It's a confusing issue, made all the worse by the use of "net neutrality" as a euphemistic slogan. The wording itself is intended to rally people behind the banner, and to quash critical thinking on the matter, in much the same way that the liberal claim to monopoly on "compassion" allows them to denigrate those who disagree with them on economic matters as "selfish" and "greedy." A key case in point is the ACLU's support for the government's version of "neutrality," which declares that without it, large corporations will be able to dictate what is said over the Internet. They're asserting, in other words, that despite three decades of anarchic free speech, corporations might suddenly take issue with what you're saying and move to clamp down on it. As usual, the ACLU is pointed precisely the wrong way on this. History amply demonstrates that it is government, not business, that most threatens your free speech. And now, with the FCC decision to "regulate" the Internet, they are finally poised to do just that.
Never mind that the democratic process argues against it (polls indicate that 2 out of 3 Americans are opposed to any kind of government regulation of the Internet, with some polls exceeding even that number). Never mind that the FCC vote took place without any transparency whatsoever, with the commissioners being barred from sharing the 317-page plan with the public...or that regulatory agencies have a history of blurring transparency and using the opacity of their offices to persecute political dissidents. Never mind the vast new inroads into privacy that FCC regulation of the Internet will provide for the NSA's PRISM snooping project. And never mind the vast panoply of Internet luminaries and innovators, including the inventors of the IP protocol itself, who oppose government regulation of the Internet.
IP co-inventor Vint Cerf is quoted in the Wiki:
"There’s also some argument that says, well you have to treat every packet the same. That’s not what any of us said. Or you can’t charge more for more usage. We didn’t say that either."The fact of the matter is that Quality of Service (QoS) protocols are required to prioritize content based on a network administrator's preferences, and that this valuable function depends on being able to discriminate kinds of content. There is some question whether this kind of discrimination can be put into play in a commercial setting in order to quash competition, and proponents of the FCC ruling point to the Comcast / Netflix imbroglio as an example of this. Folks, I was a Netflix customer during 2013, and I experienced pauses and stuttering with increasing frequency during this time. Comcast has denied throttling Netflix' "last mile," and a study by MIT bears out their denial: Netflix, not Comcast, was at fault for the slow connection speeds, as it was attempting to push its content through already-congested networks. Netflix has since arrived at an agreement with Comcast to expand on the available bandwidth, a settlement that is not a net neutrality resolution at all, but rather a straightforward "peering arrangement." Indeed, as the following chart shows, both Netflix and Comcast were affected by the slowdown.
To help clarify Cerf's clarification, let's look at Google's clarification (via chairman Eric Schmidt).
"I want to be clear what we mean by Net neutrality: What we mean is if you have one data type like video, you don't discriminate against one person's video in favor of another. But it's okay to discriminate across different types. So you could prioritize voice over video. And there is general agreement with Verizon and Google on that issue."That should help. Different kinds of content should be permitted to flow at different rates in order to preserve quality of service. But different content shouldn't be discriminated against on the basis of its source.
What I, and many others who disagree with the FCC ruling, are concerned about is that in attempting to prevent the first kind of discrimination--which is mandatory--the government will impose discrimination of the second kind. And the history of regulatory abuse certainly bears this out. (For those who simply categorically suspect Comcast and its greed of being incapable of acting in the public interest, never forget that the FCC itself is the body that made it so powerful, by approving its 2011 merger...and never forget that Chairwoman Meredith Atwell Baker stepped down from her FCC position to helm a vice presidency for governmental affairs--a lobbying position--at NBC Universal, which Comcast acquired in the merger. This is the kind of corruption--"regulatory capture"--that we're up against here, and if you believe that regulatory agencies are truly here to serve your interests, and not the interests of their own regulators, then I can only politely call you a fool and continue presenting my argument to the other, presumably-rational minds still reading this. A more conspiracy-minded writer than myself might see all this--the merger approval, the lobbying position, the FCC ruling--as being part of a long-term plan to put the Internet under government control. And who would blame such a writer, given what Edward Snowden has gone through by way of revealing that PRISM project?)
