Thoughts, essays, and writings on Liberty. Written by the heirs of Patrick Henry.

“If large numbers of people believe in freedom of speech, there will be freedom of speech even if the law forbids it. But if public opinion is sluggish, inconvenient minorities will be persecuted, even if laws exist to protect them.”     George Orwell

October 17, 2007

Getting Free Speech Wrong

by Doug Mataconis

Proving the old adage that politics makes strange bedfellows, and that misunderstanding the Constitution is something that both the right and the left are guilty of, the President of NARAL and the President of the Christian Coalition have a joint column in today’s Washington Post about the refusal by Verizon Wireless to allow broadcast text messages on “controversial” topics:

Last month, Verizon Wireless refused to approve NARAL Pro-Choice America’s application for a text-messaging “short code,” a program that enables people to voluntarily sign up to receive updates by texting a five-digit code. When NARAL Pro-Choice America protested, the nation’s second-largest wireless carrier initially claimed the right to block any content “that, in its discretion, may be seen as controversial or unsavory.”

After news of Verizon’s censorship hit the front page of the New York Times, and sparked a public outcry, the company quickly backpedaled. Verizon issued an apology and blamed the blocking on a “dusty internal policy,” while still reserving the right to block text messages in the future at its discretion.

When it comes to censoring free speech, sorry just isn’t good enough. Whatever your political views — conservative or liberal, Republican or Democrat, pro-choice or pro-life — it shouldn’t be up to Verizon to determine whether you receive the information you requested. Why should any company decide what you choose to say or do over your phone, your computer or your BlackBerry? Technologies are converging in our communications system, but the principles of free expression and the rights of all Americans to speak without intervention should remain paramount.

The authors are guilty of making a mistake that many Americans make; they take the provisions of the First Amendment and attempt to apply them in contexts in which they are simply inapplicable.

Here, for those who seem to either forget or refuse to remember is what the First Amendment actually says:

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.

The emphasis is mine, of course, but it’s meant to emphasize the simple fact that the First Amendment is only directed to government action. When we talk about Freedom of Speech, we’re talking about your right to speak without fear of state reprisal or prior restraint. We are not talking about your right to use someone’s private property to promote your agenda.

And that is exactly what the authors are talking about in this case. Verizon decided that it didn’t want to become a conduit for their political agenda. In a free society, they should have the right to do this if they want to. And if you don’t like it, then go find another cell phone provider.

But that isn’t what the authors want to hear. They want Congress to force Verizon and other telecom providers to provide them with a space on their network to promote their agenda.

We’re asking Congress to convene hearings on whether existing law is sufficient to guarantee the free flow of information and to protect against corporate censorship. The public deserves an open and fair conversation about this important issue.

No, the public needs to realize that we’ll never come close to having a free society if we don’t respect property rights, including Verizon’s.

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27 Comments

  1. This is also the reason I oppose net neutrality.

    Comment by somebody — October 17, 2007 @ 8:54 am
  2. Actually, Congress is involved. Congress, through the FCC, grants Verizon a monopoly to use certain radio frequencies, and gives Verizon the power sue anybody who encroaches upon those radio frequencies. Moreover, this grant is not a permanent transfer of ownership of the radio frequencies — it is a lease. Therefore, Congress, as the owner of the radio frequencies, is in fact responsible for these activities and therefore the First Amendment is applicable.

    This is NOT an open market. Congress grants monopolies to individual corporations.

    Comment by Chepe Noyon — October 17, 2007 @ 12:06 pm
  3. Chepe,

    Yea, well, not being a socialist I don’t buy into the whole “public airwaves” myth. If it weren’t for the technology that Verizon Wireless and the other telecom companies developed with their own money, the so-called public airwaves would just be so much electromagnetic soup.

    To argue that there is such a thing as public “ownership” of a radio frequency is to both misunderstand the technology involve and to misunderstand the meaning of what property rights are actually all about.

    So, no, I don’t concede the point that Congress has the right to tell Verizon Wireless what content it should allow on it’s network anymore than I concede the point that they have the right to tell CBS what television shows they should put on the air.

    There’s (thankfully) not a Fairness Doctrine anymore, and there doesn’t need to be one for cell phone providers.

    Comment by Doug Mataconis — October 17, 2007 @ 12:13 pm
  4. OK, Doug, if the airwaves are not public property, then on what basis can any individual claim ownership of them? How are property rights established?

