I’m going to close out my series of essays about Tim Wu’s new book, The Master Switch: The Rise and Fall of Information Empires, by discussing his proposed solutions.  In the first five essays in the series, [1, 2, 3, 4, 5] I’ve critiqued Wu’s look at information history as well as his use of terms like “market failure,” “laissez-faire” and “open” vs. “closed.”  I argued there’s a great deal of over-simplification, even outright distortion, in his use of those terms throughout the book.

Anyway, let’s run through the basics of the book once more before getting to Wu’s proposed solutions.  By my reading of The Master Switch, Wu’s argument essentially goes something like this:

• Information industries go through cycles. After a period of “openness” and competition, they tend to drift toward “closed,” corporate-controlled, anti-consumer models and outcomes.
• The resulting “monopolists” then block much innovation, competition, and free speech.
• Consequently, “the purely economic laissez-faire approach… is no longer feasible.”
• Moreover, information industries are more important than all others (“information industries… can never be properly understood as ‘normal’ industries”) and even traditional forms of regulation, including antitrust, “are clearly inadequate for the regulation of information industries.” (p. 303).
• Thus, special rules should apply to information-related sectors of our economy.

Again, I’ve challenged some of these assertions in my previous essays, specifically, Wu’s incomplete history of cycles and the fact that he greatly underplays the role of governments in “locking-in” sub-optimal market structures or, worse yet, creating those structures through misguided public policies or regulatory capture.  Wu discusses some of those factors in his book, but he tends to regard them as secondary to the inquiry, whereas I believe they are crucial to understanding how most “closed” or anti-competitive scenarios develop or endure. Instead, Wu simplistically suggests that “the purely economic laissez-faire approach… is no longer feasible,” even though no such state of affairs has ever existed within communications or media industries. They have been subjected to varying levels of indirect influence or direct control almost since their inception.

Regardless, what does Tim Wu want done about the problems he has (mis-)diagnosed?

What Wu Wants: A “Constitutional” Approach to Private Regulation

Broadly speaking, Wu wants to counter what he regards as “the danger of private power,” “the Lockean sanctification of private property,” and the fact that “American economic life [has] been built mostly on freewheeling capitalism.” (p. 300)  More specifically, he wants to end the “cycle” he describes of markets moving from supposedly open to closed.

To do so, he proposes what he calls a “constitutional” approach to private marketplace regulation.  In reality, it would be a massive, unprecedented, and highly destructive information sector industrial policy that would substitute the Rule of Man for the Rule of Law.  But let’s hear how Wu describes it:

What I propose is not a regulatory approach but rather a constitutional approach to the information economy. By that I mean a regime whose goal is to constrain and divide all power that derives from the control of information. Specifically, what we need is something I would call a Separations Principle for the information economy. A Separations Principle would mean the creation of a salutary distance between each of the major functions or layers in the information economy. It would mean that those who develop information, those who control the network infrastructure on which it travels, and those who control the tools or venues of access must be kept apart from one another. At the same time, Separations Principle stipulates one other necessity: that the government also keep its distance and not intervene in the market to favor any technology, network monopoly, or integration of the major functions of an information industry.”  (p. 302, emphasis in original)

Wu calls this a “constitutional approach” because he models it on the separations of power found in the U.S. Constitution, such as the separation of church and State, as well as the separation of powers between branches of government.  Wu makes a few additional assertions:

• “[T]he Separations Principle accepts in advance that some of the benefits of concentration and unified action will be sacrificed, even in ways that may seem painful or costly.” (p. 305)
• But Wu believes that pain or cost is worth it because of the “corrupting effect of vertically integrated power.” (p. 305)
• “You cannot serve two masters, and the objectives of creating information are often at odds with those of disseminating it,” he says. (p. 305)
• Specifically, he claims the Separations Principle would better protect free speech and entrepreneurial freedom. On the former: “It is a recognition that the disposition of firms and industries is, if anything, more critical than the actions of the state in controlling who gets heard.” On the latter: “The Separations Principle protects entrepreneurial freedom by preventing stagnation and repression of business innovation, especially with the help of the state.” (p. 306)

There’s a lot to unpack here including Wu’s stunning claim that his Separations Principle doesn’t represent a regulatory regime, as well as his rather incredible belief that government meddling and machinations could be kept in check under this regime.

