wsj.com)
133 points by foobarqux on Sept 12, 2014 | hide | past | web | favorite | 133 comments

He means a very particular type of monopolist

To an economist, every monopoly looks the same, whether it deviously eliminates rivals, secures a license from the state or innovates its way to the top. I'm not interested in illegal bullies or government favorites: By "monopoly," I mean the kind of company that is so good at what it does that no other firm can offer a close substitute.

which is simillar to Robin Hanson's "manic" monopolist

One simple robust solution to the innovation problem would seem to be manic monopolists: one aggressively-profit-maximizing firm per industry. Such a firm would internalize the entire innovation problem within that industry, all the way from designers to suppliers to producers to customers – it would have full incentives to encourage all of those parties to put nearly the right amount and type of efforts into innovation.

It's not about rent seeking, or some silly brand recognition narcissism, but about being able to coordinate and do stuff that would be widely beneficial but unprofitable for any of the participants on their own.


"He means a very particular type of monopolist"

That's a very kind way of interpreting what he's saying. I'd go as far as saying 'he's redefine common terms to fit a peculiar theory that is nice, simple and wrong".

It's mostly populist (to a certain crowd) pandering: a bit of controversy (monopoly is good!), a bit of pseudo-intellectualism (look at me being all academic and worldly!), and some 'please validate my prejudices' (patents bad, government stupid, big business bad except for those I'd want to work for).

The world needs fewer Peter Thiels and more Elon Musks; Fewer Steve Jobs and more Woz's; Fewer Rupert Murdochs and more Pierre Omidyars. Fewer Bill Gates and more __someone_who_just_gives_their_wealth_in_cash_to_the_poor_and_in_the_end_probably_does_more_for_them_then_pushing_their_own_beliefs_regarding_educational_philosophy__. More one term presidents, fewer wall street guys, oh and at least one less Kanye West. Please.

It like saying that a political system based on autocratic capable and benevolent dictator is better than a democratic system. The problem is how to ensure that the dictator remains benevolent.

Maybe that's what he means, but there are numerous examples of very innovative monopolies that are "illegal bullies" (e.g. Microsoft) or "government favorites" (e.g. AT&T, Xerox). IBM is probably all three.

This is the secret of capitalists. Monopoly for them, and market discipline for everyone else.

"Actually, capitalism and competition are opposites"

This is why State capitalism or something like fascism to them is the ideal. Any democracy is the most HORRIBLE thing.

Because after all, there are only a few capitalists, and then there is everyone else...

Capitalism simply means assets are owned by individuals and operated for profit. The implementation details depend on the individuals (and their values). Nothing about capitalism says anyone or thing needs to be exploited, cheated or monopolized.

Thank you for presenting a reasonable and realistic viewpoint. Too much lately, anytime capitalism comes up on this site, we get a deluge of people just spouting left'ish wing propaganda and disparaging capitalism and capitalists.

I think the problem is that there are a lot of practicing capitalists that also happen to be massive assholes. It's not the capitalism that's the problem, it's the asshole part.

But the assholes insist that they're _required_ to be that way, by the rules of capitalism, and almost no one seems to argue with them (except those "spouting left'ish wing propaganda").

"don't hate the player, hate the game"?

It shouldn't be so taboo to discuss flaws in the capitalist system.. The article itself is a very raw exposition of a characteristic of it that I imagine is understood by people on both ends of the political alignment spectrum as a damaging thing, not that it couldn't not be.. I think the discussion matters because reality matters.

I don't mind a few massive assholes; what I fear are the non-human capitalists, mandated to be sociopathic by law: http://omniorthogonal.blogspot.com/2013/02/hostile-ai-youre-...


That would include say a totalitarian state where everything is owned by the God King (and operated for profit). Capitalism usually means some variant of "laissez faire" capitalism, where stuff is privately held, the state doesn't interfere with day-to-day business (too much, for some value of too much), and there is enforcement of contracts. The enforcement of contracts bit is where you end up with big debate, because ultimately it means you might need courts, policemen, taxes, the national guard, the EPA, the FBI, and the Department of Agriculture.

You've described free market and private property. While they typically are bundled with capitalism, they're separate concepts.

Go look up a definition of capitalism.

Thank you for pointing this out, I agree with your comments further down in this thread about that it is the jerks who ruin it.

However, I do want to strongly note that "profit" here often gets re-invested into the company to develop new and better products (or use the money to damage others, aka the "jerk" behavior). This no longer is "profit" then, by definition, but now has become overhead in the company.

Meaning, "for profit" does not equate to "for filthy riches".

I believe that the need for profit drives certain values over others. Do you think this need for profit has no affect on values? Also, what values do you suppose motivated a system that requires a drive for profit?

The need for profit is a value (it determines sustainability). But it doesn't have to be the primary value. You get to pick that.

Need for profit is not just a value but a requirement for doing business. However, you did not answer any of my questio ns. what values do you think profit motivates if any? And what values motivated profit value?

But as Thiel is demonstrating, the best way to profit from any means of production is to seek a monopoly, so that you can exploit the market.

I think the idea is that in a capitalist competition we should assume all actors are trying to monopolize the industry and really only follow laws to avoid harming their bottom line. The same way you'd design any system by assuming any user might be malicious. The way to manage this is to eliminate corruption and strictly scrutinize the relationships between businesses and gov't entities.

The way to manage this is to eliminate corruption...

This has proven difficult in many situations. Is there any reason to believe that it can be done in e.g. USA?

It can't, but it doesn't have to be an all-or-nothing thing. A system that is less corrupt functions more smoothly than one that is more corrupt, even if there is still corruption.

