Why Not Regulation

by on August 24, 2006 · 16 comments

Prompted by the good discussion over on my recent ‘Lack of Competition’ Meme post, I’ve just spent some time looking over other posts here on TLF for articulation of why we seem to be so intransigent about net neutrality regulation.

I think it’s the consensus among TLFers that regulation is a poor way of getting the best delivery of bits to end-users. There are some good posts, but I couldn’t find the one or two that clearly show why we so prefer competition to regulation for solving this problem.

So here’s a quick summary of my thinking about why not regulation:


First, agencies and bureaucrats turn regulatory processes to their advantage, growing the size of their budgets and the scope of their authority without regard to actual need. This is an insight put forth by Cato Chairman Bill Niskanen in his book Bureaucracy and Public Economics. If you’re not versed in public choice theory–the general idea that politicians are self-interested actors just like you and me–you have to start there. Niskanen extended public choice to bureaucracies in this book–first published in 1971. (When I went to check the date with him just now, he modestly noted three books that preceded his, but his is the one I read first and his is the one that lead to broad acceptance of applying public choice to bureaucracies.) This dynamic creates a general tendency toward overregulation. There is concomitant sclerosis in competition because regulation raises barriers to entry, with new entrants unable to pay off the regulators (politically, socially, and otherwise).

Meanwhile, the incumbents in the corporate sector join the fray to turn regulation to their advantage. Companies lobby in Congress for amendments, and in the agencies for interpretations, that protect their interests. Their interests include fending off competitive new technologies, business models, and such. The economic literature calls it rent-seeking – extracting better than you could get in the marketplace by turning law and regulation in your favor. Here’s a good Jonathan Adler article on regulatory rent-seeking.

For fun, let’s apply this thinking to running a grocery store–a commercial enterprise, yes, but watch how self-interest works when you use bureaucratic decision-making!

Let’s say you were the manager of a local grocery store, part of a national franchise. You were thinking of stocking a new kind of potato. Following the Administrative Procedure Act, you would issue a notice of proposed rulemaking about the new potato. It would invite public comment on the idea of stocking the new type of potato, and query where it should be located in the store, perhaps price points, etc. should you determine to stock the potato.

Who would you hear from? The suppliers of russets, red potatoes, and maybe the instant potato people would definitely have something to say. Your customers, busy people unaware of the benefits or drawbacks of this new potato, would rationally not participate. Because of the threat to their business, the existing potato suppliers might also buy you lunch–or invite you to speak at a conference in, say, Aspen, Colorado–just to make sure that you are still a friend of their lines of potatoes.

Now, it’s true that your entire organization might benefit from selling the new line of potatoes, but you manage one store; your well-being isn’t actually affected by the entire franchise’s bottom line.

The arguments you hear, and the perks that come your way from incumbent suppliers, generally steer you away from bringing the new type of potato into the store. When you decide against this new, untested potato, a small increment of competition is lost, and a small benefit to consumers with it – though they are almost completely unaware of it.

Now, it’s very complicated to show how the twin dynamics of public choice and rent-seeking would work in places like the FCC if Congress gave it authority to write net neutrality regulation. And parties before the agency would never declare their self-interest so directly as to announce, “The provision of this new service would reduce the profits of our firm!” They would say things like “That way of doing business would be bad for consumers.”

And they don’t do all their work formally either. Over lunches, at parties, and down at the Capitol Grille, lobbyists help create an insular little hothouse for regulators and politicians in Washington, D.C. In the world they create, regulation looks very good and many dimensions of competition and innovation look very bad.

So, I can’t speak for my TLF colleagues, but hopefully this presents a decent summary of why we’re skeptics of net neutrality regulation. You don’t get what you ask for when you ask regulators to make things right.

Speaking of competition, people across the net neutrality debate agree that the solution to the problem is competition–and the current quality of competition is worthy to discuss. But I note with some dismay that, as of this writing, there are NO comments on my recent post about reforming spectrum policy.

I’m a lousy writer?! OK OK. True. But here is a deregulatory, property- and market-oriented approach to spectrum policy that would spur remarkable new competition and innovation. It would grow the pie, helping deliver new and diverse wireless services to consumers, including wireless broadband. Shouldn’t we be on this, TLF readers?!

We’re burning too much energy on net neutrality regulation, which is all about dividing up the small pie we’ve got.

