I guess the search for market failure in the privacy area is interesting to me. I wrote about it the other week too. It’s nice that those who prefer regulation feel obligated to justify that preference. It’s acknowledgment of the fact, increasingly well-accepted worldwide, that functioning free markets do a better job of discovering and satisfying consumers’ interests than any other method for organizing societies’ resources.

A recent market failure blog post called “Privacy and the Market for Lemons, or How Websites Are Like Used Cars,” seems to have piqued Adam’s interest. (See the comments.) In it, privacy and anonymity researcher Arvind Narayanan makes the case for privacy market failure. (Evidently, it’s an argument that others have made before.)

“In the realm of online privacy and data collection,” he says, “information asymmetry results from a serious lack of transparency around privacy policies. The website or service provider knows what happens to data that’s collected, but the user generally doesn’t.” Several economic, architectural, cognitive and regulatory limitations/flaws “have led to a well-documented market failure—there’s an arms race to use all means possible to entice users to give up more information, as well as to collect it passively through ever-more intrusive means.”

Alas, there’s no link at “well-documented.” I would like to see that documentation. But more importantly, what Narayanan appears to be speaking of as market failure—an arms race to get more information from Web users—is not one. That’s market action that Narayanan doesn’t like.

So where’s the market failure? Is it in the “impossibility” of navigating the Web aware of the privacy policies of each Web site? That’s certainly very hard to do. The premise is that markets need information symmetry for them to function. There’s a profoundly difficult question lurking here: Just how symmetrical does information have to be? 42?

Luckily, markets don’t require information symmetry. They work because both parties to nearly every transaction make themselves better off by their own reckoning. In the aggregate, market transactions make everyone better off without making anyone worse off. As with the information symmetry ideal, there’s no need for perfection in transacting, either. If some actors regularly make “bad” trades, but still end up better off on the whole, the market is working for them, too. (Their consistent failure to perceive their own self-interest may ultimately require them to seek the charity of those of us who do, but think carefully before depriving all consumers of the market’s opportunities just to protect some small number of incompetents.)

This logic is not defeated when a consumer gets less in a transaction than he or she thought, or bears a cost he or she didn’t know about. (“I thought I was getting a car that gets 35 mpg, but it only gets 31,” or “I thought the site would collect no information, but it associated my browser and IP address with an interest in golf.”) It is only defeated when the systematic operation of the market will reach sub-optimal results.

Will a series of transactions drive someone to their death of starvation or some other harm or ruin? Will the gears of commerce freeze? Market failure occurs when the rules, signals, and sanctions in and around a given marketplace would cause preference- and profit-maximizing actors to reach a sub-optimal outcome.

Narayanan believes there is a sub-optimal outcome—people are giving up too much privacy unaware of the consequences. I agree that people do not protect their privacy enough online. But correlating market behavior we rue to an “information asymmetry,” where every last detail of what happens to data isn’t clear, has not made the case for market failure.

The same “asymmetry” exists in the real world. I have no idea what my neighbors will do with the information they observe about my comings and goings or what my friends will say behind my back. Does this social market failure demand or justify a regulatory solution? Should I get a privacy notice detailing their plans? No. I’m on notice that stuff like that can happen with anyone and everyone I encounter. I go outside, subjecting myself to observation, because I am better off for doing so even though I pay an unknown privacy cost. Likely, Web surfers are similarly better off by their own reckoning despite paying a similar, unquantified privacy cost. The fact that they could pay less is imperfection, not failure.

As you can see, I love analogical thinking, but the analogy between the online environment and a used car market does not work for me. I also don’t see that the theory of the “lemons market” has borne itself out, either online or in the market for used cars. A lemons market should lead to stagnation—a no-trade equilibrium—but we have a robust online information environment and used car sales continue to flourish (in part because of market innovations).

In the end, Narayanan’s post is . . . a lemon. That is not a market failure—just a computer scientist who I think has hashed the economics a bit. It’s not my field either, so I welcome comments that educate and elucidate things for all of us.

Over at MediaFreedom.org, a new site devoted to fighting the fanaticism of radical anti-media freedom groups like Free Press and other “media reformistas,” I’ve started rolling out a 5-part series of essays about “The Battle for Media Freedom.” In Part 1 of the series, I defined what real media freedom is all about, and in Part 2 I discussed the rising “cyber-collectivist” threat to media freedom.  In my latest installment, I offer an analytical framework that better explains the major differences between the antagonists in the battle over media freedom.

