Don't Be Evil

by Rana Foroohar

  Big Tech and big banks are also similar in the opacity and complexity of their operations. The algorithmic use of data is like the complex securitization done by the world’s too-big-to-fail banks in the subprime era. Both are understood largely by industry experts who can use information asymmetry to hide risks and the nefarious things that companies profit from, like dubious political ads.

  Yet that complexity can backfire. Just as many big-bank risk managers had no idea what was going into and coming out of the black box before 2008, Big Tech executives themselves can be thrown off balance by the ways in which their technology can be misused.9 Consider, for example, the New York Times investigation in 2018 that revealed that Facebook had allowed a number of other Big Tech companies, including Apple, Amazon, and Microsoft, to tap sensitive user data even as it was promising to protect privacy.10

  Facebook entered into the data-sharing deals—which are a win-win for the Big Tech firms in general to the extent that they increase traffic between the various platforms and bring more and more users onto them—between 2010 and 2017 to grow its social network as fast as possible. But neither Facebook nor the other companies involved could keep track of all the implications of the arrangements for user privacy. Apple claimed to not even know it was in such a deal with Facebook, a rather stunning admission given the way in which Apple has marketed itself as a protector of user privacy. At Facebook, “some engineers and executives…considered the privacy reviews an impediment to quick innovation and growth,” read a telling line in the Times piece. And grow it has: Facebook took in more than $40 billion in revenue in 2017, more than double the $17.9 billion it reported for 2015.

  Facebook’s prioritization of growth over governance is egregious, but not unique. The tendency to look myopically at share price as the one and only indicator of value is something fostered by Wall Street, but by no means limited to it.11 The obliviousness of the tech executives who cut these deals reminds me of bank executives who had no understanding of the risks built into their balance sheets until markets started to blow up during the 2008 financial crisis. Companies tend to prioritize what can be quantified, such as earnings per share and the ratio of the stock price to earnings, and ignore (until it is too late) the harder-to-measure business risks.

  Generation Greed

  It’s no accident that most of the wealth in our world is being held by a smaller and smaller number of rich individuals and corporations, who use financial wizardry like tax offshoring and buybacks to ensure that they keep it out of the hands of national governments. It’s what we’ve been taught to think of as normal, thanks to the ideological triumph of the Chicago School of economic thought, which has, for the past five decades or so, preached—among other things—that the only purpose of corporations should be to maximize profits.

  The notion of “shareholder value” is shorthand for this idea.12 The maximization of shareholder value is part of the larger process of “financialization,” which I covered in my previous book, Makers and Takers.13 It’s a process that has risen, in tandem with the Chicago School of thinking, since the 1980s, and has created a situation in which markets have become not a conduit for supporting the real economy, as Adam Smith would have said they should be, but rather, the tail that wags the dog.

  “Consumer welfare,” rather than citizen welfare, is our primary concern. We assume that rising share prices signify something good for the economy as a whole, as opposed to merely increasing wealth for those who own them. In this process, we’ve moved from being a market economy to being what Harvard law professor Michael Sandel would call a “market society,” obsessed with profit maximization in every aspect of our lives. Our access to the basics—healthcare, education, justice—is determined by wealth. Our experiences of ourselves and those around us are thought of in transactional terms, something that is reflected in the language of the day (we “maximize” time and “monetize” relationships).

  Now, with the rise of the surveillance capitalism practiced by Big Tech, we ourselves are maximized for profit. Remember that our personal data is, for Big Tech companies and others that harvest it, the main business input. As Larry Page himself once said, when asked “What is Google?”: “If we did have a category, it would be personal information…the places you’ve seen. Communications…Sensors are really cheap….Storage is cheap. Cameras are cheap. People will generate enormous amounts of data….Everything you’ve ever heard or seen or experienced will become searchable. Your whole life will be searchable.”14

  Think about that, readers. You are the raw material used to make the product that sells you to advertisers. Yes, we really are living in the Matrix.15

  Financial markets have facilitated the shift toward this invasive, short-term, selfish capitalism, which has run in tandem with both globalization and technological advancement, creating a loop in which we are constantly competing with greater numbers of people, in shorter amounts of time, for more and more consumer goods that may be cheaper thanks in part to the deflationary effects of both outsourcing and tech-based disruption, but that can’t compensate for our stagnant incomes and stressed-out lives.