    Comment by Chepe Noyon — October 17, 2007 @ 12:32 pm
  5. Chepe,

    I think you’ll find answer to all your questions in this Cato Institute Policy Analysis

    Comment by Doug Mataconis — October 17, 2007 @ 12:52 pm
  6. Thanks for the link, Doug. It’s a good piece. Give me some time to digest it properly — it’s 36 pages long! I’ll be back later with some reactions to it.

    Comment by Chepe Noyon — October 17, 2007 @ 4:29 pm
  7. OK, Doug, I have finished the article and I have some comments. It does an excellent job of presenting the flaws with the FCC. However, it is fatally flawed by the fact that it is 25 years old and therefore quite ignorant of a whole host of developments since then. However, I’d still like to point out its central flaw: a failure to present a practical proposal for defining property rights.

    Its proposal is that rights be defined in terms of a transmitter, antenna, frequency band, and power level — just as they are currently specified by the FCC. One such definition might read something like this:

    The owner of this deed shall have all rights to transmit electromagnetic signals from an antenna no more than 200 feet high located at latitude 40 degrees, 33 minutes, 17 seconds North and longitude 120 degrees, 21 minutes, 12 seconds West, transmitting with a power level not to exceed 200 watts, in the frequency band between 51.000 MHz and 52.000 MHz. The antenna shall be of design specified in the appendix.

    OK, that looks pretty clear, doesn’t it? Now let’s suppose that the FCC auctions off all these “deeds” to people all over the country. The end result is tens of thousands of such deeds. People can sell and buy them, mortgage them, swap ‘em with their friends, and so forth. That good old market system is at work!

    But now suppose that technology improves. Suppose a technology emerges that permits us to break up this 1 MHz channel into 10 100 KHz channels, and get just as much throughput as we had with the 1 MHz channel. Huzzah for technology! But there is one little catch: this technology requires an antenna that’s 300 feet high, and nobody has a deed for a 300-foot high antenna. Since nobody owns a deed that permits the technology to be used, the new technology is never adopted.

    Or suppose that somebody comes out with a new technology that boosts the range of a transmitter while maintaining the same power levels. The deed doesn’t say anything about the technology used, it just specifies the power level. Somebody could use the new technology to transmit signals into an area that has always been covered by another transmitter. So now they’re messing up the signal for that guy, and there’s nothing the law can do to protect him. Looks like he’ll need to send a few of his boys over to make an offer the first guy can’t refuse.

    Now let’s talk about contiguity issues. Usually you set up a particular technology to operate in a given band, breaking that band into channels appropriate to the needs of the technology. For example, the band for television needs a lot more bandwidth per channel than the band for consumer radio, so that band is broken up into broader channels. And let’s say that the FCC auctions off all the deeds on that basis.

    But now (as actually happened), they shift to digital video and all of a sudden their bandwidth needs per channel drop way down. Instead of needing 10 MHz per channel, a single video signal needs only 1 MHz of bandwidth. It looks like a real windfall for the owners of current television transmitters, doesn’t it?

    But wait a minute. How exactly will the owners of the television transmitters break down their big channels into little channels? Here’s one guy using 310 to 320 MHz. He decides that he’ll keep 315 to 316 MHz for himself, and he’ll sell off 310-315 MHz and 316-320 MHz. Who’s gonna buy it? There aren’t any consumers out there with digital televisions. Why not? Because nobody is making digital televisions. Why not? Because there are no standards for digital televisions.

    Now, at this point, we say that the industry gets together and hammers out a standard, just as it has done many times before with many other problems. But this standard is a lot harder to negotiate. With other standards, you’re talking about new equipment, and you seldom have legacy problems. Where you do have legacy problems, they tend to be matters that everybody knows will go away in five years. Moreover, these negotiations usually involve just manufacturers. For example, the standards for DVDs were hammered out by a group of electronics manufacturers. But with this scheme, you’d also have all the deed-holders at the table. Some of them are eager to press ahead with the technology, because they have lots of capital to invest in it and they can quickly reap its benefits. Others, however, are just barely making a profit and they can’t afford to make the transition to the new technology anytime soon, so they want full backwards compatibility. These kind of conflicts tend to make resolution impossible. The end result: the technology sits on the shelf and is never deployed.

    This is just a short explanation of some of the problems with this paper. The writer was an economist who did not fully understand the technological issues, and that flaw ruins his whole paper. Too bad, there are some sound ideas there — but in practice, everybody is better off having a centralized bureaucracy to set standards.

    Comment by Chepe Noyon — October 17, 2007 @ 8:00 pm
  8. Your response deserves longer treatment, which I don’t necessarily have time for tonight, but I will get to it.

