Technology × Freedom

You're on the Wrong Side of the Net Neutrality Debate

February 28, 2017 invisiblehand

The New FCC Chairman, Ajit Pai, has promised to roll back regulations protecting net neutrality. As a result, countless programmers, hacktivists, cypherpunks, libertarians, and tech professionals of all political stripes are up in arms. For many of us, net neutrality is held as the most sacred of all internet virtues. In fact, to even question it can earn you accusations of being a corporate or government shill. But defenders of net neutrality, without intending to, end up reinforcing the very arguments the government and ISPs would like us to accept in order to justify government intervention into the ISP market. I’ll boil down the argument to its simplest terms:

Premise A: Because of the high infrastructure costs and wastefulness of duplicative service, internet/broadband service is a natural monopoly.

Premise B: As a natural monopoly, we must have regulations in place to prevent monopoly providers from abusing their corner on the market and violating consumers’ rights.

Conclusion: Therefore, we must petition the government to enforce regulations and protect a free and open internet.

Logically, the syllogism checks out. But there are at least four false assumptions operating behind the logic that lie at the heart of the net neutrality problem. I’d like to coax these assumptions to the surface in hopes that any readers who believe in net neutrality can at least be open to an alternate viewpoint and not merely hurl mindless accusations of “corporate propaganda!” at anyone who expresses this viewpoint.

False Assumption #1: Monopolies Are the “Natural” Result of the Free Market

This assumption is understandable. After all, we have monopolies. Where else could they have come from if not the free market? The problem is in assuming we currently operate in a free market, either here in the U.S. or abroad. In reality, the U.S. economy hasn’t been “free” since at least the turn of the 20th century, and arguably since its founding. No national economy in the world is purely free – states always intervene in their economies to one degree or another. Blaming any negative outcome on the free market simply because the outcome exists is merely begging the question.

In fact, we know from the historical record that government intervention is always in play prior to the rise of a monopoly, and when all regulations are removed, it is the functioning of the free market that naturally dissolves these monopolies. This is how Tom DiLorenzo characterizes the reality of the situation:

It is a myth that natural-monopoly theory was developed first by economists, and then used by legislators to "justify" franchise monopolies. The truth is that the monopolies were created decades before the theory was formalized by intervention-minded economists, who then used the theory as an ex post rationale for government intervention.

Notice the subtle reversal here. DiLorenzo is contending that governments intervened before monopolies were created, and then after the fact claimed that further intervention was needed to restrict these “natural” monopolies that they themselves created.

In his 1989 book Efficiency, Competition, and Policy, Harold Demsetz summarizes the state of competition in the public utilities sector prior to the onslaught of government intervention:

Six electric light companies were organized in the one year of 1887 in New York City. Forty-five electric light enterprises had the legal right to operate in Chicago in 1907. Prior to 1895, Duluth, Minnesota, was served by five electric lighting companies, and Scranton, Pennsylvania, had four in 1906. … During the latter part of the 19th century, competition was the usual situation in the gas industry in this country. Before 1884, six competing companies were operating in New York City … competition was common and especially persistent in the telephone industry … Baltimore, Chicago, Cleveland, Columbus, Detroit, Kansas City, Minneapolis, Philadelphia, Pittsburgh, and St. Louis, among the larger cities, had at least two telephone services in 1905.

In a 1940 article published in the Journal of Land and Public Utility Economics, Horace Gray describes what happened soon after:

[B]etween 1907 and 1938, the policy of state-created, state-protected monopoly became firmly established over a significant portion of the economy and became the keystone of modern public utility regulation…. [From then on] the public utility status was to be the haven of refuge for all aspiring monopolists who found it too difficult, too costly, or too precarious to secure and maintain monopoly by private action alone.

DiLorenzo traces this monopolizing regulatory process through the history of AT&T and its longstanding monopoly on telephone service:

Once AT&T's initial patents expired in 1893, dozens of competitors sprung up. By the end of 1894 over 80 new independent competitors had already grabbed 5 percent of total market share … after the turn of the century, over 3,000 competitors existed. In some states there were over 200 telephone companies operating simultaneously. By 1907, AT&T's competitors had captured 51 percent of the telephone market and prices were being driven sharply down by the competition.

The eventual creation of the telephone monopoly was the result of a conspiracy between AT&T and politicians who wanted to offer "universal telephone service" as a pork-barrel entitlement to their constituents. Politicians began denouncing competition as "duplicative," "destructive," and "wasteful," and various economists were paid to attend congressional hearings in which they somberly declared telephony a natural monopoly. "There is nothing to be gained by competition in the local telephone business," one congressional hearing concluded.

The crusade to create a monopolistic telephone industry by government fiat finally succeeded when the federal government used World War I as an excuse to nationalize the industry in 1918. AT&T still operated its phone system, but it was controlled by a government commission headed by the postmaster general. Like so many other instances of government regulation, AT&T quickly "captured" the regulators and used the regulatory apparatus to eliminate its competitors. "By 1925 not only had virtually every state established strict rate regulation guidelines, but local telephone competition was either discouraged or explicitly prohibited within many of those jurisdictions."

