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The Meaning of the Government’s Proposal
to Break Up Microsoft*


George Reisman**

            The meaning of the government’s proposal to break Microsoft into two separate companies, the one confined to producing Windows, the other confined to producing application software, is that one or the other of these two major branches of personal computer software is to be closed to the productive genius of America’s most successful software innovator: Bill Gates. As The New York Times reports, “Under the government plan, Mr. Gates, the company’s chairman, would have to choose one of the two companies and divest  himself of any financial interest in the other.” (April 29, p. B4.) In other words, Gates is to be prohibited from producing and competing either in a major area which he has been responsible for creating from the ground up, namely, Windows,  or in an area which he has been responsible for advancing beyond what other suppliers had achieved, for example, word processing and spreadsheet software.

            Thus, in the name of freedom of competition and the combating of monopoly, Gates’s freedom of competition is to be blatantly violated and one or the other of the two branches of software is to be monopolized against him—i.e., it is to become an industry, or part of an industry, reserved by means of the government’s initiation of physical force, to the exclusive possession of others.

All branches of software production are to be open to everyone, except to Gates (and also, as The Times reports, his two most important associates, Steven Ballmer, the current president of Microsoft, and Paul Allen, its co-founder.) The result is that freedom of competition in software is to apply to everyone except to those with the ability to revolutionize software. It is though the automobile industry were to be legally open to everyone except to Henry Ford. Or the electric power industry were to be legally open to everyone except to Thomas Edison.

What underlies such an incredible outcome is the utterly mistaken belief that overwhelming competitive success, to the point that one man or one company dominates an entire industry, constitutes monopoly. This, of course, is the kind of success that  Gates and Microsoft have enjoyed.

The fact is that such an outcome of free competition is not monopoly. But it is monopoly when those capable of bringing about such an outcome are forcibly excluded from an industry, or any part of an industry. The accompanying forcible reservation of an industry or part of an industry even to a mass of less capable producers is the real monopoly, as much as if the industry had been forcibly reserved to the possession of one man or one company. The essential element in monopoly is forcible exclusion and forcible reservation, not the number of producers.

            The destructive nature of the government’s proposed breakup of Microsoft is further indicated by one of the major reasons for advancing it. Namely, what The Times article describes as “A requirement that Microsoft share with other companies any technical information about Windows, including software interfaces that the system engineers are sharing with other people at Microsoft.”

            What this refers to is the fact that an important reason that Microsoft’s application software is so often better than that of others is that Microsoft, as the creator and proprietor of Windows, has greater access to and knowledge of Windows than its competitors. This gives Microsoft an important competitive advantage when it comes to producing applications that run under Windows, because it knows better how to integrate them with Windows.

            What the government does not see, and what Microsoft’s unsuccessful competitors apparently to do not care to realize, is that this competitive advantage that Microsoft enjoys in application software was a major reason for its having developed and improved the Windows operating system in the first place. The prospect of profits from application software is a powerful motive for improving operating system software. But it is such a motive only when the producer of the operating system is free to produce application software too. Only then can he directly and most substantially profit from the resulting improvements in the application software.

            It follows, of course, that to break up Microsoft must undermine the incentives of the surviving Windows portion to continue to innovate. For it will not be in a position directly to profit from any major new applications that can be based on those improvements. That will be the monopoly privilege of others.

At the same time, the surviving applications portion of Microsoft will be deprived of the benefits it would have derived from a free and motivated Windows division.

Of course, the supporters of the government’s proposal expect that once others have the same access to Windows that Microsoft now has, those others will be in a position to produce and innovate more effectively. Indeed, they will—in the same way that buggy makers and gas companies would have had greater ability to innovate if they had not been put out of business by Ford and Edison or if they had been in a position to forcibly appropriate the advances made by those great innovators as of the mid-point of their careers.

The consumers of computer software need the freedom of Bill Gates and Microsoft to produce and innovate in any branch of computer software they choose. That is, they need for them to enjoy the full, unbreached freedom of competition. They do not need the hobbling of this man by the breakup of his company, which would serve only to reduce the efficiency of both surviving parts and provide monopolistic protection  to less capable producers, whatever their number.

*Copyright © 2000 by George Reisman. All rights reserved.

**George Reisman, Ph.D., is professor of Economics at Pepperdine University’s Graziadio School of Business and Management and is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996). 

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