    Until then, I just have to wonder why you think the government is better suited for deciding this issue than the free market.

    You bring up the issue of improved technology and the possibility of dividing the spectrum even further than is currently possible…..wouldn’t that be for the better because it would give people more choices ?

    And as for who would own a specific piece of the spectrum, wouldn’t the logical choice be the person or persons who develop the technology to utilize it ?

    Frankly, I trust the market far more than I trust anyone at the FCC.

    And I don’t want Congress telling Verizon, CBS, or anyone else what they can or cannot put on the airwaves.

    Comment by Doug Mataconis — October 17, 2007 @ 8:31 pm
  9. Chepe, I never did get back to you on the last time we hit this topic. I still take issue with a number of your assertions, but your point about waves refracting around corners eventually sunk in.

    But there is one little catch: this technology requires an antenna that’s 300 feet high, and nobody has a deed for a 300-foot high antenna.

    Well, you could simply pass a law that starts with “All deeds previously allow 200 ft antennas may not use 300 ft antennas provided they…”

    The deed doesn’t say anything about the technology used, it just specifies the power level.

    That would be a mistake in the deed design. I can’t imagine why you’d specify power instead of distance. That would be like granting a property deed that says “extending the distance a 6 ft tall man can walk in 5 minutes”.

    Who’s gonna buy it? There aren’t any consumers out there with digital televisions.

    Anyone with enough capital to speculate on a resource that is clearly valuable yet underutilized.

    Some of them are eager to press ahead with the technology, because they have lots of capital to invest in it and they can quickly reap its benefits. Others, however, are just barely making a profit and they can’t afford to make the transition to the new technology anytime soon, so they want full backwards compatibility.

    You’re suggesting that this new technology is very important and efficent, yet simultaneously not valuable enough to justify paying large enough premium to motivate a deedholder who’s “barely making a profit” to sell.

    I think you will find that such cases are extremely rare throughout the history of capitalism.

    This is just a short explanation of some of the problems with this paper. The writer was an economist who did not fully understand the technological issues, and that flaw ruins his whole paper.

    It may very well be true that the writer lacked the domain knowledge necessary to write the definitive treatise on the subject, but that is a far cry from demonstrating that his thesis is wrong.

    Chepe, I don’t mean any disrespect, but it seems like you spend an inordinate amount of time trying to can’t possibly work in this case or that and you spend precious little time trying to create a legal framework in which it can.

    I suppose that’s why I, and probably others, tend not to take your word for it when you assert that something is impossible.

    Comment by Jeff Molby — October 17, 2007 @ 8:43 pm
  10. OK, first, Jeff, I’m not saying it’s impossible — nobody can prove a negative. I’m saying, if you think it’s possible, show me how. Doug came up with a proposal that he linked to. I read through that proposal and it is detailed and it makes an excellent case against the FCC. However, the specific proposal it offers is flawed and would not work as well as the admittedly flawed FCC.

    Let me get to the nub of the issue: this particular field of effort is unique in that it is dominated by technological considerations — and the technology has always been, and will likely continue to be in flux. You can’t write laws that cover technologies that don’t exist yet and you can’t know about. Every arrangement that we set up today will surely be technologically obsolete in fifty years. And our laws governing property rights for these technologies will consequently be obsolete. We’ll end up litigating ourselves to death trying to sort out competing rights in an inadequately defined legal environment.

    You’re absolutely right that properly functioning markets are always more efficient than governments in allocating resources. The problem is that markets can only function properly when you have clearly defined property rights. If the property rights can’t be clearly defined, then the market can’t do its job. And with technology changing so fast, it’s impossible to define exactly (and practicably) what constitutes the resource that is owned.

    That’s the sole advantage of letting the government run the show. By granting licenses for a limited period of time, they make it possible to make the transition to new technologies in the least expensive manner.

    Let’s take the transition from NTSC to HDTV as an example. NTSC is the standard used for television in North America. It was set up in the 1940s and has undergone many revisions, but the basic system that we use for television transmissions is now 60 years old. It’s totally obsolete! But it’s extremely difficult to change because there’s billions and billions of dollars in investments in televisions, transmitters, cameras, recorders, and all the other paraphernalia associated with video. We’ve all known since the 1970s that we had to replace NTSC, but the market imposed severe inertia on everybody. Had we relied on the market to make the transition, it would never have happened. There’s no single company that’s big enough to do the whole job. There’s the R&D costs; the costs of manufacturing a complete system of cameras, transmitters, receivers, recorders, editing machines, and all that other stuff. Next, you have to set up a distribution system and establish links to retail outlets — that’s expensive. Then you’d have to get licenses to transmit the stuff, AND you have to spend more money making content (what are they going to watch on your HDTV system? Old Gilligan’s Island reruns?) During all this time you’re losing money by the billions. Eventually enough people buy the sets that you can start making money — but the whole process is so slow that the odds are that you’ll NEVER recoup your initial investment. Result? Nothing happens.

