<nettime> Myths about markets

[McKenzie Wark <mwark@laurel.ocs.mq.edu.au>]

apologies to anyone who's received this on other lists, but
i think its useful for nettime folks interested in the
critique of cyberlibertarianism...

__________________________________________
"We no longer have roots, we have aerials."
http://www.mcs.mq.edu.au/~mwark
 -- McKenzie Wark 



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              Vol 2, No. 4
                July 1997

      THREE MYTHS ABOUT GOVERNMENT, MARKETS, AND THE NET:
      A SPECIAL REPORT ON THE CLINTON ADMINISTRATION'S PLANS 
      FOR GLOBAL ELECTRONIC COMMERCE
      -- by Anders Schneiderman, PhD., aschneid@pacbell.net


"A cutting-edge, history-making blueprint."  That's what Newsweek columnist
Steven Levy calls the Clinton Administration's grand plan for the
Internet's future.  "A Framework for Global Electronic Commerce" was
released on July 1 to a chorus of favorable reviews.  Some commentators
fretted about its position on encryption and privacy, but overall, it
earned high marks.  

The reason for this praise?  Because, as Levy says, "the report bluntly
asserts that the most important thing the govern can do about [the Net] is
_get the hell out of the way_."  Let the free market work its magic.

The Clinton Administration report is a perfect example of how far Newt
Gingrich and others have come in creating the myth of Government Bad, Free
Enterprise Good. If we patiently troll through this document's murky prose,
we can reveal glimpses of our society's confusion about how markets and
government work.


MYTH #1: THE MARKET IS ALWAYS SMARTER THAN THE GOVERNMENT.

The Clinton Administration's report is based on a simple principle:  "the
private sector should lead."  Why?  Because  "innovation, expanded
services, broader participation, and lower prices will arise in a
market-driven arena, not in an environment that operates as a regulated
industry."

This raises an obvious question.  If the government is so incompetent, why
did the Internet come from Uncle Sam and not CompuServe or AOL?  Why did
the private sector have to play catch-up with this stellar innovation?

The report knows this is a problem, so it tries to gloss over this
unpleasantness as quickly as possible. It says, "though government played a
role in financing the initial development of the Internet, its expansion
has been driven primarily by the private sector."

But the only reason the private sector is in the driver's seat is that
Uncle Sam handed over the keys. As Nathan reported in "How Netscape Stole
the Web" (Vol. 2, No. 2), Netscape succeeded because it ripped off the
University of Illinois and U of I didn't fight back.  More generally, the
Clinton Administration pulled the government out of the business of
developing the Net.   You can argue whether or not this was a good
decision, but it's hard to see the Net's history as evidence that the
private sector _must_ lead.

Our myopia about the Net's history is a classic example of the trouble
Americans have acknowledging how government facilitates the economy.
Conservatives like to say, let's get back to the glory days of the 1950s,
when the government left the private sector alone. And they're right, it
did mostly stay out of the market. Except for the military, which nurtured
the electronics and computer industries. And the FHA and VA, which
underwrote half the houses in the 'burbs. And the massive highway building
programs that helped people commute between the 'burbs and the city and
expanded the auto market. And the GI Education Bill and government grants
that paid for the explosive growth of higher education. And the NIH, the
NSF. Medicare, and Medicaid programs that poured massive money into the
health care system. And the tax breaks that underwrote a new system of
pensions. And of course there's agriculture. And banking.  But aside from
computers, electronics, housing, construction, cars, education, health
care, agriculture, and banking--and, indirectly, steel, plastic, and
concrete--government hasn't done a thing to help our economy.


MYTH #2: GOVERNMENT REGULATIONS ARE BAD FOR MARKETS

Even if the government did a great job creating the Internet, maybe it's
time to turn it over to the free market.  The Internet is moving so fast
that government bureaucrats may not be able to keep up.  That's what the
Clinton Administration thinks.   According to the Executive Summary, "The
Internet should develop as a market driven arena not a regulated industry."

But this bold statement isn't the whole story.  The report also says that
"governments must adopt a non-regulatory, market-oriented approach to
electronic commerce, one that facilitates the emergence of a transparent
and predictable legal environment to support global business and
commerce."  In other words, the government should butt out, except for
one, little, minor task.  It must create a vast new infrastructure to make
Net commerce work. 