First, however, Wu deserves credit for coming clean about just how radical his proposal is.

Constitutional Limits on Governments vs. Private Actors

Wu admits that “It would be quite radical today even to contemplate imposing on the economy the kind of safeguards that the Constitution places on the political system.” (p. 301)  A few pages later he notes that “The Separations Principle… requires a certain breadth and ambition in its application.” (p. 308)

I’m glad Wu was willing to at least acknowledge the radicalness of his proposal.  But, as he is prone to do throughout the book, he raises an important potential objection only to quickly walk away from it.  In this case, however, it’s completely understandable why Wu wouldn’t want to continue this inquiry: His proposal really is “quite radical” since it is completely at odds with America’s constitutional heritage of individual liberty and limited government.

Let’s go back to Civics 101.  We require that governments live under certain constraints and the Rule of Law because we recognize that governments possess the unique ability to fine, punish, and imprison citizens.  Moreover, escape from government’s tentacles is difficult, if not impossible. A constitutional system is required, therefore, to limit government’s role over our lives and the economy.

By contrast, we do not impose similar constraints on individuals — or on individuals when they work collaboratively in organizations or corporations — primarily because we believe there should be a presumption of liberty in most human affairs.  Freedom is the default position.  We value freedom because it allows humans to exercise their free will and live a life of their own choosing — and that includes the freedom to pursue happiness by making money in a business venture.  Our nation’s founders saw the wisdom in this even before we had a grand historical clash between communism and capitalist systems.  From that experience, however, we now have undisputed proof that social and economic freedoms are closely linked, and that when humans are free, they prosper.  The other reason we default to freedom for private individuals and organizations is because the possibility of “escape” exists from undesirable social or economic situations.

Wu doesn’t bother slowing down to appreciate these distinctions. He gives occasional lip service to the dangers of excessive government power:

Again and again in the histories I have recounted, the state has shown itself an inferior arbiter of what is good for the information industries. The federal government’s role in radio and television from the 1920s through the 1960s, for instance, was nothing short of a disgrace…. Government’s tendency to protect large market players amounts to an illegitimate complicity … [particularly its] sense of obligation to protect big industries irrespective of their having become uncompetitive. (p. 308)

Quite right. Yet, as I pointed out in this earlier essay, there’s seemingly never any serious lesson to be drawn from that conclusion.  Wu just marches right along in his narrative and ignores that “disgrace” and its relationship to “the cycle.”

The crucial point here is that Wu doesn’t fully appreciate the qualitative difference between State power and corporate power.  Instead — consistent with many “media access” theorists who came before him — he largely equates those forms of power or even makes private power out to be the more significant threat to personal liberties and freedom of speech.  Again, we hear statements like “the disposition of firms and industries is, if anything, more critical than the actions of the state in controlling who gets heard.”

The problem with this is that (a) history shows it’s simply not true and (b) the corrective remedies such a theory counsels would require a massive enhancement of State power to counter the supposed threats of private power, which (c) would create an even bigger threat to human liberty since only the State can fine, imprison, and truly foreclose speech.

So, I’ll stick with traditional “constitutionalism,” thank you very much!  Tim Wu’s “constitutionalism,” by contrast, is the Rule of Man, not the Rule of Law.  Specifically, it would be the rule of a handful of unelected men (and women) down at the Federal Communications Commission, the Federal Trade Commission, or whatever other regulatory bureaucracies Wu would empower under this approach.   And, as we’ll see next, that approach is truly audacious in its scope.

Practical Considerations: An Unprecedented Information Control Regime

OK, let’s forget about all that philosophical and legalistic mumbo-jumbo.  After all, most people these days don’t really give a hoot about constitutional limitations or the first principles associated with our nation’s founding. Let us instead explore the Bold New World of information regulation that Wu wants imposed on the high-tech economy and consider its complexity and costs.  Wu is a bit short on details about how policymakers should go about constructing a “Separations” regime, or how it will work in practice, but he does suggest that Net neutrality regulation and expanded antitrust oversight are at least two of the core elements. But he says that will not be enough.

