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Source link: http://archive.mises.org/5174/government-did-invent-the-internet-but-the-market-made-it-glorious/

Government Did Invent the Internet, But the Market Made It Glorious

June 12, 2006 by

It is incorrect to describe the internet as a “private” technology, a spontaneous order, or a shining example of capitalistic ingenuity. It is none of these. And that is why we are left a panoply of lingering inefficiencies, misallocations, abuses, and political favoritism. At the same time, almost all of the internet’s current applications — unforeseen by its original designers — have been developed in the private sector. In other words, government involvement accounts for the internet’s continuing problems, while the market should get the credit for its glories. FULL ARTICLE

{ 54 comments }

Lorenc June 12, 2006 at 8:32 am

After quoting the Netbook you write:
In other words, the designers of the internet were “free” from the constraint that whatever they produced had to satisfy consumer wants.

No they were not. They were the consumer. Why should they satisfy what today’s consumer wants? They were trying to create something that met a need that the market had left unmet and was going to leave unmet for the foreseeable future (to the best of their foreseeing abilities). Good technical performance for data transferral was one of the customers’ needs and it was effectively met. The scientists involved were not stupid. If they could have used the funds to buy something to meet their need, they would have, and thus saved time to use in research they meant to do in the first place.

The market now wants to use this thoroughfare for transporting different goods (video, sound, etc.) and finds that the technology sometimes is right and sometimes does not quite match the need. The fault does not lie with the original designers; it lies with the market participants using this “free” and “unlimited” bandwidth (just the overuse of the commons that you mentioned; let’s not solve that problem in this already-too-long comment).

My point is that the market frequently demonstrates a preference for short-term results and ignores the not-so-immediately-marketable ideas. Heavy government intervention in the market is not the solution to this problem, I am not now and would never advocate such a thing. However, the article gives the impression that the government shouldn’t have bothered because the market would have found a better way. This is supported mainly by the lamentation that the funds “wasted” by the government doing this inefficient research might have brought about some other glorious creation in the hands of the market. Who’s to say that the funds wouldn’t otherwise have been used to create a new government program and to expand government in ways clearly described in these pages of mises.org?

If we are lamenting potential futures that [unfortunately?] did not happen, perhaps we should imagine where we would be today if the Athenian or Spartan Advanced Research Projects Agency had somehow been able to fund the development of the steam engine? [See the April 15 daily article for the point that capital is often more important than technological invention.]

This reader is one of many satisfied that the government funded (provided the capital for) that “wsteful” early development of the internet. If we had waited for the market to see its potential it may not have been around to play the important role that it has played in supporting freedom by disseminating information in situations where it was often the only means that the state could not censor. Just search the internet for the numerous examples, concentrate on Russia if the number of results is overwhelming.

David C June 12, 2006 at 10:08 am

In all fairness, in a free market R&D and the internet would likely have happened in the private sector. Many people forget that government controlls commonly refered to as copyrights and patents pretty much force persuit of knowledge and R&D out of the private sector. While some still happens anyhow, companies rarely collaberate or build off of each others advances precicely because patents and copyrights encourage them to build technologies and fence them off. This causes the industry to center around a license model instead of a service model.

Copyrights also discourage R&D because they have a side effect where the media gets rewarded for hype over substance. The revenue streams go to whomever most successfully promotes the most information hype rather then whomever provides the most needed information services. This cause all sorts of strange market distortions like football players geting paid millions while school teachers get paid thousands, even though the latter is arguably more productive than the former (unless they’re a public school teacher;)

Curt Howland June 12, 2006 at 10:15 am

Lorenc, I’ll post a little thing I wrote up about what I saw happen in 1992-1993 when the NFS did that most amazing and rare thing for a government agency to do: Absolve themselves of responsibility.

I agree that the people who were building the network were the consumers. The “market” for their labor was in effect the same market that a “hobbyist” serves. In my opinion, that’s why the base protocols are so functional as opposed to the “everything and the kitchen sink too” that is IPv6. As Col. Jeff Cooper repeatedly points out, “The professional seeks to be good _enough_. The amateur seeks to be _better_.” It was also an evolved, rather than designed, system. Ideas were tried out to see if they worked, and what worked was kept. It really did function like a hobby, because there wasn’t profit and loss to act as an incentive.

http://www.pbs.org/cringely/nerdtv/shows/

Anyone interested in this owes it to themselves to see the Nerd TV interview with Bob Kahn. I had the opportunity to talk with him once, I found his intellect inspiring. The other interviews are excellent also. I can especially suggest the interview with Brewster Kahle, someone who really did invent a better mouse-trap.

Curt Howland June 12, 2006 at 10:34 am

Is this were I put “Copyright Sat Jul 17 17:08:08 2004 Curt Howland”? Attribution for re-use requested.

I would like to wax philosophic on a subject for a moment. My apologies
to anyone who doesn’t care.

I started working at NASA Ames Research Center in July, 1992. Prior to
this I had worked as a computer operator then network engineer for a
large multinational, and I’d been using network services starting with
Compu$erve in 1983, Fido-net, I-link, BBS’s, etc.

Being about as close to the heart of things as one could get, and working
the graveyard and evening shifts, gave me a wonderful ring-side seat to
watch as a Liberty occurred.

Ames was the location of the Metropolitan Area Exchange, West. MAE-East
was located at Goddard Space Flight Center, also my responsibility
to monitor and help fix. This was where, if you were an “Internet”
participant, your circuits were connected so that your IP packets could
be routed to other “Internet” participants. Ames and Goddard also had two
of the Root Name Servers, which I believe are still being run from there.

The machines that held the look-up tables of participant addresses
were owned and operated by the National Science Foundation. I had to
watch over all this and make sure that the right people were notified
if anything went wrong, so I was pretty much on top of who-owned-what.

If you’re old enough to remember, recall that AlGore had been
promising the “Information Superhighway” long before he became Vice
President. HillaryCare was in vogue, centralization not yet the boogyman
in the press that it was to become. The Information Superhighway would
have been 6 peering points, connected to each other, and everybody would
have had to connect to one of these points by law in order to talk to
anyone else by computer.