  But you could argue that, in a deeper way, Silicon Valley—not the old Valley that was full of garage start-ups and true innovators, but the financially driven Valley of today—represents the apex of the shift toward financialization. Today the large tech companies are run by a generation of business leaders who came of age and started their firms at a time when government was viewed as the enemy, and profit maximization was universally seen as the best way to advance the economy, and indeed society. Regulation or limits on corporate behavior have been viewed as tyrannical or even authoritarian. “Self-regulation” has become the norm. “Consumers” have replaced citizens.16

  All of it is reflected in the Valley’s “move fast and break things” mentality, which the tech titans view as a fait accompli. As Eric Schmidt and Jared Cohen wrote in an afterword to the paperback edition of their book, “Bemoaning the inevitable increase in the size and reach of the technology sector distracts us from the real question….Many of the changes that we discuss are inevitable. They’re coming.”17

  The Cost of Surveillance Capitalism

  Perhaps. But the idea that this should preclude any discussion of the effects of the technology sector on the public at large is simply arrogant. There’s a huge cost to this line of thinking. Consider that $1 trillion in wealth that has been parked offshore by America’s largest, most IP rich firms. A trillion is no small sum: That’s an eighteenth of America’s annual gross domestic product, much of which was garnered from products and services made possible by core government-funded research and innovators. Yet U.S. citizens have not gotten their fair share of that investment because of tax offshoring. It’s worth noting that while the U.S. corporate tax rate was recently lowered from 35 percent to 21 percent, most big companies have for years paid only around 20 percent of their income, thanks to various loopholes. The tech industry pays even less—around 11 to 15 percent—for this same reason: Data and IP can be offshored while a factory or grocery store cannot.

  This points to yet another neoliberal myth—the idea that if we simply cut U.S. tax rates then these “American” companies will bring all their money home and invest it in job-creating goods and services in the USA. But America’s biggest and richest companies have been at the forefront of globalization since the 1980s. Despite small decreases in overseas revenues for the past couple of years, nearly half of all sales from S&P 500 companies come from abroad. How, then, can such companies be perceived as being “totally committed” to the United States, or, indeed, to any particular country?18 Their commitment, at least the way American capitalism is practiced today, is to customers and investors, and when both of them are increasingly global, then it’s hard to argue for any sort of special consideration for American workers or communities in the boardroom.

  Tech firms are more abl
e than any other type of company to move business abroad, because most of their wealth isn’t in “fixed assets” but in data, human capital, patents, and software, which aren’t tied to physical locations (like factories or retail stores) but can move anywhere. And as we have already learned, while those things do represent wealth, they don’t create broad-based demand growth in the economy like the investments of a previous era.

  “If Apple acquires a license to a technology for a phone it manufactures in China, it does not create employment in the U.S., beyond the creator of the licensed technology if they are in the U.S.,” says Daniel Alpert, a financier and a professor at Cornell University studying the effects of this shift in investment. “Apps, Netflix, and Amazon movies don’t create jobs the way a new plant would.” Or, as my Financial Times colleague Martin Wolf has put it, “[Apple] is now an investment fund attached to an innovation machine and so a black hole for aggregate demand. The idea that a lower corporate tax rate would raise investment in such businesses is ludicrous.”19 In short, cash-rich corporations—especially tech firms—have become the financial engineers of our day.20

