Destroying Creative Destruction: The DMA against Innovation

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Siamak Ettefagh
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In the ever-evolving landscape of economic theory and policy, few concepts have been as influential and controversial as Joseph Schumpeter’s “creative destruction.” This powerful idea, which describes the process by which innovation continuously reshapes markets, challenges conventional wisdom about competition, monopolies, and the role of government intervention. As we grapple with the complexities of the digital age, the tension between creative destruction and regulatory frameworks, like antitrust laws and the European Union’s Digital Markets Act (DMA) has become increasingly apparent.

Creative destruction, as articulated by Schumpeter in his 1942 work “Capitalism, Socialism, and Democracy,” refers to the: “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” This dynamic force drives economic progress by continually replacing outdated technologies, business models, and industries with more innovative and efficient ones. Unlike traditional economic models that emphasize static equilibrium and price competition, Schumpeter’s vision portrays capitalism as a system in perpetual flux, where the true engine of growth is not the optimization of existing structures but their wholesale transformation.

The implications of creative destruction for antitrust law are profound and potentially unsettling. Conventional antitrust theory—rooted in neoclassical economics—views market concentration and monopoly power as inherently harmful to consumer welfare. This perspective has led to a regulatory approach that seeks to maintain a “competitive” landscape by breaking up large firms and preventing mergers that could lead to market dominance. However, through the lens of creative destruction, this approach may be misguided and even counterproductive.

Schumpeter argued that temporary monopolies—far from being detrimental to innovation—could actually foster it. Large firms with significant market power, he contended, are often better-positioned to invest in long-term research and development, taking risks that smaller competitors cannot afford. The “monopoly” rents these firms enjoy provide both the incentive and the means to pursue groundbreaking innovations. By focusing solely on market concentration and short-term price effects, antitrust law may inadvertently stifle the very dynamism it allegedly seeks to promote.

Moreover, the Schumpeterian view suggests that market dominance is often transient, constantly threatened by the next wave of disruptive innovation. Today’s “monopolist” may be tomorrow’s obsolete relic, rendered irrelevant by a nimble startup with a revolutionary idea. Antitrust interventions, in this light, risk disrupting the natural cycle of creative destruction, potentially preserving inefficient incumbents at the expense of emerging innovators.

The historical record is replete with examples of industries transformed, not by government intervention, but by innovative outsiders who upended entire markets. From the advent of the automobile, which decimated the horse-drawn carriage industry, to the rise of e-commerce giants that revolutionized retail, the most significant advancements have come, not from regulatory tinkering, but from bold entrepreneurs willing to challenge the status quo.

It is against this backdrop of dynamic competition and creative destruction that we must view the European Union’s Digital Markets Act (DMA), a regulatory overreach that represents the apex of misguided interventionism. Far from fostering innovation or protecting consumers, the DMA threatens to calcify the digital economy, stifling the very forces that have driven unprecedented technological progress and consumer benefit.

The DMA’s fundamental premise—that large digital platforms must be constrained to ensure fair competition—is deeply flawed, which I have previously discussed. It assumes that bureaucrats in Brussels possess the omniscience to determine what constitutes “fair” in the rapidly-evolving digital landscape. This hubris is not just misplaced; it’s dangerous. By imposing a raft of ex ante regulations on so-called “gatekeeper” platforms, the DMA risks strangling innovation in its cradle.

The act’s prohibition on practices like self-preferencing betrays a profound ignorance of how digital ecosystems function. Integration of services and features is often the very mechanism by which platforms create value for consumers. By mandating artificial separations, the DMA could deprive users of beneficial synergies and efficiencies. The irony is palpable: in its quest to promote competition, the DMA may well reduce the quality and utility of digital services for millions of Europeans.

