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Book Review: Trust on Trial

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Trust on Trial: How the Microsoft Case Is Reframing the Rules of Competition
by Richard B. McKenzie (Cambridge, Mass.: Perseus Publishing, 2000); 281 pages; $26.

IN HIS 1942 BOOK, Capitalism, Socialism and Democracy, Joseph A. Schumpeter argued, “The fundamental impulse that set and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.” Schumpeter noted, “This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.”

Schumpeter explained that when critics of the market economy judged the effectiveness of competition by looking at the market at a frozen moment in time, they made a fundamental error analogous to focusing on one frame of a motion picture and then reaching various normative conclusions from this out-of-context perspective. It ignores the market’s competitive process out of which the particular present moment developed from past rivalrous activities and gives little or no attention to the logic of the same competitive forces that will change the present situation into something totally different in the future. Schumpeter insisted that in the real world, entrepreneurs and market innovators attempt to capture consumers away from their rivals by offering new and different products, through new and different methods of production, with pricing strategies different from their competitors’.

Schumpeter’s conception of the competitive process is similar to that which free-market economist Richarrd B. McKenzie applies in his recent book, Trust on Trial, in evaluating the Microsoft antitrust case. When Schumpeter was writing almost 60 years ago, he asked the reader to think of the competitive process of creative destruction as one that did its innovating work over decades. McKenzie points out that in the new computer world of competition, the competitive process innovatively changes things in a matter of a few years, sometimes in a matter of a few months. The time-dimension of change has been dramatically shortened.

McKenzie uses clear economic reasoning and a carefully researched background in the history and structure of the computer industry to refute practically all the theoretical and factual arguments that have been used by the Department of Justice and some of Microsoft’s rivals in trying to justify their charge that Microsoft is an anticompetitive monopoly that should be punished and reined in.

First, he explains that if a monopoly is an enterprise that uses its power in the market to manipulate the price at the expense of the consumer, then Microsoft cannot be found guilty as charged. It has consistently lowered its price and improved its product lines over time.

Second, McKenzie demonstrates that, in fact, Microsoft is not a monopoly. Its market share in certain product areas is only 90 percent, and while that sounds high, in fact the remaining 10 percent controlled by its rivals in these product areas shows that it is not the only game in town: consumers have options but are choosing to use Microsoft’s products instead. Furthermore, he points out that there is a problem in how market share is defined in the Justice Department’s case and that when categorized differently Microsoft’s share falls to less than 50 percent for certain products.

Third, Microsoft’s “bundling” of its browser with its operating system is a response to market-demand forces that have been emerging for integrated networks for consumer convenience. When I buy an automobile, a certain brand of tires comes with the car. I usually do not bargain or negotiate over the brand of tires that will come with the vehicle. My purchase of the tires is “tied” to the acquisition of the car. If I don’t like the “feel” or the ride the tires provide me once I’m behind the wheel of the car I’ve bought, I can enter the market and replace them with another kind that provides what I consider to be a safer or more comfortable ride. I might not do so immediately (after all, the original tires are on the car and I’ve paid for them), but at some point tires are replaced and then I choose the tires I prefer.

Whether Microsoft says its browser comes “free” with the computer and its system or not, in fact when I purchase the machine, I’ve bought the browser as well. After I’ve “driven” the browser for a period of time, I can decide whether or not I really want to continue using it. Besides, innovations and cost efficiencies over time should make better and cheaper browsers available from any number of competitors, like Netscape, who can try to persuade me that theirs is better and should be purchased as a replacement or substitute for the one I’ve been using. After all, people invest some amount of time to find the tires they think would be best for their car, given what they are willing to pay, so why wouldn’t we expect the same to be the case with browser programs?

In the longer run, if customers in general came to prefer browsers other than Microsoft’s Internet Explorer, the pressure of market demand would eventually require Microsoft to “untie” the two, if it did not want to lose consumer confidence and face a “revolt” from the computer manufacturers who were finding it less and less desirable to sell a product with built-in features the public did not want to buy as part of the package. If Microsoft has made a marketing error in tying IE to its programs, the company will bear the consequences with an eventual falling off in business and a loss of brand-name reputation. But it should be the market that judges this entrepreneurial decision, not the U.S. Department of Justice or a federal judge. Because, after all, who is the market? It is you and I and everyone else who looks for and purchases computers and the programs to use with them. We are better judges of our own interests than is the government.

Fourth, it is claimed that Microsoft has the ability to determine the interface standards that will be followed in the computer industry. Many markets eventually settle into a user standard to which all manufacturers more or less conform. But being the first or even dominant player does not mean that you fix the shape of the future. When video laser disks first came on the market, they seemed to be setting the standard with a size reminiscent of old-fashioned LP records. These clearly are now being superseded by DVDs, which are much smaller in size. And what seems to have influenced their dimensions? Clearly the size of music CDs, which can also be played in a DVD player. But there is no certainty that ten years from now, the CD-DVD format will still be the “standard.” To think that even with a dominant position in the market Microsoft can single-handedly set the path of the industry’s development for the next century is simply absurd and inconsistent with the past history of many, if not most, other industries.

What is arrogant and presumptuousness is not Microsoft’s supposed hardball aggressiveness in innovation and marketing. Other names that might be given to Microsoft’s conduct could be: leadership, creativity, confidence, determination, courage, vision. The hubris lies with the administrators, bureaucrats, and economists in the pay of the Department of Justice who claim to know how the computer industry should develop, the form of competition that should be permitted in the industry, and what product design and features manufacturers should be allowed to install in their products and offer to the consuming public.

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    Richard M. Ebeling is a professor of economics at Northwood University. He was formerly president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).