Let markets deliver the deathblow that red tape can’t

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Goliaths of the 1970s such as Kodak were decimated by innovations - David Becker/Getty Images

Whatever you think of big tech dominance, political “fixes” aren’t the answer. The optimal solution is that same force that felled Debenhams, Arcadia Group and The Body Shop.

Creative destruction.

The non-stop churn of new startups out-thinking, outflanking and ousting ageing giants solves the issue naturally, and always has. It is a near-perfect self-regulatory feature.

Pandering politicians globally claim tech’s behemoths are too dominant, requiring the myriad regulatory crackdowns you see today. But they are wrong. Creative destruction – capitalism’s lifeblood – naturally remedies hugeness.

How? Hugeness creates vast profits. As firms become Goliaths, entrepreneurial Davids salivate – and pounce. Old, fattened hunters become the hunted. Innovators craftily overthrow ageing titans who become unable to adapt.

It takes 10 or 20 years, rarely more. I have watched this eventuality play out for 50-plus years. Dominance isn’t permanence.

But still, the Treasury started targeting tech titans with the digital services tax in 2020, aiming to capture revenue tax “loopholes” that let these giants shift their revenue declarations elsewhere. Meanwhile, the EU’s eight-year quest to force Apple to pay €13bn in Irish back taxes recently bore fruit.

Calls to thwart big tech go far further. Think “break up the biggies” that anti-trust politicos touted during EU elections. Outstripping them all is Rishi Sunak’s swansong, the Digital Markets, Competition and Consumers Act, providing regulators a broad toolkit to curb big tech’s “market power”.

America’s election fanned similar shrillness, with US regulators’ twin lawsuits targeting Google’s online search and alleged digital ad “monopolies”. Pundits nod mindlessly, praising governments sagely stepping in. They are wrong.

Take the 20 largest global firms by market cap in 1970, 1990, 2010 and today. From 1970’s tally, only seven made 1990’s list, with several from then-booming Japan appearing.

By 2010, those hot Japanese firms faded and fell from the list. Just four firms from 1970’s list made 2010’s. None do today.

What happened? Innovation.

Many Goliaths of the seventies got decimated. Think Kodak, Sears and Xerox. Others, like DuPont, General Motors, IBM and General Electric shrank to second or third-tier status. Entrepreneurial entrants ate their lunches – no government “fixes” needed.

Mini-computer firms toppled IBM. PCs toppled mini-computer firms. Smartphones decimated Kodak. Amazon and Walmart toppled Sears. Shell ceded its energy giant crown to Exxon. AT&T lapped BT. Everyone toppled Xerox.

It never ends. Consider today’s top 20 global firms – only five adorned 2010’s list. In 14 years, 15 new entrants reached the top 20. Only two of today’s top 20 made the cut in 1990. Creative destruction reigns.

Yes, this process can cause business failures, threatening jobs and spurring angst. But, long term, failure benefits all by freeing capital. It allows dynamic upstarts to provide world-bettering offerings and higher-quality jobs. Crucially, failures show what works and what needs improvement. Barring or inducing it governmentally muddles those messages.

Consider Japan’s infamous “zombie companies,” which syphon capital from challengers – cross-shareholding effectively subsidises them. Many would be long dead without such support and artificially low interest rates, which remain globally puny now, despite the Bank of Japan’s endlessly fretted “hikes”.

Many cheer Japan’s stable employment but the nation’s dearth of creative destruction fomented a decades-long malaise. Japanese GDP grew just 0.8pc annualised from 1994 through 2023. Compare that with America’s 2.5pc, or the UK’s GDP, which more than doubled Japan’s, at 1.9pc annualised.

Japanese stocks’ 152pc return in yen over that stretch badly lagged Britain’s 684pc in pounds. The S&P 500 boomed 1,694pc in dollars over that period. Or, on an annualised basis, Japan posted meagre 3.2pc returns over that span versus the US and UK’s respective 10.5pc and 7.4pc. “Protections” couldn’t prevent Japan’s strong presence in 1990’s top 20 list from fading, either.

Governmental meddling creates unintended consequences. Wide-ranging EU attempts to hobble big tech show this, such as fining Google €2.4bn for supposedly “anticompetitive” practices. Unsurprisingly, Europe’s tech sector is tiny: Only three of the world’s 50 largest tech or tech-like firms are eurozone-based. I won’t even go into the seriously sore spot that is Arm’s decision to list in New York when it returned to public markets.

People are right to decry the lost competitiveness as old-line sectors lag. Meanwhile, America has 34 of tech’s Big 50. But the opportunities for Britain’s many tech startups to dethrone the competition are many, if they get the freedom to grow.

No, I don’t urge some no-regulation free-for-all. The Government should enforce property rights, truth in advertising, and safety rules. All are crucial to investor confidence and risk-taking. But in regulating “market dominance,” creative destruction works best. Embrace it and thrive.

P.S. I told you what would happen with the US elections last month.