In the U.S, corruption takes the form of old-boy networks for financial access, exclusive business relationships, under-the-table deals that you'd rather not be made public, close relationships between business and politicians, alumni networks, etc. In many other countries, corruption takes the form of bribes needed to even start a business, hired goons that you have to pay off for protection, unreserved Party loyalty, and midnight executions of people who are deemed a threat. As a startup founder, I get annoyed at all the hoops I have to jump through that have little to do with building a good product, but realistically, I am risking comparatively little and there are ways to convince people that don't involve obsequiousness. Doing something disruptive in, say, sub-Saharan Africa or China or the Philippines often involves much more significant risks to life or property.

It, of course, can't be done practically speaking.

That's one of the the basic failings of all the true free market capitalists (at least the ones who really believe in it and aren't just using the idea to manipulate others the way religions do with their 'flocks').

They have this naive understanding of human nature that believes such a system could exist without corruption when history shows again and again and again (and again...) that even if you start from a system relatively free of corruption, if there are not pre-existing checks and balances (eg. meaningful government regulations) that are constantly maintained the entities who "win" at the system invariably become corrupt in order to maintain the status quo that has worked out so well for them and they begin to tilt the system in their favor. Since they won (and thus have the most resources) they are in the perfect position to influence the system to bend to them, which they invariably eventually do if given the chance.

oh to live in a world with which those relationships can't exist because the entities can't exist. But that might be too radical.

Sooo... you want a world without business or government entities? What?

I think the thought seems to be that if we don't allow people to organize in any meaningful way (i.e. against the people) then the problem of organizations is solved.

Never mind that said organizations would simply resort to setting up unofficial enforcement mechanisms, much like organized crime already does today. Other counter-examples aren't that hard to find either.

What "what"? This has been a standard aim for anarchists etc for ages...

Unfortunately it's not as simple as that. There is a lot of gray area between lobbying and corruption. And lobbying has a bad connotation, but people and corporations both must be able to speak to their representatives and advocate for legislative outcomes.

> people and corporations both must be able to speak to their representatives

A lack of lobbying wouldn't prevent anyone from speaking to their representatives. The negative connotations around lobbying come from things like:

- Large campaign contributors getting more attention than constituents (even if their industry isn't in the state; See Orrin Hatch and Hollywood for an example).

- Lobbyists being people that know the politicians, and therefore are being paid to use that trust.

... etc

we're not clever enough to price all externalities.

Not all capitalists. I'm not sure I can think of any actual ones for whom any democracy is the most horrible thing. Bit of a straw man argument perhaps?

Thiel is playing fast and loose with the definition of profit here. While it's true that "economic profit" will go to zero under perfect competition, that only means that the company's accounting profit is the same as the discount rate in the economy generally. It doesn't mean that there's zero accounting profit on the company's books.


He's also playing fast and loose with the definition of monopoly.

Oxford dictionary: Monopoly - 1) The exclusive possession or control of the supply of or trade in a commodity or service.

There is no way Google is a monopoly by that definition. Bing or any other company can and do compete. Google dominates because they are better but that is a very different thing.

Maybe you could say that google has a monopoly on high quality/relevant search results?

Again, you are mistaking "high quality" with consumer's "differing tastes". See my reply to your In-N-Out comment.

It also doesn't mean that nobody working for the company is making money. The workers' salaries aren't counted as "profits" (including salaries that the owners pay themselves). Thiel says at one point that a business that has to compete can probably only pay its workers minimum wage, but that depends on the market the business is competing in. Intel is in a competitive market for CPUs, but they don't pay their employees minimum wage.

> All failed companies are the same: They failed to escape competition.

This is absurd; most failed companies didn't face any competition because they didn't find a market; you can argue that they in some way failed to escape competition from alternative products to their own, that a firm is in competition with every other firm on the planet because they all fight for the money of their customers, etc., but this is specious.

Failed companies failed to sell above cost, and most failed to sell at all. Not much to do with competition.

> This is absurd; most failed companies didn't face any competition because they didn't find a market

You are saying the majority of companies that fail produce a product with no market?

I doubt that's the case. There is a market, however small and a product that is similar or can be substituted for your product is still in direct competition.

Yes, I may be exaggerating but that's what I'm saying; -- many restaurants would still have no customers even if they were the only restaurant in the world.

If you take this analysis one step further, one could argue that a company which fails to sell profitably before its death is not a company at all; it's a hobby or charity, redirecting invested time and money to its customers.

Many companies fail long before they even manage to create a product, never mind figure out how to produce it, distribute it, etc. There's a long list of reasons why, not many have to do with competition.

Monopolies are indistinguishable from governments at the end of the day, as they become the enforcement agency. And if capitalism, by definition, is an economic and political system not controlled by a government, then Peter Thiel is flat out wrong.

This quote by Thiel, in the article, contradicts his argument:

   'By "monopoly," I mean the kind of company that is so good at what it does that no other firm can offer a close substitute.'
Even the mere presence of "other firms" implies there is something to compare against, and as a result, that comparison is the competitive nature of capitalism. Maybe he needs to review his economic theories, but he is in the wrong and inconsistent.

Monopolies are easily distinguishable, at all times, from governments because they possess no legislative authority, no control over or enforcement of laws, and no authority over the use of force.

It's an extraordinarily simple, and obvious, line of separation that nobody could ever confuse in a free market economy with constitutional protections on individual liberty.

That assumes we do live in a free market economy and that our individual liberties are protected by the constitution. However, it looks like from the disclosures of people like Snowden, that that is not the case.

The line gets blurred when the government meddles in the affairs of businesses (like wire tapping) and when businesses lobby enforcement laws into place. Over time, as entropy increases, things may become hard to distinguish.