  • http://webpages.charter.net/mad_prophet Mad Prophet

    Good explanation of the public source theory.

  • http://webpages.charter.net/mad_prophet Mad Prophet

    Good explanation of the public source theory.

  • http://www.telepocalypse.net/ Martin Geddes

    The spectrum policy document is OK within the oversimplified view of physics that prevails among the regulatory environment. However, a chat with the mesh folk at MIT will tell you that there’s no such thing as interference (the waves pass right through each other), just devices that aren’t smart enough to differentiate signals and co-operate with each other. This could lead to a radically different set of ownership rights more based on the equipment and its cooperative properties than on the largely false metaphor of spectrum.

  • http://www.telepocalypse.net/ Martin Geddes

    The spectrum policy document is OK within the oversimplified view of physics that prevails among the regulatory environment. However, a chat with the mesh folk at MIT will tell you that there’s no such thing as interference (the waves pass right through each other), just devices that aren’t smart enough to differentiate signals and co-operate with each other. This could lead to a radically different set of ownership rights more based on the equipment and its cooperative properties than on the largely false metaphor of spectrum.

  • enigma_foundry

    Regulation and Competition both have there places. Very few people, for example, that we should de-regulate Highways, and let people decide if they drive on the left or the right. Some markets are, in fact, almost entirely created by regulation, enforced by the government.

    All IP is like that-the owner gets a short term (or in the case of copyright, a too long term) monopoly on the production of an item. This limited time monopoly is enforced thorough laws of the state.

    So, for me, the internet, as a critical conduit of the economy and public discourse, deserve protection from monopolization and abuse by corporations.

    (I had previously posted a list of several corporate abuses of internet control, when net neutrality was not in effect. One of the examples was of an ISP that closed of access by its customers to the website of a labor union with which the company was having a labor dispute.)

  • http://tieguy.org/ Luis Villa

    This is a great explanation of why regulation, in general, is quite bad, Jim; I’ll be certain to point people to it in the future.

    But… (you knew that was coming ;) you write this as if in this particular case this is not already a heavily regulated and deeply flawed competitive space. Were network access a wonderful competitive utopia, of course this would be a terrible idea. But the lobbyists already control competition in this space. Special interests already threaten internet content (*cough*COPA*cough*).

    I guess in the end I find it very hard to believe that one additional layer of regulation would make the problem of government control significantly worse than it already is. I weigh that against a particularly onerous threat that I find quite plausible- a default-deny, cell-phone like network instead of a default-accept, current-gen internet network- and in this particular case I have to come down on the side of regulation.

    (And to follow up on the last post in the other thread, Jim, I’ve been at Columbia for… a week and a half. :) So, no, I haven’t taken admin law, though I also have a polisci degree, so I know at least a little bit about how deeply fucked our system is. My plan is to focus in corporate and IP law so as to do more bottom-up innovation (i.e., start a company), so I’m not sure if an admin law course will fit in, but I’ll definitely keep it in mind- thanks for the suggestion.)

    (Also, your search is slightly busted- I ran a search and got results… for draftnewt.org :)

  • http://enigmafoundry.wordpress.com eee_eff

    Regulation and Competition both have there places. Very few people, for example, that we should de-regulate Highways, and let people decide if they drive on the left or the right. Some markets are, in fact, almost entirely created by regulation, enforced by the government.

    All IP is like that-the owner gets a short term (or in the case of copyright, a too long term) monopoly on the production of an item. This limited time monopoly is enforced thorough laws of the state.

    So, for me, the internet, as a critical conduit of the economy and public discourse, deserve protection from monopolization and abuse by corporations.

    (I had previously posted a list of several corporate abuses of internet control, when net neutrality was not in effect. One of the examples was of an ISP that closed of access by its customers to the website of a labor union with which the company was having a labor dispute.)

  • http://tieguy.org/ Luis Villa

    This is a great explanation of why regulation, in general, is quite bad, Jim; I’ll be certain to point people to it in the future.

    But… (you knew that was coming ;) you write this as if in this particular case this is not already a heavily regulated and deeply flawed competitive space. Were network access a wonderful competitive utopia, of course this would be a terrible idea. But the lobbyists already control competition in this space. Special interests already threaten internet content (*cough*COPA*cough*).

    I guess in the end I find it very hard to believe that one additional layer of regulation would make the problem of government control significantly worse than it already is. I weigh that against a particularly onerous threat that I find quite plausible- a default-deny, cell-phone like network instead of a default-accept, current-gen internet network- and in this particular case I have to come down on the side of regulation.