To put the different kinds of discrimination into perspective, let's review the history of the Internet for examples of corporate entities limiting free speech.
*crickets*
Now let's review the history of the government limiting free speech.
The Alien and Sedition Acts of 1798
The Sedition Act of 1918
Motion pictures not entitled to freedom of speech
"Obscene" materials not protected by the First Amendment
Broadcast media have less First Amendment protection than other forms of "speech" (not coincidentally, this is precisely the kind of content regulated by the FCC)
"Official" student papers entitled to more First Amendment protection than informal papers (granting freedom of speech preferentially to the Establishment!)
And that's just our own government, which is arguably the "best" in this regard.
Let's be clear about this. I do not absolve Comcast of responsibility for any past, present or future acts of malfeasance. But its oligopolistic position in the Internet industry is most certainly the result of government activity. With the exception of natural monopolies, the vast majority of true monopolies in this nation have been created at the behest of government. (This is a complete topic unto itself, one I reserve for a fuller discussion at a later date.) But I have far greater concerns about government intrusion into my rights than I have about corporate intrusions, and with ample historical precedent for those concerns. Unless Comcast turns out to be an actual instrument of the government's attempt to suppress speech--a possibility we'll return to at the end of the essay--I have to make a decision as to which I trust less, and government will always occupy that less-trustworthy slot. Always. (Reporters without Borders has called the United States government an "Enemy of the Internet," ranking it up there with China and Russia.)
To reiterate, approving of the concept of net neutrality doesn't require that we advocate the government's FCC-governed version of Net Neutrality. It may well be the case that some kind of protection of content is called for, although we've yet to see any actual examples of the kind of abuse that would justify such protection. What it comes down to, for me, is whether the FCC's regulatory model applies in this case. Before I launch into a discussion of why the Internet differs from "public utilities," let me just point out that the FCC, from its very inception, has been concerned with limiting property rights and rights of expression. The government doesn't own the airwaves; we do. Radio communications were invented by private researchers, and were intended for everybody. The government sliced up the radio spectrum into bands and now dictates who gets which slice. This is such a long-accompli'd fait accompli that people of my generation don't even question it, but the fact remains: what gives the government the authority to do that? Proponents of a "free and open Internet," such as Anonymous, point out that the Internet grew so rapidly, and became so powerful and expressive, precisely because it was unregulated over the first several decades of its existence. That kind of openness draws investment and commerce much more rapidly than a regulated environment does, and many of the sources I've previously mentioned have argued that regulating the Internet will dramatically slow investment, in turn dramatically slowing the pace of innovation and the rate at which technologies become affordable and widespread.
On to the "public utility" thing. It's necessary at this point to digress into economics for a few paragraphs, for which I apologize. I had intended several weeks ago to include this very digression in my discussion of markets, thereby giving it a post of its own and more supporting material, but the Net Neutrality issue has now reached critical mass, and I can't put this off any longer. Much of the following exposition derives from my copy of McConnell, Brue & Flynn's Economics, 18th edition.
In a capitalist market economy, there are several different modes of operation that occur in the various industries, termed "market models." These models are of course ideals, and simplifications, but they do come very close to accurately predicting the behavior of participants in each industry, and they allow for a ready categorization of firms and industries on this basis. There are two primary characteristics that distinguish each of the models: the ease of entry / exit into the industry ("barriers to entry"), and the degree of product differentiation between firms ("substitutability"). Various combinations of these two factors result in the placement of a given industry into one of the categories. In order of most "free" to least, these are pure competition, monopolistic competition, oligopoly, and pure monopoly.
In a pure competition, products are undifferentiated, and there are few to no barriers to entry or to exit. What this means in a macroeconomic sense is that firms produce essentially the same product, and can enter and leave the market easily and quickly. What this means in a microeconomic sense--to the consumer--is that these firms are "price takers," and that the consumer is sovereign: no one firm can gain market share by reducing its prices below that of its competitors, because then they would all immediately follow suit. The industry's product price is essentially the same throughout, and the public's demand is the primary determinant of what the industry is able to charge. This is the situation that holds for many food products, especially farm produce, as well as for materials such as lumber that you can purchase in a retail outlet. One strawberry isn't fundamentally different from another, and two-by-fours tend to be functionally identical, barring the odd defect.