Despite the fact that Wu admits the FCC “has on occasion let itself become the enemy of the good, effectively a tool of repression,” Wu seems to suggest the agency will continue to have “day-to-day authority over the information industries.” (p. 309) Of course, the FCC’s role is currently limited mostly to older sectors of the information economy, but Wu seems to suggest that role should be expanded considerably.  Yet, FCC oversight isn’t enough either, Wu says.  He argues that “what is needed is not only an FCC institutionally committed to a Separations Principle but also a structural arrangement to guard against such deviations, including congressional oversight as well as attention and corrections from other branches of government.”

Here the “breadth and ambition in its application” associated with Wu’s Separations Principal becomes more apparent. We are talking about layers upon layers of regulation. More importantly, the key attribute of Wu’s Separations Principle is that it is preemptive and prophylactic in character.  He explicitly rejects the idea that marketplace experimentation should be allowed and that ex post administrative proceedings or antitrust enforcement will be good enough. “[T]here is the problem of taking an after-the-fact approach to a commodity so vital to our basic liberties,” he argues. (p. 204) Thus, Wu’s approach represent a return to the sort of anticipatory, “Mother, May I” regulatory regime America was supposed to be turning away from following the passage of the Telecommunications Act of 1996.

What’s most bizarre about Wu’s call for such a preemptive “Separations” approach is his insistence that it is not a regulatory approach.  It’s hard to know whether this is an astonishing bit of hubris or just plain naiveté.  I hate to suggest it, but I think Wu is perfectly aware of just how regulatory his system would be in practice; he just doesn’t want to admit it.  After all, for there to be “separations” of various segments of the information sector, someone would need to determine who and what belongs in which bucket.  Wu suggests we’ll need at least three buckets. To repeat, he says his Separations Principle “would mean that those who develop information, those who control the network infrastructure on which it travels, and those who control the tools or venues of access must be kept apart from one another.”  Let’s put some labels on these buckets:

• Bucket #1: Information Creators
• Bucket #2: Information Distributors
• Bucket #3: Information Hardware Makers

These would essentially become three of the new “titles” (or regulatory sections) of a forthcoming “Information Economy Separations Act.” (I’m assuming Wu understands it would take an act of Congress to implement this sweeping regime, although he never makes that clear.  Or perhaps he would just prefer the FCC “reclassify” the entire information economy by regulatory fiat? Who knows.  Again, he never really sweats the details on this important point.)

Regardless, the problem with these conceptually neat classifications is that don’t conform to our fast-paced, highly dynamic Information Age economy.  There is a fluidity of innovation and market activity that Wu utterly fails to appreciate.  I suppose it’d be easy to throw a couple of players into these buckets and tell them to stay put.  We could tell T-Mobile, for example, that they could be a wireless information distributor and absolutely nothing else; we could tell Discovery Networks, they could be a content creator and absolutely nothing else; and we could tell Intel, you can be a chip maker and absolutely nothing else.

But not every existing information sector actor or technology is so neatly compartmentalized. Moreover, Wu’s framework also begs the question: Would firms that currently have integrated operations and investments in multiple fields be forced to divest control of various operations to come in line with Wu’s Separations Principle?   Here are a few scenarios to consider (and with each example, ask yourself the question: What’s the harm here to would justify the sort of “separations” regime Wu proposes?):