Since I was working graveyard, then evening shift, I don’t recall the
exact date (graveyard and I don’t get along) the Liberty occurred,
but here’s what it was: The NSF released control of the routing tables.

Until then, the NSF was who said exactly who could connect to the
“Internet” and how to get to them. That had also been the model of the
Information Superhighway. Now it was up to the company or organization
who connected to the MAE “ring” to maintain their own routing tables,
their own equipment, to decide who they would reach and who they would
not reach.

As an aside, even then Sprint sucked. Working with their so-called
“engineers” was an exercise in bureaucratic diarrhea. The stories I
have….Ah, but that’s another rant.

The MAE-West, and -East, expanded to include other facilities because
all the people who wanted to connect couldn’t fit. It wasn’t explosive,
it was evolutionary. Only as experience and available capital increased
could people be “good neighbors” on the “rings”. This and the MAE
service contract also kept the growth problems as much as possible to
just technical ones.

Content could now be commercial, since that had been one of the
restrictions of the NSF. CNN.com came online, as did the AltaVista search
engine nearby at Digital Equipment. The HTTP protocol and “browser”
were established, and the smart BBS operators became dial-up real-time
service providers, some of which morphed into Netcom, AOL, JPS, a list
too long and too variable for anyone to know.

The need for every content consumer to reach every content provider, or
even just for this email to be able to reach everyone on the list, created
a market for those who maintained routs to “everyone” to sell the service
of being able to get from here to there. People who didn’t play nicely,
like Alternet, didn’t last long. Their own customers demanded the ability
to reach everyone, and the sovereign consumer always wins in the end.

Everybody who had a clue knew that the MAE’s couldn’t handle the
traffic, and quickly there were other “public” peering locations.
Some, like the beautiful PAIX in Palo Alto, California, were computing
facilities who created the same kind of environment that the early MAE’s
had been. Others, such as Pacific Bell and AADS-NAP Chicago, created
virtual peering “points” which were actually just meshed networks within
their own telephone switches. People built facilities and others came
to use them, each free to offer desired services no matter what those
may be. Freedom of infrastructure had occurred.

It’s easy to talk about the benefits of freedom. We can point to John
R. Lott’s books which show that when lawful freedom to carry arms is
increased, even a little, crime decreases and stays down. We can cite
the Great Northern railroad, which eschewed government involvement and
built a railroad which is still profitable.

I can talk about self-policing, spontaneous order and individual
initiative to build “public” goods. I saw it happen.

quasibill June 12, 2006 at 10:52 am

Curt, I daresay that if you beefed up that post a little, it would make a fantastic article.

I certainly am interested read more about how that evolution occurred now.

Fernando June 12, 2006 at 11:09 am

Because the sender’s marginal cost of each transmission is effectively zero, the network is overused, and often congested. Like any essentially unowned resource, an open-ended packet-switching network suffers from what Garrett Hardin famously called the “Tragedy of the Commons.”

I suggest the author to read about how Internet manages congestion in a clever and efficient way. See “Computer Networks: a system approach” by Peterson or “Computer Networks” by Tenembaum. Both are technical books but will provide the author with better information.

Regarding “packet-switching” I’d like to say that the other and only technology is “circuit switching” supported by the Telcos.

Packet switching is far more efficient than circuit switching, so efficient that, Internet has won the battle over ATM, the technology sponsored by the Telcos.

Even, Internet is affecting Telcos’ core bussiness: VoIP is the future (in fact almost the present) of telephony.

I think that the Internet is a clear example of how the right amount of planning allows success. The general idea is planned, the execution of the details, is implemented and tested in an evolutionary fashion.

Designers of the TCP/IP protocols were clever enough to put “points of extension” and to design around “abstractions” that would allow new technology to be incorporated with the minimum of problems (but no error-free, of course) .

Best regards

Urbanitect June 12, 2006 at 11:30 am

This is no different from derivative market applications of any military inventions. Rockets were eventually used to place sattellites. Does that mean the market had need of rockets? Perhaps not, but once they were invented something useful could be done with them.

Did anyone need a nuclear-proof command network? Not really, but once it was in place the market found out it could be used for useful things.

Curt Howland June 12, 2006 at 12:16 pm

Quasibill, you are too kind. I would enjoy such an effort, but it would likely require a co-writer to bounce ideas, ask for fill-in, point out particulars, that sort of thing.

I write technical stuff. I failed 9th grade English and nearly flunked out of highschool entirely, because of not writing. I found the way past the writers-block was by being specific and technical, the more specific the better. It doesn’t make for good prose.

On packet-switch verses circuit-switched, there is a great, even vast, difference in quality. But that quality difference also illustrates the “problem” of immunity from competition.

There is no question that a voice call that is circuit switched is of a higher quality than packet switched. The delay through the network is constant, capacity is perfectly predictable. Even though the ATM system is packet switched, the bits per second for a connection, a “call” if you will, is reserved when the transmission is initiated. It becomes a “circuit” which remains up for the duration of the “call”.

Packet switching allows for what is called “best effort”. That also means that packets may very well be dropped. The connection between any two end-points is not reserved, packets can be lost, they can arrive out of order.

It is very understandable why the telephone companies wanted absolute predictability, because bureaucracies love control. The geeks, technicians, mathematicians, put together “best effort” because they knew that the unknown is part of life.

It also turns out to be vastly more efficient in terms of utilization. Companies like Juniper have created routers that are almost frightening in their capacity for routing packets without using miracle technology. “Innovation” as it were.

VoIP is “good enough” for the vast majority of people, and the efficiencies that it allows over circuit switching phone ensure that it will be used. The entire existence of VoIP is because of competition being allowed in the field. Now that government is trying to squash that competition, _forcing_ Vonage to provide “911″ service instead of allowing Vonage to provide “911″ as a special is just one glaring example, that innovation will slow and maybe halt.