It's ironic how much people in the technology industry rail against monopolies, when you think how much of the fundamental technology we depend on today was invented by monopolies.

Point 1. The world of technology as we know it today was invented at Xerox PARC: http://en.wikipedia.org/wiki/PARC_(company)#Accomplishments. The GUI, Ethernet, OOP. What wasn't invented at Xerox was invented at AT&T Bell Labs: http://en.wikipedia.org/wiki/Bell_Labs. The transistor, major advances in semiconductors, UNIX, C.

Point 2. PARC existed on the back of Xerox's patent monopoly on copiers: http://en.wikipedia.org/wiki/Xerox#1970s. Bell Labs existed on the back of the AT&T telephone monopoly.

The government initiated action against both monopolies in the 1970's: forcing Xerox to license its patent portfolio to Japanese competitors, and breaking up AT&T. It's interesting to think about whether these actions were ultimately good or bad for innovation.

As sad as it makes me that Bell Labs no longer exists, I am glad that Bell was broken up. If it weren't for that we might still have only half a dozen different colors and two different shapes of telephone (rental only).

It seems that people don't even start to rail against monopolists until long after they've become obnoxious tyrants.

It also seems that there are plenty of other fine inventions in the world that weren't made by the benevolence of some monopolist.

I think your list overstates the contribution of the private sector in many of those inventions. For example, the (semiconductor) transistor was patented elsewhere before IBM invented the way to produce it. OOP existed before Xerox Smalltalk.

And while C and UNIX are widely used I don't think they were extremely innovative; they were instances of a class, not a new class itself.

Finally, it is not clear how much state support was given to these labs. At least today, Xerox Parc gets 1/3 of its funding from the government.

I don't think the involvement of the state negates the point. The U.S. government is the ultimate monopolist: almost totally insulated from competition. My suspicion is that the R&D sector in the U.S. has evolved into a highly-suitable structure for invention: a broad mix of government subsidy, large corporate monopolies, and small R&D firms.

If the argument is that companies start research labs because of excess profits then that would be negated by the fact that those labs are largely funded by the government.

And the government is clearly sui generis, you can't compare it to private industry monopolies.

I don't think either AT&T nor Xerox PARC were ever "largely funded" by the government.

Transistors and semiconductor advances were far more important than UNIX or C. You can't have modern computing without the underlying hardware, but it's not hard to envisage an alternate reality where UNIX or its descendents never became popular.

There are two types of inventions: obvious and non-obvious ones.

Even if we didn't have Ethernet and OOP, we would end up with some kind of networking protocol and some kind of programming abstraction, as somebody would have come up with it.

Which is very different from discovery of, let's say, penicillin.

A quote from Thomas Edison:

> None of my inventions came by accident. I see a worthwhile need to be met and I make trial after trial until it comes. What it boils down to is one per cent inspiration and ninety-nine per cent perspiration.

Inventing Ethernet isn't just a matter of writing down a protocol. Embedded in the simple abstract idea is years of experimentation to figure out how to e.g. detect and handle collissions, etc.

I used to be an engineer at an R&D outfit. You could describe our overall idea in one, somewhat long, sentence. But we spent years thinking and experimenting to work out the details. That's what the inventive process is like.

The reason monopolies are so inventive is because they have the time and money to engage in this slow, expensive process. Companies in perfect competition don't tend to.

Right, you won't necessarily get a perfect implementation, but then are Ethernet and OOP perfect?

Examples of Betamax and VHS, BluRay and HD-DVD, USB and FireWire show that given market demand a technology can achieve a reasonable degree of development and maturity even without monopolistic environment.

Not only might you not get a perfect implementation, you might not even get a viable implementation. When it comes to really novel technology, it can take tremendous investment just to get a technology to the level of viability.

My point isn't that every new technology requires a monopolistic environment. My point is that monopolies (or oligopolies) are particularly good at developing really fundamental new inventions, while competitive markets excel more in making better variants of well-understood technologies. Blu-Ray and HD-DVD were competing optical disc formats, but the original CD was actually a joint-venture by audio giants Sony and Panasonic.

I think a great example is the work Google is doing in self-driving cars. It can afford this sort of blue-sky R&D because of the massive profits thrown off by its advertising business. One day the technology will be mature and you'll see companies compete to refine it and make variations of it, but it will have been Google, using the profits from its near-monopoly on search, that will have done the really fundamental work.

>>>>> The opposite of perfect competition is monopoly. Whereas a competitive firm must sell at the market price, a monopoly owns its market, so it can set its own prices. Since it has no competition, it produces at the quantity and price combination that maximizes its profits.

This is missing an important detail: It still has to be a product that somebody wants to pay for. Even a monopoly could have a zero or negative profit.

>>>>> By "monopoly," I mean the kind of company that is so good at what it does that no other firm can offer a close substitute.

i.e., the kind of company whose success can only be described thanks to hindsight.

IMO, this is the most important bit in the article, and it also seems to be the piece that everybody is overlooking:

So why are economists obsessed with competition as an ideal state? It is a relic of history. Economists copied their mathematics from the work of 19th-century physicists: They see individuals and businesses as interchangeable atoms, not as unique creators. Their theories describe an equilibrium state of perfect competition because that is what's easy to model, not because it represents the best of business.

Yes, exactly. Pretty much all classical / neo-classical economic thought is rooted in the idea of equilibrium, but a strong case can be made that economic systems are not equilibrium systems. Eric Beinocker covers this ground very thoroughly in The Origin of Wealth[1]. I would personally recommend this book to everyone interested in economics. Beinhocker and the other "complexity economists" present a model of economic activity as an evolutionary system with periods of punctuated equilibrium as opposed to a strict equilibrium system.