    (And to follow up on the last post in the other thread, Jim, I’ve been at Columbia for… a week and a half. :) So, no, I haven’t taken admin law, though I also have a polisci degree, so I know at least a little bit about how deeply fucked our system is. My plan is to focus in corporate and IP law so as to do more bottom-up innovation (i.e., start a company), so I’m not sure if an admin law course will fit in, but I’ll definitely keep it in mind- thanks for the suggestion.)

    (Also, your search is slightly busted- I ran a search and got results… for draftnewt.org :)

  • http://www.cato.org/people/harper.html Jim Harper

    Thanks, Martin. I think the spectrum paper notes that the quality of transmitters and receivers “create” interference. That’s part of what makes spectrum rights less analogous to real property than most people believe. If only higher quality shoes could allow you to traverse physical space without trespassing . . . .

    Enigma, interesting. Do you think that people would drive every which direction if the law about driving on the right were lifted? Wouldn’t the great mass of people recognize their own interest in orderly traffic and drive by uniform standards? You and I are communicating using a highly developed protocol called “English” – under no legal compulsion to do so whatsoever! People don’t just flop around but for laws telling them what to do and what not to do.

    Luis, I didn’t mean to suggest that broadband is a competitive utopia. It’s not. Rather than allowing the current regulatory barriers to competition metastisize into net neutrality rules, though, my preferred solution is to lift the regulations that prevent full competition – and there are plenty. The paper on spectrum reform is an example of where you could move to a less regulatory model and enhance competition, leaping over the last mile problem with radio. But the FCC are sitting on their hands, enjoying their power and the fawning over them by incumbents.

    (You seem to have stumbled into saying, “It’s already screwed up so a little more regulation won’t make it that much worse,” and I doubt if you mean that.)

    Don’t know what you mean by the “search” comment. A search on TLF points you to draftnewt? Searching for me on Google gets you to draftnewt? Whatever the case, I apologize that you had to experience that, and I hope you have a strong stomach. )

    First-year of law school – Fun! After I got out of law school (Hastings), I had to teach myself federalism and separation of powers. Question authority.

  • http://www.cato.org/people/harper.html Jim Harper

    Thanks, Martin. I think the spectrum paper notes that the quality of transmitters and receivers “create” interference. That’s part of what makes spectrum rights less analogous to real property than most people believe. If only higher quality shoes could allow you to traverse physical space without trespassing . . . .

    Enigma, interesting. Do you think that people would drive every which direction if the law about driving on the right were lifted? Wouldn’t the great mass of people recognize their own interest in orderly traffic and drive by uniform standards? You and I are communicating using a highly developed protocol called “English” – under no legal compulsion to do so whatsoever! People don’t just flop around but for laws telling them what to do and what not to do.

    Luis, I didn’t mean to suggest that broadband is a competitive utopia. It’s not. Rather than allowing the current regulatory barriers to competition metastisize into net neutrality rules, though, my preferred solution is to lift the regulations that prevent full competition – and there are plenty. The paper on spectrum reform is an example of where you could move to a less regulatory model and enhance competition, leaping over the last mile problem with radio. But the FCC are sitting on their hands, enjoying their power and the fawning over them by incumbents.

    (You seem to have stumbled into saying, “It’s already screwed up so a little more regulation won’t make it that much worse,” and I doubt if you mean that.)

    Don’t know what you mean by the “search” comment. A search on TLF points you to draftnewt? Searching for me on Google gets you to draftnewt? Whatever the case, I apologize that you had to experience that, and I hope you have a strong stomach. )

    First-year of law school – Fun! After I got out of law school (Hastings), I had to teach myself federalism and separation of powers. Question authority.

  • http://tieguy.org/ Luis Villa

    More on the rest later, but literally, I searched for something (don’t remember what) using the search bar on the main TLF page, and the results page was titled ‘draftnewt.org’ :) Works today, though. (I guess pjdoland.com co-hosts draftnewt as well as you guys and some wires got crossed somewhere?)

  • http://tieguy.org/ Luis Villa

    More on the rest later, but literally, I searched for something (don’t remember what) using the search bar on the main TLF page, and the results page was titled ‘draftnewt.org’ :) Works today, though. (I guess pjdoland.com co-hosts draftnewt as well as you guys and some wires got crossed somewhere?)