• Cox Enterprises has a wide variety of content and distribution properties including: broadband services, cable TV channels and distribution systems, newspapers, radio stations, advertising and direct mail divisions, and AutoTrader.com.  How many pieces does the firm need to be split into to comply with Wu’s new “Separations” regime?
• Should an ISP be allowed to develop or offer (or directly integrate into their service) free anti-virus software and parental control technologies since that’s not part of the underlying distribution service? Nearly every major ISP does so already today.
• Even though the experiment was ultimately a failure, should Google have been allowed to break out of the search market and give the handheld device business a shot with the Nexus One?  Likewise, should Google be allowed to continue its experiment with local fiber or wi-fi networks even though it is so clearly outside their traditional line of business?  Finally, should the FCC have disallowed Google’s bid in the 700 MHz spectrum auction back in 2008 since it would have meant the firm was formally entering the information distribution business?
• Which bucket is Microsoft in as a traditional OS and software provider?  Regardless, was it a mistake to allow them to jump into the video game console marketplace with the Xbox many years ago?   Should MS have been forbidden from creating the Zune since it too was a digital device outside of Microsoft’s core field?  Should MS be allowed to have a content division that develops games or other content for its operating systems even though they might be considered two separate information markets?
• Sony produces movie and video game content but also develops hardware (video game consoles, televisions, music players, phones, etc.) on which that content can be played. Should that be illegal? Would they have to divest some of these divisions once Wu’s system went into effect?
• Apple is the ultimate example of an information hardware manufacturer that has not only diversified its hardware offerings from PCs to iPods, iPhones and iPads, but also become a (if not the) leading information distributor for digital music, movies, television shows, podcasts, books and audiobooks through iTunes.  The company’s Apps store also makes it a key distributor of software.  What bucket is it in?
• Should Amazon be allowed to be both the biggest online marketplace as well as the manufacturer of a device (the Kindle) that offers access to that store?

I could go on and on, but here’s the crucial point: Creating firewalls between the buckets Wu proposes would be a nightmare and would entail incessant regulatory interventions to make sure the walls weren’t breached.  As suggested above, the very act of regulatory line-drawing would be mind-bogglingly complex.  More importantly, each new information sector innovation would suddenly be subjected to a regulatory classification proceeding.

Wu is essentially saying there are few integrative efficiencies or other economic benefits associated with cross-sector deals or cross-platform technological developments.  Again, he dismisses the notion with one line: “[T]he Separations Principle accepts in advance that some of the benefits of concentration and unified action will be sacrificed, even in ways that may seem painful or costly.” (p. 305)  Well, that’s nice… except that this regulatory system would upend the U.S. information economy as we know it!  His Separations Principle is an unprecedented regulatory wrecking ball that would do untold destruction to the American economy in the name of creating a system of information apartheid. Wu also completely ignores the litigation nightmare that would ensue once the government started forcing the divestiture of various lines of business.  After all, many companies would likely have valid “takings” claims here under the Fifth Amendment.

But even if we could get beyond all that, we’d have to consider how this regime would work going forward.  Let’s consider a hypothetical example.  Virtual reality is an emerging field of our information economy that promises to experience rapid growth in coming years.  A number of companies are currently developing content and devices that will help bring a veritable Star Trek holodeck experience to our living rooms sometime very soon.  The market is still in a great deal of flux and it remains unclear which technologies will prevail or which developers and device makers will prosper.  One thing we know for certain, however: it’s a hugely complex and expensive undertaking.  VR technologies aren’t like creating a YouTube video of your cat playing a piano. There are significant costs associated with developing VR content and devices. Distributing VR bits over networks will, no doubt, be quite complicated as well.  Now, imagine two scenarios (which, for all I know, may already be playing out in the marketplace today):

• Scenario 1: A partnership is announced between some cutting-edge VR companies that have different core competencies in this field.  One of the companies is developing holographic imaging devices to project immersive environments directly into your living room or workspace.  Another of the partners is developing games that would take advantage of those new holographic imaging innovations.  And a third partner in the deal is developing software that will help manage the real-time, high-bandwidth flow of VR bits across broadband lines.  Under Wu’s Separations Principle, would this deal be illegal?
• Scenario 2: All of the activities discussed above are being handled by a single, integrated firm.  Is that illegal under Wu’s Separations Principle?

