What the Oil Spill Really Says About Net Neutrality: Regulatory Capture v. the Nirvana Fallacy

by on June 9, 2010 · 18 comments

A diverse group of technology companies including broadband, video and wireless providers as well as Google, Microsoft and hardware giants like Intel and Cisco today launched the  Broadband Internet Technical Advisory Group (BITAG or TAG) to provide exactly the kind of self-regulatory forum for dealing with concerns about network management practices that we at PFF have long called for—most recently in Adam Thierer and Mike Wendy’s recent paper, “The Constructive Alternative to Net Neutrality Regulation and Title II Reclassification Wars.” But rather than applauding BITAG, the regulatory radicals at Free Press insisted that:

this or any other voluntary effort is not a substitute for the government setting basic rules of the road for the Internet.

Swansong of an Industry?

There must be a separate FCC rulemaking process, which can take the recommendations of this or any other voluntary advisory group into account, but rubber-stamping those recommendations would ignore the agency’s mandate to create public policy in the public interest. Allowing industry to set its own rules is like allowing BP to regulate its drilling. The Comcast BitTorrent case shows that without government oversight, Internet Service Providers will engage in what are already deemed by engineers to be bad practices

Free Press certainly wouldn’t have the influence they do if they weren’t so good at picking metaphors. But what does the oil spill really teach us about regulation? The Wall Street Journal notes the growing outrage on the political Left against president Obama from those who are “furious and frustrated that the President hasn’t demanded the heads of BP executives on pikes.” But the Journal points out the central irony of the situation:

The [so-called] liberals’ fury at the President is almost as astounding as their outrage over the discovery that oil companies and their regulators might have grown too cozy. In economic literature, this behavior is known as “regulatory capture,” and the current political irony is that this is a long-time conservative critique of the regulatory state….

In the better economic textbooks, regulatory capture is described as a “government failure,” as opposed to a market failure. It refers to the fact that individuals or companies with the highest interest or stake in a policy outcome will be able to focus their energies on politicians and bureaucracies to get the outcome they prefer.

Our friends at EFF have a soft spot for “net neutrality,” but are also savvy enough to realize the dangers of giving the FCC that kind of power, largely because “Experience shows that the FCC is particularly vulnerable to regulatory capture.” The master historians of regulation Alfred E. Kahn, himself a “progressive” Democrat explains why:

When a commission is responsible for the performance of an industry, it is under never completely escapable pressure to protect the health of the companies it regulates, to assure a desirable performance by relying on those monopolistic chosen instruments and its own controls rather than on the unplanned and unplannable forces of competition. […] Responsible for the continued provision and improvement of service, [the regulatory commission] comes increasingly and understandably to identify the interest of the public with that of the existing companies on whom it must rely to deliver goods.

This is true both for the much-vilified Minerals Management Service and the Federal Communications Commission. So when Free Press dismisses BITAG for falling short of their ideal of the omniscient, omnipotent and yet incorruptible regulator who will, like Solomon, pass judgment on the sins of “digital Israel” (online intermediaries), separating the wheat (“beneficial” network management) from the chaff (“harmful” network management) without playing favorites or reducing the bounty of future harvests (the cornucopia of innovative services and content delivered to Internet users), they are committing the classic “Nirvana fallacy,” which the great economist Harold Demsetz first named in 1969:

The view that now pervades much public policy economics implicitly presents the relevant choice as between an ideal norm and an existing ‘imperfect’ institutional arrangement. This nirvana approach differs considerably from a comparative institution approach in which the relevant choice is between alternative real institutional arrangements.

In other words, given the reality of regulatory capture, especially at the FCC, the choice is not between the regulatory paradise  imagined by Free Press—a land where the digital “milk and honey” runs freely and investment never dries up no matter how heavy the burdens of regulation—and a digital dystopia in which companies collude with each other to thwart consumer choice.

The Garden of Earthly Delights, Hieronymus Bosch (c. 1450–1516)

No, the real choice is between:

  • The “mutually assured destruction” made inevitable by the sweeping, prophylactic neutrality regulations Free Press demands, because tech giants will use their political sway over the FCC to turn even the best-intention regulations to weapons against their competitors. (Think: “You the FCC want to regulate my network? I’ll get the Chairman to regulate your [search engine, API, social neworking site]!” How do you like them apples?“) OR
  • An evolving “institutional arrangement” in which companies with very different interests try to work out difficult questions of network management in a way that makes rational use of scarce resources, promotes investment and encourages innovation at the “core” of networks without stifling innovation at the edge of networks among the content and service providers so cherished by Internet users.

The former is essentially what happens when regulatory fantasies meet the real world of lobbyists and the limits and incentives inherent in any bureaucracy, as Tim Lee explained in his classic 2008 Cato paper The Durable Internet: Preserving Network Neutrality without Regulation. The latter is essentially what BITAG represents—not a perfect solution to all disputes about network management, but a giant step in an ongoing process of self-policing. If given the chance, BITAG cold evolve over time into a sophisticated system for the private production of “law” governing disputes between online operators whose great virtue would be the flexibility and nimbleness necessary to keep up with a rapidly changing technological landscape.

But not if Free Press has their way! No, we must trust in the Solomons of the FCC, who will be protected from corrupting corporate influences by ever-higher walls of ethical rules and whose purest of motives would never allow even a moment’s consideration of so base a concern as the number of windows in their office, the size of their staff, or the extent of their powers. (Never mind the FCC’s recent regulatory frenzy!) After “Change” has transformed all the land, and caused the lobbyist lion to lay down with the consumerist lamb, and we have fully “immanentized the eschaton,” regulatory capture will become a thing of the past—along with, no doubt, greed, ugliness, and even those annoying headaches you get from eating ice cream too fast! As Free Press has willed it, so let it be done! And 1000 generations of curses unto anyone who questions whether this Neutrality Nirvana is actually possible!

Such is the view of  what Adam Smith called the “man of systems,” who is:

apt to be very wise in his own conceit, and is so often enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests or to the strong prejudices which may oppose it: he seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board; he does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might choose to impress upon it.

The Sage of Scotland

Smith was hardly naive about the potential abuses of business, famously remarking: “People of the same trade seldom meet together even for merriment and diversion, but the conversation ends in a conspiracy against the public or some contrivance to raise prices.” But that’s essentially the point of regulatory capture: It’s just how things work, so the best we can do is to allow evolution of Demsetz’s “institutional arrangements” that do a better job than government would at dealing with problems. (And BITAG’s members are hardly “of the same trade” anyway, including companies on opposite side of the net neutrality wars who can hardly stand each other.) If Smith were still alive today—telecommuting from a coffee shop in Glasgow on his iPad, no doubt—I’m sure he would be the first to applaud BITAG and what it means for the future digital “Wealth of Nations.”

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