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The Message of the Microsoft Case

Tags Legal SystemMonopoly and Competition

12/28/1999Christopher Westley

When I began my new job, I was told that Netscape Navigator was being added to my computer. I immediately asked if Microsoft's Internet Explorer was available. Why, the systems administrator asked. The two programs are identical. I clued him in then on the reasons why many economists dislike Netscape.

Netscape dominated—some would even say, "monopolized"—the Internet browser market through most of the 1990s. When it became apparent that Microsoft was going to offer it some serious competition, Netscape responded by intensifying its lobbying efforts in Washington, knowing that, despite its obvious market power, Microsoft had not yet developed helpful contacts among the political class, preferring instead on focusing its resources on pleasing customers.

Netscape’s strategy underscores a trend that has grown with the increased scope of government in public life, namely, that faced with market competition, firms now have three options: First, they can go out of business. Second, they can fight back by trying even harder to satisfy customer needs and wants better than their rivals. And third, they can now cajole their elected representatives to intervene in the market process by contributing directly to them or to their pet causes—making it costly or even impossible for meaningful competition to develop in the market at all.

The technical term that economists use for the third option is rent-dissipation. It describes what happens when possible investment capital is invested in the political class rather than on customers. When this happens, the wealth creation process is hampered considerably. The successful firms are those that are willing and able to pay up for the implied assurance that politicians won’t throw obstacles in the way of the firms’ attempt to participate in the market.

The costs of rent dissipation are perhaps more evident to economists, and they generally admired Microsoft for refusing to play this game. Up to 1995, Microsoft had a meager lobbying presence in Washington, relative to its competitors; indeed, the company’s enormous success seemed to highlight Washington’s irrelevance to the market process.

It was only when Microsoft decided to offer serious competition to Netscape that Netscape decided to cash in on some of its political investments in Washington. Soon thereafter, the term "antitrust" began to be bantered around in association with Microsoft. Four years later, Judge Thomas Penfield Jackson made it official. Microsoft was going to pay for not ponying up when it had the chance.

Two weeks before this ruling was announced late on a Friday afternoon, Microsoft Chairman Bill Gates announced that, through his foundation, he was funneling $1 billion dollars to organizations that provided scholarships to black Americans. Two weeks following the ruling, the government announced that it would be going into arbitration with Microsoft to determine exactly how its case should proceed, if at all. It was announced that a famous libertarian judge was to hear the arbitration, much to the surprise of Microsoft’s enemies.

Could there be a connection between the two events? Is it possible that Gates is trying to communicate, through his actions, to the political class that he finally learned about the need to be compliant, albeit somewhat late?

At least since the development of income tax withholding as an emergency measure during World War II, American business, to varying but astounding degrees, has been forced to do the bidding of the state. To the degree this has been made possible, business has been nationalized. Firms learned that to be successful, there were two sets of customers that had to be satisfied: the conventional ones who consumed their products, and the regulators.

After all, both had the power to make or break their businesses. Successful firms today still must satisfy the consumer in order to remain in business, but they also must satisfy the political class as well. Failure to do either can spell doom for the naïve firm.

The reason Microsoft caught the attention of so many free market economists was that its success challenged this regime. This undoubtedly scared the political class enough to force Microsoft to pay for ignoring it. At first, it looked as if the state had finally picked a fight with an adversary that had the capability to fight back, and millions of taxpayer dollars were paid out in lawyers’ hours in this effort. With its initial victory in Judge Jackson’s ruling, the government is implicitly sending a message to the entrepreneurial class: if it can force Microsoft to play by its rules, then it can make any other firm comply as well.

In the end, what Frederic Bastiat wrote 150 years ago applies just as much today: "Sometimes the law defends plunder and participates in it. Thus the beneficiaries are spared shame, danger, and scruple which their acts would otherwise involve. Sometimes the law places the whole apparatus of judges, police, prisons, and gendarmes at the service of the plunderers, and treats the victim--when he defends himself--as a criminal. In short, there is legal plunder."


Contact Christopher Westley

Christopher Westley a professor of economics in the Lutgert College Business at Florida Gulf Coast University and an associated scholar at the Mises Institute.

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