The absurdity of those who want to regulate and legislate the ‘Net in order to “keep it open” is that the reason for the things very things they like about the ‘Net are the result of the _lack_ of regulation. Of course, the politicians won’t tell them that.

quasibill June 12, 2006 at 12:44 pm

Curt,

In my experience, good writing comes from authors who a) know of what they speak (i.e., they lived it), and b) are passionate about it. The best writing occurs when a&b are both present. If they are present, prose and grammar and etc. are less noticeable – in fact, it is often best to hear the author’s true voice, warts and all.

Just my 2 cents.

M E Hoffer June 12, 2006 at 1:10 pm

CH,

quasibill is soft-pedalling the facts that make good writers. He is exactly correct.

I’ve long thought you’ve been “hiding your light ‘neath the bushel basket”.

Thank you for proving my suspicions, correct.

As quasibill points out, further above, your post should, in fact, become an article for broad distro.

So many of us have, too many times and too often, an “outside looking in” perspective that sets us up for base manipulation by miscreant purveyors of disinfo. More voices, like yours, to be found and amplified, are crucial to combat the cacophony of clap-trap that confounds cognition.

Worry not about your imagined “shortcomings” with prose, and keep long on the obvious knowledge that you have to share.

Curt Howland June 12, 2006 at 2:06 pm

M.E., thank you. I’m humbled.

The text as presented is as far as I’m going to take it myself, it says pretty much what I want it to say. I could take off from several places into free-market ramblings, but I think that would just lose what little focus the piece has. I do use elements of it as a base point for going off into a free-market rant when needed.

Mostly, I wrote it to get it out on paper before it was forgotten. Only in retrospect did I understand how profound that decision by the NFS turned out to be. At the time, it was a simple technical fact that demand had outpaced capacity. Dual IBM RS6000 servers on each MAE (and there were others, basically the 6 peering points of AlGore’s Information Superhighway) just couldn’t keep up. The only way the system could continue was to distribute the load out to the individual peers.

And let me tell you, it was *hard*. In 1993 the absolute top-of-the-line hardware could barely keep up with the demands on the single 100Mbps ring that made up each MAE. It wasn’t until 1995 that hardware began to be powerful enough that it wasn’t running constantly flat-out. But this also illustrates how the explosive growth of usage demand was in fact being met the entire time. Demand created supply, and at the same time prices dropped through the floor.

1995 is also when I discovered Linux, but that’s a different story. :^)

If I may ask, should I be complemented by “under a bushel basket”? Sorry, just not quite certain what you mean.

M E Hoffer June 12, 2006 at 2:23 pm

CH,

the bushel basket idea was meant to convey: that while I thought that much of what you have proffered previously was of value, it gave, to me, the suspicion that there was much more.

By no means was it meant to be derogatory, in the least. It was, meant to be, a roundabout compliment.

Eric June 12, 2006 at 2:56 pm

I agree with the broken window comment. In addition, there are some rather nasty problems that we have because of the implementation using tcp/ip.

I didn’t see it mentioned how the gigantic security holes that exist with tcp/ip came out of the deficiencies in the protocol. And that’s ironic, since the initial desire was to have a secure network. I work on military training simulation projects and have written some of the tcp/ip hub apps that are used. Even with a purely private network (not connected to the internet) we have had viruses spread that took many large training exercises out of action. It is useless to try to secure tcp/ip connections at the application level, as the network is easily prone to spoofing. I did add access lists, but as mentioned, these are only secure to a point if you can’t really rely on the information the api’s provide.

On voip, the main reason I put up with it (the echo’s and single duplex – almost needs “over”, “out” and that sort of communication) is that I only need a “land-line” for my direct-tv connection (which uses key-tones and so will work with vonage, whereas I can’t use a modem connection – sometimes needed to dload upgrades to my direct-tv equipment). Oh, the secondary reason was that it avoided (until recently) charging me any taxes. Well, that soon will change, and so I doubt that I will continue using such a terrible service.

So, while I and most others cannot see how to better provide an internet that will be used for video, audio, etc. that doesn’t mean that some bright entrepreneur won’t see how to do this where the rest of us fail. That is the part of the broken window fallacy that is overlooked so often.

Peter G. Klein June 12, 2006 at 5:35 pm

I’m enjoying the lively and informative discussion above. I have little to add on the purely technical points, but let me emphasize that the main theme is economic, not technological. Whether packet-switching is “really” better than circuit-switching is really beside the point. The argument is simply that the only way to know which technolgy best satisfies consumer wants (Lorenc, “comsumer” here means taxpayer, not ARPANET user) is to let the market decide. Let individuals and firms, not government agencies and tax-supported universities, decide what products and services they want by voting with their dollars. Otherwise, any government program is “efficient” by definition, in the sense that it satisfies the preferences of the government officials responsible for it.

Curt Howland June 12, 2006 at 5:42 pm

Eric, actually, the “network” was not designed to be secure. It was designed to get packets from here to there in a comparatively peaceful environment. That’s why such attacks as SYN flooding have had to have specific filters to try to prevent the problem.

It is also why security, encryption, data integrity, are all dealt with at layers above the network itself. Payload is not a network issue, exactly the way a pilot doesn’t care what the cargo is, only that it is packed well for the trip.

Also, viruses cannot infect the “network”. Viruses are _executable_ code. The network layer does not execute code. It just passes packets. Therefore, your problem was not with network security but with insecure hosts. Don’t blame TCP/IP for a problem caused by running Windows.

The essence of transmission of time-synched data such as voice and video is bandwidth. The problems of echo are application problems, which will be worked out. Delay is bandwidth, and as fast compression is effectively rolled into the products that will improve.

But all of this does indeed depend on “what is unseen”. The opportunity for anyone with a better idea to step in and try it out without regulation, without taxation, without barriers to entry. That is what the ‘Net has been. Speak Freely was perfectly usable VoIP with dial-up modems, and that was 12 years ago.

quincunx June 12, 2006 at 9:44 pm

“Also, viruses cannot infect the “network”. Viruses are _executable_ code. The network layer does not execute code. It just passes packets. Therefore, your problem was not with network security but with insecure hosts. Don’t blame TCP/IP for a problem caused by running Windows.”

The only sense in which it can is knocking out some poorly designed routers, in this case it will affect a part of the “network”, indeed. The ‘smarter’ a router is (defined in terms of number of executable code analyzing & manipulating the stream) the higher the chance of viral infection.

