American capitalism just got a black eye

Sorry to intrude on your inbox again today, but I thought you’d like to know why the stock market tanked this morning.

Late last week, a little-known Chinese artificial intelligence start-up called DeepSeek revealed that it had come up with more advanced AI than America’s Big Tech companies, and at a tiny fraction of the cost — even without access to America’s advanced chip technology.

To add insult to injury, DeepSeek has made its technology “open source” — that is, available to everyone.

The lesson here is that Microsoft, Amazon, Meta, and Google became too big, fat, and musclebound to remain sufficiently innovative. Instead of out-of-the-box invention, they specialized in marginal improvements.

By contrast, Chinese tech corporations compete fiercely with each other. This has put them on the cutting edge — and is why China has been able to come up with startling innovations (not only in AI but in electric vehicles, batteries, even TikTok, and much more).

China’s secret sauce hasn’t been big subsidies from the Chinese government creating giant “national champions.” It’s been intense competition.

Lina Khan, Biden’s chair of the Federal Trade Commission — who sued Big Tech for monopolizing the market — correctly pointed out last March that the United States could not stay on the cutting edge by relying on giant “national champions.”

These days, the “national champions” argument often gets made in the context of our dominant tech firms. We often hear that pursuing antitrust cases against or regulating these firms will weaken American innovation and cede the global stage to China. These conversations often assume a Cold War-like arms race, with each country’s firms in a zero-sum quest for dominance…
History and experience show that lumbering monopolies mired in red tape and bureaucratic inertia cannot deliver the breakthrough technological advancements that hungry startups tend to create. It is precisely these breakthroughs that have allowed America to harness cutting-edge technologies and have made our economy the envy of the world. To stay ahead globally, we don’t need to protect our monopolies from innovation—we need to protect innovation from our monopolies. We need to choose competition over national champions.

So what happened to the stock market this morning?

Much of its recent valuation has been based on gigantic bets on artificial intelligence — in which big tech has been investing hundreds of billions of dollars in data centers and energy capacity it assumed it needed to get to the next generation of AI.

Wrong.

America is going to have to rethink our entire approach to technology. We may also have to rethink our approach to capitalism.

Robert Reich is a professor of public policy at Berkeley and former secretary of labor. His writings can be found at https://robertreich.substack.com/.