    (A side note: much of the hard work of setting up the standards for HDTV was done by private industry, not the government. This shows that the market really can solve some problems. However, somebody had to allocate an entire band of the spectrum for HDTV use, and that would have been impossible with ten thousand owners of little patches of spectrum. Unless you simply bought them all out — requiring even greater capitalization — you’d never have been able to get the coordinated effort required to get an entire system working. The FCC has acted as umpire here, setting up a system that will permit a smooth transition to HDTV with the minimum damage to all participants in the market.)

    I’d next like to talk about the problems the market has in dealing with capital-intensive high-tech problems, but that’ll have to wait until tomorrow.

    Comment by Chepe Noyon — October 17, 2007 @ 10:44 pm
  11. If the property rights can’t be clearly defined, then the market can’t do its job.

    I agree, but your fundamental assumption seems to be that the property rights must be defined in relation to the technology, which will change rapidly.

    Why can’t the property rights be defined in relation to the underlying physics, which will be relatively static?

    you’d never have been able to get the coordinated effort required to get an entire system working.

    Of course, but you haven’t demonstrated why it has to be a coordinated national rollout. Why wouldn’t Beverly Hills overpay for early adoption like it does for every other tech? Hasn’t every other form of communication been rolled out piecemeal?

    I’d next like to talk about the problems the market has in dealing with capital-intensive high-tech problems, but that’ll have to wait until tomorrow.

    Ok. Keep in mind that I’m quite willing to accept occasional inefficiencies in order to avoid setting nasty precedents. Theoretically, at least. In reality, the precedents have long since been set.

    Comment by Jeff Molby — October 17, 2007 @ 11:08 pm
  12. I agree with Doug on this one. The original topic is an instance where “Freedom of Speech” clashes with property rights.

    As Doug pointed out, the First Amendment is about Congress making laws to curtail freedom of speech, not private citizens on their private property. The fact that I want to say something does not guarantee my use of someone else’s property to do it.

    For instance, I may only post at The Liberty Papers because the owners choose to host an open forum on their nickel. I haven’t paid for their web servers, their development time, and other parts of their infrastructure. They have. If The Liberty Papers chose to stop allowing me to use their private property for free (or at all), I’d need to find another avenue to get my message out…on my own nickel.

    As for the concept of the FCC, air waves, and licensing: it reminded me of yet another fascinating article I read recently from the Mises Institute. I found the article very educational as to the history of the broadcast industry, and the decisions that gave us the environment we have today. It discusses how various judges applied variants of water rights and homesteading law to determine ownership, and how others maintained that only the government could administer the airwaves fairly. The article also discusses the economics of supply and demand on radio waves, frequencies, and changing markets through innovation. I highly recommend the read.

    Ownership is the power to dispose of a thing. If a licensor can revoke your ability to use something, they control it, not you. I see Congress making laws via the FCC to control speech as the true violation of the First Amendment.

    Or to quote someone with more cachet than my own anonymous self:

    “By placing discretion in the hands of an official to grant or deny a license, such a statute creates a threat of censorship that by its very existence chills free speech.”
    – Harry A Blackmun, Associate Justice, US Supreme Court

    If we support property rights, support ownership of airwaves, just as we do for other “scarce” resources (see that article I referenced above), and keep the Congress-via-the-FCC out of the First Amendment abrogation business, I think we would have a country modeled more closely to the original constitutional design.

    Voluntary free markets, in the places they still exist, are still the most adaptive, efficient, responsive, growth environments we have.

    Comment by Akston — October 18, 2007 @ 12:19 am
  13. Jeff, you raise a good point in wondering why we don’t just rely on fundamental physics to define property rights. In this case, the fundamental physical value at stake is the power flux in a defined frequency band at a defined location. Thus, a property right would be expressed in a deed rather like this:

    The owner of this deed has to right to transmit in the region marked on the map in the frequency band from X MHz to Y MHz, to a maximum power flux of Z W/m2. The transmission may not exceed a power flux of A W/m2 in any other frequency, nor may it exceed a power flux of B W/m2 outside of the marked region.

