My economic critique of “net neutrality” from a high-level, Austrian perspective

Though the motives of net neutrality advocates differ, the most common motive seems to be a general belief that internet service providers (ISPs) face no serious competition, and therefore overcharge customers and generally treat customers poorly. In other words, ISPs have “natural monopolies” that allow them to rake in profits without improving service to customers or dealing with different customer-types in an equitable manner.

This perspective gave rise to “net neutrality,” which the FCC approved a few years back. This measure essentially transforms the internet into a public utility by regulating ISPs like other utilities (electricity, water, etc.). For convoluted reasons, regulators believe this will improve internet service is distributed equitably among all who are willing to pay the going rate—no more “special favor” for major players who can afford to crowd out smaller, less capitalized firms.

Underlying this perspective is the belief that we can decipher, in some way, the level of service that ought to be offered on the market. Regulators examine the ISP market and decide, on some grounds, that what exists ought to be differently, and that such a change can only come about through government regulation.

But by what standard are regulators judging ISPs to be acting unfairly? Who can say they are making too much or offering too little? Sure, internet service, as the technology has evolved, bears some similarity to public utilities like water and electricity, but it is not the same service.

More specifically, how can we know what ISPs ought to charge?

Some argue that ISPs have obtained special regulatory favors in the past that positioned them to build unfair monopolies in the present. That’s another argument entirely that, frankly, isn’t often made by regulators. But even if that were true, is the solution to end the market for internet service altogether, and opt instead for a pseudo-market whose bounds and limits are controlled, ultimately, by government regulators?

This brings to mind one aspect of the socialist calculation debate, whereby Austrian economists (among others) revealed the self-destructive nature of socialism. One pillar of their argument—Mises’, specifically—is that without a market to study and observe, central planners will not know what prices to mandate for what quantities of goods. The result will be over- or under-production of regulated goods—distortive resource misallocations that ripple throughout the economy and cause excess supply and/or demand.

It is not hard to see how this applies to net neutrality and regulating ISPs. By arbitrarily changing existing markets for internet service, regulators risk corrupting the fragile preconditions necessary for firms and consumers to calculate rationally. The result could be excess demand in the market for internet service if regulations force prices too low, or excess supply if regulations force prices too high. What’s worse, however, is that either way, market players will have no way to know whether related resources are being used toward their most highly-valued end.

This is not a complex point, but it’s important in this particular context, given the importance of internet service in modern economies. A more subtle but equally applicable point has to do with the nature of change in a dynamic world. In a sense, this is a more formal restatement of the problem with comparing market conditions to some model rooted in a concept of the economy as rotating in some static equilibrium. Peter Boettke explains:

Mises [explained] how the static conditions of equilibrium only solved the problem of economic calculation by hypothesis, and that the real problem was one of calculation within the dynamic world of change, in which the lure of pure profit and the penalty of loss would serve a vital error detection and correction role in the economic process.

In the context of the issue at hand, this is particularly consequential. The market for internet service is brand new and growing and evolving quickly. To decide, in a market as young and dynamic as this, that prices are not fair reveals a great degree of confidence in “hypotheses,” as Boettke puts it, about what the ideal market for internet service would look like.

QOTD: Peter Boettke

Peter Boettke writing today at Coordination Problem:

We live in an imperfect world populated by very imperfect individuals muddling through with the aid of various institutions, such as those of involved in financial intermediation. The system if based on the rule of law and freedom of contract, will be smarter than any of the individuals that utilize it. Property, prices and profit/loss incentivize, provide guiding signals, and the critical learning feedback so that savings of some will be allocated toward productive investment projects by others. There simply is no alternative to generalized prosperity than through a vibrant capital market.

The idle rich are never really idle is a free market economy.