Regulating Facebook protects Facebook

There are increasing calls all around the world for the government to regulate social media companies such as Facebook and Twitter and tech giants like Amazon. A web of reasons explains these sentiments, which were kindled by the Cambridge Analytica scandal which damaged Facebook’s reputation internationally. Coupled with recent scares on fake news and misinformation, the case for government regulation seems compelling. In fact, the Singapore government, in early May, has already passed legislation that would compel sites like Facebook to issue corrections or make changes to posts that are deemed to be against "public interest".

This concern over the spread of fake news is related to a larger concern about the economic power wielded by large tech companies such as Google and Facebook. This is rooted in the economic theory of market concentration, whereby large firms have the power to squeeze out competition to the detriment of consumers and social welfare. This market position may in turn be abused by the companies; for e.g. it may cause social media firms like Facebook to be more cavalier in how they treat falsehoods on their platform, if anything. Cynical observers also dismiss Facebook's 'privacy' argument as nothing more than it protecting its own economic self-interest.

This is the sentiment motivating Democratic Senator and 2020 presidential candidate Elizabeth Warren, who had argued that “It’s time to break up Amazon, Google, and Facebook.” Her far-reaching proposals would empower regulators to fragment the firms and undo past acquisitions. The market concentration argument is what animated the creation of antitrust laws in the United States and in other countries in the early 20th century, and also what drives the initiatives of the Singapore Competition Commission of Singapore.

I recommend however, strong caution against imposing government regulations.

Government regulations impose compliance costs on businesses. On a macro level, this would reduce economic competitiveness as business costs increase, sending firms to countries with lighter regulation. Studies have shown that increasing regulatory accumulation in the United States since the 1960s has cost the economy dearly. More recently, a report by the Competitive Enterprise Institute has documented how the Obama presidency cost the economy US$600b.

On a micro level, smaller firms lose their space. Larger firms have the ability and willingness to comply with regulations, and sometimes even influence it to their advantage, crowding out smaller firms.

The supreme irony is that large firms exploit the regulations intended to control them. Increasing layers of regulatory obligations increases barriers of entry for new competitors, stifling innovation. It should be unsurprising that Mark Zuckerberg himself has called on governments to play a “more active role” in regulating the Internet. He knows that few other competitors have the wherewithal for lawyers and lobbyists his deep pockets afford. Regulating Facebook protects Facebook. This counter-intuitive insight is recognised by leading economist Tyler Cowen, prominent tech author Larry Downes in a HBR article, and even a former Facebook employee Kevin Knight.

This scenario has played out in Europe where top-down data protection regulations have pushed digital innovators and firms to other continents, leaving behind only the large American firms we are familiar with Facebook and Google. Adam Thierer from the Mercatus Center at George Mason University has studied this issue extensively, showing how a culture of “permissionless innovation” had historically given the USA an edge in tech innovation over Europe which has operated on a precautionary principle. In Europe, where stability trumps all other concerns, its innovators are burdened with cultures and institutions that fear change and stigmatise failure. Consequently, Europe has failed to create a Silicon Valley of its own. However, tech companies across the Atlantic succeed from the understanding that each success arises from many failures—and a country that shares this wisdom.

Political economists have warned about the unintended consequences of government regulation. Regulatory capture is a phenomenon described by Nobel Laureate George Stigler where regulations create a perverse incentive for regulated firms to secure regulators for their narrow interests. Less serious than regulatory capture is the phenomenon of rent seeking advanced by Gordon Tullock and Anne Krueger, which renders a scenario of firms diverting resources from work and innovation to gain political advantages. These are all logical outcomes of regulation which incentivises firms to focus on politics rather than competition.

This does not mean that the tech industry should be left to operate as a wild west where anything goes. This has never been the position of pro-market and pro-competition advocates and economists. The argument is that bottom-up efforts of self-regulation are superior. In fact, industry groups in the USA have promoted voluntary standards and transparency practices as alternatives for wider adoption by companies.

Amongst the many principles that policymakers can follow are educating the public to change norms, promoting industry self-regulation, and relying on existing legal solutions. This is especially important for countries such as Singapore which are developing innovation-centric, knowledge-based economies—because innovation is stifled otherwise.