Big Tech is Like the Cocaine Cartels

Wainwright’s Narconomics is one of my favorite books. In order to show how the free market really works, he went and studied it in its pure, unconstrained form: the cocaine cartels. It was a fun and insightful read, and ever since I first encountered it I’ve wanted him to go back and do a similar book about big tech companies. After all, they too sell artificially addictive products, treat the legal system as a mere expense, and are run by sociopathic narcissists.

Wainwright’s thesis is that every business faces a common set of problems: how to maintain product quality, how to protect market territory, how to enforce agreements with suppliers, how to recruit and manage staff, and how to handle disputes with competitors. Legal businesses deal with these issues through a combination of contract law, trademark and patent protection, employment law, and (if all else fails) litigation.

Drug cartels solve the same problems by different means, and their solutions reveal some interesting things about how business actually works. Take brand protection, for example. A consumer who buys a product with a known brand name has some assurance of consistent quality because the brand owner has reputational incentives to maintain standards and can take legal action against counterfeit goods.

A cocaine cartel can’t use trademark law. It can, however, use violence against competitors who sell adulterated product under the same name or who operate in territory the cartel has claimed. The aim—maintaining exclusivity and quality signals—is the same, it’s just the mechanism that differs. (And yes, the word “just” is doing a lot of work in that sentence.) However, violence is like litigation: it’s expensive, it’s noisy, and you might lose in the end, so you have a lot of reasons to try to negotiate a settlement, even if it’s a bad one.

Worker relations are also similar. Employment law has evolved over the last hundred and fifty years to reduce mistreatment of workers through minimum wages, safety requirements, and prohibitions on arbitrary dismissal. People who work in the drug trade have no such protections. However, the brutal labor relations practices of the cartels are not a consequence of the personalities involved. They are instead the result of removing the legal protections that exist precisely to prevent brutality and exploitation in legal labor markets.

As a final example, consider vertical integration. A business that controls its entire supply chain is less vulnerable to supplier failure, price gouging, and quality problems. Legal businesses achieve this through acquisition and contract, but face antitrust limits on how far they can consolidate. (At least, they used to: antitrust enforcement has been steadily weakened since the early 1980s.)

Cartels can’t sue suppliers who fail to deliver, so they have a powerful incentive to own suppliers outright. The cartels that have achieved the most durable market positions have typically integrated vertically as far as they can, unconstrained by antitrust law.

Tech companies use the term “disruption” to describe entering and reorganizing an existing market. From the perspective of the incumbent businesses in that market, disruption means that the pricing norms, labor deals, and the competitive equilibria they had established are attacked by a new entrant willing to operate at a loss or outside the regulatory frameworks that the incumbents are bound by. Drug cartels are, in this sense, serial disruptors: they subvert the legal system to undercut incumbents when they enter markets, often at great cost to local communities.

If this sounds like the way Uber, AirBnB, and others have operated, that’s not an accident: the connection between market concentration and the capacity to externalize harm is a structural feature of markets, not something specific to drug cartels. A highly concentrated firm in any industry has reduced competitive pressure, which means it can absorb the reputational cost of poor labor or environmental practices without losing market share. It can also use its political leverage to shift the cost of its harms onto workers through suppressed wages, onto communities through pollution and infrastructure strain, and onto governments through underfunded services and tax avoidance. Cartels exhibit this pattern in its most extreme form because they face the weakest institutional constraints, but the underlying logic is no different from what Google, Meta, and others have been doing for years.

The safeguards of legal markets that people take for granted in first-world democracies were invented specifically to prevent the damage done by unregulated markets. Minimum wage laws, environmental standards, workplace safety rules, antitrust regulations, and consumer protection statutes are society’s equivalent of immune reactions. Each was lobbied against by the industries they constrained on the grounds that regulation would be impossible, ineffective, immoral, expensive, or harmful to national security. As we belatedly start to think seriously about regulating social media and AI, I think it’s worth keeping the cocaine cartels in mind.

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Tom Wainwright: Narconomics: How to Run a Drug Cartel. PublicAffairs, 2017, 978-1610397704.