  The House Always Wins

  There are the ways in which Big Tech is driving the mega-trends in global markets, as we’ve just explored. Then, there are the ways tech companies are playing in those markets that grant them an unfair advantage over consumers. For example, Google, Facebook, and increasingly Amazon now own the digital advertising market, and can set whatever terms they like for customers. The opacity of their algorithms coupled with their dominance of their respective markets makes it impossible for customers to have an even playing field. This can lead to exploitative pricing and/or behaviors that put our privacy at risk. Consider also the way in which Uber uses “surge pricing” to set rates based on customers’ willingness to pay. Or the “shadow profiles” that Facebook compiles on users. Or the way in which Google and Mastercard teamed up to track whether online ads led to physical store sales, without letting Mastercard holders know they were being tracked.21

  Or the way Amazon secured an unusual procurement deal with local governments. It was, as of 2018, allowed to purchase all the office and classroom supplies for 1,500 public agencies, including local governments and schools, around the country, without guaranteeing them fixed prices for the goods. The purchasing would be done through “dynamic pricing”—essentially another form of surge pricing, whereby the prices reflect whatever the market will withstand—with the final charges depending on bids put forward by suppliers on Amazon’s platform. It was a stunning corporate jujitsu, given that the whole point of a bulk-purchasing contract is to guarantee the public sector competitive prices by bundling together demand. For all the hype about Amazon’s discounts, a study conducted by the nonprofit Institute for Local Self-Reliance concluded that one California school district would have paid 10 to 12 percent more if it had bought from Amazon. And cities that wanted to keep on using existing suppliers that didn’t do business on the retail giant’s platform would be forced to move that business (and those suppliers) to Amazon because of the way that that deal was structured.22

  It’s hard to ignore the parallels in Amazon’s behavior to the lending practices of some financial groups before the 2008 crash. They, too, used dynamic pricing, in the form of variable rate subprime mortgage loans, and they, too, exploited huge information asymmetries in their sale of mortgage-backed securities and complex debt deals to unwary investors, not only to individuals, but also to cities such as Detroit. Amazon, for its part, has vastly more market data than the suppliers and public sector purchasers it plans to link. As in any transaction, the party that knows the most can make the smartest deal. The bottom line is that both big-platform tech players and large financial institutions sit in the center of an hourglass of information and commerce, taking a cut of whatever passes through. They are the house, and the house always wins.

  As with the banks, systemic regulation may well be the only way to prevent Big Tech companies from unfairly capitalizing on those advantages. Lina Khan, the antitrust lawyer we read about in chapter 9, explored this possibility in a Columbia Law Review paper23 that argues that companies that both create marketplaces or platforms, and then also do commerce within them, have an unfair advantage. Her work calls in part upon that of a prescient academic, the Cornell University law professor Saule Omarova, who first came to my attention when I was researching Makers and Takers. Omarova was a key witness in hearings over the Goldman Sachs aluminum hoarding episode—as you might remember, the bank had found a diabolical way around rules saying that big financial institutions could not hoard raw materials like aluminum in order to drive up the price, but had to move the commodity in and out of warehouses to ensure that supply wasn’t being interfered with. As a front-page New York Times piece exposed, Goldman was getting around those rules by simply using a forklift to move the aluminum back and forth between warehouses that were only a few feet away from each other.

  Omarova’s paper on the problem of financial institutions both owning and trading commodities, entitled “The Merchants of Wall Street: Banking, Commerce, and Commodities,” sparked serious public interest in the topic. While the bank eventually offloaded its aluminum and came away from the episode without any legal action, Omarova said, “I’m sure that Goldman used the information they had about aluminum to influence the market.” But, underscoring the opacity and complexity issue, she added, “Can I prove it? No. Can the CFTC [the regulator in charge of commodities trading] prove it? I doubt it. And if that’s the case, should Goldman be doing any of this? Absolutely not.”24

  Omarova now believes that this dynamic is in play in the technology world, as big platforms both own the marketplace and trade within it. Her recent research raises questions about whether large tech platform firms pose the same kind of threat not only as the nineteenth-century railroads did (which also owned platforms and conducted business on them, as we’ve already learned) but also as the too-big-to-fail banks do.25 She’s particularly worried about the marriage of Big Tech companies and finance, and it’s not hard to imagine why. “If Amazon can see your bank data and assets [what is to stop them from] selling you a loan at the maximum price they know you are able to pay?” Omarova asks.