Now, it would be easy to dismiss this scenario with a casual wave of the hand and a ‘we’ll-figure-it-out-later’ attitude.  But consider the fact that deals and developments like this are happening every single minute of the day our modern information economy.  One wonders how regulators would even be expected to keep track of it all.  And they would have to keep track of it all because, again, Wu’s Separations Principle is preemptive and prophylactic in character.  His regulatory regime is going to have to come to grips with that fact that innovation happens. Markets evolve. People want to experiment and do bold new things. They tinker. They develop. They pitch. They deal. And so on.  As that dynamic process unfolds every day across the high-tech economy, Wu’s Separations Principle will be put to the test and necessitate a regulatory proceeding of some sort to determine what is permitted and what is verboten.  Meanwhile, the very uncertainty associated with Wu’s regime would delay and discourage investment in the field and formation of the partnership/venture necessary to successfully bring VR to market

Astonishingly, however, Wu argues that “a Separations regime would take much of the guesswork and impressionism, and indeed the influence trafficking, out of the oversight of information industries.” (p. 307) That’s a doozy of a claim.  To the extent his Separations Principle eliminates “guesswork” and creates more regulatory certainty, it would only do so by creating rigid artificial barriers to market entry and innovation across the information economy.  That’s “certainty” that we can live without.

Conclusion

Over on Amazon.com, I was interested to see Tim Wu post a glowing review of Kevin Kelly’s important new book, What Technology Wants (which I will be reviewing here next).  Kelly’s book argues that we should think of technology, or what he calls “the Technium,” as a “force” or even a living “organism” that has a “vital spirit” and which “has its own wants” and “a noticeable measure of autonomy.”  I think Kelly goes a bit far, but to the extent one buys into the notion that technology is like an organism, Tim Wu’s Information Industrial Policy would kill that organism.  Or, it would at least severely stunt its continued growth and evolution.

Because his information industry policy is every bit as “radical” as he suggests and would require, as he also admits, “a certain breadth and ambition in its application,” it is essential we reject this innovation-killing regulatory regime.  The health of the high-tech economy, the global competitiveness of the U.S. technology sector, and the long-term welfare of consumers depends upon it.

I want to thank Tim Wu for continuing to engage in a discussion here about his book, The Master Switch, with his various comments to my ongoing rants.  After pouring out about 15,000 words over the past 4 days, I suspect I’m beginning to sound a bit like his cyber-stalker!  I feel a bit bad about this because I really do like Tim a lot and find him to be one of the all-around coolest and most laid-back guys in the Net policy business.  But, as I’ve noted in my ongoing series [see parts 1, 2, 3, & 4], we have profoundly different worldviews when it comes to information history and policy. And some of the recent comments he made to my 3^rd post deserve a serious response.

In one of those comments he asks, “The question, then, is how you get, essentially, limited, controlled government in regulatory affairs; how you duplicate, in some sense, the limits imposed on other dangerous gov’t functions like the army. I don’t think this is having things both ways; I think this is trying to learn from what has gone wrong in the past.”  In the other, he says: “The question I’m asking in the end of the book is whether we can do better; try to have rules against the worse forms abuse without a creeping regulation that turns into capture. I suspect you think that’s impossible, but I don’t.”

So, here’s my response (and I’m making it a new, dedicated post here instead of just a comment in an old thread because I feel we are getting to the heart of the difference between cyber-libertarians (like myself) and cyber-collectivists (or whatever Tim would call himself).

To be clear, I don’t think corporations are angels or that there is never a time when a market can’t be naturally subject to a great deal of control by one company or a handful of companies.  The difference between us comes down to two things primarily.

First, as I have already noted in a couple of these essays (especially this one), I believe regulatory capture, mismanagement, or other shenanigans have more to do with creating and / or maintaining “monopoly” or lasting / harmful “market power” than natural market forces.   By definition, a “purely economic laissez-faire approach” does not exist in markets characterized by regulatory capture and bureaucratic mismanagement.  And you won’t ever get less regulatory capture and bureaucratic mismanagement by increasing the scope of government control over a market.

Second, to the extent that any company or set of companies is able to achieve “market power” is a largely natural fashion (think IBM in 70s or Microsoft in late 90s), I believe that markets can and do act to evolve around those situations quite rapidly, even more rapidly when the market is built on code.

