Monthly Archives: November 2014

Not Neutrality, Part 3

Last week’s article on Net Neutrality focused primarily on what not to do. Net Neutrality shares an ideological pedigree with every other government backed “solution” intended to solve the problem fostered by government itself. The solution to the (mostly) unfounded fears of Net Neutrality advocates is more competition, not more government one-size-fits-all programs. The only way to get more competition is to reign in government’s ability to restrict it.

The overriding problem is structural. The world we live in is the result of decades of misguided policies and government induced market distortions. Like some perverse game of pick up sticks, this state backed structure retains its form no matter how many pieces are removed, impervious to all “reform.” The state has wrought a Gordian knot so intractable the only solution is to cut it.

At the ground floor of this structure are local municipalities that grant utility providers exclusive monopoly privileges in exchange for the fig leaf of “oversight”. If an outside Internet Service Provider (ISP) wishes to enter that market they have no choice but to negotiate either with the municipality itself or its pet public utility for access to “public” infrastructure such as utility poles or underground conduit. The fees charged for such access can double the cost of the entire project, turning an economically viable endeavor into one that is hopelessly unprofitable and results in the ISP throwing up their hands in disgust and walking away. This encourages either no service or monopoly service. Just as a sperm cell induces a protective response in the egg it fertilizes, so too does the first ISP in a region use the powers of its municipal host to keep out all would be competitors. For example, they may negotiate a contract that requires the municipality or public utility charge any future competitors much higher rates for access or a guarantee of exclusive access, thus effectively securing their monopoly position. In at least 20 states so far some ISPs have pushed for legislation that blocks municipalities from competing as ISPs themselves. Such legislation is typically cloaked in the rhetoric of “saving jobs” to pass the sniff test of public opinion. Not that “municipalizing” an industry is ever a good idea, but to the extent that it is possible for this to occur without the use of any taxes, subsidies or eminent domain, there is theoretically no ethical issue with such competition. Although I would seriously question whether such tax-free competition is possible, the easiest way to test that is to remove the power of taxation and eminent domain, not create a rat’s nest of exceptions and restrictions.

To ultimately solve these issues we need fewer, not more laws. We need fewer grants of monopoly privilege for both private and “public” interests. Municipalities should have no rights to grant charters or licenses to any business. This removes the whole notion of “public” utilities. With that antiquated framework swept away, we would witness competition between electric, gas, water, sewage, phone, and Internet providers solve an array of problems that are intractable under the current “public” system. For example, restrictions in Georgia on the generation of solar power, water rationing during drought, and poor and expensive phone service, are all easily solved in a competitive environment. For Internet access one solution could be totally free access but the consumer pays the content provider directly. Or a consumer pays their ISP but there exists an explicit contract where the ISP guarantees maximum speed to all content. Or a million other approaches that neither you nor I can predict. We must dispense with the “should” attitude of “it should work this way or that way.” “Should” implies the necessity of an enforcer to make that “should” a reality. “Could” is more appropriate. It acknowledges the uncertainty of anyone being prescient enough to know what is best. To paraphrase Yoda, “No should! Could or could not, there is no should.”

Competition permits the creative power of millions to come to bear on solving problems. They pursue it in hopes of “winning” the best-solution-lottery that will yield happy paying customers. Municipal monopolies maintain a legacy status quo system by restricting all allowed approaches to just one. If one is knowingly ingesting poison the solution is to not also simultaneously ingest an antidote; the solution is to stop ingesting the poison.

Not Neutrality, Part 2

The moniker “net neutrality” is perhaps one of the most masterful strokes of political propaganda, right up there with “ethnic cleansing” and “quantitative easing” when measured for overall obfuscation. When asked their opinion, many are hesitant to take a stand, as they retreat behind a wall of an honest lack of knowledge on the subject. For the most part this is due to a perceived requirement that one must possess a deep technical understanding of how the internet works in order to have an informed opinion. Unfortunately this plays right into the hands of its proponents; “it’s complicated, trust us, we know what is best”. In fact this complexity tactic comes directly from the pundit’s playbook; witness the recent condescending Jonathan Gruber revelations (“Lack of transparency is a huge political advantage.”) In fact, the essence of net neutrality is not at all complicated; it is just good ol’ fashioned crony capitalism in 21st century garb.

