28Harold Demsetz, had a less scornful, yet still dismissive attitude to Galbraith’s views on advertising (1968, p. 174): The formation of wants is a complex process. No doubt wants are modiﬁed by Madison

Avenue. They are also modiﬁed by Washington, by university faculties, and by churches.

And it is not at all clear to this reviewer that Madison Avenue has the advantage when it

comes to false claims and exaggeration.

29The Entrepreneurial State and the Platform Economy

While both Harold Demsetz and George Stigler are neoclassical economists, they are also ﬁrmly within the so-called Chicago tradition.

A better analysis of the importance and value of advertising has come from economists in the Austrian tradition. Ludwig von Mises (1949, pp. 321–322) makes the obvious counterargument: It is a widespread fallacy that skillful advertising can talk the consumers into buying

everything that the advertiser wants them to buy. The consumer is, according to this legend,

simply defenseless against ‘high-pressure’ advertising. If this were true, success or failure in

business would depend on the mode of advertising only. . . . The idea that business

propaganda can force the consumers to submit to the will of the advertisers is spurious.

Advertising can never succeed in supplanting better or cheaper goods by poorer goods. Unlike Galbraith, Mises is making an empirical claim. Far too many new products fail in the market for advertising to be the powerful force that Galbraith suggests it is. Furthermore, while it may be possible for advertising to induce a consumer to buy the product once, it cannot also convince the consumer that purchasing the product has actually satisﬁed their wants. The point being that although advertising may satisfy the need to acquire information about a good or service, advertising cannot also satisfy the actual consumption expectations the consumer has when consuming the good or service. The notion that advertising itself can manipulate consumers, in the long run, contrary to their own best interest is discredited. But that still leaves the unexplored question—unexplored also by Mazzucato et al.—of whether platform ﬁrms are uniquely placed to manipulate their users through advertising.

What the platforms do, however, is offer their clients targeted advertising. This service is valuable. As U.S. retailer John Wanamaker is purported to have said, “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” Advertising is a cost to business. Simultaneously, undirected advertising is a distraction for consumers. Targeted advertising reduces costs for both business and consumers. It may even represent a Pareto improvement to the economy as information and search costs fall for all market participants.

Similarly to advertising, there is a lot of confusion as to the role of proﬁt in the economy. Mazzucato et al. imply that the proﬁt motive has distorted platform decisions away from what they otherwise might have been. This is almost certainly true. That is what proﬁts are intended to do. As Schumpeter said (1939, p. 105), “Proﬁt is the premium put upon successful innovation in capitalist society and is temporary by nature: it will vanish in the subsequent process of competition and adaptation.” The decisions that would be made were the proﬁt motive not in place would be quite different. The approach to proﬁt of Mazzucato et al. ﬂows from their view that platforms exploit users. Not only do they provide no evidence that platforms exploit their users—they do make that assertion—but they also do not recommend policy action on consumer welfare grounds. Rather, their argument is that the entrepreneurial state can better manage the platforms, i.e., it could direct resources to capture value differently or have different priorities to those the platforms currently pursue. This S. Davidson and J. Potts

30argument is trivially true. Being true, however, does not make the argument a viable or even desirable policy option. What is clear is that the platform ﬁrms are particularly good at meeting consumer wants. These wants can be good or bad, even vulgar. As Mises (1949, pp. 299–300) has pointed out, It is not the fault of the entrepreneurs that the consumers—the people, the common man—

prefer liquor to Bibles and detective stories to serious books, and that governments prefer

guns to butter. The entrepreneur does not make greater proﬁts in selling ‘bad’ things than in

selling ‘good’ things. His proﬁts are the greater the better he succeeds in providing the

consumers with those things they ask for most intensely. People do not drink intoxicating

beverages in order to make the ‘alcohol capital’ happy, and they do not go to war in order to

increase the proﬁts of the ‘merchants of death.’ The Mazzucato et al. argument invites the reader to imagine that bureaucrats could better meet the needs of consumers. Their argument, however, is that consumers have been misled into holding the preferences they hold and that other preferences should be substituted for consumer preferences. This argument is popular and widespread among academic and political elites. It forms the basis of the nudge movement within behavioral economics. Berg and Davidson (2017) have provided a critique of the policy consequences of behavioral economics and nudge. Many of the challenges facing libertarian paternalists using behavioral economic insights are those that face central planners. As Ludwig von Mises and Friedrich Hayek argued in the 1920s and 1930s, the information costs and incentives that planners (or bureaucrats or libertarian paternalists) face make it impossible for them to actually plan an economy. The Hayekian information problem is fatal to many forms of planning—and nudging—beyond very trivial instances. That, however, is not the Mazzucato et al. view. Indeed, Mazzucato herself has been at the forefront of arguing that the state can, and does, do much more than what even many neoclassical economists claim it can and should do. This is especially so in the case of R&D and innovation. The ﬁrst point to make is that Mazzucato (2013) has an industrial conception of R&D. In her 2013 book, for example, she makes the following argument (2013, p. 82): . . . it is also true that if a country has lower than average R&D spending, this is not

necessarily a problem if the sectors that the country specializes in are not sectors in which

innovation occurs necessarily through R&D (Pierrakis 2010). For example, the UK special-

izes in ﬁnancial services, construction and creative industries (such as music)—all with

relatively low needs for basic R&D. And there are many industries, especially in the service

sector, that do no R&D at all. Yet creative industries do not do little R&D; they are R&D (Potts, 2011). Indeed, as Potts et al. (2008) argue, the creative industries are not really industries at all, but are better understood as being a type of social network market.