To provide a somewhat deeper dive, we have to distinguish between the two kinds of profit. "Economic profit" is what is commonly meant by the unqualified word profit, and refers to all revenue that exceeds costs. It is what accrues to shareholders, and is the incentive for investing in the means of production. "Normal profit," by contrast, is actually a cost, and is what is used by the firm to retain entrepreneurial ability at the firm. It is the cost of keeping the entrepreneurial spirit alive and working for you. To provide examples from my own field, in the various Web design / development shops I've worked in, normal profit went into providing employee bonuses, holiday parties, video games for the break rooms, and the like.
The distinction between the two kinds of profit might seem academic until you understand that normal profit is a cost of doing business, and economic profit is what's left over after all costs, including normal profit, have been paid down. In the context of a pure competition market, there are no long-run economic profits. This is because a lack of product differentiation makes it easy for consumers to switch to new firms when prices of any one firm increase, and because a lack of barriers to entry makes it easy for new firms to enter the industry and compete whenever prices rise enough to create economic profits. As new firms enter the industry, a new equilibrium is established in which economic profits are distributed among all newcomers, until there are none left to distribute. The long-run equilibrium price in a competitive market is described by two equations:
P = MCand
P = min ATC.
The first equation equates marginal costs--the cost of producing one additional unit of output--with price. The second equation equates the minimum average total cost--the lowest point on the average total cost curve, where economies of scale are balanced by diseconomies of scale--with price. When both of these equations hold true, the following conditions are met:
1. Productive efficiency. The company is properly utilizing all inputs to generate the most efficient output. Resources are not being wasted producing more output than the company can sell, nor is productive capacity being wasted by an underutilization of resources.
2. Allocative efficiency. The company is exactly meeting society's demand for the product, producing neither more nor less of the product than is desired.
3. Economic efficiency, the sum of productive and allocative efficiency. Society is getting just what it wants, and how much, at just the price it is wiling to pay. Society's well-being cannot be improved by either reducing or increasing the amount of the good produced.
It is a general truism that these conditions only hold true in a purely-competitive market, and that this is why a properly free market--"unfettered capitalism"--is in fact the best kind of market for consumers. This is true for a number of reasons, including the fact that this kind of competition tends to drive prices downward, making products affordable to the greatest number of people, and also because in the absence of long-run economic profits, there is no upward redistribution of wealth. This is the focus of my intended series on free markets, so I won't overplay this hand here, other than to point out that this is a maxim in economic textbooks, and not just a figment of my own opinion. The concentration of wealth in an upper class is the result of barriers to entry that inhibit pure competition, and is therefore not a product of "unfettered capitalism" at all...but rather of regulation that imposes barriers to entry.
But I digress.
For various reasons, including the existence of regulatory hurdles and products that are differentiated, not all competition is perfect. "Imperfect competition" occurs in monopolistically competitive markets and in oligopolies. Monopolistically competitive markets are characterized by product differentiation that results in the existence of various "niches" for products. Automobiles, for instance, are distinguished by a number of factors, including appearance, purpose, power, efficiency, safety and prestige. Minivans are not pickup trucks. Sports cars are not luxury sedans. Products in this kind of market are not readily substitutable for each other, so in a sense, each automaker and each product line monopolizes a niche to some degree. Price is not the primary means whereby such firms compete; there is substantial nonprice competition (such as expensive advertising campaigns) which is intended to promote customer loyalty. Products of monopolistically-competitive markets tend to be more expensive than those in purely-competitive markets, other things being equal, because the dual equivalence outlined above doesn't hold true. The means of production also tend to be more expensive, resulting in somewhat higher barriers to entry. This can be both good and bad for the consumer. The highest-quality, most prestigious products are often well out of the range of the typical buyer, but there are almost always niches within reach of any income level. Still, the consumer is no longer sovereign in this model, nor in the remaining two.