I spent time developing these points in detail in this two-part debate [1, 2] with Lawrence Lessig, which I hope Prof. Wu will take the time to read since I went to great pains to clearly delineate the differences that separate our worldviews.  Ultimately, as I said there in response to Prof. Lessig, what really separates the cyber-libertarian and cyber-collectivist schools of thinking comes down to a belief that “market failures” or “code failures” are ultimately better addressed by voluntary, spontaneous, bottom-up, marketplace responses than by coerced, top-down, governmental solutions. Moreover, the decisive advantage of the market-driven approach to correcting code failure comes down to the rapidity and nimbleness of those response(s).

Does that mean cyber-libertarians believe everything will be all wine and roses in a truly free marketplace?  Absolutely not.  There will be short term spells of what many of us would regard as excessive market power.  The difference between us comes down to the amount of faith we would place in government actors versus market forces / evolution to better solve that problem.  We cyber-libertarians would obviously have a lot more patience with markets and technological change, and would be willing to wait and see how things work out.  We believe, as I have noted in my previous responses to Wu, that it is during what some regard as a market’s darkest hour when some of the most exciting disruptive technologies and innovation are developing.   We are bullish on what I have called experimental, evolutionary dynamism.  People don’t sit still; they respond to incentives, including short-term spells of “market power.”

Is this blind faith in the market?  I suspect Prof. Wu and others would accuse us of that.  But I would argue it isn’t blind faith but informed fact.  It’s interesting, for example, that one of the “information empires” Wu doesn’t spend much time on in his book is IBM.  Back in the 60s and 70s, (as I have documented here before) IBM was the big, bad dog of the computing world, with significant “market power” in mainframes — the only computers that really counted at the time.  Big Blue’s market power was achieved in a fairly natural way, however.  Importantly, there isn’t much regulatory capture or interference I could point to that helped cause or maintain the power IBM had. So, it’s certainly a better case study than others Wu uses in his book, most of which were subject to early meddling by government that tipped the balance in unnatural directions.

Anyway, back in the 1960’s, some folks at the time feared IBM might “leverage” their significant market power into new fields. As a result, the Department of Justice opened an antitrust case against Big Blue in 1969 that would become a 13-year quagmire, with little to show for all the legal wrangling by the time the case was abandoned in 1982.  Here’s how CNet staff writer Rachel Konrad summarized the fiasco back in 2000:

In January 1969, the government began a sweeping antitrust investigation into IBM’s dominance and attempted to break it into smaller companies that would compete against one another. During the six most critical years of the trial, from 1975 to 1980, the parties called 974 witnesses and read 104,400 pages of transcripts, according to Emerson Pugh’s 1995 book “Building IBM: Shaping an Industry and Its Technology.” The 13-year investigation, which required IBM to retain 200 attorneys at one point, fizzled in the early ’80s as the computing landscape shifted from mainframes to personal computers. The government abandoned the tainted effort entirely in 1982, as clones of the IBM PC eroded Big Blue’s dominance. But the company, still fearful of the watchful eye of the Justice Department, took pains to avoid the appearance of a monopoly long after it relinquished its hold on the market. People who worked for IBM in the ’80s and early ’90s said the company routinely fell victim to “pricing death strategy”–a reluctance to lower prices below cost, even on products that weren’t selling–to avoid what the government would call predatory pricing. By the mid-’80s, the company was in bad shape. The antitrust troubles, combined with ill-timed product failures such as the Future System, pinched revenues. The company began a nearly decade-long financial slide. In retrospect, the antitrust case against IBM seemed laughable.

IBM had become the victim of a classic “disruptive technology” paradigm shift that few could have foreseen in 1969.  As Peter Pitsch noted in his 1996 PFF book The Innovation Age, “In 1981 the Department of Justice was still pressing their case against IBM while market forces were about to lay waste to the company.” Pitsch continued:

IBM certainly did not expect to see PCs erode the market share and profitability of its venerable mainframe computers, but the fall of the old “big iron” machines was rapid and spectacular. The revenue of IBM’s mainframe unit fell from roughly $9 billion in 1990 to an estimated $4.5 billion in 1994… [T]he parties destined to become players in the PC revolution were unknown when the PC was introduced, and the experts’ predictions of a much-ballyhooed computer face-off between IBM and AT&T never materialized. Innovative companies that did not exist at the beginning of the revolution rose rapidly. Few people had ever heard of a small company named Microsoft. Nor had they heard of Intel, Novell, Compaq, Dell, or Netscape.

