Europe’s Digital Dirigisme
Google has recently announced that it is ending its Google News service in Spain before a new intellectual property law – dubbed the ‘Google tax’ – requires Spanish publishers to charge the company for displaying snippets of their articles. Whist newspapers claim that Google infringes copyright by using their text, Google argues that their News service drives traffic to the featured websites, boosting advertising revenues. Certainly, Germany’s biggest publisher Axel Springer scrapped plans to block Google from their news items when they discovered that doing so caused their traffic to plunge.
This is yet another complication of Google - EU relations. In May, the European Court of Justice ruled in favour of the ‘right to be forgotten’, which has so far resulted in over 250,000 takedown requests. Building on this 'success', the EU now wants to force search engines to scrub ‘irrelevant or incorrect’ (read: inconvenient) links at a not just a European but a global level.
And as the European Commission’s four-year antitrust investigation into Google drags on, the European Parliament symbolically voted to break up its operation and ‘unbundle’ its search function from other services. Whilst the parliament has no power to touch the internet giant, it sends a very strong message as to what European politicians want.
European politicians portray such moves as guarding against monopoly, enabling fair competition and safeguarding the privacy of individuals. However, it’s not obvious that the way Google presents search results is to the detriment of its actual users (as opposed to rival firms), whilst the ‘right to be forgotten’ sets a dangerous precedent against internet openness. American firms and politicians have responded harshly to the actions, branding them politically motivated, anti-competitive and detrimental to trade relations.
European policy makers should be very careful not to cause harm to the digital economy through politicized regulation. Policymakers may be concerned by the digital domination of American firms like Amazon, Facebook and Google – yet it's worth noting Europe fails to produce many rivals of its own.
As the Eurozone struggles with weak growth and low inflation, the WSJ reports that the number of those engaged in early entrepreneurial activity in countries like Germany, France and Italy (5%, 4.6%, and 3.4% of the population respectively) is a fraction of those in the US (12.7%). Once they are established, these businesses tend to be smaller and slower-growing than their US counterparts. They also seem less likely to hit the big time: among the world’s 500 largest listed companies, only 5 of the European firms were founded after 1975, compared with 31 from the US and 31 from emerging economies.
Digital policy analyst Adam Thierer argues that the relative performance of US and European tech firms is largely driven by the regulatory culture in each country. US policy makers have by deliberate design fostered a culture of permissionless innovation, which allows and encourages entrepreneurs to innovate, push boundaries and take risks. As a result, the American tech sector has boomed, producing inventions and companies beloved and envied across the world. In contrast, European culture has been far more risk-averse and policy far more bureaucratic. The result of unnecessary regulation and data directives has been a dearth of successful European firms. Those European ‘unicorn’ firms which strike big have overwhelmingly come from countries fairly removed from continental Europe, such as the UK, Scandinavia and Russia.
The EU’s move towards net neutrality regulation, market interventions and tighter data laws will only further disadvantage tech firms. State interference is particularly unhelpful in dynamic, evolving digital sectors, where fast-paced progress is typical and innovation key to staying relevant. Moreover, European policymakers may want to check Google’s power through legislation, but it is large incumbent firms who have the resources and lawyers to comply with new regulation. Those hit hardest are smaller competitors, and the fledgling start-ups the EU should focus on encouraging.
In some sense, European policymakers are onto something with their suspicion of ‘big tech’. The vast majority of UK internet users say that they’re uncomfortable with what they share online and with whom, and even the technophilic Wired ran a recent cover story on how the data industry is ‘selling our lives’. Perhaps people really are fed up of Google, which then only maintains its 90% European market share in search because there’s no decent alternative.
But attacking Google's influence requires innovation, not regulation. Tech history is littered with market leaders such as IBM, Nokia and AOL who have slid, sometimes quite spectacularly, from the top spot. In tech-orientated sectors it is particularly hard for large firms to stay relevant and embrace new trends – let alone to develop them.
To facilitate creative destruction and the emergence of challenger firms, Europe needs a digital policy which is favorable to new technology and experimentation, and which encourages individuals to accept risk and forge ahead with business plans without first jumping through hoops and courting regulators (the trials and tribulations of Uber and Skype spring to mind here).
Blockchain-based projects which aim to ‘decentralize the internet’ and give users more control over their data are part of an exciting peer-to-peer movement which could re-sculpt the shape of the net. But these innovators are entering unchartered territory (a wild west, if you like), and an open and permissive regulatory culture is essential in allowing them to flourish (or fail).
Were Europe to grasp this, the benefits could be enormous. But if European policymakers carry on down their current path of tightening control, we're likely to see less entrepreneurship, less competition, reduced consumer utility, and probably a lot more Google.
Mazzucato versus Worstall and Westlake
Marianna Mazzucato’s 2013 The Entrepreneurial State is the most influential book on innovation. Although Mazzucato’s arguments in the book and beyond are many and varied – for example, I’m particularly sympathetic to her scepticism of the uncritical financial support for small businesses – the arguments gaining the most traction are the least convincing and potentially most damaging. In short, Mazzucato’s thesis is that the state has been the key driver of “innovation” and should therefore take a more active role than they currently do. Central to this, is the policy suggestion that government agencies that fund this innovation should take a cut of the profits from the inventions. Two writers have convincingly unpicked this – the Adam Smith Institute's Tim Worstall and Nesta’s Stian Westlake.
First, on the point about states driving innovation, Worstall cites William Baumol, who makes the crucial distinction between innovation and inventions. In reference to Mazzucato’s observation that the key technologies that went into making the iPhone were state funded Worstall explains: “Baumol's point is that the private sector could have come up with these technologies, even though it was the state that did. But only the private, or market, sector could have come up with the iPhone.”
To put it another way, the iPhone is more than the sum of its parts. In an excellent article (worth reading in full), Westlake cites the work of Jonathan Haskel, which “suggests that for every £1 that British businesses spend on R&D, they spend £8 on other intangible investments of the sort that Apple used to make the iPod a success: design, new business models, marketing and software development.”
But perhaps Mazzucato’s biggest mistake is one of policy. As Westlake explains elsewhere, in The Entrepreneurial State Mazzucato suggests that “the state should find ways to share directly in the profits of companies that benefit from government innovation spending. A repayment system needs to 'reward [the government for] the wins when they happen so that the returns can cover the losses from the inevitable failures.'”
Westlake outline three convincing reasons why this wouldn’t work: “it would be nightmarish to administer; it imposes costs on exactly the wrong businesses, creating both a presentational and a practical problem; and it’s worse than an already existing option – funding innovation from general taxation.” Westlake's last point cuts to heart of the problem. As Worstall has pointed out in a response to Mazzucato’s response to his criticism of her work:
That governments sometimes produce public goods should not be a surprise. That’s what governments are for in fact. To provide collectively those things that cannot be provided through voluntary cooperation. To then complain that government doesn’t get extra rewards for doing the very thing we institute it for seems most odd. That’s why we pay our taxes in the first place: in order to get those public goods. Why should there then be some extra appropriation when all government is doing is what we asked it to and paid for it to do in the first place?
Philip Salter is director of The Entrepreneurs Network.