The DMA’s misguided approach is further exemplified by its insistence on interoperability between platforms. This requirement, far from promoting competition, threatens to homogenize digital services and stifle innovation. By forcing successful platforms to open their carefully-crafted ecosystems to competitors, the DMA undermines the very differentiation that drives progress in the tech sector. Interoperability may sound appealing in theory, but in practice it can lead to a race to the bottom in terms of features and security. It ignores the fact that closed ecosystems often provide superior user experiences and stronger privacy protections. Moreover, mandated interoperability can actually entrench dominant players by reducing switching costs and diminishing the incentive for users to seek out alternative platforms.

Perhaps most egregiously, the DMA’s one-size-fits-all approach to regulating “gatekeepers” fails to account for the nuanced and multifaceted nature of digital markets. Companies like Amazon and Google operate across diverse sectors, blending digital and physical realms in ways that defy simplistic categorization. Attempting to shoehorn these complex entities into rigid regulatory frameworks is an exercise in futility that can only result in unintended consequences and lost opportunities for innovation.

The DMA’s proponents claim to be protecting small businesses and potential competitors, but the reality is far more insidious. By imposing onerous compliance costs and operational restrictions on successful platforms, the act erects formidable barriers to entry for aspiring innovators. The result is a perverse form of regulatory capture, where established players are insulated from disruptive competition by the very rules meant to constrain them.

Furthermore, the DMA’s focus on preserving existing market structures fundamentally misunderstands the nature of technological progress. The most revolutionary innovations don’t just compete within existing markets, they create entirely new ones. By fixating on maintaining competition in current paradigms, the DMA risks missing the forest for the trees, potentially stifling the next generation of transformative technologies before they can even emerge.

The notion that regulators can anticipate and legislate for the future of technology is laughable on its face. If the brightest minds in Silicon Valley struggle to predict the next big technological breakthrough, what hope do bureaucrats have of crafting regulations that won’t be obsolete before the ink is dry?

The DMA represents a hubristic attempt to control the uncontrollable, to tame the wild forces of innovation that have driven human progress for centuries. As Ludwig von Mises has pointed out in Human Action: “If it were possible to calculate the future structure of the market, the future would not be uncertain. There would be neither entrepreneurial loss nor profit. What people expect from the economists is beyond the power of any mortal man.”

Proponents of the DMA, and antitrust regulation more broadly, often couch their arguments in terms of consumer protection and fairness. This is a smokescreen for what amounts to little more than economic central planning and/or cronyism by another name. The idea that consumers need protection from the very companies whose products and services they voluntarily choose to use is patronizing at best and authoritarian at worst.

In reality, the most effective protection for consumers is not regulation, but competition—not the artificial, managed competition envisioned by antitrust lawyers, but the dynamic, unpredictable competition, driven by creative destruction. It is this force that has given consumers smartphones, e-commerce, search engines, and countless other innovations that have transformed modern life. Each of these advancements came, not from government mandates or regulatory frameworks, but from the relentless pursuit of better products and services in a free market.

The path forward is clear, though it may be uncomfortable for those accustomed to the illusion of control offered by regulatory regimes. We must resist the siren song of antitrust law and reject misguided efforts like the Digital Markets Act (DMA) outright. Instead, we should embrace the dynamic, often chaotic process of creative destruction that has proven time and again to be the true engine of progress.

In conclusion, the concept of creative destruction exposes the fundamental flaws in both traditional antitrust law and modern regulatory efforts like the DMA. These interventions, far from promoting innovation and protecting consumers, serve only to impede the natural evolution of markets and technologies. The greatest threat to consumer welfare and economic progress is not alleged monopoly power or market concentration, but the heavy hand of regulation stifling the entrepreneurial spirit that drives innovation.

As we stand on the cusp of new technological revolutions in artificial intelligence, biotechnology, and beyond, the stakes could not be higher. Will we allow the forces of creative destruction to propel us into a future of unimaginable progress and prosperity? Or will we succumb to the fatal conceit of regulators who believe they can plan and control the unplannable? The choice is ours, and the consequences of that choice will reverberate for generations to come.