“I write technical stuff. I failed 9th grade English and nearly flunked out of highschool entirely, because of not writing.”

Wow! Same thing happend to me.

Let me guess: You were good at math & science, but bored to tears in other subjects. Later on found a great deal of interest in them when not presented in a formalized schooling environment.

Peter G,

I think that the government or AT&T were the only ones that COULD create the internet (at that time) since these institutions are monopolies.

The internet is simply inconceivable from an entrepreneurial perspective when the telecom industry was nationalized. There is nothing in economic theory that prevents a monopoly from innovating (occasionally), but I think the broken window fallacy applies more so to the period before the internet.

“We must be very careful not to describe the internet as a “private” technology, a spontaneous order, or a shining example of capitalistic ingenuity. It is none of these. Of course, almost all of the internet’s current applications — unforeseen by its original designers — have been developed in the private sector.”

I take issue with this. You understate the latter – that TODAY it has an extremely high degree of spontaneous order, and the capitalistic ingenuity takes place at the network edge – as it should (like mises.org).

Maybe I’m misinterpreting this comment. I do agree that it can obviously be MORE spontaneous and private, and the state will never give it up.

I think stating the view of internet as spontaneous order has a lot of appeal to those that are not well versed in Austrian Economics. So it might be better not to shoot ourselves in the foot – by pointing out trivialities (outside of mises.org forum).

There are other inventions that were the result of the state – but that in no way should delegitimize their purposefulness when employed outside the state. People can be innovative and creative at the expense of the public, their work should not be discarded because of its origins. Especially after enough time has elapsed.

David C June 12, 2006 at 10:57 pm

“I write technical stuff. I failed 9th grade English and nearly flunked out of highschool entirely, because of not writing.”

Wow! Same thing happend to me.

Interesting, same thing happened to me too. Perhaps is has to do with an emphasis on logic that pushes people toward IT and the Austrian school of thought while delaying the maturity of less choerent memory based knowledge systems. :)

Peter G. Klein June 13, 2006 at 3:31 am

Quincunx, I do not disagree at all, and certainly do not wish to discard, delegitimize, or otherwise dismiss any of the key technological contributions. Researchers at public universities, for instance, have made pathbreaking and brilliant contributions to culture and society. But this does not of course provide a _rationale_ for public funding. My argument is mainly about the _mechanism_ by which particular outcomes are chosen, not the specific outcomes themselves, about which different experts can have different opinions.

I also agree, by the way, that emphasizing the spontaneous-order aspects of the internet can be valuable for pedagogical purposes.

Fernando June 13, 2006 at 2:19 pm

Peter said

The argument is simply that the only way to know which technolgy best satisfies consumer wants (Lorenc, “comsumer” here means taxpayer, not ARPANET user) is to let the market decide.

But, following the austrian method you’ll never know wich technology is the best.

The only thing you can know is that a costumer prefered to use certain technology at a certain time.

Next time the costumer can change his mind and choose another one. As far as I understand, for the austrian school, there is no best technology as there is no “unique and absolute ” price. Price is a dynamic thing reflected in customer actions.

By the way, what do you think of the open source software development cycle? GNU?

Max Chiz June 13, 2006 at 7:42 pm

First off, I know what I’m talking about on this: I have an undergraduate degree in Electrical Engineering. I’ve worked in engineering R&D — building computers. I’ve built and administrated networks. I can say, as someone who is intimately familiar with the technology and the industry, that this article has so many factual errors that it is not up to the normal quality standards for articles on this site. Mises.org should retract the article or at least issue a correction. I am extremely disappointed that something this lacking in quality and research was allowed on the front page for all the world to see. Now let’s examine Dr. Klein’s claims and see if they hold water.

It is a general misconception, shared by Dr. Klein, that “technological value is not the same as economic value”. The entire job of an engineer, and what you spend years in college learning how to do, is to combine the data of the market (in the form of prices for materials, components, land, buildings, labor, assembly equipment, etc) with knowledge of science to better meet the needs of the customer. Engineers try to find the optimal tradeoff between quality, cost, and time to market. It is true that engineers often describe products in terms of “elegance”, “beauty”, etc., but these terms would have no meaning if it weren’t for the market. A device is “elegant” precisely because of the ingenuity that went into satisfying customers — it uses less parts (and hence costs less), it fits in less space (and hence has higher quality in the eyes of the customer), it will let you get your product out the door in half the time (and meet consumer desires sooner). I am especially embarrassed that an Austrian blog can’t get this simple point — as it is a critical part of the calculation problem. After all, if I don’t have prices for all of those factors, the combination of things I can build is effectively infinite.

Next, as others on this blog have pointed out, Klein’s conception of how the Internet came to be is flawed. The research that ultimately led to the it was already privately funded and well underway at UCB and Stanford. They ended up applying that early research to ARPANET because some bureaucrat, in a flash of brilliance, decided it would be more effective to make use of existing civilian research and technology instead of paying a military contractor to re-invent the wheel. This is precisely what should have been done; given that the military was going to purchase the functionality in some fashion, it is significantly better for the tax payers if they do so on the competitive market.

It is true that when the government ran ARPANET, it was basically a boondoggle. They did a bad job, and organized it poorly. Should any of this surprise us? However, the author seems to think that the “problems” of the Internet are somehow the fault of the government’s prior ownership and that the market is not flexible enough to correct the ills of an intervention once that intervention goes away. Not only does this fly in the face of economic theory, in stands in clear contradiction of the facts. In a marvelous testament to the power of the free market, since the Internet was privatized, it has been fundamentally reworked from the ground up. Once subjected to market forces, all of the problems that once plagued the ARPANET have been eliminated. Routing is decentralized and significantly more intelligent and cost effective. Computers now use strong encryption, secure authentication, and other security features to protect themselves instead of relying on the government regulators. Networks now have flexible billing schemes. I could go on and on. This is a perfect example of the good that can come of privatizing a government owned industry, and it should be exhibit number one when Austrians argue about privatizing other government owned property.

