Mises Daily Articles
The Net Neutrality Scam
Yet again, the government wants to fix a problem that doesn’t exist. According to the Obama administration and the FCC, it is necessary to regulate internet service providers so that they don’t interfere with people’s access to the web. The claim immediately prompts one to ask: Who is being denied access to the web?
In the past twenty years, access to the internet has only become more widespread and service today is far faster for many people — including “ordinary” people — than it was twenty years ago, or even ten years ago. Today, broadband in Europe, where the internet is more tightly regulated, has less reach than it has in the United States.
The administration’s plan is rather innocuously called “net neutrality,” but in fact it has nothing at all to do with neutrality and is just a scheme to vastly increase the federal government’s control over the internet.
What is Net Neutrality?
We don’t know the details of the plan because the FCC refuses to let the taxpayers see the 300-page proposal before the FCC votes on it today. But, we do know a few things.
Currently, ISPs are regulated by the FCC, but as an “information service” under the less restrictive rules of so-called Title I. But now, the FCC wants to regulate ISPs as utilities under the far more restrictive Title II restrictions. For a clue as to how cutting edge this idea is, remember this switch to Title II regulation would put ISPs into the same regulatory regime as Ma Bell under the Communications Act of 1934.
So what does this mean for the FCC in practice? According to FCC Commissioner Ajit Pai, “It gives the FCC the power to micromanage virtually every aspect of how the Internet works.” More specifically, Gordon Crovitz at the Wall Street Journal writes:
[With Net Netruality,] bureaucrats can review the fairness of Google’s search results, Facebook’s news feeds and news sites’ links to one another and to advertisers. BlackBerry is already lobbying the FCC to force Apple and Netflix to offer apps for BlackBerry’s unpopular phones. Bureaucrats will oversee peering, content-delivery networks and other parts of the interconnected network that enables everything from Netflix and YouTube to security drones and online surgery.
The administration insists these measures are necessary because — even though there is no evidence that this has actually happened — it is possible that at some point in the future, internet service providers could restrict some content and apps on the internet. Thus, we are told, control of content should be handed over to the federal government to ensure that internet service providers are “neutral” when it comes to deciding what is on the internet and what is not.
Can Goods Be Allocated in a “Neutral” Way?
The problem is that there is no such thing as “neutral” allocation of resources, whether done by government or the marketplace.
In the marketplace, goods and services tend to be allocated according to those who demand the goods the most. Where demand is highest, prices are highest, so goods and services tend to go to where they are most demanded. This makes perfect sense, of course, and also reflects the inherent democracy of the markets. Where larger numbers of people put more resources is where more goods and services will head.
It is this mechanism that drives the marketplaces for food, clothing, and a host of other products. Consequently, both food and clothing have become so plentiful that obesity is a major health problem and second-hand clothing stores, selling barely-worn discarded clothing, are a boom industry, even in affluent neighborhoods. Similarly, cell phones have only become more affordable and more widespread in recent decades.
For industries where new firms may freely enter, and customers are not compelled to buy, companies or individuals that wish to make money must use their resources in ways that are freely demanded by others. Unless they have been granted monopoly power by government, no firm can simply ignore its customers. If they do, competing firms will enter the marketplace with other goods and services.
Although goods allocated in this fashion are — according to the administration — not being allocated “neutrally,” the fact is that more people now have more service at higher speeds than was the case in the past. Furthermore, even if firms (or the government) attempted to allocate goods in a neutral manner, it would be impossible to do so, because neither society nor the physical world are neutral.
In his recent interview on net neutrality, Peter Klein used the analogy of a grocery store. In modern-day grocery stores, suppliers of food and drink will negotiate with stores (using so-called “slotting allowances”) to have their goods advertised near the front of the store or have goods placed on store shelves at eye level.
If government were to tell grocery stores to start being more “neutral” about where it places goods, we can see immediately that such a thing is impossible. After all, somebody’s goods have to be at eye level or near the front of the store. Who is to decide? A handful of government bureaucrats, or thousands of consumers who with their purchases control the success and failure of firms?
In a similar way, bandwidth varies for various ISP clients depending on the infrastructure available, and the resources available to each client. And yet, in spite of the administration’s fear-mongering that ISPs will lock out clients of humble means, and the need to hand all bandwidth over to plutocrats, internet access continues to expand. And who can be surprised? Have grocery stores stopped carrying low-priced nutritious food such as bananas and oatmeal just because Nabisco Corp. pays for better product placement for its costly processed foods? Obviously not.
Who will Control the FCC?
All goods need not be allocated in response to the human-choice-driven price mechanism of the marketplace. Goods and services can also be allocated by political means. That is, states, employing coercive means can seize goods and services and allocate them according to certain political goals and the goals of people in positions of political power. There is nothing “neutral” about this method of allocating resources.
In the net neutrality debate, it’s almost risible that some are suggesting that the FCC will somehow necessarily work in the “public” interest. First of all, we can already see how the FCC regards the public with its refusal to make its own proposals public. Second, who will define who the “public” is? And finally, after identifying who the “public” is, how will the governing bodies of the FCC determine what the “public” wants?
It’s a safe bet there will be no plebiscitary process, so what mechanism will be used? In practice, bureaucratic agencies respond to lobbying and political pressure like any other political institution. Those who can most afford to lobby and provide information to the FCC, however, will not be ordinary people who have the constraints of household budgets and lives to live in places other than Washington, DC office buildings. No, the general public will be essentially powerless because regulatory regimes diminish the market power of customers.
Most of the interaction that FCC policymakers will have with the “public” will be through lobbyists working for the internet service providers, so what net neutrality does is turn the attention of the ISPs away from the consumers themselves and toward the regulatory agency. In the marketplace, a firm’s customers are the most important decision makers. But the more regulated an industry becomes, the more important the regulating agency becomes to the firm’s owners and managers.
The natural outcome will be more “regulatory capture,” in which the institutions with the most at stake in a regulatory agency’s decisions end up controlling the agencies themselves. We see this all the time in the revolving door between legislators, regulators, and lobbyists. And you can also be sure that once this happens, the industry will close itself off to new innovative firms seeking to enter the marketplace. The regulatory agencies will ensure the health of the status quo providers at the cost of new entrepreneurs and new competitors.
Nor are such regulatory regimes even “efficient” in the mainstream use of the term. As economist Douglass North noted, regulatory regimes do not improve efficiency, but serve the interests of those with political power:
Institutions are not necessarily or even usually created to be socially efficient; rather they, or at least the formal rules, are created to serve the interests of those with the bargaining power to create new rules.
So, if populists think net neutrality will somehow give “the people” greater voice in how bandwidth is allocated and ISPs function, they should think again.