[1]: http://www.amazon.com/The-Origin-Wealth-Remaking-Economics/d...

In business, equilibrium means stasis, and stasis means death. If your industry is in a competitive equilibrium, the death of your business won't matter to the world; some other undifferentiated competitor will always be ready to take your place.

Bingo. Yes, the "goal" is to achieve a "monopoly" but even if you do achieve that, you don't get to set still and just collect limitless money for perpetuity... because evolution will eventually deliver a competitor in one form or another.

"Their theories describe an equilibrium state of perfect competition because that is what's easy to model, not because it represents the best of business."

I've had this debate dozens of times and strangely enough I find myself siding with the economists on this one. Yes, the 'end state' of most economic theories is equilibrium; that doesn't mean that all of a sudden everything in economics is wrong. If your end state is equilibrium but you acknowledge that at any moment in time you're converging towards equilibrium, but also that at any moment in time your convergence function is different, then your theory might still hold. This is then the point where I argue that a system dynamics approach is the way to do that, but apart from that: I found the theory in the article flimsy and arguing a straw man. No economist in the literature today argues what Thiel apparently argues in the article (and book).

But probably that's just part of the spin to get people to buy the book.

That sounds like a reasonable argument, but it's not the reason economists side with the equilibrium theory.

They side with the equilibrium theory because if they didn't there wouldn't be an economics science to speak of (or at least, very smart people fear there wouldn't be). And because we don't want to lose the useful results (a cynic would say : or the many jobs in that field), ... we'll just believe that idea and ignore the many reasons to question it.

People don't realize just how much of science works like this. A lot of ancient physics theories are in wide use (e.g. newtonian mechanics), because of this. Architecture wouldn't exist if we had to run gravity simulations on buildings according to relativity.

Lots of theories don't really exist. In theory we can calculate strengths of materials. In practice we don't, because the theories used to do that get it wrong too often. How do we "know" strength of materials ? Well we measure lots of materials, and create a catalog.

In theory we should know why, say a vaccine, or a medication works. In practice we only have "after-the-fact" explanations. Yes we know what aspirin does, but we knew about aspirin long, long before we had any idea what it did. What I mean is that if medicine didn't have it's double blind studies following "let's just mix stuff together and see what works" methodology, we wouldn't have medicine.

Climate science has several proofs against it, which don't necessarily prove it wrong, of course, but when it comes right down to it : climate science takes bad measurements from 300-400 years and extrapolates from that what will happen over unseen timeframes with never-before-seen circumstances. Needless to say, statistically, this is not sound reasoning. Also: climate science simply does not use first principles. Why ? Because if you did that, there wouldn't be any climate science. It ignores the incorrect use of statistics ? Why ? Because if it didn't there wouldn't be a climate science field.

Even in the "pure" sciences this happens. Godel's treatment of logic is effectively ignored, to an extent. Given the incompleteness theory, don't you think, at an intuitive level, that logic just kind of has to be fundamentally wrong ? If we picked the right theories, after all, we did so purely by chance, and we've never really changed our minds since 2000 BC. Yet logic is presented as the be-all-end-all truth that supersedes all other truth (examine the history of that idea, and you'll soon conclude that this atttitude is a component of Christianity, or rather something from Greek culture that got incorporated into Christianity, spread with it, and the original belief in logic died out, but don't ever tell a mathematician that).

You can even point to historical situations where people did this, and they ... turned out to be catastrophically wrong. I guess the basic problem is a "local optimum". A given science gets to a point where it is no longer possible to improve it on a fundamental level without destroying the entire body of knowledge in that field, most of which is perfectly correct, or at least useful. So it is not done (take the relativity fight, and before that the black-body problem, take Godel, take ... Godel pretty much walked into a room filled with the core of mathematicians of the age, and told them not just that all of their theories to be presented there were wrong, but that the field itself was fundamentally unverifiable (just short of "wrong", think about it. It may be right, but you can never verify it. What are the chances you've just randomly picked the correct theory ?). Needless to say, this resulted in exactly the reception you'd expect them to give someone like that).

Apple is a counter example. They have stiff competition, control a minority of the market, but make more than all the other players combined.

It's not like they're not building a moat, with things like Facetime, iMessage and AppStore, which exist only within Apple ecosystem.

Analogs of them exist outside of that ecosystem, but it's not like the apps you've bought through iTunes AppStore will magically work on Windows Phone, should you decide to switch.

I don't know anyone who cares one iota about Facetime. The AppStore is the only real moat because you pay all that money and can't take the apps out of the platform.

Facetime and iMessage can be replaced with any number of cross platform third party alternatives, many of them better.

That's true now, but it's a fairly recent development in Apple's history. It remains to be seen whether Apple can maintain its enviable position in the long term.

A.k.a. "monopolistic competition" - a pretty bad term IMO

Thiel fails to mention that at the time that air travel was regulated airlines did make money even though they weren't a monopoly and had competition.


"The landmark event in U.S. commercial aviation history – as important as the incorporation of sound was to motion pictures, or the forward pass was to football – was the Airline Deregulation Act of 1978. Prior to its passage, the federal government set rates, fares and schedules, guaranteeing profitability to each oligopolistic airline but doing its best to thwart innovation. "

So prior to about 1978 during certain stretches it was pretty good to be operating an airline.

Thwart innovation?

The only true change had been low cost carriers, who can use their late entry to the market to avoid things like collective bargaining and route networks.

So now we have a dreadful airline industry that only survives by grace of the occasional direct investment by the government.

I think an implicit point that Thiel is trying to make is that there are enough untapped opportunities out there that there is no point to compete. The startup world is not a zero-sum game. We can all win.