Understanding the Origins of Political Struggles

In his many enlightening books, Thomas Sowell, a great economist and an even better political scientist, often warns of the triumph of good intentions over good economics. It’s a theme that F.A. Hayek and Milton Friedman both developed extensively before him. But Sowell has taken this analysis to an entirely differently level in books like A Conflict of Visions: Ideological Origins of Political Struggles, and The Vision of the Anointed: Self-Congratulation as a Basis for Social Policy . Sowell teaches us that no matter how noble one’s intentions might be, it does not mean that those ideas will translate into sound public policy. Nonetheless, since “the anointed” believe their own intentions are pure and their methods are sound, they see nothing wrong with substituting their will for the will of millions of individuals interacting spontaneously and voluntarily in the marketplace. The result is an expansion of the scope of public decision-making and a contraction of the scope of private, voluntary action. As a result, mandates replace markets, and freedom gives way central planning.

Sowell developed two useful paradigms to help us better understand “the origins of political struggles.” He refers to the “constrained” versus “unconstrained” vision and separates these two camps according to how they view the nature of man, society, economy, and politics:

The Unconstrained Nature of the Cyber-Collectivist Vision

Sowell’s taxonomy provides a useful frame of reference for today’s debate over communications and media policy. The unconstrained vision crowd here might best be labeled “cyber-collectivists.” This collectivism is not necessarily the hard-edged Marxist brand of collectivism of modern times. It is more the collectivism of Plato’s rule by “philosopher kings” as much as it is modern European “social democrat” collectivism. It generally rejects outright State ownership of the means of production, although there are some exceptions. (Free Press founder Robert McChesney, for example, would go much further than most other collectivists in having the State intervene and directly control or even own media and communications outlets and infrastructure).

Like their many “unconstrained” intellectual predecessors, what unifies the cyber-collectivists is the belief that the State should have a hand in guiding market outcomes toward a “fairer” end. The cyber-collectivists, for example, get indigestion over unequal patterns whether we are talking audience shares or technological diffusion. They are quick to allege “market failure” when some of their preferred media voices only capture miniscule audience shares (even when it’s just the result of consumer demand in action). And when some people or communities gain access to a network or new technology quicker than others, they are often quick to conclude some nefarious plot by greedy capitalists must be to blame.

Of course, in reality, this is just the way things in a free society have always worked. “Liberty upsets patterns” the late Harvard University philosopher Robert Nozick taught us in his 1974 masterpiece “Anarchy, State, and Utopia.” What Nozick meant was that there is a fundamental tension between liberty and egalitarianism such that when people are left to their own devices, some forms of inequality would be inevitable and persistent throughout society. Correspondingly, any attempt to force patterns, or outcomes, upon society requires a surrender of liberty.

All of this is equally true for media and communications policy. Just as there will never be perfect equality of outcomes in the provision of homes, cars, or incomes, there will never be perfect equality of tech gadgets or audience shares for media speakers / outlets.

Speech Redistributionism

The cyber-collectivists are not content with that, however. Just as they call for a redistribution of wealth to rectify the supposed injustice of unequal incomes, so too they call for “something to be done” to “balance” outcomes and ensure “fairer” outcomes. We might call this “media redistributionism” or even “speech redistributionism.”

Consider, for example, a proposal set forth by Cass Sunstein, the prolific University of Chicago law professor (and now Obama Administration official). In his 2001 book Republic.com, in which he suggests that government should consider requiring “electronic sidewalks” in cyberspace to encourage more balance on Internet websites. The state would impose the equivalent of “must carry” mandates on popular or partisan websites, forcing them to carry links to opposing viewpoints. In the name of “media access” or “fairness,” Sunstein and others are apparently willing to let the state impose tyrannical mandates on private website operators, forcing them to open their private property to use by others. Essentially it’s a Fairness Doctrine for the Internet Age.

Elsewhere Sunstein has argued in favor of greater “public interest” regulation to actually change public attitudes and tastes, claiming that there “is a large difference between the public interest and what interests the public.” [See: Television and the Public Interest, 88 California Law Review 499, 501 (2000).] He and many other cyber-collectivist scholars claim that they have a better idea of what interests the public. Essentially, the public doesn’t know what’s best for them, so someone else must tell them—and potentially even force supposedly better choices upon them. For example, Ellen P. Goodman of the Rutgers-Camden School of Law, and currently an adviser to the Federal Communications Commission, believes that, “a proactive media policy must not only correct a poorly functioning market, but also provide diversions around existing media markets and tastes. Proactive media policy can do this by changing consumer wants.”

The thought of having government “change consumer wants” is positively Orwellian and raises the obvious question: according to who’s tastes and values? The viewing and listening public has a broad array of interests and desires that cannot be easily gauged by congressional lawmakers, and certainly not by five unelected bureaucrats at the FCC. As media scholar Benjamin Compaine has correctly noted, “[i]n democracies, there is no universal ‘public interest.’ Rather there are numerous and changing ‘interested publics.’”