Dr. Klein does cite examples of “problems” that are alleged to have been caused by the initial government interference in the market: poor service and network neutrality. Both of these arguments totally miss the point.

First, Dr. Klein claims, “without any mechanism for pricing individual packets, the network is overused, like any public good. Every packet is assigned an equal priority.” This is totally false. While that was certainly the case when the government was running things, it is not the case now. The Internet, being a digital medium, transmits digital information from one computer to another. The wonderful thing about this is that, it can transmit anything. Furthermore the cost to any firm for transmitting that data is the same regardless of the content. Now, we all know that, according to Bohm-Bawerk, the law of marginal utility dictates that the cost to the consumer for transmitting any two packets with different data (but otherwise identical circumstances) will tend to equalize. The market has done precisely what Austrian theory would predict, and instead of citing this as a wonderful success, the author is indignant!

Now, this doesn’t mean that everyone pays the same thing regardless of how they use it. You pay for two things: bandwidth(how much data you can move in a given time) and latency(the time it takes you transmit your data) — that is to say, you pay different amounts for different products.

The true source of the poor service many people get should be obvious. For consumer grade Internet access, the ISPs “over-book” their networks by selling more bandwidth then they actually have. Because these companies generally have a government sanctioned monopoly, they don’t have to be concerned with the poor quality of service that results when they take this too far. As a result, the Internet often appears “overused, like any public good”. Again, this shouldn’t surprise any of us.

If Dr. Klein is truly unsatisfied, he is welcome to purchase his Internet access from the portion of the market that IS subject to free competition: the “back-bone” providers. The per-unit cost is substantially lower and the billing is extremely flexible. That’s why the industrial router he would have to buy to use his new service includes features that would let him route high priority information over low latency connections, bulk transfers to low cost connections, and so forth. In short, in the portion of the Internet where there is free competition, the pricing schedule matches Dr. Klein’s ideal: “different charges [are] assessed for different types of transmissions”. We still should not be surprised.

Dr. Klein also totally misunderstands the network neutrality issue. He seems to think that network neutrality is some insidious regulation forced upon the market by evil regulators. However, as we have seen it is the natural result of the free market. What the people campaigning against “network neutrality” want is for the government to give them the authority to extract payment from third parties with whom they have no contractual agreement.

For example, Verizon, which has contracted to provide its customers with web access and whose customers have decided to use that access to go to google.com, wants to have the power to turn around and BILL GOOGLE, a company with whom it has no contractual relations. It argues for this “right” under the false pretense that when a customer, who bought web access and understood it to mean equal access to any web site he chose to visit, tries to use his web access to get information from Google, it is Google, and not the paying customer, who is making use of Verizon’s network!

Verizon is entirely free to contact Google and tell them that they will prevent customers from accessing Google’s web site or make it difficult or inconvenient to do so if Google does not pay them a certain amount of money. In fact they have already done something VERY similar with their wireless EvDO network — they specified in their contract that it could only be used for certain types of access and have cut off service for customers who violated this agreement. The result has been predictable: customers have flocked to Verizon’s competitor, Sprint, which does not have any restrictions on the manner in which the bandwidth is used. This is precisely why these companies want the FCC to step in, as long as there is not a government mandated “solution”, companies like Google will simply refuse to pay up and if the ISP tries to make good on its threat, customers will leave for the competition in droves. Again, exactly what we would predict in a free market.

In summary, every major aspect of Internet can be explained with current Austrian theory. The problems noted by Dr. Klein are not the result of the government originally funding the Internet decades ago, but of government interventions that exist today.

Stephan Kinsella April 9, 2010 at 11:50 am

Max Chiz’s technical knowledge about computers from his undergraduate electrical engineering days before he went to law school is fine, but that’s not the point. Someone opposing network neutrality does not support the right of a telco to bill someone they don’t have a contract with. We oppose the FCC having authority to regulate any of these private companies. That’s the question, Max: do you support the FCC’s (or the state’s) net neutrality regulations, or not? Such regulation is clearly unlibertarian. So if you don’t support it, you oppose “net neutrality.” See my post Net Neutrality Developments. All this talk demonstrating your previous EE expertise, the history of the Internet, etc., is irrelevant and nothing but a sidetracking distraction as far as I can tell.

M E Hoffer June 13, 2006 at 8:47 pm

M. Chiz,

FWIW, I thought your post was, both, well written and accurately argued.

I’ll lay 8-to-5 that: we don’t hear the first peep from Dr. Klein.

Peter G. Klein June 14, 2006 at 12:48 am

Peep!

I don’t quite know what to make of Mr. Chiz’s lengthy comment. A few quick remarks: (1) Technological value is not, repeat not, the same as economic value. What engineers think they are doing in solving a design problem has absolutely nothing to do with this. The key is market competition, not intent. (2) Mr. Chiz disagrees with me on the degree to which the work done at ARPA, RAND, etc. had a significant impact on the core technologies themselves. Fine, I have no wish to quarrel about this. Is his claim that the vast amounts of public funding poured into network research had _no_ effect on the allocation of reources? Today’s network technologies and protocols would be no different at all had there been no government intervention? Would that all government programs could be so benign! I think I’m as enthusiastic about the market as Mr. Chiz (hence the subtitle of the article), but if the market is “flexible enought to correct the ills of an intervention once that intervention goes away,” at zero cost, then what is the case against intervention?

(3) Mr. Chiz’s reading of Boehm-Bawerk differs fundamentally from mine. The fact that the cost of transmitting packets is the same, regardless of content, has nothing to do with the efficient allocation of bandwidth. Under competition prices reflect the economic value of the content, not the cost of provision. Have we become Ricardians now? Is Mr. Chiz’s point that congestion pricing (a la Varian and Mackie-Mason) should be prohibited by law? (4) If my brief reference to network neutrality sounds like I favor allowing telcos to tax content providers, independent of any prior contractual relationship, then I must be a really bad writer. Of course they shouldn’t, but neither should telcos be legally prohibited from charging different fees for routing different kinds of packets, or from blocking certain content providers altogether. What net neutrality proponents want to protect is not consumers’ right to switch providers, as in Mr. Chiz’s EvDO exmaple, but content providers’ and consumers’ “right” not to be charged market prices.