    Now, this is a simple, clean system that is easily measured and enforced. Unfortunately, it raises practical problems. The power flux received at a point distant from an antenna depends not only on the power level and the antenna design, but also on many factors outside the control of the transmitter: humidity, air temperature, the state of ionization of the atmosphere, and the solar wind are the biggest factors, but there are more. Therefore, in order to remain within the legal bounds defined in the deed, the transmitter will need to operate at a power level less than optimal.

    But it gets worse. At the boundary between two regions, if both transmitters are operating optimally, then the signal strength of the two transmitters will be the same — meaning that a person on the boundary can’t get a good signal. Depending upon the type of transmission we’re talking about, we’ll need a S/N ratio of at least 4:1 to get good reception. But in order to accomplish that, we need the dead zone between two transmitters to be equal to half the separation between them — which means that we can only cover about one quarter of the total area! Three quarters of the people in the area don’t get any reception!

    The way around this is to overlap different regions with different channels. That’s why there are 13 VHF television channels even though for most of the time there were only four main networks: ABC, NBC, CBS, and PBS.

    Here’s a simple illustration of the problem. Let’s talk about the San Francisco Bay Area and treat it as if it were one long, continuous target area. We’d divide it into, say, five zones: North, mid-North, Central, mid-South, and South. For the South Bay, we’d set up ABC on channel 2, CBS on channel 5, NBC on channel 8, and PBS on channel 11. For south-central, we put ABC on channel 3, CBS on channel 6, NBC on channel 9, and PBS on channel 12. For central, we use ABC on 4, CBS on 7, NBC on 10, and PBS on 13. For mid-north, we start the cycle over, with ABC on 2, CBS on 5, NBC on 8, and PBS on 11. Now, the mid-north transmitters might interfere with the south transmitters, but they’re so far apart that the interference can be handled.

    But consider this: nobody can have any rights to channels 2,4,5,7,8,10,11, or 13 in the south central region. We’re throwing away 2/3 of the spectrum in order to obtain clearly defined property rights.

    Now, one solution to this problem is to use directional antennae. These allow you to crowd transmitters closer together without getting much interference. But these raise a whole host of new problems. You see, the ability to control the power flux at any given point in a region depends upon the wavelength. Longer wavelengths mean less control, and more interference problems. So now you have to rewrite the deed to take into account the differences in wavelength; deeds for lower frequencies need laxer standards than deeds for higher frequencies.

    Then you have to take into account topography. Are there any mountains on which to site antennae? What areas can be reached by antennae on those mountaintops? What about intervening mountains that might block transmissions? The Hollywood hills in the LA basin block higher frequencies, but not lower frequencies. So now you need to write a custom deed for each and every transmission region, marking out its limits on the map, and defining the power density standards. And you have to do a separate version for each and every frequency band.

    Now, this isn’t impossible, it just takes a big bureaucracy to nail down the specifications, and this is what the FCC spends a lot of time doing. We could have made the FCC not a regulatory agency but a registration agency, like the land registration offices in every county in the country. They keep records of who owns what. Of course, the FCC’s registry would be a lot more complicated, but it’s theoretically possible.

    But now let’s imagine implementing this system and letting it evolve according to market forces. Every year there are hundreds of transactions in which people transfer ownership of narrowly defined chunks of spectrum and territory. Now, you can always break down a deed by frequency — breaking your bandwidth into two chunks and selling the two chunks as two new deeds. But here’s the rub: you can’t combine deeds to assemble something bigger. If you buy up the rights to Channel 2 in both the south bay and the mid-north bay, that doesn’t give you any rights in the central bay or mid-south bay. There are no economies of scale. It doesn’t buy you anything special.

    Imagine land use laws that permitted landowners to break down their parcels into smaller and smaller parcels, but never permitted them to combine smaller parcels into a bigger parcel. What would you end up with in the end? An impossible situation!

    Gee, and I still haven’t gotten to problems of capital intensity, standards creation, and “winner takes all” in technology. If you guys still aren’t convinced, I’ll get to them.

    Comment by Chepe Noyon — October 18, 2007 @ 1:19 pm
  14. Of course, the FCC’s registry would be a lot more complicated, but it’s theoretically possible.

    I’ll skip this for now because you acknowledge that it’s possible. Feel free to come back to it if we overcome the as of yet unstated deal-breakers.

    But here’s the rub: you can’t combine deeds to assemble something bigger. If you buy up the rights to Channel 2 in both the south bay and the mid-north bay, that doesn’t give you any rights in the central bay or mid-south bay. There are no economies of scale.