True, but competing could be a successful short term strategy, if you can identify a target who are burdened with excessive costs for some reason, or can think of a cheaper way to make something.

I see what you mean, and this would probably be good for society (you are supposedly replacing something with a better version). Granted if you could identify a different undeveloped business, you may have more to gain individually. Imagine there is company A pursuing market A', if company B decides to pursue A', then A and B have to split the value of A'. Rather, B can pursue B', and if |A'| ~ |B'|, then there could be more to gain by not being competitive. If B(A') < |B'| then this still holds true (where B of A' is a function of how much value of A' that B can realize). In the finite world that we live in, there can only be so many A', B' or X', so this strategy may eventually much more in favor of competition. What I believe Thiel has identified is that we haven't reached that stage yet, or even that it's improbable that we will ever reach that stage.

Is google is the king of search, how do other competitors (bing/yahoo) stay in business and why do they want to try to fight google? Why don't they just focus their efforts on something else?

They barely do make money. Bing is heavily subsidised both financially by Microsoft and by what remains of Microsoft's desktop monopoly. Yahoo is a lot more than a search company, and hardly in the best of health.

Is anyone making significant money out of search (apart from Google)? Does DDG?

As for why they would want to be in search. For Bing it seems highly misguided. DDG probably would like to be even 1% as big as Google, so they could sell adverts and make $billions.

Yahoo doesn't "barely" make money. $1.3bn to be exact.[0] You're right, Bing is subsidized, but it's not like their revenues are $0.

I appreciated your effort to add to the conversation, but "They barely do make money." followed by "Is anyone making significant money out of search" doesn't add much to the discussion.


That's 1/50th of what Google makes, from a broader range of products. Seems to back up my point.

Yandex and Baidu.

Fair point, although I'm doubtful Baidu could survive if it had to actually compete with Google (which is banned or filtered in most of China).

Actually Google failed to gain any market share in China, and "filtered" didn't play any role in that. If anything Baidu is equally filtered and monitored.

Google just doesn't appeal much to the Chinese sensibilities, and especially earlier had very bad Chinese search results.

Thiel is correct that capitalism is more about monopoly, rather than competition, and of course the fact that innovative companies in newly emerging markets have managed to obtain locks on natural monopolies (eg in operating systems, telephone networks and so on) has led to huge success and profits.

But he's completely wrong that this is a good thing, at least not for the overall economy in the long term, as opposed to individual companies in the short term. To extend his example, if the restaurant business were like search engines, you'd have a choice of just a few big chains (maybe macdonalds, and pizza hut) which would be on every street.

Direct competition is absolutely vital, because it drives innovation. Innovation is how companies escape competition.

Companies should perhaps enjoy some limited "monopoly" over their innovations, but they should not be allowed to milk them forever, and probably, for example, the current patent system awards much too much and too long a monopoly for much too little innovation.

Introducing, encouraging, or even mandating competition by splitting companies up, is required in order to keep companies innovating, rather than dominating and then exploiting, and it is one of government's most important functions, sadly neglected in recent decades.

Of course VC fund managers like Thiel would like you to believe that monopolies are good, since that's how they profit - invest upfront, and then reap huge rewards based on monopoly valuations.

This article is shallow and misleading.

Economists do indeed have models of perfect competition, and perfect monopoly. But these are not the only concepts that economics has. For example, the market for pharmaceuticals is competitive ex ante, but monopolistic ex post. Anyone can choose to put research into developing a drug. But having discovered a particular drug, they have a monopoly over it.

Even though the monopoly is bad ex post, the promise of a monopoly is needed as an incentive to engage in productive activity ex ante. The same applies even more to company's like Apple and Google who maintain their monopoly by creating a unique product.

So the article is completely wrong when it says "To an economist, every monopoly looks the same, whether it deviously eliminates rivals, secures a license from the state or innovates its way to the top. I'm not interested in illegal bullies or government favorites"

Every kind of monopoly looks the same ex post, but monopolies achieved through innovation and monopolies achieved through bribery or favoritism are completely different ex ante. The first kind of monopoly incentivizes inventing new things. The second kind incentivizes unproductive activity such as bribery.

Basically, don't enter over saturated markets unless you offer something that makes you different. Google did it offering relevant results for search, Apple did with an iPhone that just works. The key of Thiel's reasoning is 'By "monopoly," I mean the kind of company that is so good at what it does that no other firm can offer a close substitute'.

Exactly. A company can have a monopoly on product quality, or manufacturing efficiency, not necessarily a monopoly on a vague, conventional definition of an industry. Another example is in-n-out burger. They don't have a monopoly on hamburgers, but they do have a monopoly on their kind of hamburger (high quality/freshness, low price at scale).

You must not have had an In-N-Out burger, they hardly have high quality. I did a blind taste test study on 23 participants, between McDonalds meat and In-N-Out. There were no significant results - people were only able to identify the correct meat 53% of the time (and it was McDonald's, not In-N-Out's, indicating a slight preference towards McDonald's taste). Essentially, every time you ordered a burger, you could flip a coin and you wouldn't notice the difference in the meat.

This was a small sample size, but I want to expand it with a more comprehensive study. Where most In-N-Out fans go wrong is that they compare a $1 McDonalds Cheeseburger that has no lettuce or tomatoes, etc. with a $4 In-N-Out burger that lots of garnish and Thousand Island Dressing. A more "accurate" comparison would be between one of McDonald's Quarter-Pounders, of similar price, and In-N-Out, but ultimately the dressing is going to cause the divide... not the "high quality/freshness" of the burger.