M E Hoffer June 14, 2006 at 8:58 am

Dr. Klein, Good Sport!~, let’s start with this one: “but if the market is “flexible enough to correct the ills of an intervention once that intervention goes away,” at zero cost, then what is the case against intervention?”

This: “then what is the case against intervention?”, is your Q.

Does not “intervention”( Government, presumably )
always cost Money, that the Government does not have, and Time, of which we all have too little ?

And, with this: “What net neutrality proponents want to protect is not consumers’ right to switch providers, as in Mr. Chiz’s EvDO exmaple, but content providers’ and consumers’ “right” not to be charged market prices.”, how do you propose that that is the case? You’re Premises, Bitte!

Curt Howland June 14, 2006 at 11:25 am

M.E., if I may. Customers have always been charged for the price of their access. Higher prices will provide bigger pipes, more bps, fewer hops, faster servers, exclusive use, etc. Dial-up verses “broadband”.

The so-called “net neutrality” is a internal “quality of service” argument. Packets from/to a high-paying customer will not be dropped as soon as a lower-paying customers packets in a congestion situation.

The absurdity of this is that it is already happening and has for years in more specific applications. It is de-reguer (sp?) in the “frame relay” circuit to have a “committed information rate” that is set lower than the full circuit speed. Problems only occur if that “committed” rate is over-sold, just like over-selling seats on an airplane because everybody knows there will always be cancellations.

I don’t like “Quality Of Service”. If best effort packet delivery isn’t working, then there is a fault that should be fixed. Some people are using QoS as a bandaid so they don’t have to spend money to make the bosses VoIP phone calls get through. Chortle.

The fact is that charging more for “not dropping packets as soon” is just as valid as charging more for a higher bits per second in the first place. To make one illegal but not another is insane. But who ever said government is sane?

M E Hoffer June 14, 2006 at 12:15 pm

CH,

I hear you. One reason I was asking the author for his premises is that he was a making broad categorical in the face of an issue, “net neutrality”, that is fraught with many different claims.

To me this issue is nothing more than a textbook example of a “Hobson’s choice”.
http://en.wikipedia.org/wiki/Hobson's_choice

On one hand, we get arguments for the Gov’t granting, “fee simple”, ownership of assets, that couldn’t readily be built but for the tremendous largesse, of various franchises, rights-of-way, geographic monopolies, etc., given in exchange for certain service committments–seemingly to be abrogated. On the other hand, we get arguments for further Gov’t regulation to “protect” the service base from the problems inherent in the “duopoly”(Cable/Telco) the Gov’t intervention has created.

The “debate”, seemingly about “net neutrality”, is truly a grand canard. The Statecraft employed to (mis-)frame this “dispute” is as admirable, in a sense, as the technology that is its subject.

The link, below, provides an, almost, unimaginable flashback to a much different, though not so long ago, era:

http://patriotpost.us/histdocs/crockett_not_yours_to_give.asp

Max Chiz June 14, 2006 at 12:21 pm

Dr. Klein, thank you for your response. Allow me to address some of the issues you raise.

>(1) Technological value is not, repeat not, the same as economic value. What engineers think they are doing in solving a design problem has absolutely nothing to do with this. The key is market competition, not intent.

Dr. Klein, there is no such thing as “technological value” for its own sake. Engineers do create technology, but the only determinant of the value is the success in the market. If a product does not in fact meet the needs of consumers, it is not “valuable”. As I said, quality, cost, and time to market are usually tradeoffs. If a product does not have the correct balance (as determined by the consumer), it is does not have some inherent “technological value”. The reason a concept of “technological value” exists is because certain types of innovations and designs will almost always better satisfy the customer because they allow one of the three main factors to be significantly improved while having little or no negative impact on the other two. The existence of such concepts does not in any way undermine the fact that all “value” is ultimately rooted in the market. If you still believe otherwise please explain what you mean by “technological value” and how this concept exists totally divorced from market forces

>Is his claim that the vast amounts of public funding poured into network research had _no_ effect on the allocation of reources? Today’s network technologies and protocols would be no different at all had there been no government intervention? Would that all government programs could be so benign! I think I’m as enthusiastic about the market as Mr. Chiz (hence the subtitle of the article), but if the market is “flexible enought to correct the ills of an intervention once that intervention goes away,” at zero cost, then what is the case against intervention?

My point is that the market has already absorbed the cost of fixing this. Over half of the RFCs were written AFTER the government got out, and most of them deal with fixing problems in the original government protocol. Before the government got out, there were many competing network protocols offered by a wide variety of commercial interests. In fact most companies used on of these commercial protocols instead of the government ones. However, after the government got out and many problems with the protocols were fixed by private firms, ethernet, IP, and UDP/TCP became the de facto standard BECAUSE they out-comparted the other network standards. Companies have spent billions replacing their old stuff with new TCP/IP networks. They wouldn’t have done this if the technology was not competitive enough to overcome the transition costs. Furthermore, today’s Internet runs on new lines and across new networks that did not exist when the government managed it; it uses protocols and transmission methods that weren’t even imaginable. To claim, as the statists do, that the modern Internet is the result of the government funding instead of the billions of dollars of private funds that were spend fixing problems caused by the government is to grant the statists their key assertion: that government actually can create things that are superior to what the market developed.

>(3) Mr. Chiz’s reading of Boehm-Bawerk differs fundamentally from mine. The fact that the cost of transmitting packets is the same, regardless of content, has nothing to do with the efficient allocation of bandwidth. Under competition prices reflect the economic value of the content, not the cost of provision.

Please explain how my reading is incorrect. For anyone who is curious, the chapters titled “The Law of Costs” in both Basic Principles of Economic Value and The Positive Theory of Capital are what we are discussing.

First, however, the good in question, the routing of a stream of packets of given size at given latency at a given time, is the same regardless of the content of the packet stream. Providers can and do charge more for higher bandwidth, lower latency, and usage during peak hours. On what other basis should these goods be considered different?

