With this watershed event, investors questioned why they should finance the expense of technology start-ups at enormous risk if, as soon as the day is won, the government makes it impossible to reap the full benefits. All of this highlights a dynamic that can motivate broad swings in both equity prices and the economy. Investors must be willing to take risks to finance the economy's growth. Investors will take outsized risks as long as they believe that they will reap outsized returns. When expectations are high that these returns are achievable, financing is amply available, and the economy grows rapidly.
Financing thus flows less freely, and the economy's growth weakens.
When investor confidence is completely lost, a recession ensues. A growing understanding of this dynamic has resulted in increasing criticism of the Justice Department's recent efforts. Critics argue that policymakers should refrain from any further action so that the equity market and the economy's growth can be re-ignited. While various members of the administration likely have some sympathy for these arguments, they will not, nor should they, prevail. The overriding principle guiding the conduct of antitrust policy is that the policies pursued should result in the least economic damage if they ultimately turn out to be wrong.