It is important to realize that R&D is an input—it is a cost to business—and innovation is an output. The difference between R&D and innovation is Knightian uncertainty. We cannot know which R&D will be valuable and which will not be The Entrepreneurial State and the Platform Economy

31valuable. This is why there is value in private order institutions that pool knowledge in early-stage innovation in order to discover entrepreneurial opportunities (Potts, 2019). It may be true that the U.S. military built the internet as a communications system to survive a nuclear war, but until someone realized that it could be used to trade (or even share cat pictures), no innovation had occurred.

Mazzucato’s critique of Apple, for example (and this is her example), misses the important point (2013, p. 143): . . . Apple concentrates its ingenuity not on developing new technologies and components,

but on integrating them into an innovative architecture: its great in-house innovative product

designs are, like that of many ‘smart phone’ producers, based on technologies that are mostly

invented somewhere else, often backed by tax dollars. . . . Apple’s capabilities are mainly

related to their ability to (a) recognize emerging technologies with great potential, (b) apply

complex engineering skills that successfully integrate recognized emerging technologies,

and (c) maintain a clear corporate vision prioritizing design-oriented product development

for ultimate user satisfaction. It is these capabilities that have enabled Apple to become a

global powerhouse in the computer and electronics industry. These are not trivial abilities. No doubt Apple has many competitors and would be imitators. Yet it has succeeded where many others have failed. Moreover, if it was such a trivial thing to develop these capabilities, which in turn have created manifestly enormous proﬁts, then we may reasonably ask why those clearly observable proﬁts did not induce the many other technology ﬁrms around the world to imitate these allegedly trivial capabilities and erode Apple’s proﬁts. The fact that Apple retained a sufﬁciently competitive lead, and one that enabled it to exploit premium pricing models for decades in one of the world’s most competitive businesses, suggests that those capabilities were perhaps not as trivial as Mazzucato et al. suppose. What is also important to note is that the state has not been entrepreneurial. The state has provided many of the inputs to the entrepreneurial process. Some of these inputs are more obvious and important than others. Military expenditure, however, is mostly waste. It reﬂects well on entrepreneurs that they are able to create value from what would otherwise be wasteful expenditure.

Building on that point, it is the entrepreneurs who add value in platform economies. Mazzucato et al. make an intriguing concession:

But the foregone compensation here is not really about remuneration (the value of one’s

individual data production is miniscule, amounting to perhaps a few dollars per year). The value of the data that platforms collect is low. The value of the platforms themselves is extremely high. It is the entrepreneurs who have added value to the data being collected. This is not acknowledged in Mazzucato et al. It is difﬁcult to reconcile their argument that platforms simply earn rents, but at the same time that the value of the data they collect is low, “perhaps a few dollars per year.”

32S. Davidson and J. Potts

The Techlash and the Hipster Takeover

What is known as competition policy in most parts of the world, but as antitrust in the United States, has for the past half century been signiﬁcantly shaped by the analytic perspective of the Chicago school of economics. This approach argues for a powerful and direct focus on revealed consumer welfare as being the standard whereby competition policy is evaluated. The Chicago approach thereby allows that highly competitive market structures that maximize consumer welfare can occur with large and even very large seemingly monopolistic ﬁrms. This recognizes that when ﬁrm size is the result of scale economies and markets are contestable, the beneﬁts of scale and innovation ﬂow to consumers through aggressively competitive pricing. In the Chicago approach, whether or not big is bad is to be evaluated by the effect on pricing and consumer welfare, not directly by the size of the ﬁrms.

However, the new progressive antitrust—also known as “hipster antitrust” (Shapiro, 2018)—has sought to block mergers and enforce breakups to reduce market power by taking a principled position against size per se, irrespective of any evidence—or even in the face of counter evidence that indicates clear beneﬁts to consumers—of harm to consumers, even when these same ﬁrms, which are all platforms, are lowering prices, often to zero, in their markets. The hipster antitrust approach is foremost concerned with countering the perceived “power and inﬂuence” of these “big tech” ﬁrms (see especially Kahn, 2017, and Wu, 2019).

The hipster antitrust approach that works to threaten large (and almost entirely U.S.) platforms with forced de-mergers or breakups, as well as global taxation, has proven to be a popular policy agenda on the progressive side of politics, with U.S. President Biden appointing prominent hipsters (including Lena Kahn) to high-ranking positions in his administration. The European Union has also sought to drive competition policy in this direction, emphasizing data privacy concerns and seeking to enact signiﬁcant taxes on tech platforms operating in the Union. Very large and proﬁtable companies, irrespective of the competitive structure of their industries, represent a perennially popular (and populist) target for political bargaining and rent-seeking, irrespective of whether the economic logic of the attack makes any sense. However, a number of prominent legal and economics scholars (Schrepel, 2019; Dorsey et al., 2020) have pushed back against these progressive developments, arguing that these populist proposals are not backed by any evidence that consumer welfare is being harmed, nor that antitrust policy enforcement is failing or currently misdirected. Indeed, they worry that—just as happened 50 years ago, prior to the Chicago revolution in antitrust strategy (as detailed in Dorsey et al., 2020)—the populist approach may end up causing economic harm due to its fundamental incoherence as a policy approach by blindly targeting anything big.

Mazzucato et al. are at least right about this point, arguing against a hipster antitrust approach and recognizing that breaking up one large platform will just result in a bunch of smaller, less efﬁcient platforms.