Putatively complicated subjects are often best understood through metaphor. In this case we cast the large content carriers (Netflix, Amazon, Apple, Google) as manufacturers. The manufacturers need to ship their product to distributors. The ISP’s (Comcast, AT&T, Verizon) are the shipping carriers. Currently it is entirely uncontroversial that shipping carriers charge more to ship large things quickly than they do to ship small things slowly. So if we rename “net neutrality” as “shipping neutrality” things come into focus. Under “shipping neutrality” the large manufacturers want the government to force the shipping carriers to charge everyone the exact same amount regardless of size, weight, or speed. In fact, they want the shippers to ship everything at “next day air” speeds but charge first class letter rates. Net neutrality is nothing more than two parties disagreeing over pricing for a service. The cronyism comes in to play when one side demands the government take their side and implement a price ceiling. Of course such naked rent seeking would never fly politically, so it is camouflaged under the guise of protecting freedom, equality and baby kittens. Who could be against baby kittens?

But, as with all types of economic protectionism (tariffs, subsidies and other price controls) it is the consumer that is ultimately harmed. To discern this harm we must extend the metaphor a bit further. If the shipping carriers could not recoup their costs from the shipper then they would have no choice but to collect it from the recipient (postage due surcharge). Nothing is free and someone must pay.

We should be striving to make the internet more, not less, like a package shipping network. For example, if our neighbor receives a large delivery and we receive a small one, we do not subsidize his shipment through a “monthly shipment access fee”. If we receive no shipments in a particular month, we pay nothing. With free competition we would likely see a similar situation with internet access develop: no monthly charges, pay for only the amount and speed you demand as you actually consume it.

Today with internet access we pay the same amount month after month regardless of the extent to which we utilize that service. Although some may pay a bit more for faster service, the fact remains that light users subsidize heavy users. Under net neutrality this subsidization ‘inequality’ would only become more extreme. Heavy Netflix users will cause ISP’s to increase access rates for all consumers because they are legally prohibited from collecting anything extra from Netflix or basing consumer’s charges on their usage patterns; all in the name of ‘fairness’ of course. Would it not be a better outcome if through competition ISP’s charged Netflix more to ensure priority for their content and Netflix in turned passed that cost onto their customers alone? Internet access for everyone else would get cheaper and faster as ISP’s plow that ‘Netflix’ profit into bigger and faster pipes.

An even worse outcome of net neutrality would be if ISP’s were prohibited from raising anyone’s rates. This would result in a fixed price but ever slowing speeds as the network became more congested. At which point the voters would cry out “to do something” and we would then see a new “internet delivery tax” collected by the government and doled out to ISP’s that promised to wag their tails and do their master’s bidding (such as identifying all users on their network, tracking “suspicious” behavior and shutting down websites deemed by the government to be “politically incorrect”.)

So net neutrality supporters, be careful what you wish for, you just might get the world Edward Snowden feared.

“Muh Ebola outbreak!”

When those who steadfastly believe in the ideal of a free society (i.e. no state) try to convince their brainwashed brethren to imagine a world free of institutionalized violence they are invariably assailed not with counter-arguments but rather with emotionalism or questions. “But without the state, how would X be accomplished?” This typical smug response betrays the interlocutor’s belief in the false choice promoted by the state, namely, that without the state it is not possible to accomplish X, Y, or Z. But a question is not an argument. A question proves nothing other than the questioner’s inability to understand the argument. A lack of understanding does not invalidate an argument any more than understanding it proves its validity. There is no more telling example of this truth than the obvious invalidity of the rejoinder “but who will pick the cotton?” from those that opposed the end of slavery. Apropos the similarity between statism and slavery: this method of argumentation, assaulting your opponent with questions believed to have no answer, is the most common tact against those proposing the end of statism. Without the state: who will build the roads? Who will teach the children? Who will stop the criminals? Who will stop the Ebola outbreaks?

It is this last point that I’d like to address since (a) the first three are absurdly easy to refute and (b) even some libertarians have a hard time answering this one. Let me begin by stating the guiding principle behind any of these thought experiments: if apparently the only way to accomplish something is by initiating violence against a fellow human being then you’re either not very imaginative or it is something that truly should not be done. Incentives and persuasion always trump coercion and violence. So, without further ado, how does one stop the spread of highly infectious diseases in a free society? To find the answer we need look no further than what the state does, albeit rather poorly, today. The answer lies within the principal of private property and the absolute control and discretion of private property owners over the use of their property. The state takes on the presumptive role of being the property owner of all within its borders. Under this presumption of ownership it then exercises its putative rights as property owner, namely control of ingress and egress and movement in that property. The irony of such state control is that the state actually has an incentive to do a poor job when it comes to control of infectious disease. Why is that? Because crises are the perennial excuse for expansion of state power, power that when the crises is over, is never relinquished. That is not to say those in power deliberately try to make it worse, but merely that failure of the state in its stated goals always results in the people rewarding it with more, not less, power.