    And I can’t put up houses, let alone hotels, until I acquire Tennessee Ave, New York Ave, and St. James Place.

    If you acquired the rights to Channel 2 in a properly shaped contiguous area, you would have an economy of scale, right?

    Comment by Jeff Molby — October 18, 2007 @ 2:13 pm
  15. “If you acquired the rights to Channel 2 in a properly shaped contiguous area, you would have an economy of scale, right?”

    No, because you can’t have contiguous areas with the same channel, because of problems with S/N ratios. Go back to this statement in my previous comment:

    “But consider this: nobody can have any rights to channels 2,4,5,7,8,10,11, or 13 in the south central region. We’re throwing away 2/3 of the spectrum in order to obtain clearly defined property rights.”

    And read the preceding paragraph to see why.

    I just realized, though, that you could get away with it by exceeding the terms of the deed but insuring that nobody has standing to sue you because you already own the other rights. In other words, even though nobody owns the rights to your channel in the intermediate zone, if you own the rights on the two peripheral zones and transmit into the intermediate zone, nobody else would be injured by your action, and so you could technically violate the deed without any problems.

    Of course, this still raises really wild problems. What if you buy up several deeds, combine them, use them as a whole, and then later break them down and sell off pieces? Would this create legal nightmares? I need some time to think this through.

    Comment by Chepe Noyon — October 18, 2007 @ 2:26 pm
  16. Of course, this still raises really wild problems. What if you buy up several deeds, combine them, use them as a whole, and then later break them down and sell off pieces? Would this create legal nightmares?

    I don’t see why. You would essentially be squatting in that intermediate zone, so it’s not like any rights to that area would get transferred during the break up. It would simply revert back to the original arrangement, because then the new owner would be injuring someone by encroaching on the intermediate zone.

    Comment by Jeff Molby — October 18, 2007 @ 8:37 pm
  17. Now I’d like to talk about market-based standards creation and the “switching barriers” problem (see this Wikipedia article for a basic description of the problem. The market will often settle upon a standard for reasons that are correct at the moment but in the long run lead to less than optimal results. A good example comes from the dominance of Microsoft in the software business. Microsoft obtained its dominance by the sheer luck of having IBM choose them to provide an operating system for their new PC. For twenty three years Microsoft has enjoyed roughly 90% market share, while Macintosh has had about 8% and Linux and others a few percent. The superiority of the Mac OS and Linus to Windows has not resulted in them taking up market share. The controlling factor is not quality but the cost of switching from Windows to another OS. So here we are stuck with inferior technology.

    Now, I’m not suggesting that we need to Federal government to dictate that everybody dump Windows and embrace Mac or Linux. My point is that, in some technical markets, the free marketplace does NOT yield optimal results. Blind faith in the efficiency of the marketplace in such situations is misplaced.

    A variation of this phenomenon is called “winner takes all”. In some kinds of markets, the market leader simply wipes out all competition. A good example of this is the Windows/Mac competition, or the Netscape/Explorer competition. Google is presently using its market size to crush competition, and again, some of its advantage stems not from a superior product but from greater size. The end result in each case is a failure of the market to deliver the optimal results.

    The inverse of this problem arises when we get incompatible standards. One of the classic examples of this is the old VHS/Betamax competition, in which the superior product (Betamax) lost out. While it’s easy to shrug your shoulders and say, well, that’s the market for you, we must remember that this competition required consumers to make uninformed guesses as to which technology would prevail; when the matter was decided, consumers lost millions of dollars. This was not a shining moment for the market economy. Capitalism sometimes screws up.

    We’re now going through exactly the same thing with the HD/Blu-Ray competition. Once again consumers are being asked to flip a coin, take a gamble, and see if they win or lose. Some will win; some will lose. And there’s no way right now that any consumer can make a reliable judgement as to which technology to pick.

    If we had the same market-based approach in telecommunications, we’d have the same problems, only larger. For example, consider cellphone service. You cannot readily mix and match hardware with service providers. If you buy handset X, you’re probably stuck with service provider Y. Apple’s iPhone is a wonderful technology, but you can’t use any service provider you want. Moreover, once you’ve chosen a service provider, your service area is limited. You can’t be certain that service provider Y will provide good service in the same areas that service provider Z does. The ironic result is that a free market for service providers creates a less-than-free market for consumers.

    OK, time to stop and let you digest this.