However, even if there is a way to consider them as different goods. The market price for routing them should be the same. The most marginal use to which the factors of production can be put will impute its price to those factors of production and the price of the non-marginal uses for those factors of production will be reduced by the law of supply and demand. Bohm-Bawerk is VERY clear in this regard. I do not see how any other result is even possible without violating economic law.

>If my brief reference to network neutrality sounds like I favor allowing telcos to tax content providers, independent of any prior contractual relationship, then I must be a really bad writer. Of course they shouldn’t, but neither should telcos be legally prohibited from charging different fees for routing different kinds of packets, or from blocking certain content providers altogether. What net neutrality proponents want to protect is not consumers’ right to switch providers, as in Mr. Chiz’s EvDO exmaple, but content providers’ and consumers’ “right” not to be charged market prices.

The debate of network neutrality that is currently taking place in Washington is not about whether or not there should be any regulation, but what the regulation should be. The “network neutrality” supporters are arguing that the status quo, which was based on the idea that network neutrality was an implied understanding in existing contracts, should hold. The main opponents are urging for a government “solution” to the “problem” I stated above. If you come out in opposition to network neutrality but make no mention of the new regulation that may be foisted upon us in its place, it is logical to conclude that you simply do not understand the issue.

Furthermore, as I’ve stated above, the “network neutrality” principles are not enforced, nor are they technically regulation. In fact, they are just that principles that the FCC will consider when making a decision. There isn’t a service provider on the Internet that actually follows these four principles because doing so would be utterly disastrous.

Naturally, one must assume, given the nature of this blog, that every writer is opposed to ANY government regulation, but what is on the table is not the choice between no regulation and some regulation, but between some regulation and almost total regulation. Obviously I’d prefer if the government stayed out of things, but given my present choices, unenforced, unenforceable regulation is most certainly better than the massive intervention many of the big telecom companies are pushing for.

Curt Howland June 14, 2006 at 12:29 pm

I’m not sure where the “largess” comes from. The ‘Net was thrown open in 1993, everything built since has been private. Every web site, every bit of software.

Yes, the basic protocols were developed while various universities and government contractors were hammering out how to talk to each other, but that’s like saying that since Jefferson wrote the Declaration of Independence on a government contract that it should not be utilized because doing so would be to rely on government largess.

Thanks for the flash-back. I agree, this is not merely a non-issue, it has been deliberately blown all out of proportion in order to be the crisis of the week. Let’s hope that what it is distracting us from is not too murderous.

Keep in mind that the vast majority of the protocols used every day, HTTP, RSS, BitTorrent, SMTP, were not developed by government grant. And if/when IPv6 is further deployed, the extend of the “largess” will be miniscule at best.

M E Hoffer June 14, 2006 at 1:58 pm

CH,

to this: “I’m not sure where the “largess” comes from. The ‘Net was thrown open in 1993, everything built since has been private. Every web site, every bit of software.”

Sorry, I know that my previous post wasn’t quite clear. i was referring, in the main, to the “last mile”, and the “duopoly”, that holds it dear, the Cable/Telcos.

Peter G. Klein June 14, 2006 at 5:22 pm

My brief reference to net neutrality seems to have stirred up a hornet’s nest. I’m enjoying the discussion on that point but have little to add. In an ideal world, all the infrastructure would be privately owned and unregulated, telcos would not have state-granted monopoly franchises, and service providers, content providers, end users, and other participants would be free to negotiate whatever pricing and service quality arrangements they wished. I don’t think any of us disagree on this point. Tim Swanson has already written about the pros and cons of various specific neutrality proposals (there’s a link in my article). Perhaps one of you should submit a follow-up article to Tim’s.

Mr. Chiz and I continue to disagree about the legacy of government intervention in this case. He insists that private actors have corrected all the relevant flaws in the project’s original design. Even if true, I don’t see how that addresses my basic point, which is that the original government expenditures represent a significant opportunity cost. In the absence of those expenditures, alternative technologies might have been developed that would not require such expensive correction, and that indeed might have resulted in technologies better than those we have today. Of course, markets are extremely adept at “working around” the harmful effects of government programs, in all kinds of situations. (The Dutch building extremely narrow houses to avoid property taxes based on house width is one of my favorite examples.) But it doesn’t follow that such programs are harmless.

I continue to be baffled by Mr. Chiz’s discussion of packet pricing. In a free market for packet delivery services, the delivery of a packet with given characteristics will tend to equal the _value_ of the information contained in that packet to the end user. The market price of a Picasso exceeds the price of a black velvet Elvis, even if the paintings are of identical size and weight, take up the same amount of wall space, cost the same to deliver, etc.

As I mentioned in a previous comment there is a healthy literature on packet pricing (see the technical papers here, for starters). Proposals for real-time auctions, in which each packet would include a header containing a bid corresponding to the sender’s willingness to pay, with winning bidders getting their packets sent through first and everyone being billed ex post according to their bids, have been floating around for years. A reader tells me that given current technology, such auctions are relatively expensive to run, such that the bandwidth provider is usually better off simply purchasing more routers and switches. (Just as most cafes have figured out that the time and trouble necessary to bill and collect from patrons for wi-fi is higher than the cost of simply giving away the wi-fi for free.) But economic theory suggests that such pricing mechanisms, in principle, can have many advantages over the more egalitarian routing algorithms in use today.

Finally, Mr. Chiz misreads me if he thinks I am defending the statists. Quite the opposite. I suppose one could articulate three positions: (1) The government created the internet, all for the good. (2) The government had little to do with the internet, which is as good as it could possibly be. (3) The government had a significant, and negative, role in the creation of the internet, which fortunately market participants have done much to overcome. Call the first the Al Gore position. Mr. Chiz seems to hold the second. My purpose in writing the article was to articulate this third position, one I haven’t seen expressed in the literature before.