Pitsch went on to summarize how IBM’s manufacturing capacity was slashed in the years that followed and also notes that, astonishingly, “in the space of five years after 1987, IBM lost two thirds of its market value — more than $70 billion.”  In sum, new marketplace innovation and competition handled the short-term market power concern that antitrust regulators had about Big Blue.  Pitsch goes on to explain what the antitrust regulators missed:

A dominant firm can lose its “King of the Hill” status in two ways. First, if it does not continually improve, it will lose market share and profits to low-cost imitators. For example, the ability of low-end PC manufacturers to make IBM clones fostered robust price competition in the PC market. Second, today’s market leaders must worry that some established and well-financed competitor or possibly an upstart produce a technical breakthrough that will displace them. This situation reflects [the] fact that gains from innovation are so powerful and beneficial to consumers that they outweigh the higher prices dominant firms can charge. Indeed, attempts to eliminate these high profits by regulating prices would almost certainly disserve consumers even if the regulations dampened the incentives for innovation only slightly.

What Pitsch is talking about here is dynamic competition, not the static competition. And what the history of IBM shows is the power of evolutionary dynamism in action.  Markets are a learning experience; a “discovery process” as Austrian economists have taught us. Those of us who believe in dynamic competition and evolutionary dynamism see markets in a constant state of flux and expect that sub-optimal market developments or configurations are exactly the spark that incentivizes new form of market entry, innovation, price competition, and so on. Experimentation and evolution happen if you let them happen.

Others, however – and I suspect this includes Prof. Wu – would argue that’s not good enough. They want action, and they want it now!  Every short-term hiccup deserves a policy response in the name of protecting “the public interest,” however they define it through regulation.  But what about the costs and trade-offs associated with early, preemptive, or prescriptive regulation?  What of the danger of regulation steering markets in unnatural or inefficient directions? The possibility of picking technological winners and losers, or technological lock-in?  The possibility of regulatory capture and the creation of a special interest, lobbying hell inside the Beltway?

Somehow these factors often go out the window for those who subscribe to the more static, snapshot-oriented view of markets and competition that is so prevalent in cyber-collectivist circles.  But the cyber-libertarian can’t let those go.  Those factors lie at the core of the problem, we would argue. Actions have consequences. Regulations have costs. And those costs typically outweigh the benefits of preemptive strikes by the State.

And that, at root, is what separates the cyber-libertarian and cyber-collectivist worldviews when it comes to concerns about “market power” and what to do about it.

[Jump to Part 6 in the series.]

Somewhere between Nick Carr’s “Typology of Network Strategies” and Chris Anderson’s “Four Kinds of Free” is the secret to understanding our new economy:

Carr’s “Typology of Network Strategies”:

1. Network effect
2. Data mining
3. Digital sharecropping, or “user-generated content”
4. Complements
5. Two-sided markets
6. Economies of scale, economies of scope, and experience

Anderson’s “Four Kinds of Free”:

1. Direct cross-subsidy (get one thing free, pay for another)
2. Ad-supported (third-party subsidizes second party)
3. “Freemium” (a few people subsidize everyone else)
4. “Gift economy” (people give away things for non-monetary rewards)

Of course, both Carr and Anderson are building on theories and business models previously articulated by many others. A few that come to mind:

• Carl Shapiro & Hal Varian, Information Rules: A Strategic Guide to the Network Economy (1999)
• Stan Liebowitz, Re-thinking the Network Economy (2002)
• Jeffrey H. Rohlfs, Bandwagon Effects in High-Technology Industries (2001)
• Oz Shy, The Economics of Network Industries (2001)
• Don Tapscott & Anthony Williams, Wikinomics: How Mass Collaboration Changes Everything (2006)