    Comment by Chepe Noyon — October 18, 2007 @ 8:49 pm
  18. Jeff, your point is solid. I’ve given the problem more thought and I agree that the process of combining deeds is reversible. Note, however, that while combining deeds creates wealth, breaking them down destroys wealth. This suggests an inexorable market bias towards combining deeds — which could get us into monopoly issues. I need to think some more on this problem.

    Comment by Chepe Noyon — October 18, 2007 @ 8:52 pm
  19. You’re certainly right that in any given market, capitalism may not be the most efficient process, but I don’t exactly trust the powers that be to know when that will or will not be the case. Even if they did, I don’t exactly trust them to outperform capitalism on average. Even if they did, I’ve already stated that I’m willing to accept occasional inefficiencies because it is blatantly obvious that capitalism is the most efficient process in the aggregate. Not to mention the moral benefits of embracing individual freedom.

    Two other points:
    - In general, the ones that lose out in cases like you’ve cited are “early adopters” who readily accept that risk as part of the transaction. (I don’t regret buying an LS-120)
    - For every BetaMax example, there are many more where the free market faced such a choice and decides “I want both standards!” Witness optical disc drives that can read and write to an incredible combination of disc formats and speeds.

    Comment by Jeff Molby — October 18, 2007 @ 9:22 pm
  20. Note, however, that while combining deeds creates wealth, breaking them down destroys wealth. This suggests an inexorable market bias towards combining deeds — which could get us into monopoly issues.

    Only to a point. The optimum deed size will probably be one that covers most of a city. After that, the returns would diminish quickly. Monopoly issues would be minor because you’d still have other channels.

    When the dust settled, you’d probably have something remarkably similar to the status quo without having to take a top-down approach.

    Comment by Jeff Molby — October 18, 2007 @ 9:25 pm
  21. Jeff, let’s distinguish between average performance and universal performance. We both agree that the market vastly outperforms the state in most cases. But there are special cases in which state intervention results in improved market performance. I’ll leave out the whole class of state interventions meant to insure that the market operates fairly. Let’s just concentrate on those situations in which state intrusion results in better performance due to technical considerations.

    One example might be roads. Yes, toll roads can work in some special cases, but for the basic road net, a privatized system would be most inefficient. Having to stop every few blocks to pay a 3 cent toll here and a 8 cent toll there is just not a good way to get around. Yet if we rely on economies of scale, we get into problems of monopolistic behavior — when there’s a big event at the theater, the owner of the roads jacks up the toll. This is no way to run a road system. And we all agree that this is a case for state ownership, not private ownership.

    The same thing goes for public utilities such as fire and police protection, electricity, and telephone wires. So the real question is whether we should treat radio communications as a public utility. It’s a complicated issue, as I’ve been pointing out.

    In general, the ones that lose out in cases like you’ve cited are “early adopters” who readily accept that risk as part of the transaction.

    Which means that rational consumers will wait until long after the technology is ready, waiting to see which format will win out in the end. This delays adoption of a beneficial technology. If the state had simply declared “We’re going to use Technology A”, then we’d have earlier adoption of the technology. Of course, we all understand that the state could easily make the wrong choice (and often does). My point is that there is some economic benefit to having a central referee flip a coin and make a decision when the call is very close.

    For every BetaMax example, there are many more where the free market faced such a choice and decides “I want both standards!” Witness optical disc drives that can read and write to an incredible combination of disc formats and speeds.

    Well, yes and no. It depends on how truly different the standards are. With optical disk drives, the formatting differences are really tiny; the basic physical layouts are the same and the only differences are in data structures, so format issues aren’t so serious in that case.

    Let’s take an example of a situation where differing standards have been worked out by the market successfully. Let’s talk about communications buses. We go all the way back to the venerable (and terribly confusing) RS-232 standard, which is still in use in some older equipment. (I have a few devices that still use it.) It was in use in the 70s. It’s a pretty good serial standard, but it is slow and stupid; you can’t share the bus with any other devices, so you have to dedicate a separate port to each device. Through the years we’ve seen all sorts of buses: the Centronics printer bus, SCSI, ADB, USB, FireWire, USB2, and so on. The market has done a good job of maintaining enough diversity to permit technological advances while providing some standards and stability for consumers. But there’s a key reason why: there is only one group of companies involved in creating the standards: the hardware manufacturers. And even then the standardization process is pretty simple: most new designs are readily presented to the relevant industry standards committee to obtain registry, so that they can license the standard to the commodity hardware manufacturers. Here, everybody’s interests are aligned and it’s easy to get a standard.

