Do We Need the Government’s Permission for Everything?

By Sheldon Richman
December 01, 1997

The other day I caught the television news report about America Online’s plan to buy out its largest rival, CompuServe. At the end of the report the broadcaster said that "the government will have to approve the deal."

It got me thinking: does the government have to approve everything we do? President Clinton says we’ve left the era of big government behind, but I’m not convinced, especially when things like the AOL-CompuServe deal come along.

AOL, the largest online computer service, with more than 9 million subscribers, wants to buy the number two service, CompuServe, with more than 2 million subscribers. CompuServe will continue to operate as a separate service. The antitrust watchdogs at the Department of Justice will scrutinize the proposed deal, ever ready to protect us helpless consumers from big companies.

But is there anything to save us from? Antitrust law has always been based on a misleading theory of the competitive economy as a static place where no one profits by bold initiative. When things get a little too dynamic for that theory, the government gets worried and considers putting a halt to activity it cannot understand.

In reality the marketplace is dynamic. Knowledge is always incomplete and changing. Errors in the use of resources abound. There is always much to learn, and the churning competitive process is the forum for discovery. Entrepreneurs in quest of profits seek opportunities to serve consumers in ways they are not now being served. Success indicates that an entrepreneur found an "error" regarding how consumers were being treated and corrected it. After all, the way to make profits is to provide something consumers are willing to buy.

If AOL buys CompuServe and increases its profits, that’s a sign the deal was good for consumers. If it experiences losses, the opposite verdict would have been rendered.

But would the AOL-CompuServe deal harm consumers by providing fewer choices in the computer online-service industry? It would seem so, but actually it would not harm consumers. Although CompuServe would no longer be independent, other choices would still exist. There are many large and small providers of access to the Internet, for example. They don’t offer users the in-house content and services that AOL and CompuServe do. But there are equivalents on the Internet, even if they take some searching. The point is that every Internet service provider is a competitor of AOL.

Besides that, AOL has a competitor in Microsoft Network. This is a young service and would be only one-sixth the size of AOL-CompuServe. But that is just its present condition. It would grow quickly if AOL, having bought CompuServe, became complacent. As a matter of fact, a short time ago, people were frantically predicting that Microsoft Network would come to dominate the online-service business because the company includes the access software with Windows, the operating environment most commonly found on personal computers. This has obviously not happened.

Our memory is very short in such matters. AOL was not always the top online service. Before AOL existed, CompuServe was the major service, having bought out its closest rival, The Source. But CompuServe’s domination did not prevent the upstart AOL from blanketing the country with computer disks containing its access software. Before long, AOL’s membership surpassed CompuServe’s.

There is a critical lesson in that story. Potential competition is every bit as important in an industry as actual competition. Venture capital is always looking for new places to invest. If the dominant firm in an industry leaves room for a competitor to seize an advantage, someone will do it. But if the firm is so effective that no one wants to challenge it, consumers are the winners. The antitrust people still have not gotten the message.

The only thing that can keep the process from working is the presence of legal barriers to the entry of new firms. Companies often seek regulations to make it difficult or impossible for new competitors to challenge them. All the government needs to do to protect consumers is to refuse to go along. To put it another way, if the freedom and property rights of all people are protected, the free market serves everyone and creates prosperity. Antitrust laws violate property rights, punish success, and harm consumers. They should be repealed.

Topics: Business, Culture , Government, Statism

Sheldon Richman

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