  • http://bennett.com/blog Richard Bennett

    Martin says: “However, a chat with the mesh folk at MIT will tell you that there’s no such thing as interference (the waves pass right through each other), just devices that aren’t smart enough to differentiate signals and co-operate with each other.”

    This question-begging assertion assumes that interference can only be caused by something that can’t cause it. In the real world, the issue with interference is much broader than these naive theories about it. Waves undergo multipath distortion, couple with waves from non-radio sources, undergo various types of fading, and couple with similar waves from different sources.

    The real issue with spectrum management has to do more with the ability of real equipment to extract bits from real signals than with any sort of effect that waves have on each other. If bits are encoded on waves from different sources that encode bits the same way, extracting them becomes impossible with the kind of decoders we can actually implement in the real world today.

    Here’s a very simple example. Two devices are transmitting in a location such that a third device receives signals from both of them. In this system, 1 bits are encoded as a high energy pulse, and 0 bits as a low energy pulse. The first transmitting device sends high-low-high at the same time that the second device sends low-high-low. The receiving device receives high-high-high.

    While there certainly are more sophisticated ways of encoding bits, as long as the two transmitters use the same method your receiver has a problem.

  • http://bennett.com/blog Richard Bennett

    Martin says: “However, a chat with the mesh folk at MIT will tell you that there’s no such thing as interference (the waves pass right through each other), just devices that aren’t smart enough to differentiate signals and co-operate with each other.”

    This question-begging assertion assumes that interference can only be caused by something that can’t cause it. In the real world, the issue with interference is much broader than these naive theories about it. Waves undergo multipath distortion, couple with waves from non-radio sources, undergo various types of fading, and couple with similar waves from different sources.

    The real issue with spectrum management has to do more with the ability of real equipment to extract bits from real signals than with any sort of effect that waves have on each other. If bits are encoded on waves from different sources that encode bits the same way, extracting them becomes impossible with the kind of decoders we can actually implement in the real world today.

    Here’s a very simple example. Two devices are transmitting in a location such that a third device receives signals from both of them. In this system, 1 bits are encoded as a high energy pulse, and 0 bits as a low energy pulse. The first transmitting device sends high-low-high at the same time that the second device sends low-high-low. The receiving device receives high-high-high.

    While there certainly are more sophisticated ways of encoding bits, as long as the two transmitters use the same method your receiver has a problem.

  • http://www.wetmachine.com/totsf Harold Feld

    As with many things, it becomes a trade off on what do you fear more.

    Public choice theory is important, but so is the predictable behavior of profit seeking firms in markets with limited competition and where the market is subject to consumer lock-in based on network effects and switching costs.

    Given that we have had about 30 years of regulation of the internet and the networks that carry that traffic, and it produced excellent results, I prefer to risk the dangers of regulatory capture to the certainty of rent-seeking behavior by quasi-monopolists. Also, others have pointed out, we are now (with experation of the “phase in” period from last years dereg order) entering a world of intrusive government mandates like CALEA (supported by incumbents because they impose costs on new entrants and small competitors) with no restraint on the ability of dominant firms to exercise market power on upstream providers and downstream customers.

    If you are curious in a general rebuttal of the argument that public choice theory demonstrates that regulation is invairiabley worse, please see my post “Outsourcing Big Brother” at http://www.wetmachine.com/totsf/item/440

  • http://www.wetmachine.com/totsf Harold Feld

    As with many things, it becomes a trade off on what do you fear more.

    Public choice theory is important, but so is the predictable behavior of profit seeking firms in markets with limited competition and where the market is subject to consumer lock-in based on network effects and switching costs.

    Given that we have had about 30 years of regulation of the internet and the networks that carry that traffic, and it produced excellent results, I prefer to risk the dangers of regulatory capture to the certainty of rent-seeking behavior by quasi-monopolists. Also, others have pointed out, we are now (with experation of the “phase in” period from last years dereg order) entering a world of intrusive government mandates like CALEA (supported by incumbents because they impose costs on new entrants and small competitors) with no restraint on the ability of dominant firms to exercise market power on upstream providers and downstream customers.

    If you are curious in a general rebuttal of the argument that public choice theory demonstrates that regulation is invairiabley worse, please see my post “Outsourcing Big Brother” at http://www.wetmachine.com/totsf/item/440

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