Julian Gutman

If You Support PIPA/SOPA, You’re A Socialist

Economic innovation is driven by destruction. Joseph Schumpeter coined the term “Creative Destruction” to describe this idea in his seminal work Capitalism, Socialism, and Democracy. Schumpeter argues that what makes Capitalistism uniquely effective is its ability to generate and tolerate the destruction of old industries by the force of technological innovation. More top-down economic systems fail in two dimensions: they are unable to manage the complex beast that is a modern economy and worse they inevitably use their centralized power to protect an entrenched few thus undermining the path of creative destruction.

Politicians today throw the word “innovation” around in spades when discussing what makes America great and resilient. The fact that these same politicians back PIPA/SOPA indicates they are ignorant of how innovation actually works. The last century of economic innovation in America is a tour of industries and companies that either adapted to the the force of creative destruction or died. I suspect that if we had the same class of politician for that run we’d still be perfecting a faster horse buggy.

Making matters worse the second most overused term by the same class of politician is “Socialism”. Although again they don’t care for what the word actually means, only its intended rhetorical effect, they use it to criticize a government they believe intervenes too deeply in the “free-market.” I hope it’s ignorance and not lobbying that has these same politicians supporting one of the most egregious free-market interventions in history.

It’s easy to predict how Washington will fight back. They’ll use more rhetorical tricks to argue that they are simply trying to prevent “theft”. “Are you pro stealing in society?” they’ll ask with the usual wry smile. They’ll paint you a picture of cyber-thieves overseas that are holding the American media industry at virtual gunpoint and threatening our economic prosperity.

Realistically the driving force behind PIPA/SOPA is a collection of media companies who support the ideology of the free-market when its working in their favor and fight it when the very forces it unleashes threaten their cash flow. Before the rise of one of the greatest and most innovative disruptions in modern history, the internet, the strategic power of the media industry was in their ability to control the distribution of physical media. The big players used vertical integration to achieve channel control and monopolistic pricing power which as always translated into a mix of higher prices, bundling, conglomerates reducing competition, and stagnation on a cultural level.

The internet was a Godzilla of creative destruction to the media industry. By its very nature it drove the price of digital goods to near zero and commoditized distribution (technologically that’s literally what it does) thus destroying the industries long standing business advantage of controlling the distribution channel. Basic microeconomics dictates that as a result the industry would suffer a reduction in pricing power/margins/ROE and would need to rethink how it creates value. The former has certainly occurred but the industry is trying to resist the latter.

In the end of the day Creative Destruction is a force of redistribution. The value that’s taken from one industry and its companies is distributed to a combination of consumers via better pricing/quality and new players who are willing to embrace the innovation to serve customer needs more effectively. No value is lost and society is better off. 

The media industry needs to either accept the fact that their slice of the big economic pie has changed or adapt to this new environment by going after their share of the new new thing. Arguably they are even best positioned to grab a large share. I once asked Jeff Bezos why he came out with the Kindle if it was going to cannablize their core business. His response was that of a man who understands Creative Destruction, “I’d rather eat my own lunch than have someone else do it.” 

So call your politicians and tell them to stop driving America towards Socialism. It’s not merely the internet and the infinite benefits it brings society that are at risk. If we accept the precedent that industries can use the government to fight creative destruction when its not in their favor we become party to the crippling of true innovation.

Let me know what you think over at Hacker News: http://news.ycombinator.com/item?id=3482452

PS - I’m taking no position here on whether piracy is theft. I’m arguing against using legislation as an economic weapon against changing industry dynamics, especially when said legislation will have tremendous negative externalities on overall innovation and other thriving industries.