Some random thoughts:

- Economists don't like monopolies due to dead-weight loss. However there is only dead-weight loss if the monopolist cannot price-discriminate. If they can price-discriminate, it's simply of a transfer of wealth from customers/employees/suppliers to shareholders. So there is some room to argue against it on efficiency grounds (if they can't price-discriminate), and definitely room to argue against on equality grounds (if you care about such things).

- Unregulated monopoly is the most profitable form of business. Abusive monopolies are probably more profitable than nice ones. Abusive monopolies are illegal (?). As a manager at a US public company, you are legally required to maximize shareholder value, ie try to create an abusive monopoly, ie break the law.

- Monopolies are bad for everyone except the shareholders and probably management

- Oligopolies probably do more R&D than monopolies, as monopolies don't have an incentive to spend money on research. Perfect competition leaves no profit to spend on R&D

Perfect competition might assume R&D costs as an expense of doing business, so your last point is highly debatable. In general, technological change changes the boundary values within which economic analysis produces useful results, so the best economics can do is tell you what impact a technological change might have once that change is well-understood.

if the R&D were any good, then there won't be perfect information though...

So, Thiel is interested in monopolies:

"But the world we live in is dynamic: We can invent new and better things. Creative monopolists give customers more choices by adding entirely new categories of abundance to the world."

Okay, I'll try to understand this:

I'll go back to the Al Capone "A person can get much farther with a kind word and a gun than with a kind word alone."

Well, with a VC firm an entrepreneur can get much farther with "new and better things" and traction significant and growing rapidly than with "new and better things" alone. Or, with the traction, a VC might just assume there are "new and better things" in there somewhere?

There's a bait and switch in this article. Thiel starts out arguing,correctly, that monopolies can generally capture more of the value they create. But he ends up arguing, incorrectly, that monopolies create more value. Why incorrectly? Because his own opening paragraphs say otherwise: he says airlines (competitive) create more value than Google (monopoly), although Google captures far more value than the airlines.

A fascinating line of markets and competition that I've only learned of relatively recently, and is of interest in light of YC's first category in its request for startups,[1] is the role of the Texas Railroad Commission in US oil markets.

I first ran across a reference to this in a paper from the Federal Reserve Bank of Philadelphia, written by Keith Sill, chief economist, "Macroeconomics of Oil Shocks":

"From 1948 to 1972, the price of oil produced [that is: extracted] in the U.S. was influenced by the production quotas set by the Texas Railroad Commission (TRC). Each month, the TRC (and other state regulatory agencies like it) made forecasts of petroleum demand for the upcoming month and set production quotas to meet the forecasted demand."[2]

A more complete history occupies most of Chapter 13, "The Flood", of Daniel Yergin's The Prize: The epic quest for oil, money, and power.[3]

The short version: in the 1920s, an early abundance of oil which was proving hugely useful for automobiles and machinery looked to be iffy, until vast deposits were found in Texas and Oaklahoma in 1930. But that created a new problem: with no restrictions on drilling, oil prices collapsed to as little as $0.13/bbl. Government production controls were prohibited by Texas state law (lobbied for by independent oil producers), though they were permitted in Oklahoma. A target of $1/bbl. was set but there was no way to enforce it. Before this was resolved, Oklahoma's governor had mobilized the militia to take control of its oil fields in August, 1931, Texas mobilized the National Guard and Texas Rangers shortly after, an oil shutdown was enforced stabilizing prices. With the Depression settling in across the U.S. (and in the wake of the Teapot Dome scandal, itself over oil), Franklin Roosevelt appointed Harold Ickes as Secretary of the Interior, and established a number of measures including "certificates of clearance" for all oil shipments within the US -- oil without certificates wasn't salable.

That regime remained in place until March of 1972, when peak oil extraction in the US meant that limits were no longer necessary -- slack demand was now being met through imports, not domestic production. Which left the U.S. vulnerable to a foreign oil embargo, experienced in October of 1973.

There's a pretty strong argument to be made that stable oil prices, as the base of the U.S. economy, had a great deal to do with uniform economic growth in the post-WWII period, from 1945-1972. It's after that date that many of the "modern" crises of economics have been felt: stagflation, offshoring, wage stagnation, etc.

There have been better and worse times, but those have tended to be driven by total global oil abundance (or shortages), with cheap oil beginning in the mid-1980s through the late 1990s, with few exceptions (1990 and the first Gulf War War notably).

But yes, a noncompetitive controlled market can be a good thing.

More: http://www.reddit.com/r/dredmorbius/comments/2akwjj/oil_and_...



1. http://www.ycombinator.com/rfs/

2. http://www.phil.frb.org/research-and-data/publications/busin...

3. http://www.powells.com/biblio/7-9781439110126-9

Nixon imposed price controls on oil in Aug 1971, which enabled the oil embargo, gas crises, etc. This all stopped when Reagan, as his first Executive Order, repealed the price controls. We haven't had a gas crisis since.

See "Capitalism" by George Reisman pg. 189

> Nixon imposed price controls on oil in Aug 1971, which enabled the oil embargo

The Arab Oil embargo wasn't "enabled" by US price controls, it was enabled by the fact that the Arabs states involved supplied a substantial fraction of the world's oil supply.

And, while it was certainly a response to action by the US government, it wasn't to US oil price controls, it was to US support for Israel.

> This all stopped when Reagan, as his first Executive Order, repealed the price controls.

No, its stopped because by the time Reagan became President, Arab state priorities had shifted (with many favoring increased deliveries for domestic economic reasons), overall production distribution had shifted greatly increasing the share of non-OPEC production, and US consumption had dropped, which led Jimmy Carter to issue an executive order ending price controls (which Reagan accelerated.)


I lived through that time. There was a pretty sharp line before and after that EO - I never was in a gas line again, and was in the months leading up to it.