We've established that monopolies can't exist – or at least not for very long – unless there is government meddling first. But would net neutrality be achieved if we let a truly free market be its own regulator? Yes, because the corporations that currently hold the corner on the market – the Comcasts, AT&Ts, and Verizons of the world – would be vulnerable to undercutting by new competitors entering the market with better business models. Again, history attests to this process with amazing consistency. But we also have to understand that an un-neutral internet may be a key part of that process – not the end result, but admittedly a temporary stepping stone. Here's how Josh Steimle put it in his excellent op-ed for Forbes:

If the telecoms are forced to compete in a truly free market, Comcast and Time Warner won’t exist 10 years from now. They’ll be replaced by options that give us better service at a lower price. Some of these new options may depend on being able to take advantage of the very freedom to charge more for certain types of Internet traffic that Net Neutrality seeks to eliminate.

Let me pause here and play devil's advocate. Let's assume none of this is true; natural monopolies do exist and a free market won't guarantee that better service providers will sweep in to innovate the industry. Given this, should we really trust the biggest monopoly in the world – the U.S. government – to regulate these smaller corporate monopolies? Quoting Steimle again:

We’re talking about the same organization that spent an amount equal to Facebook’s first six years of operating costs to build a health care website that doesn't work, the same organization that can’t keep the country’s bridges from falling down, and the same organization that spends 320 times what private industry spends to send a rocket into space. Think of an industry that has major problems. Public schools? Health care? How about higher education, student loans, housing, banking, physical infrastructure, immigration, the space program, the military, the police, or the post office? What do all these industries and/or organizations have in common? They are all heavily regulated or controlled by the government. On the other hand we see that where deregulation has occurred, innovation has bloomed, such as with telephony services. Do you think we’d all be walking around with smartphones today if the government still ran the phone system?

It's time to stop thinking that corporations, which are beholden to consumer interests, are somehow worse than the government, which has no stake in protecting consumer interests and on the contrary extracts continual, massive, involuntary payments from citizens regardless of the quality or cost-effectiveness of their services.

False Assumption #2: Consumers Have a Right to a Free and Open Internet

This is the philosophical dividing line that most people will never be able to cross, because it cuts right to the heart of our deeply held beliefs and convictions. It dictates our very definition of justice and what causes we believe in as a result of that definition.

Here is my view: Rights are only negative. That is, we never have a right to something; we only have a right against something. We have a right not to have our bodies, minds, and property aggressed against. That is the extent of our fundamental rights as human beings. If we begin to say we have a positive right – a right to possess, use, or otherwise access something, either for free or at an affordable cost – we enter a realm of unlimited moral absurdities and nightmarish conclusions. Because to demand anything from anyone else as a “right” by necessity violates the right of another individual from whom you are demanding that good or service. The modern egalitarian mindset views anything as a right that is enjoyed by some but not all, a definition that has increasingly little to do with what is necessary for a free life.

Defenders of net neutrality believe, even if unconsciously, that we all have a right to access an "open" internet, and that this access should not be tainted by provider preferences, artificial scarcity, throttling, zero-rating, or any other business interests. But what is the ethical principle underlying this “right”? I wholeheartedly agree an open internet – one that doesn't block content sources or favor some sources over others – is a major societal good. But if we achieve this through monopoly-creating regulations that distort the market and lead to malinvestment of capital, which in turn hurts consumers and the economy as a whole, then we are doing far more harm than good in the long run. As history bears out, letting the market dissolve “natural” monopolies and drive innovation to meet consumer demand is the only way to ethically achieve net neutrality.

False Assumption #3: Corporations Don't Care About What Consumers Want

This perceived antagonism between corporations and consumers runs through every single argument I've ever heard against the free market. The assumption is that, left to their own devices, corporations will trample over consumers in a greedy rampage for more profits. Of course, even the most ignorant student of economics knows that companies cannot exist without consumers, which is why large corporations spend billions of dollars every year on market research to try and crack the code of what consumers want. This is economics 101: the companies that are most adept at meeting the wants of consumers at the lowest cost are the ones that survive. The only time this isn't true is when they collude with the government to create an artifical monopoly, thus enabling them to raise costs and not worry about competition undercutting them with better service or lower costs.

Unfortunately, the tech world is rife with economically ignorant statements like this one from the "Save the Internet" project:

Without Net Neutrality, cable and phone companies could carve the Internet into fast and slow lanes. An ISP could slow down its competitors' content or block political opinions it disagreed with. ISPs could charge extra fees to the few content companies that could afford to pay for preferential treatment — relegating everyone else to a slower tier of service. This would destroy the open Internet.

Little does the writer understand that the moment ISPs do something its customers dislike, they'll feel the effects in their quarterly profit reports. The very fact that corporations are profit-driven means they are limited by what consumers want and are willing to put up with.

False Assumption #4: Things Will Always Be the Way They Are Today

This last assumption renders everything else obsolete, in my opinion. Ultimately, the net neutrality debate will be a flash in the pan in the history of the internet. Technological innovation is occuring at such a rapid pace that the way we access the internet will inevitably change, causing the old corporate behemoths to crumble and giving rise to a plethora of new, competitive, entrepreneurial providers. I return to Steimle:

Five years from now a new satellite technology may emerge that makes fiber obsolete, and we’ll all be getting wireless terabit downloads from space directly to our smartphones, anywhere in the world, for $5/month. Unrealistic? Just think what someone would have said in 1994 if you had tried to explain to them everything you can do today on an iPhone, and at what price.