More on net neutrality

Thought-provoking piece here by Aaron M. Renn of the Manhattan Institute.

I don’t agree with some of his conclusions here. Namely, that Congress and the FCC should immediately launch investigations into the censoring practices of Silicon Valley social media giants, which cut off the public’s access to content that they find politically objectionable.

We technically have no right to see certain types of information. Nor do we have to use Facebook or Google. Nor should we expect that these platforms (or any platforms) ensure we only see true, unbiased, factual information when browsing. It’s up to us to be informed—it’s not Facebook’s or Google’s job. We shouldn’t trust them, or anything else, so much.

(On that note, this is why I think Trump is, perhaps unknowingly, doing us all a favor by calling everything “fake news.” The fact is, there is a lot of fake news out there, and I think were were and are all just too fascinated by the speed and availability of information on the internet to stop and wonder whether what we’re reading is true. Much of it is simply false.)

But the bigger issue that this article raises is the almost arbitrary standard we use to determine whether something is a “public utility,” or simply ubiquitous enough that it should be governed by bureaucrats, not by owners.

Yes, “natural monopoly” is supposed to that standard. But that’s an absurd concept. I realize it’s an accepted notion among the vast majority of economists, but count me in the minority (here’s some reading on that).

Aside from that, it’s becoming clear that the day is nigh when policymakers push to turn Facebook and Google (and other similar tech/information platforms/networks) into what amounts to “public utilities,” with the goal of regulating them to be “neutral” in the way these tech giants want ISPs to be neutral. They’re certainly ubiquitous enough. But they are decidedly NOT “natural monopolies.”

This very article advocates such regulation in the last paragraph (though I don’t agree).

But of course, these companies would oppose that. Because they built these services, not the government. They should make their own rules.

That said, it’s wrong to assume that big companies like Facebook, Google and Comcast will always oppose policies that hamper their freedom to set prices and their freedom, generally. It’s a trade-off. If it means further weaving themselves into the public infrastructure, even at the expense of short-term profits, they may push for strategic regulations on themselves—especially ones that create permits and licenses that boost barriers to entry in their industries.

Think hypothetically: Comcast may one day decide to advocate for net neutrality (that is, for regulating itself) if it means they in turn become an “endorsed” provider of information—that only they are allowed to deliver internet because they are “licensed” and abide by the government’s rules. This kills their competition by boosting barriers to entry for their competition. It’s called “regulatory capture.”

This issue is complicated. It’s not just about “neutral” ISP.

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.

Me on net neutrality

If you’re like most people, you’re hearing a lot about net neutrality but know almost nothing about it. It has something to do with the internet. President Obama likes it. Republicans don’t seem to get it, but they don’t like that Obama likes it.

That was me a few weeks ago. Then I read up on net neutrality, and now I’ve written a piece at Enhancing Capital that (I hope) familiarizes people with net neutrality and helps put the issue in some context. I also offer some advice for investors who might have positions in some stocks whose performance could be affected—namely, that both ISPs (like Comcast and Verizon) and large web content owners (like Netflix and Google) could see some volatility in the coming weeks and months, as net neutrality is approved by the FCC (which is quite likely), is fought by Republicans in Congress (also likely), and reveals its true nature (whether it will be a game-changer for the internet as we know it).

I’m not a big fan of net neutrality. I understand its proponents’ arguments and their fear that big, powerful ISPs “colluding” with big, powerful content owners could stifle competition. But I don’t like government meddling in markets, and frankly it only makes sense to me that barriers to entry become higher as an industry gets older. Trying to prevent this from happening will, I think, have some unfortunate consequences.

A note on “net neutrality”

I don’t know much about the ongoing net neutrality debate (which I gather is to end when the FCC passes new rules this month), but it appears to me that a major reason behind the FCC’s push for “net neutrality” is a general complaint that internet service providers (ISPs), which often face little competition in the regions where they operate, treat customers poorly and charge too much. That ISPs have “natural monopolies” that allow them to rake in profits without improving service to customers.

(For those who don’t know, “net neutrality” basically turns the internet into a public utility by regulating ISPs like providers of other utilities (like electricity, water, etc.)

But by what standard are we judging the way ISPs treat customers? Who is to say that they are making too much or offering too little? If we’re paying too much for internet service now, then what should we be paying? How are we to know a fair price for internet service without a market for internet service?

I understand that ISPs may have gained certain privileges in the past from the government that may have given them unfair advantages. But is the solution to end the market for internet service altogether?

This reminds me of one aspect of the socialist calculation debate, whereby Austrian economists (among others) revealed the self-destructive nature of socialism. One pillar of their argument (and I’m simplifying here) is that without a market to study and observe, central planners will not know what prices to mandate for what goods. The result will be the production of too much or too little of regulated goods–distortive resource misallocations that result in excess supply and/or demand.

Again, I don’t know much about net neutrality. Read my comments in light of better analyses, like this one featuring Tech Freedom president Berin Szoka.