The problem is simple.  If the government really butts out, Internet
commerce will die.  The day the report came out, Sun Microsystems director
Dennis Tsu complained to the press that the U.S. wasn't aggressive enough
about expanding intellectual property rights, patents, and copyright
protection.  Net commerce depends on them.  So if Net commerce is to
flourish, we need to radically change our legal system. 

For example, in the next few years  there will  be a huge brawl over
copyright law.  Right now, most Netizens ignore copyright rules.  The Net
grew so rapidly because no one worried about whether they were violating
intellectual property law. "Information wants to be free!" was the Net's
motto.  But now that there's money to be made, Sun and Microsoft and IBM
and Times-Warner and all the other players want a new set of rules that
make damn sure this attitude goes away.  And they need the government to do
it for them.

The government is also needed to create online equivalents of money,
signatures (for signing contracts), and other fundamental features of Net
mass commerce.  The industry can take the lead in developing these
standards, but none of it will work if the government doesn't enforce them,
because ultimately only the government can create legally-binding courts or
cash.

The report tries to get around this paradox by using one of the clever
shell games conservatives have adopted:  we don't want 'government,' just
contracts and courts. When the government must intervene, the report says,
it "should establish a predictable and simple legal environment based on a
decentralized, contractual model of law rather than one based on top-down
regulation."  

For those of you who have an infant, I have a piece of advice: tape that
sentence over their crib.  It's the Corporate Lawyer Full Employment Act.
The computer world is already lawsuit-crazy, and if Clinton--a lawyer by
training--has his way, we'll be up to our eyebrows in 'em.  This isn't less
government, it is more lawyers.

Far from decreasing the scope of regulation, this approach will increase
it. Nathan's column in this issue of E-Node tells the story of the ISPs
and AT&T, where attempts to get the government out of the market have led
to more government, not less. 

This paradox is evident throughout the report. The report warns against
"potential areas of problematic regulation," one of which is "rate
regulation of [Internet] service providers."   But while protecting us from
Internet service providers (ISPs) is bad, protecting ISPs from the phone
companies is good.  The report warns that "monopolies or dominant telephone
companies often price interconnection well above cost, and refuse to
interconnect because of alleged concerns." In other words, if Clinton
really let competition loose, the phone companies would simply refuse to
let ISPs connect up to their customers:  you want to serve 'em, you run
wires to their houses.  So government should butt out--except where it must
butt in.  

As a result of this sophistry, the report is littered with sentences like,
"genuine market opening will lead to increased competition, improved
telecommunications infrastructures, more customer choice, lower prices and
increased and improved services."  Translation: every few years, we will
hold a fascinating philosophical debate over the proper definition of a
"genuine market." Federal courts and bureaucrats will hand out
billion-dollar prizes to the debate winners in the form of regulations and
court decisions, which spell out in excruciating detail how we will ensure
we have "genuine markets."  This is less government? 

Finally, as someone who loves the Internet, I'd argue that if some of the
anti-government fears are realized and the government does slow down the
pace of innovation a little, that might not be such a bad thing. As I noted
last year (Vol. 1, No. 1), competition has lead to Just-Too-Fast
development.  Companies scrambling to survive are forced to throw in new
features and create new toys without knowing whether they work well or are
even useful. To solve many serious Net problems, we need more
thoughtfulness, not more speed.  Maybe a little sand in the wheels is a
good thing.


MYTH #3: IF THE GOVERNMENT GETS OUT OF THE WAY, WE'LL ALL BENEFIT.

The last myth is that market competition is good for everybody. As noted
above, the report insists that "Innovation, expanded services, broader
participation, and lower prices will arise in a market-driven arena, not in
an environment that operates as a regulated industry."  That's why  "where
governmental involvement is needed, its aim should be to support and
enforce a predictable, minimalist, consistent and simple legal environment
for commerce," and not, say, justice, fairness, or other bleeding-heart
concerns.  

This approach makes cheery assumptions about the world that experience does
not bear out.  In a recent issue of Salon Magazine, Andrew Leonard points
out one example that's already reared its ugly head:  privacy.  The
Administration wants the market to take the lead in developing standards
for protecting consumer privacy.  But so far, says Leonard, the
market-driven Open Profiling Standard proposal has no means "for taking
care of the basic problem of whether or not information should be collected
in the first place."  There's a good reason for that:  "The desire for
online privacy runs directly at odds with one of the most attractive
aspects of doing business online -- the Net's capacity for helping target
marketing and advertising efforts directly at specific users."  Consumer
choice ends where corporate needs begin.