    But with telecommunications, it’s immensely more difficult, for many reasons. In the first place, there are many more parties: the people who manufacture the transmission equipment, the people who manufacture the reception equipment, the people who provide the service, and the content people. Getting all these people to agree on anything can be hellacious. I remember sitting in on a single standards committee meeting as a content expert way back in 1984, and the discussion was hopelessly muddled. The guys who were running it (Philips) were trying to get a standard for CD-ROM reading devices. The hardware people wanted an absolutely minimal device that would just read data and send it down a bus like a hard drive. But CD is much slower than a hard drive, and as a content provider, I felt that we needed a lot more intelligence to make it useful. I remember waiting for an hour to get my two cents’ worth in. Finally, when my turn came, I screwed up my courage and said, “I think we need to put in at least a 68000 CPU to make this thing run fast enough.” There was stunned silence throughout the room; my proposal was really out on the far edge. The silence was broken by Alan Kay, one of the great computer scientists of our age, who said, “Is that all?” as if a 68000 were too weak a CPU for this. I was absolutely flabbergasted, and I cannot imagine what the Philips guys thought of Alan Kay. In any event, the CD-ROM standard for readers did not include a 68000, and in fact was pretty dumb, which was one reason why CD-ROMs took a long time to catch on. They were just too slow.

    Anyway, this process of setting technical standards is really hairy and just intoning “let the market do it” doesn’t address the complexities. This is not like selling potato chips.

    Comment by Chepe Noyon — October 18, 2007 @ 10:53 pm
  22. Let’s just concentrate on those situations in which state intrusion results in better performance due to technical considerations.

    Actually, I’d rather stick to electromagnetic communications. I take issue with a number of your assertions in the other examples as well, so the discussion would quickly get out of hand.

    This delays adoption of a beneficial technology. If the state had simply declared “We’re going to use Technology A”, then we’d have earlier adoption of the technology.

    You’re making the unjustified assumption that both paths would begin at the same time. It’s not a stretch to suggest that the market may be able to go through several iterations of “beta” products before the government has even recognized the opportunity, let alone reached a consensus on a path.

    the basic physical layouts are the same and the only differences are in data structures, so format issues aren’t so serious in that case.

    Ok, but I have a $20 media reader that can read and write 7 types of solid state media. Let’s try to avoid tangents.

    Anyway, this process of setting technical standards is really hairy and just intoning “let the market do it” doesn’t address the complexities.

    Indeed, but your assertion is that adding electoral politics to the mix is going to improve things enough to justify the intervention.

    I remain unconvinced.

    Comment by Jeff Molby — October 18, 2007 @ 11:14 pm
  23. Jeff, electoral politics doesn’t have much impact on the FCC. This is a slow-moving agency and they take years to nail down a major new regime. The coming and going of different administrations happens too quickly to have much of an impact on the FCC, except when it comes to some of their faster decisions. Certainly regulation of broadcast communications is not one of those.

    The question is not whether we should let politics determine these issues. The question is whether we should have a central referee who sorts out the issues and imposes some standards on a very complex situation. There are unquestionably some major economic benefits that we enjoy due to having this central referee. There are also some economic losses we pay for it. Treating this as an ideological issue, simply declaring that “the market is always right”, is too simple-minded for such a complex issue. I’ve been dumping kilobytes of text on you guys trying to lay out just SOME of the complexities. I don’t demand that you accept my personal conclusions. But you would be foolish to ignore the complexities I’m explaining.

    Comment by Chepe Noyon — October 18, 2007 @ 11:27 pm
  24. Treating this as an ideological issue, simply declaring that “the market is always right”, is too simple-minded for such a complex issue.

    Have I ever said such a thing? My position would be more accurately described as “The market is so beneficial on the whole that I don’t support intervention unless a certain inefficiency is simply unbearable.”

    You could convince me that such is the case, but you haven’t made much progress yet. That’s all I’m saying.

    Comment by Jeff Molby — October 18, 2007 @ 11:46 pm
  25. Well, Jeff, if I have failed to convince you that this is a complicated issue, then I suppose I’ll just give up.

    Comment by Chepe Noyon — October 18, 2007 @ 11:57 pm
  26. It’s clearly a complicated issue. I understand why it has been regulated, but I don’t yet see a reason why it must be regulated.

    After all, there was a time when wages for certain professions were regulated across whole kingdoms. It wasn’t fatal. Life went on, but that doesn’t justify the regulation.

    Comment by Jeff Molby — October 19, 2007 @ 12:03 am
  27. Oliovia…

    It would be great help if I could get some clarity on the real issues…

    Trackback by Oliovia — October 28, 2007 @ 3:37 am

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