The motives of net neutrality advocates differ. But the common thread among them is a general belief that internet service providers (ISPs) face no serious competition, and therefore overcharge both their supply-side (i.e., Netflix) and demand-side (internet users) customers and generally treat customers poorly.
In other
words, ISPs have “natural monopolies” that allow them to rake in profits
without improving service to customers or dealing with different customer-types
in an equitable manner.
This
perspective gave rise to “net neutrality,” which the Trump administration
soundly condemned last week. This measure would have essentially transformed
the internet into a public utility by regulating ISPs like other utilities
(electricity, water, etc.). For convoluted reasons, regulators believe this
will ensure internet service is distributed equitably among all who are willing
to pay the going rate — no more up-charging big bandwidth-eaters (like
Netflix), even at mutually-agreeable prices.
Underlying
this perspective is the belief that we can decipher, in some way, the level of
service that ought to be offered on the ISP market. To implement net
neutrality, regulators would allegedly examine the ISP market and decide, on
some grounds, that what exists ought to be different, and that such a change
can only come about through government regulation.
But by what
standard are regulators judging ISPs to be acting unfairly? Who can say they
are making too much or offering too little? Sure, internet service, as the
technology has evolved, bears some similarity to public utilities like water
and electricity. But it is not the same service.
More
specifically, how can we know what ISPs ought to charge?
Some argue
that ISPs have obtained special regulatory favors in the past that positioned
them to build unfair monopolies in the present. That’s another argument entirely
that, frankly, isn’t often made by regulators. But even if that were true, is
the solution to end the market for internet service altogether, and opt instead
for a pseudo-market whose bounds and limits are controlled, ultimately, by
government regulators?
This brings
to mind an aspect of the socialist calculation debate, whereby Austrian economists (among
others) revealed the self-destructive nature of socialism. One pillar of their
argument — Mises’s specifically — is that without a market to
study and observe, central planners will not know what prices to mandate for
what quantities of goods. The result will be over- or under-production of
regulated goods — distortive resource misallocations that ripple throughout the
economy and cause excess supply and/or demand. Further, such regulations stifle
investment and innovation in targeted industries, most often by indirectly
capping profits.
It is not
hard to see how this applies to net neutrality and regulating ISPs. By
arbitrarily changing existing markets for internet service, regulators risk
corrupting the fragile preconditions necessary for firms and consumers to
calculate rationally, and the incentives necessary to lure investment and
risk-laden innovative enterprises. The result could be excess demand in the
market for internet service if regulations force prices too low, excess supply
if regulations force prices too high, or stilted innovation in ISP technology
altogether. Tech icon Marc Andreesen explains:
…”A pure
net neutrality view is difficult to sustain if you also want to have continued
investment in broadband networks. … If you have these pure net neutrality rules
where you can never charge a company like Netflix anything, you’re not ever
going to get a return on continued network investment — which means you’ll stop
investing in the network. And I would not want to be sitting here 10 or 20
years from now with the same broadband speeds we’re getting today…”
This is not
a complex point, but it’s important in this particular context, given the
importance of internet service in modern economies. A subtler but equally
applicable point regards the nature of change in a dynamic world. In a sense,
this is a more formal restatement of the problem with comparing market
conditions to some model rooted in a concept of the economy as rotating in some
static equilibrium. Economist Peter Boettke explains:
…”Mises
[explained] how the static conditions of equilibrium only solved the problem of
economic calculation by hypothesis, and that the real problem was one of
calculation within the dynamic world of change, in which the lure of pure
profit and the penalty of loss would serve a vital error detection and
correction role in the economic process…”
In the
context of the issue at hand, this is particularly consequential. The market
for internet service is brand new and growing and evolving quickly. To decide,
in a market as young and dynamic as this, that current market prices are not
fair reveals a great degree of confidence in mere “hypotheses,” as Boettke puts
it, about what the ideal market for internet service should look like.
*Nick Freiling is
Founder/Director at Haven Insights, a DC-based market research firm. He studied
Austrian economics at Grove City College and George Mason University.
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