Carter had 4 years to eliminate the price and allocation controls, and left it to Reagan to repeal the price and allocation controls 8 days after being inaugurated.

As to it enabling it, the price controls prevented domestic prices from being bid up so that domestic supply could be increased to blunt the embargo. Non-Arab oil imports could raise their prices, but because of the price controlled cheap domestic oil, which they'd be competing with, they sold instead to Europe, etc., from where they'd get higher prices. In essence, price controls enabled the embargo because it prevented the market from responding to and circumventing it.

Reisman goes into some detail on this in the reference I cited.

The Arabs had been providing a substantial fraction of global oil since at least 1950, when the US began imports. However it wasn't until 1972 that the the US had no slack supply capability.

There had been previous attempts at oil embargoes, particularly in 1967[1] and 1956[2] during the Six Day War and Suez Crisis, respectively. Neither was effective. At both times, loss of supply could be made up for elsewhere. Peak oil in the U.S. lead to vulnerability.



1. http://en.wikipedia.org/wiki/1967_Oil_Embargo

2. http://en.wikipedia.org/wiki/Suez_Crisis

You're not supposed to say anything about Saint Ronald that's not praise.

It's interesting that wage controls, price controls, using martial law to seize assets, and paying large handouts to oil-owning capitalists can be spun as a "good thing" if you can produce a handwavey, mostly unsupported association between these policies and the good ol' days of America.

Waves of economic thinking tend to coincide with one crisis and go out of fashion with the next crisis. Most economic policies that were once popular can thusly be blamed for "uniform economic growth" in a chosen period.

The point in question for oil is the one control you haven't mentioned: supply control.

That was the whole point of the TRC quotas: to match wellhead output to demand. If you'll follow my reddit link above I show the growth trend in GDP and oil prices -- what was achieved was a very high level of price stability. Not through direct price controls, but by matching levels.

Post-1973, prices wander all over the map, see BP's Annual Statistical Review:


From: http://www.bp.com/en/global/corporate/about-bp/energy-econom...

Note that prices stabilize in the mid-1930s, and actually fall in real terms through 1973. The period since is marked by profound variability.

The good from supply and consumption matching is that there was a high degree of economic stability during this period.

What truly amazes me is that the US actually stopped doing it.

> That regime remained in place until March of 1972, when peak oil extraction in the US meant that limits were no longer necessary --

I come from Europe, where tons and tons of regulation is no longer necessary, but has somehow transformed into yet another tax. Oil price controls were introduced in Europe as well, but they somehow transformed from a bottom under prices, into a 40%+ tax on gasoline.

And that tax has served Europe very well.

It's diverted monies which would have gone to oil companies (and states), allowed for infrastructure investments, and hugely increased energy efficiency, particularly in transportation.

Imagine if Mark Zuckerberg would have heard this advice and been convinced that there was no point in competing with MySpace..

But he wasn't competing with MySpace. Not when he started The Face Book at Harvard.

Nor when he expanded that out over numerous other Ivys and Stanford, then additional selective universities.

It wasn't until he'd created an existing, high-quality, attractive userbase, of interest to both advertisers and the general public, that he was competing with MySpace.

Sometimes the monopoly is in where you define your market.

Amazon took a similar tack, first going after book sales (an excellent market for online commerce), then a broader set of markets.

Like Thiel, you're attempting to redefine the word competition. Facebook destroyed MySpace by competing with them. They competed by offering a superior service that attracted customers away. Amazon competed with book stores by offering a superior service.

They competed by innovating but that doesn't change the fact that they had to compete.

Facebook also incubated itself for a time in a space that MySpace didn't effectively own or control.

See Ha-Joon Chang's Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism for more on this.

"Chang blasts holes in the “World I s Flat” orthodoxy of T homas Friedman and other liberal economists who argue that only unfettered capitalism and wide-open international trade can lift struggling nations out of poverty. On the contrary, Chang shows, todays economic superpowers—from the U .S. to Britain to his native Korea—all attained prosperity by shameless protectionism and government intervention in industry."


Similar principles can be applied in business.

I think Facebook beat Myspace on a few fronts. One, network effect of high quality groups to attract other groups. Two, spamming user's inbox in an enticing way. Three, clean user interface, although the side bars are cluttered now.

It's worth noting that Peter Thiel himself uses these two companies as examples of what he's talking about.

Where? Not in the linked article.

Do you have a reference?

>Imagine if Mark Zuckerberg would have heard this advice and been convinced that there was no point in competing with MySpace..

You probably confuse a market leader of a nascent market with a monopoly. MySpace was popular, but even at its peak it was 1/10 or less of the size of Facebook.

Say there's a new product category, for example "pet-rock social sites".

The first site PetRockSter on the market gets 1M account. A second site, PetrockSpace arrives, totally obscures the first site, and gets 20M people.

Then a third one cames (PetrockBook), and everybody you know starts getting "pet-rock social sites", to the point that half the population or more is now using that third website.

Technically the first and second time were "monopolies" in their time. But they only had 100% of a very small niche market, before it matured, that is they had like 100% but of a small percentage of the whole population that would eventually get a social pet rock account.

You are only a legit monopoly (with all the power that entails) if a) you have a huge share of a market and b) that market is not blowing up and expanding at a fast rate. E.g the way Microsoft has a near monopoly on desktop OSes.

You're saying that MySpace was highly tuned? It was awful. It was a truly terrible experience, even compared to other social network sites (eg. mixi.jp had a far better experience back in 2004). It was obvious to everyone that you could make a better social network than MySpace -- I even suggested it to my co-founder back then.