  She’s not the only one worried. In June 2019, Christine Lagarde, the head of the International Monetary Fund, sounded the alarm about Big Tech, questioning whether the largest tech platform firms could destabilize the global financial system.26 In December 2018, Agustín Carstens, the general manager of the Bank for International Settlements, spoke about the rise of Google, Alibaba, Facebook, Tencent, Baidu, eBay, and other companies in the global credit markets, calling them “one of the greatest challenges” to financial regulators today. “Will Big Tech’s involvement in finance lead to a more diverse and competitive financial system, or to new forms of concentration, market power, and systemic importance?” he asked. “Is the expansion of Big Tech powered by efficiency gains? Or by the cost advantage of circumventing the current regulatory system?” It’s a question that is ever more pressing as Facebook attempts to launch its own cryptocurrency.

  The jury is still out on whether Big Tech will destabilize global finance. Meanwhile, Carstens and regulators in both the United States and Europe are looking carefully at whether the predictive algorithms and machine learning offered up by Apple, Amazon, Facebook, and others moving into the finance business are increasing or decreasing stability in the financial sector. One particular area of concern is how Big Tech firms use machines rather than human relationships to judge customers (thus circumventing many of the “know your customer” rules that govern traditional banking). As the mathematician Cathy O’Neil laid out in her book Weapons of Math Destruction, credit card companies and other financial institutions regularly use opaque algorithms that hoover up online data (our Web browsing patterns, for example, or our location data) and use them to create customer profiles that make it easier for pe
ople in upmarket zip codes that click on, say, a Jaguar during a car search rather than a Taurus, to get credit. That then creates a snowballing cycle of inequality; as she puts it, “A person using a computer on San Francisco’s Balboa Terrace is a far better [credit] prospect than the one across the bay in East Oakland.” That may, of course, be completely untrue. But the result is that what you do online may affect opportunities in your offline life in a big way.27

  Then there are questions of whether Amazon or Facebook could leverage their existing positions in e-commerce or social media to unfair advantage in finance, using what they already know about our shopping and buying patterns to push us into buying the products they want us to in ways that are either (a) anticompetitive, or (b) predatory. There are also questions about whether they might cut and run at the first sign of market trouble, destabilizing the credit markets in the process.

  “Big Tech lending does not involve human intervention of a long-term relationship with the client,” said Carstens. “These loans are strictly transactional, typically short-term credit lines that can be automatically cut if a firm’s condition deteriorates. This means that, in a downturn, there could be a large drop in credit to [small and middle-sized companies] and large social costs.”28 If you think that sounds a lot like the situation that we were in back in 2008, you’d be right.

  Some people do not worry about any of this. They feel that such risks are a fair trade for the convenience of being able to link together all of our daily tasks, via a single password, on a single platform—be it Apple, Amazon, Google, or Facebook. But it is impossible to know what is “fair” when none of us can see inside the algorithmic black boxes of the largest technology companies. It is one thing for a company to know my vacation shopping patterns or what media I like; it is another for them to access my entire financial history, including my investments. Many people already lack confidence in making financial decisions and personal wealth management. Why else would so many of them still be paying above average fees for such services? Imagine how vulnerable some consumers might be if, for example, their bank notices that they have $9,000 sitting in a savings account and promptly serves them a pop-up ad urging them to move their money into a wonderful new higher yielding investment vehicle? Or imagine if your Facebook page had a checking account on top of it. What could go wrong?