Oligopolistic markets are characterized by higher barriers to entry, typically in the form of economies of scale that have the effect, among others, of making the market incapable of supporting more than a few players. This can be both good and bad for the consumer. There tends to be less choice than in the previous two market models, and prices can be still higher (relative to the cost of the inputs), but on the other hand, firms in this kind of market often have substantial capital to put into research and development, leading to innovation and improvements to the means of production that result in better products; and over time, as these improvements accumulate, pushing upward the "top of the line" and the "state of the art," the more commonplace, standard technological / quality levels are pushed downward in price. Personal computers were inordinately expensive 30 years ago, and are now remarkably affordable in comparison. And this rule applies throughout the market segment as well, as new microprocessors and video cards hit the market at high prices and then become more and more affordable over the ensuing months and years. There are "entry level" computers and "gamer PCs," as well as "servers" and "barebones systems."
Monopoly can be seen as the extreme case of oligopoly. "Monopoly" simply means that the industry and the firm are synonymous. Monopolies that arise under market forces alone are quite rare. As I will elucidate in the series on markets, government intervention is usually required to create a true monopoly. However, this does not apply in the case of natural monopolies, which are those that come about by virtue of economies of scale that prohibit all but one player from participating in the industry. The canonical example is the electrical service provider powering a neighborhood or a city; since only one company can own the transmission lines, only one company can deliver electricity.
Monopolies are essentially the polar opposite of pure competition. Monopoly firms are "price makers." There is absolutely no consumer sovereignty and absolutely no consumer choice (because there is absolutely no substitutability). There are no market forces, in other words, to drive costs down and keep prices low. Neither P = MC nor P = min ATC holds true. Monopolies are inherently inefficient, not necessarily because they don't care to keep costs down, but because they can't. The pricing mechanism, which provides the signals that all other kinds of firms can use to monitor their operating efficiencies, simply doesn't exist for monopolies. A condition called "X-inefficiency" is the result, which manifests typically as a burgeoning bureaucracy, as expensive furnishing for executives, and as lavish compensation packages for top executives.
I hope it goes without saying that as we move along the continuum from pure competition to pure monopoly, there is an increasing tendency for long-run economic profits to be realized, and therefore for wealth to be concentrated upward. If I can be permitted one more digression at this point, I will simply say that the concentration of wealth in this country has a lot more to do with government regulation than with "unfettered capitalism."
Ahem.
This is why public utilities fall under government purview. When price exceeds marginal cost, and the consumer cannot substitute a different good for the product, then the price of monopoly goods will quite frequently exceed the ability of some consumers to pay. Government, and society at large to at least some degree, regards utilities as "public goods," and requires that they be made available to as many people as possible. (It could be argued, of course, that only water is a true necessity, and that electricity is a luxury, but that's a discussion perhaps for another time.) Price controls are the obvious answer: government imposes a legal ceiling for the price of the good, and firms must make the good available at that price or lower.
This would seem to benefit society in the sense that more people can afford the good. The question is whether the costs to society actually justify that benefit, and the results are more mixed. The reason has to do with subsidy. When firms are compelled by law to offer their products at a lower price than their own costs, they lose money. A firm that loses money consistently will eventually go out of business. This might seem like poetic justice to some, until it's pointed out to them that this would undermine the point of the price control, which is to make a public good available to the widest possible clientele.
So how does government meet this challenge? By paying the firm to remain in business. A typical regulatory scheme will impose not only a price control, but a set of conditions under which subsidies are offered. The firm will be monitored to determine whether it it making economic profits. If it is determined that it is making economic profits for an extended period of time, the price ceiling is lowered so that profits are eliminated. To keep the firm operating, it receives a regular infusion of cash from the government.
There are many, many problems inherent in this scenario, which I'll go over in much greater detail in the discussion of markets. For our purposes here, however, it's sufficient to point out the perverse incentives that result, including the expansion of X-inefficiency well beyond its original extent. There is a "dead-weight loss" to society, in that the optimal amount of product isn't being produced, because there is no pricing signal to indicate what the optimal amount is. In the case of subsidized firms, some of that loss takes the form of income taxes given up by consumers for a product that they do not benefit from.
