The end state of capitalism is monopoly and then failure
Even as the AI Bubble threatens to pop, it appears to have already caused a completely different tech crisis amongst IT companies that relied on your inability to switch to a competitor to avoid having to invest in their own products.
There’s a crisis going on in the tech sector that you may not have noticed – possibly because it’s not the one you’re looking at. It’s not the AI bubble that is threatening to eat every computer chip and piece of creative human endeavour before it inevitably collapses. It’s not the cryptocurrency bubble which is currently bursting as investors finally realise that burning compute time on an “asset” that has literally no use outwith money laundering is even less valuable than AI chatbots that steal your art then tell you to kill yourself.
The other tech bubble is the one laid out here by Matt Stoller and looks at the way ‘platform decay’ has crippled a huge number of companies -and how they have now started to find a way out of the traps they were in. To understand how this happened, first we need to step back to an underlying truth about our economy: Capitalists hate free markets.
That sounds like an oxymoron. It sounds like the very antithesis of what capitalism is about. Is this whole purpose of capitalism not to sell goods and services through markets that are as unrestrained as possible so as to allow perfect competition – competition which drives innovation and price reductions?
I mean, that’s what we were taught, but it’s not what those at the top actually believe. The capitalists at the top hate competition. Competition, you see, forces them to reduce prices and to spend money on research and development instead of extracting it as a profit for their own use.
And so the ideas of fair competition, of the free market and of providing the best service at the best price are not ideas that are compatible with capitalism as it is implemented in practice.
The first idea is easy to break down. Rather than compete with your competitors you could agree to not compete. Cartels are groups of businesses all mutually agreeing to set prices and/or standards. OPEC is a prominent modern example where the member countries agree to control oil production in order to manipulate oil prices up or down. Cartels exist within many different product sectors though and countries often push back against them with regulations (the power of which are often dependent on how open the cartel is about its price fixing and how easy it is for the cartel itself to corrupt, influence or write the regulations).
Where cartels are insufficient, monopolies are the next stage of this kind of market consolidation. Why compete with another company when you can just buy it and either dissolve it or keep it around as a brand label in order to fake the appearance of choice. You may have heard the story that basically all brands of luxury sunglasses are produced by the same company. You’ve probably also noticed that companies like banks and media producers are basically all owned by the same handful of companies.
Related to this is interference with the concept of the free market. Companies these days are increasingly pushing themselves not as product makers but as platform providers. Amazon is the standout example of this, creating a near-monopoly in internet shopping for almost everything. Except they aren’t just a platform or a provider of market space, but an active and corrupt player in that market too.
There have been plenty of stories of Amazon charging onerous fees for placing your goods on their platform, only for them to create an own-brand copy of your goods and not just sell them for less (because they don’t have to pay themselves the access fee, never mind more nefarious dealings like deliberately loss-leading the goods to drive you out of business) but to actively promote them in the search listings because they control the algorithm. Regulators have been utterly ineffective but I believe the solution here is a relatively simple one – if you own the platform, you don’t get to sell goods on it. It’s too much of a conflict of interest to be otherwise.
And here we get to the specific tech bubble mentioned at the start. Sometimes the platform you’re selling isn’t a marketplace for others to sell on. Sometimes they’re selling the means for you to do business.
An IT platform that runs all of the accounts of your business, or one that manages the financial transactions of your bank, or the patient records of your health service is a platform that once you’ve bought is very difficult to move away from. The upheaval that would come from retraining everyone to use a new system while maintaining customer/client continuity and ensuring that no-ones records got lost or altered in the switch is a daunting task.
Therefore the ‘switching cost’ to another system is so high that it’s not even a matter of price but existential practicality.
This means that the company you bought it from has absolutely zero incentive either to keep prices down (even if they haven’t bought or signed deals with competitors, you aren’t going to switch to a cheaper option) and very little incentive even to improve or basically maintain the platform. It doesn’t need to work the best it can do. It doesn’t need to work well. It just needs to barely function enough to not quite overcome the huge switching costs. Companies have run for decades on inadequate software because switching to better options simply weren’t possible.
But what if the switching cost goes away?
“If you want an economy based on free market capitalism then you have to defend it.”
And here we get to the specific tech bubble mentioned at the start. Sometimes the platform you’re selling isn’t a marketplace for others to sell on. Sometimes they’re selling the means for you to do business.
An IT platform that runs all of the accounts of your business, or one that manages the financial transactions of your bank, or the patient records of your health service is a platform that once you’ve bought is very difficult to move away from. The upheaval that would come from retraining everyone to use a new system while maintaining customer/client continuity and ensuring that no-ones records got lost or altered in the switch is a daunting task.
Therefore the ‘switching cost’ to another system is so high that it’s not even a matter of price but existential practicality.
This means that the company you bought it from has absolutely zero incentive either to keep prices down (even if they haven’t bought or signed deals with competitors, you aren’t going to switch to a cheaper option) and very little incentive even to improve or basically maintain the platform. It doesn’t need to work the best it can do. It doesn’t need to work well. It just needs to barely function enough to not quite overcome the huge switching costs. Companies have run for decades on inadequate software because switching to better options simply weren’t possible.
But what if the switching cost goes away?
One of the few things that the new generations of AI appear to be not ‘good’ at, but better at than the average lay person is in generating functioning computer code. The code it generates is often bad, it’s often hard to understand and edit, there are sometimes glaring security holes in it and the entire basis of the development of the AI’s ability to code is likely based on the same theft of creative endeavour as AI ‘art’ is. But if you, the computer illiterate company exec, can order ChatGPT to ‘vibecode’ custom software that despite all of those caveats is still better than the thing you were being overcharged for before, you’ll suddenly overcome that switching cost barrier.
And when that happens, several trillions of dollars worth of computer software platform companies that were utterly reliant on you sucking up their terrible platforms become worthless. That began to happen last weekend.
The AI bubble is still coming though and I think the big players still stand to massively crash, but every tech bubble results in something useful coming out of the ruins. I think the future of generative AI won’t be massive data centres that eat your entire town’s electricity and water to burn out GPU cards in a matter of months. It’ll be smaller, more specialised models that run locally on your PC or even your phone. It needn’t be companies buying cloud services only for an overtanned dictator to turn them off because he had a bad night’s sleep, but more local IT infrastructure and a crowd of misfits in the basement holding it all together.
And, of course, for the companies who can’t or don’t want to do that, the service providers will still be around and may well now have the incentive to actually improve their products.
This isn’t a defence of AI specifically but it is a warning to economic planners and politicians. If you want an economy based on free market capitalism (and I’ll have the debate about that desire in another article) then you have to defend it. Because capitalists fundamentally hate free market capitalism and if they can’t mutate it into rentierism, cartelism and monopolies then they absolutely will. And then they’ll suck all value out of everything the own until it collapses under its own weight or, if we’re lucky, it’ll cling on just long enough to be replaced. The end state of the capitalism that they want is always monopoly and then failure.
