Contract and Competition: the Microsoft Example

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critics are looking for a way to explain Microsoft’s incomparable
success in the market, but without having to acknowledge the obvious
fact of voluntary consumer choice, which is a capitalistic principle.
They hate Microsoft, but they also say they love free market competition,
so in order to justify their hatred, they blame the government
for Microsoft’s success. “Monopoly!” they cry. “Government-created

the way, I am receiving two opposing arguments from Linux cult
members. (1) Linux is not free of charge; companies sell it; you
can buy support from these companies. (2) Linux is free, so Microsoft
is doomed because of price competition. To the first group, I
ask: Why would any typical user of Windows pay money to switch
to unknown Linux, sold by an unknown little company, instead of
paying to upgrade his familiar Windows? To the second group, I
ask: Why should millions of users switch to a program that is
not supported locally in repair shops, where most of us get our
computer problems solved, the way we get our Windows-based systems


are not protected comprehensively in the modern world. This is
because the State’s agents know that the full right of contract
would create multiple and permanent private institutions that
could operate without being beholden to legislators and bureaucrats.
Think of zoning laws. They are passed because courts refuse to
enforce “restrictive covenants,” meaning restrictive contracts.

If contracts
were consistently and comprehensibly enforceable in the courts,
Microsoft could develop a new piece of software and authorize
no one use its property who did not agree to abide by the terms
of the contract. Microsoft could write the contract so that its
property — code — would be fully protected. This is
true of any producer of any product.

You may
think I’m exaggerating, that nobody would argue this way. Here
is a letter from Paul.

You won’t
find any Biblical basis for IP and it in fact violates real
property. You are usually clear and right on these kind of things,
but I’ve read conflicting things from you on this. Perhaps an
unsettled conscience? Mine is clear and settled since I dealt
with the moral issues based on prayer and the Word of God: file
sharing is doing freedom a favour and downsizing oversized businesses
built upon violent threats of government force over property
that no longer rightfully belongs to them is good (so is prudence
of course!)

In practice,
other OS’es and ‘piracy’ are a residual market force that keep
microsoft on its toes so it does the job reasonably well. But
who can tell what would have developed without IP laws in a
real market? . . .

You are
right about market share and linux user friendliness right now.
This is to do with the corporate/feudal/fascist form of capitalism
that prevails. It affects everything including marketing and
the free flow of good advice, and has relegated other Os’es
to niche markets, for now, and the impetus for user friendliness
is reduced.

To explain
his attitude, I refer back to a political and judicial battle
over property rights and contract law in the United States: the
civil rights movement.


In the 1960s,
protestors in the South went into restaurants and luncheon counters
and refused to leave when asked to leave. These were called sit-ins.
This was a flagrant violation of property rights. Signs on the
walls announced, “We reserve the right to refuse service to anyone.”
Those signs were not enforced by the courts. They have been made
illegal by federal law today.

I would
have driven a free jitney in Birmingham in 1956 to take blacks
to and from work as a protest against the tax-funded municipal
bus line that refused to let all paying customers sit where they
wanted, and when a local law against for-profit cabs was enforced
to keep bus-boycotters from getting to their destinations. I would
have done this because I favor the free market. I don’t like municipal
bus lines and cab licensing because these are violations of the
principle of voluntary contract. I would have bowed out when the
sit-ins began for the same reason.

The right
of a restaurant owner not to do business with anyone he chose
not to do business with should have been legally enforceable.
The right of a Birmingham protestor to do business with an unlicensed
for-profit provider of transportation services should have been
equally enforceable. Both of these rights stem from the same right:
the right of voluntary contract.

The sit-in
organizers violated this right as surely as the Birmingham city
council violated it. The right of an unlicensed cabbie to say
“get in” is as valid as the right of a restaurant owner to say
“get out.” But both sides saw color as the basis of right, and
therefore as the basis of legislation. Blacks had to sit in the
back of the tax-funded buses, despite the fact that they paid
the same fare, and no one was allowed to offer an alternative
for profit. Blacks were allowed to sit at a counter after being
asked to leave, and the courts would not enforce their forcible
removal. Southern whites cheered for one violation of property
rights (sit-backs) and booed against the other (sit-ins). Blacks
and white agitators did the same cheering and booing, but reversed
the categories.

Think of
Lester Maddox, with a baseball bat on the wall, and a sign, “We
reserve the right to refuse service to anyone.” I would not have
been one of Mr. Maddox’s customers. I don’t approve of racism.
I would have protested his refusal to serve blacks by withholding
my money. But I would have voted for him for Governor of Georgia
for the sake of that sign and that baseball bat. Racism is bad,
but the violation of property rights is worse. Racism can be dealt
with by the victims through increased productivity, as Japanese
Americans proved after World War II. The honoring of contracts
is the best possible way to overcome racism. “Your money is good
here” are among the most anti-racist words on earth.


My critic
invokes a mantra of the anti-corporation Left. He uses knee-jerk
Leftist rhetoric: feudal (we all hate feudalism, right?) and fascism
(bad stuff, right?).

For those
of you who are confused about corporation law, let me present
a simplified example of what is at stake. You join a church. You
donate to the church. You benefit from being a member of the church.
If the church gets sued, and the courts convict the church, and
the church is forced to sell its property to pay off the plaintiff,
should the plaintiff also have the right to take everything you
own, too, just because you are a member of the church?

No? Why
not? You reply, “Because I am not responsible for what the Board
of Trustees or the pastor did on behalf of the church.” I agree
entirely. Fortunately for the success of the church, so do most
legislatures and the courts. So far. If limited liability protection
is valid for church members, why is it invalid for investors in
corporations? What is morally wrong with the concept of the limited
liability corporation? What is wrong with contract law that would
allow the following provision in a contract? “In doing business
with this organization, I hereby surrender my right to sue investors
in this corporation for acts of the Board of this corporation.”

of the corporation, some of whom are anti-capitalists to the core
of their being, despite their verbal affirmation of the free market,
do not understand the rise of the modern corporation. The legislatures’
creation of limited liability protection was a formal transfer
to business entities of the principle of limited liability church

Here is
what was wrong with corporation law in the late nineteenth century:
limited liability protection was granted by legislatures only
to the favored few. It should have been available, as it is today,
to anyone who would write a limited liability clause into the
corporate by-laws and fill out boilerplate forms.

It is not
the corporation as such that is evil. What was evil, a century
ago, was state legislatures’ monopolization of the right to grant
such limited liability protection to a business. The state should
have allowed the courts to enforce contract law, which could easily
have established limited liability protection for any privately
funded entity.

Murray Rothbard
once quipped that Ayn Rand hated God more than she hated the State.
I get the distinct impression that a hard core of anti-Microsoft
libertarians hate Bill Gates more than they hate the State.


An excellent
test of a person’s commitment to a principle is his willingness
to accept his worst enemy’s success by honoring that principle.
As Moses put it, “One law shall be to him that is homeborn, and
unto the stranger that sojourneth among you” (Exodus 12:49). This
is the rule of law. Without it, legal predictability dies and
tyranny is secured.

29, 2004

North [send him mail]
is the author of Mises
on Money
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