It is not my intention here to argue against the regulation of public utilities. My point is only this: the Internet is not a public utility. It doesn't even begin to meet the definition of a monopoly (natural or otherwise), and the FCC has already admitted this. In some rural markets, there may well be just one phyiscal ISP, but regional ISPs are still only a tiny fraction of the whole, and at this point in time there isn't a point on the planet's populated surface that isn't also serviced by satellite, so there is always some choice. There is absolutely no justification for labeling the Internet as a monopoly, or even hinting that it is, other than, of course, to bring it under the purview of government.
This may well be what some ISPs want. It's entirely possible that there's an end game here in which the FCC's merger-granting power will result in Comcast, or some other firm, getting monopoly control over the entire Net. It's also entirely possible that Comcast, and / or some of the other players, may desire an excuse to become subsidized by the federal government. I'm not conspiracy theorist enough to come up with all the possibilities; it suffices for me to note that possibilities exist, and that these vastly outnumber the optimal situation, in which the consumer is sovereign, the government cannot infringe on free speech, and our own tax dollars cannot be used against us.
Nor is it just the view of the occasional lunatic-fringe reporter such as myself that this situation could lead to government abuse. Ajit Pai, FCC Commissioner and dissenting voter on the issue, has issued a statement in joint with Lee Goodman of the FEC on the danger the plan poses for the FEC's ability to protect free speech online. In a previous joint statement (with the FTC), he has already warned that this plan will interfere with the FTC's ability to protect online consumers. The concern that the FCC will decide who gets free speech is a real one, as is the prospect of the new rules hampering investment and harming startup business, especially among news providers.
Before ringing off for the night, I want to present one more chart, which demonstrates that, contrary to the behavior of a monopoly industry, the Internet has continued to improve its services, continued to diversify, and continued to extend its offerings.
In conclusion, I just want to offer a couple of video warnings from Anonymous, the group most committed to the freedom of speech and information (and one far less ideologically biased, by virtue of its internal diversity, than the ACLU can ever hope to be). Given a choice between taking the FCC's word on the matter, or taking Anonymous'....well, there's no question at all. Anonymous wins, hands down.
Anonymous -- The Monopoly
Anonymous -- The FCC killing net neutrality
"Net neutrality," like "liberty," doesn't mean what the government thinks it does. Net neutrality is what we already have. What the government is doing is the opposite.
Sources:
Wiki on net neutrality
ACLU page on net neutrality
CBS Los Angeles poll on net neutrality
Newsmax article: Seven reasons why net neutrality is a threat to your freedom
Washington Times article: Judge rules EPA lied about transparency
The Detroit News article: The Netflix slowdown and net neutrality
Reason.com article: Three charts that show the FCC is full of malarkey on net neutrality and Title II
Consumerist.com article: Netflix agrees to pay Comcast to end slowdown
Junayd article: Regulatory Capture: FCC Commissioner joins Comcast-NBC
Meridian Wealth article: Regulatory Capture: Comcast grabs FCC chair...after she supported merger deal
BGR.com article: Newly exposed emails reveal Comcast execs are disturbingly cozy with DOJ antitrust officials
The Guardian's timeline of Edward Snowden and the NSA files
Wiki on the Alien and Sedition Acts
Wiki on the Sedition Act of 1918
Wiki on Mutual Film Corp. vs. Industrial Commission of Ohio
Wiki on Roth vs. United States
Wiki on FCC vs. Pacifica Foundation
Wiki on Hazelwood vs. Kuhlmeier
National Center for Policy Analysis brief: Monopolies created by government
Reporters Without Borders
Wiki on PRISM
Wiki on Reporters Without Borders
Wiki on Internet Censorship in the United States
Anonymous' Facebook profile
Economics: Principles, Problems, and Policies, 18th ed., by McConnell, Brue & Flynn
Inside Sources: There's nothing neutral about net neutrality
The Daily Caller: FCC Commissioner: Net neutrality is a threat to free speech
Mint Press News: Net neutrality and the First Amendment: FCC will decide who gets free speech
YouTube video: Anonymous -- The monopoly
YouTube video: Anonymous -- The FCC killing net neutrality
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