This is true of sports as well. True competition in sports is a lose-lose for teams--if teams don't compete, they can coordinate to maximize their gambling winnings, and everyone comes out ahead (except for fans, just as lack of competition in business makes consumers the loser).

This sort of reminds me of professional wrestling.

[0] https://en.wikipedia.org/wiki/Kayfabe

Monopolists can afford R&D, without demanding products or papers. eg Xerox PARC labs, AT&T labs

Today we have Microsoft Research and Google of course is funding lots of stuff that it's not really making money from.

it's true that patents create monopolies, but I don't think they're explicitly designed for that.

Aren't patents there to allow a company to have a temporary monopoly, to benefit from its invention, which expires the day the patent expire ?

Monopoly leads to Hegemony

so he's a joseph schumpeter fan!


How do I create a monopoly with SaaS when we are constantly looking to undercut each other?

undercut all of them out of business. now you're a honest to goodness monopoly.


can we say a SaaS is a commodity business? Amazing history, I am blown away by Standard Oil, although I wonder if the same principles apply, continue to innovate and keep prices low.

Do something nobody else can do. Good luck.


I wonder if he realizes that he just made an argument for professionalization (or, worse, unionization) of software engineers. My guess is that he'd not like that can of worms. But it's open.

Doing typical corporate programming, the stuff that any CommodityJavaDrone can do, is for losers. I'm not sure that managing that kind of work (which is the only way to make money in that world) is less loser-like.

Right now, the less-savvy (or cornered) programmers do what their bosses ask them to do. The savvy programmers chase high-quality experience, read esoteric papers on company time, and only seriously work on the 10% of in-company projects that will help their careers.

This arrangement is anarchic but there are always enough people who are cornered (family/financial pressures) and can be pushed into taking the less-savvy path and doing what they're told. And the personal-brand-definers have more fun and may get promoted faster early on, or get to strike out as consultants, but they're unlikely to get seriously rich (500k+) as they would if, you know, programmers were actually paid what they're worth. So the VCs and corporate executives and (to a lesser degree) software managers still make out like bandits.

What if that changed, though? What if programmers collectively realized that we had allowed ourselves to be commoditized and were overcompeting and losing all over the place?

Since I've been grappling with this issue for years, here's some further reading from my blog:

[1] What’s a mid-career software engineer actually worth? Try $779,000 per year as a lower bound. ( http://michaelochurch.wordpress.com/2014/05/24/whats-a-mid-c... )

[2] Why programmers can't make any money: dimensionality and the Eternal Haskell Tax. ( http://michaelochurch.wordpress.com/2014/06/06/why-programme... )

[3] Programmer autonomy is a $1 trillion issue. ( http://michaelochurch.wordpress.com/2012/11/25/programmer-au... )

[4] How the Other Half Works: An Adventure in the Low Status of Software Engineers. ( http://michaelochurch.wordpress.com/2014/07/13/how-the-other... )

Can you explain what Thiel's article has to do with professionalizaton or unionizaton of software engineers? Thiel's thesis here is that you need to innovate to hold an at least temporary monopoly on something (you have the monopoly because you're the only one in the market yet), it has nothing to do with what you mention.

Selling one's labor as an individual is competition, which Thiel says is "for losers." Unionizing and practicing collective bargaining is effectively forming a monopoly in the market for a particular type of labor--at least if you can get a critical mass of workers to join your union.

If you think a programmers union should exist, why don't you go ahead and start it? Judging from your history of Hacker News comments, this seems like one of your major life passions. So if you really believe in it, why not do it?

> If you think a programmers union should exist, why don't you go ahead and start it?

One reason might be that such unions already exist, e.g., http://www.iww.org/unions/dept500/iu560

Off-topic: Why do these kind of websites always have a stock price next to brand names? Is this useful Information? It looks a little bit scammy.

This website is the website for the Wall Street Journal. Wall Street is pretty much used to describe the financial markets of the US as a whole. If you are reading an article about finance it's useful for the reader to have instant access to the stock price information.

How anyone would find this to seem scammy I wouldn't understand.

"these kind"? You mean news sources with a focus on the financial? (a few financial blogs do the same thing too).

It's an automated parsing script(either client or server side). For mentioned companies that are publicly traded and named in a story, the script looks up their stock listing and adds it and a hyperlink to the story for context. In most cases, though, it's not very helpful. But easier just to have the script run on every story than to do the linking by hand for a few stories.

Often if a company is mentioned in an article (particularly the WSJ), the article is directly related to stock performance. Stock often trades on news, so it's relevant information to know what the impact of the news is on the stock price of the company in question.

Many times the articles reference some new, meaningful information about the respective company and seeing the change in stock price adds merit to the story.

I don't know. Usually when I see this UI widget I think "correlation and causation" over and over. It's the rare story that definitively causes or reports on other news that causes a significant change in price. In a prestigious newspaper, showing the price inline with the article devalues the content. It emphasizes the "what's in it for me" angle rather than speaking to considered learning. If I were the designer, I'd rather include those metrics at the end of the article with more context and graphs (though I have a feeling this was carefully A/B tested).

What's more is that even a few hours to a few days after a story is released, the stock price no longer has any relevance to the story since the widgets are not pegged to that point in time.

His comparison of Googles high margins to those of a monopoly seems wrong to me, because Google doesn't actually set any prices for advertisement.

Its customers set those prices by bidding on keywords. Not the other way around.

Moral of story: Make some billions and say any shit you want, newspaper will create articles of whatever you say and people will think you are some kind of a genius

Modern society is a funny thing

This has been known for some time:

> And it won't make one bit of difference if I answer right or wrong.

> When you're rich, they think you really know!

- If I Were a Rich Man, from Fiddler on the Roof


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