Experience has also shown us that increased competition can have a
paradoxical effect:  sometimes more competition means that fewer, not more,
people benefit. In a terrific article in Newsweek last year, Marc Levinson
showed that in the the financial world, banks don't _want_ to compete for
most of us.  On average, "20 percent of households account for almost all
of consumer-banking profits, while three out of five customers are money
losers."  That means that if there's more competition, the banks will
compete to attract the 20 percent who generate profits and they will
compete to dump the 60 percent who don't.

As Nathan demonstrated in his last two E-Node columns, we see similar
economics in electrical and telephone services.  When competition kicks
into high gear in some markets, companies understandably focus on "cream
skimming" the customers who can turn a profit.  If the same holds true for
Internet commerce in general, then far from leading to high-quality
universal access, more competition could leave a lot of us worse off.

The final example of the disconnect between who markets are supposed to
help and who they really do help is the tricky issue of taxes.  Most
accounts of the report's conclusions about taxes make the same mistake that
Steven Levy makes.  According to Levy, the report argues that "one thing
governments should most decidedly _not_ do is tax the Internet"--it should
be  a "tariff-free zone."  In other words, the government should not stifle
the Net's explosive growth with taxes.

There's an obvious problem with this approach.  If the Net is tax-free,
then anybody with any sense will move every sales transaction onto the Net
that they can.  Even if Net commerce isn't more efficient--even if it's a
little less efficient--you'll save money.  Needless to say, that would
strongly penalize many people who don't have access to the Net,
particularly poor folk.  But the most devastating effect would be on state
and local government.

On June 24th, a few days before the report was due out, the U.S. Conference
of Mayors passed a resolution telling the Feds to butt out of the question
of how Net commerce should be taxed.  That's because state and local
governments are terrified.  Without revenue from sales taxes, local
services and the people that depend on them will be road kill (for more
details, see the report, "Prop 13 Meets the Internet," at
http://garnet.berkeley.edu:3333/).

And that's the reason why the Administration's report does _not_ advocate
making the Net tax-free. This is what the report says:  "the United States
believes that no new taxes should be imposed on Internet commerce."  No new
taxes, but what about the old ones? The report doesn't really say.  Its
authors know that there is a problem.  At one point, it proclaims that  "no
tax system should discriminate among types of commerce, nor should it
create incentives that will change the nature or location of transactions."
 But this is more of a wish than an answer.

So how does the Administration propose solving this problem, this
life-and-death issue that will determine the fate of all state and local
governments and the people who rely on them?  Very simply:  "No new taxes
should be applied to electronic commerce, and states should coordinate
their allocation of income derived from electronic commerce."    Got it?
No "new" taxes.  Just somehow, magically, we're going to collect the same
revenue local governments used to obtain from sales tax and we'll divvy it
up so it works out just like it used to. 

Having dumped the readers into a very murky swamp, the report then pushes
us in further with its next sentence:  "Of course, implementation of these
principles may differ at the [state and local] level where indirect
taxation plays a larger role." And in case our heads are still above water,
one more shove: "the system should be simple and transparent," "capable of
capturing the overwhelming majorities of appropriate revenues" while
"minimiz[ing] burdensome record keeping and costs for all parties." 

This is a cutting-edge, history-making blueprint?  This is more like one of
those challenges they give engineering students where they say, here's 20
boxes of toothpicks, 100 bowls of Lime Jello, and a magnifying glass, now
build us a working model of La Guardia Airport. This is a recipe for disaster.


CONCLUSION

Economic markets are a wonder to behold.  Like natural ecosystems, they can
produce marvels that are hard to imagine occurring any other way.  And like
nature, ultimately they resist our control. Even with the best of
intentions, clumsy attempts to nurture or direct economic markets can turn
around and bite us.  The experience of Europe's ham-handed attempts to
force the creation of a European computer industry was not so different
from the experience of people who live in flood plains, who learn the hard
way that Mother Nature respects no engineer.
 
But at the same time, we need to be careful that in respecting the power of
markets we don't blind ourselves to the crucial role played by our
government.  Because when we do turn a blind eye, we stop debating an
important question:  who benefits?  Who will reap the harvest from our tax
dollars?  Instead, those questions are settled in private, behind closed
doors.  That's not right.  If Uncle Sam must ask his family to help tend
the garden of the Internet, then all members of his family should partake
of its bounty.

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