Published in the Financial Post, February 26, 2004, p. FP11.

Smash the State, Not Microsoft
by
Pierre Lemieux

 

After three years of investigation, and long “negotiations” with its regulatory victim, the European Commission will soon hit Microsoft for its alleged monopoly practices. The penalties and repentance imposed are expected to be stiffer than the terms of the 2001 U.S. settlement. Just last month, the U.S. Justice Department and 16 American states argued in court that Microsoft has not complied satisfactorily. The State of Massachusetts talked about “serial killing of competing technologies.” What do all these states have against Microsoft? One grudge relates to what economists call “rent-seeking”: Microsoft competitors are exerting pressure and waging public-opinion campaigns to win in the political arena what they can’t gain from voluntary customers in the marketplace. RealNetworks has just joined the fray and sued Microsoft because the latter favours its own media player. Since Microsoft itself must not be totally inept at political lobbying and manipulation, there must be other reasons for the antipathy shown by politicians and bureaucrats. Many observers of politics, from Alexis de Tocqueville to Bertrand de Jouvenel, have noted that independent social institutions contribute to disperse power in society, and provide an annoying obstacle to state power. Microsoft is the largest corporation in the world in terms of market capitalization (US$264-billion), but it is followed, on the Financial Times’s Global 500 list, by companies that have been much less harassed, if at all: G.E., Exxon Mobil, Wal-Mart, Pfizer, Citigroup, Johnson & Johnson … Microsoft does have one characteristic that no corporation matches: It is a standard setter. Its Windows operating system is a private standard in computing. There is no obligation to buy a Windows box, as opposed to Linux or Apple operating systems, but since 95% of the PC market talks Windows, there is a powerful incentive to do so. Yet, as a private standard, Windows (or the Office software suite) remains contestable on the market. Standards, public or private, are useful because they help co-ordinate individual actions in society, whether they be simple conventions like driving on the righthand side of the road or using common weights and measures, or more complex sets of rules like language, money, etiquette, morals and law. Standards also have costs, as other potentially better ways of doing things face higher hurdles. The question is, who weighs the costs and benefits of standards? Many economists argue that private choices are generally more efficient than state decisions, and that, where this is the case, private standards are preferable to state-imposed standards. Since 1894, Underwriters Laboratories, a private, non-profit, testing organization, has established quality and safety standards. Every year, “UL” marks are applied 17 billion times (look under your toaster). Until quite recently, rules of corporate governance were private standards that emerged from the interaction of investors, executives and accountants. Or consider a wireless standard like Bluetooth, which is being developed since the late 90s by a few large companies. Compare flexible, consumer-driven, private standards with, say, the anticompetitive standards imposed by the Canadian Radio and Telecommunications Commission in every field it touches, or the linguistic standards imposed by the Quebec government, or the Ontario Securities Commission’s “public interest” standard, or the Kyoto environmental standards … The state is an organization just like, say, Microsoft. What both organizations do, however complex and impersonal they are, they do it for a purpose. Individuals inside Microsoft or inside the state act in ways that are consistent with the incentive structure they face, which in turn depends on the goal of the organization. Simplifying a bit, Microsoft maximizes its profits while the state maximizes its power Being by its very nature in the monopoly business, the state has never liked private, competing standards. According to anthropologist James Scott (in his interesting book Seeing Like a State), the work of the modern state has been to simplify and standardize social practices so as to make them fit into its “administrative grid.” Weights and measures are just one example. Surnames imposed by the nascent English state in the 14th and 15th centuries, and the cadastral survey in the French Napoleonic period, were other instruments of the state for monitoring transactions, and tracing taxpayers and conscripts. State-imposed standards are also an efficient tool for stealth protectionism. The classical example was the German 1902 tariff protecting the domestic market from “brown or dappled cows reared at a level of at least 300 metres above sea level and passing at least one month in every summer at an altitude of at least 800 meters” — a standard excluding only Swiss cows. Labour and environmental standards sneaked into the FTAA (Free Trade Area of the Americas) project are a way for states of wealthy countries to protect the interests of unions and other political clienteles against outside competition. Because Microsoft is a private standard setter, and because theory and history show that the state does not like private standards, Microsoft’s persecution — I maintain — stems stems at least partly from its infringement on the state’s princely prerogative of setting standards. Many people entertain an idyllic vision of the state. Even The Economist, the London magazine, is calling for the state to break Microsoft. Bill Gates, who is politically a naive liberal, would disagree with me, but I would rather have Microsoft break the state.