And, more practically, how should such goals be accomplished in an age of information abundance? The sheer scale and volume of media activity taking place across an unprecedented variety of communications platforms makes it difficult to imagine how a scarcity-era regulatory regime will be applied going forward. Are we going to have speech patrols standing on every cyber-corner policing the Net for “fairness” violations or determining what is and isn’t “in the public interest”?

Opportunity, Not Outcome, Is What Matters Most

Those of us who subscribe to a more “constrained vision” understand that what is really important is equality of media opportunity, not equality of media outcomes. A focus on the latter is both foolish and destructive. It is foolish because media equality is an impossibility absent extreme measures, which in turn explains why it is destructive. We would need totalitarian government controls on media outputs and consumption in order to achieve anything remotely close to “balance” or “equality” in terms of media results. What counts most is that people have a chance to be heard, not whether millions are listening or whether there is a perfect distribution of digital technology.

Again, that is not enough for the unconstrained visionaries who guide the cyber-collectivist movement. They want action and they want results and they want them now! And, they will always remind us, they have the best of intentions, so we should just trust them. The problem is, intentions + action = control. When they say “something to be done” that is usually code (excuse the pun) for heavy-handed government action to control the messy, un-patterned outcomes of a free marketplace.

And so we arrive at the critical difference between the cyber-freedom and the cyber-collectivist movements: Those of us who adhere to a more constrained view of nature, society and economy (i.e., the cyber-freedom movement) believe that liberty is the default position and that it generally trumps other values. Supposed “market failures” (or “code failures,” as the case may be) are ultimately better addressed by voluntary, spontaneous, bottom-up, marketplace responses than by the coerced, top-down, governmental solutions that the cyber-collectivists call for. Moreover, the decisive advantage of the market-driven approach to correcting code failure comes down to the rapidity and nimbleness of those response(s). Finally, and quite importantly, we in the cyber-freedom movement are not so quick to cry “market failure!” and call in the code cops. We understand that those messy, un-patterned market outcomes are the result of an evolutionary process or trial-and-error and that society and economy benefit from the resulting learning process.

Sure, there may be times when governments may need to intervene at the margins, but we would counsel against abrupt and incessant interventions to correct every supposed “market failure” or “unfair” outcome. After all, those interventions will simply beget more and more interventions to correct the inevitable failures of, or dissatisfaction with, previous interventions. There is simply no sugar-coating the reality that, no matter how well-intentioned, more and more media control is the inevitable prescription.

In my next installment in this series, I will detail the cyber-collectivist blueprint for radical media redistributionism by outlining this movement’s goals and its proposed methods of control.

I’ve posted another response in the Cato Unbound online debate over the impact of Lawrence Lessig’s Code and Other Laws of Cyberspace upon the book’s 10th anniversary.  You will recall that I went fairly hard on Prof. Lessig in my essay, “Code, Pessimism, and the Illusion of ‘Perfect Control,’” and Lessig responded with a counter-punch that went after me for it.  I respond in a new essay about “Our Conflict of Cyber-Visions.” In the piece, I address Lessig’s assertion that I just didn’t understand the central teachings of Code, as well as his reluctance to accept the “cyber-collectivism” label that I affixed to his book and life’s work.  Again, please hop over to Cato Unbound for my complete response.

But one thing from the essay that I thought worth reproducing here is my effort to better define the key principles that separate the cyber-libertarian and cyber-collectivist schools of thinking.  I argue that it comes down to this:

The cyber-libertarian believes that “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).

Of course, another key difference relates to how quickly one jumps to the conclusion that “code failures” are actually occurring at all. I argue:

What concerns me about the way Prof. Lessig approaches these issues in Code and in his subsequent work is that he is far too quick to declare the debate over by labeling short-term code hiccups as sky-is-falling market failures. The end result of such myopic techno-pessimism is the inevitable call for governments to intervene and “do something” to correct supposed code failures.  The cyber-libertarian instead counsels patience. Let’s give those other forces — alternative platforms, new innovators, social norms, public pressure, etc. — a chance to work some magic. Evolution happens, if you let it. Moreover, if you are always running around crying “market failure!” and calling in the code cops, it creates perverse marketplace incentives by discouraging efforts to innovate or “route around” bad code or code failure. We don’t want the whole world sitting around waiting for government to regulate the mousetrap to improve it or even give everyone better access to it; we should want the world to be innovating to create better mousetraps! To reiterate a key point I already stressed in my original essay: One need not believe that the markets in code are “perfectly competitive” to accept that they are “competitive enough” — or at least, better than regulatory alternatives.

Anyway, please head over to the Cato site to read the whole thing and let me know what you think.  If nothing else, I’m sure that Seth Finkelstein will have something incredibly nasty to say about me!  And I will wear his scorn as a badge of honor.