Within a free society that had full private property rights the property owner (hospital) carries liability insurance and that insurance requires it do everything in its power to not release infected people. If an infected person wanted to leave anyway, they could, but only to the extent surrounding property owners permitted it. In other words, they wouldn’t get very far owing to highly secure fences and private roads. A private road owner would have a mutual contract with the hospital (for their own insurance reasons) to not permit sick individuals to leave without a clean bill of health. Because the state shields hospitals from this type of liability and the state owns all the roads and the state itself has no liability many people like this fall through the cracks today. In a private system there are many more people involved (insurance, hospital, road company, surrounding property owners) and this ensures a more granular level of control that minimizes “crack fall through”.

What we have today is a total structural problem in how society is organized. This is why there is no simple “what liberty says we should do” answer when we consider how we should handle quarantines within the current system. It is insufficient to say “we must respect the right of the individual who is infected” while ignoring the systemic problem of monopolistic state ownership that both crowds out competitors that would do a better job and that eliminates liability for its own mistakes.

Halloween Economics

Every Halloween children engage in the single largest simultaneous generation of mutual profit and yet not a single dollar changes hands. As the lights go out on the front porches the opening trade bell chimes for the time honored post-Trick-or-Treat ritual known as “the trade”. Twizzlers, Snickers, M&M’s, lollipops all change hands multiple times. The absolute quantity of candy changing hands is static, only ownership changes. Yet when all trades are complete everyone is happier than when they started out. How then can this apparent zero-sum game produce a positive output not just for some participants, but for all participants? The answer is quite simple: all value is subjective.

The Halloween candy market mirrors the real world in microcosmic fashion. Each participant starts out with a random distribution of candy; some may have more and some less, but all have something. In the same way each of us is born into this world with differing abilities that carry with them advantages and disadvantages (i.e. some are born into candy rich or candy poor neighborhoods to extend the metaphor). This process may be “unfair” but all have something to offer each other. But, what all have in equal proportion is the human propensity for general dissatisfaction with whatever they do have and therefore each has a desire to improve his or her condition. So, people have X but they want Y, and in order to achieve Y they will use X to get as much of Y as they can. Of course trade is usually never that simple. Sometimes to get X you must trade Y for T and T for R and R for U and then U for X. But the point is that with each completed trade both participants have a profit; that is, both place a higher value on the item(s) obtained post-trade then the items they had pre-trade. Profit is merely our subjective assessment of having gained an increase in satisfaction when we consider our post and pre-trade mindsets. Were there not an anticipated increase in satisfaction then naturally we would not have engaged in such a trade. Of course it is not impossible to deliberately trade away something we hold in high esteem for something we hold in much lower esteem, but it would be foolish. But do not misinterpret that as meaning that a “sacrifice” is foolish. In fact if done willingly it is not possible to “sacrifice” something. The one “sacrificing” does receive something of greater value in the exchange; the satisfaction of benefitting the one for whom they willingly “sacrifice”.

Because all value is subjective it makes it difficult (if not impossible) for a third party to judge the outcome of a trade. To use the candy example, if a parent who detests Tootsie Rolls witnesses their child trade away all of their Hershey Kisses for Tootsie Rolls, then that parent will indignantly conclude their child has been “ripped off” and may attempt to intervene. But since their child loves Tootsie Rolls and the other kid loves Hershey Kisses then both kids are now much happier because of their swap. Both children have profited from the trade but the parent believes one child has gained and the other has lost. This demonstrates the utter futility of believe a third party can “regulate” economic trade by substituting their own subjective opinion for the equally subjective opinion of the market participants. For example, imagine what would happen if a parent decreed a minimum wage of sorts. House rules say jawbreakers must trade for at least two Hershey Kisses. But, jawbreakers are so universally disliked that the market rate is actually 10 jawbreakers for one Hershey’s kiss. What do you imagine would happen to the kids with lots of jawbreakers? That’s right, no one would trade with them because no one would be willing to meet the decreed price minimum. This market intervention and subsequent distortion causes decreased profit not only for the kids with jawbreakers but for all other participants that now are barred from trading with them. Intervention robs all of the maximum satisfaction that could have been achieved.

Fortunately the state has yet to get involved in exerting control over this chaotic and unregulated candy free market. Each Halloween we are witness to the simple beauty of the natural equilibrium of increasing satisfaction achieved by those able to freely engage in uncoerced and unregulated trade.