Herbert Spencer June 14, 2006 at 7:21 pm

It is not to the State that we owe the multitudinous useful inventions from the spade to the telephone; it was not the State which made possible extended navigation by a developed astronomy; it was not the State which made the discoveries in physics, chemistry, and the rest, which guide modern manufacturers; it was not the State which devised the machinery for producing fabrics of every kind, for transferring men and things from place to place, and for ministering in a thousand ways to our comforts.
The world-wide transactions conducted in merchants’ offices, the rush of traffic filling our streets, the retail distributing system which brings everything within easy reach and delivers the necessaries of life daily at our doors, are not of governmental origin.
All these are results of the spontaneous activities of citizens, separate or grouped. Nay, to these spontaneous activities Governments owe the very means of performing their duties. Divest the political machinery of all those aids which Science and Art have yielded it – leave it with those only which State-officials have invented; and its functions would cease.
The very language in which its laws are registered and the orders of its agents daily given, is an instrument not in the remotest degree due to the legislator; but is one which has unawares grown up during men’s intercourse while pursuing their personal satisfactions.

M E Hoffer June 14, 2006 at 7:48 pm

Mr. Spencer,

Well put, Well said, and Well done.

Thank you for your post.

You have put, within ready reach, that, from which, readers of this thread can devine, not only the wholesome truth of our yesterday, today, and tomorrow, but also the true viewpoint of the column’s Author.

Tim Swanson June 14, 2006 at 8:59 pm

Max Chiz,

Not to split hairs, but your appeal to authority/experience in terms of having a degree in engineering is not a well-reasoned argument. I personally know quite a few engineers with varying degrees of expertise, as I am sure Dr. Klein does as well, none of whom got hung up over this “technological valuation” you lambast. Argumentum ad verecundiam.

And I do not think Klein insinuates in any remote manner, the need or justification for State intervention. In fact, he doesn’t use or laude any kind of “market failure” argument — he rails against this redistribution of productive resources. Furthermore, he suggests that the opportunity costs, the unseen costs of resource allocation has created this tenuous quagmire which is continuously regulated.

You’re Nirvana-like interpretation of how packets are transfered from computer-to-computer appears uninformed. Wired magazine recently published an article discussing just how chaotic peering agreements have been and continue to be. Here is a list of other good articles which detail both the technical and economic fallacies enshrined by “net neutrality” legislation. It is certainly not a natural result of the “free-market” (just an fyi, free-trade does not involve the State).

Bit discrimination is not a bad thing. Variable pricing is not a bad thing. Telling pipeline owners what they can and cannot do with traffic, whether it is blocking, approving or degrading access, is intervention in the marketplace. Charging higher prices for premium access is well within the right of any property owner to practice.

And yes, one of the reasons we are in this quagmire is because of how the government originally funded and later subsidized various aspects of the Internet. This is compounded by the fact that the State still erects barriers to entry in various geographical regions, which favor the incumbents. Deregulation and the abolishment of the FCC could potentially create a different land use and bandwidth allocation.

Max Chiz June 14, 2006 at 9:57 pm

>Even if true, I don’t see how that addresses my basic point, which is that the original government expenditures represent a significant opportunity cost

While I wouldn’t phrase it that way, I would agree that the government expenditures were generally wasteful. Furthermore, I would add that many of the problems caused by government actions resulted in further costs being incurred when the market had to correct them. My point in this regard is simply that if the government was going to purchase this functionality for the military under any conditions, the way they actually went about it, while wasteful, was surprisingly efficient when compared to the norm. Whoever it was that decided to use existing technology and off the shelf parts instead of paying a military contractor to do a custom job deserves credit for making the most of a bad circumstance.

>I continue to be baffled by Mr. Chiz’s discussion of packet pricing

And I continue to be baffled by the number of Austrians who ignore Bohm-Bawerk on this point, which is, in my opinion, one of the important differences between the Austrian theory of price and the neo-classical one. To wit, “The market price of goods that can be reproduced at will tends to coincide in the long run with the production costs” (Basic Principles of Economic Value, p161). He spends and entire chapter in both that book and The Positive Theory of Capital elaborating on this point. Your Picasso counter example is not relevant because it cannot be produced at will. Network capacity, however, can be; the cost of doing so is independent of the value of the data transferred.

With the noted exception of consumers using ISPs, most people on the Internet have a choice as to how they route their information. Their decision will affect their Internet bill. If one provider decided to charge more for traffic on TCP port 80 (by convention this would be HTTP), everyone would simply route port 80 traffic around their network. The competition of the market place keeps the price down so that only the three determinants I listed affect the final price.

Because the technology involved seems to be confusing you, lets take an easier example. It is in the interest of insurance companies to divide their customers into groups of equal risk. If they do not discriminate enough, lower risk customers will be over charged. As a result they will move to other insurance providers who do make the appropriate distinction. However if they discriminate too much, by charging customers more for insurance, simply because they subjectively value it significantly more than the cost of providing it to them, the competition has an incentive to charge less money and draw those customers away. As a result of the competitive process, the price of a given insurance policy is not set based on the price at which each individual customer values the policy, but the price at which the most marginal customer in that risk class values the policy. Does this make sense to you now?

>Finally, Mr. Chiz misreads me if he thinks I am defending the statists

I believe you have done so inadvertently:

  1. By propitiating the myth of “technical value”.
  2. By giving the government too large a role in the development of the modern Internet.
  3. By implying that the markets are so rigid that in over a decade since privatization and with hundreds of millions of dollars spent rebuilding from the ground up, that the market still hasn’t been able to recover from a relatively minor intervention. If it takes this long to adjust for such a small intervention, how can we hope to see any advantage in our own life times from eliminating the big problems like social security, or the federal reserve system?
  4. By ignoring Bohm-Bawerk’s version of the law of costs, and thereby leaving room for the belief that business can exploit consumers by charging them all that they can afford.
  5. By failing to understand the industry and, as a result, claiming that the free, and nearly unregulated, portions of the market have “failed” to price the goods effectively.
  6. By condemning the status quo “neutrality” while failing to condemn the “market solutions” proposed by many of the ISPs and thereby leading unformed readers to support those efforts.

M E Hoffer June 14, 2006 at 10:52 pm

Mr. Swanson,

Your posit: “I personally know quite a few engineers with varying degrees of expertise, as I am sure Dr. Klein does as well, none of whom got hung up over this “technological valuation” you lambast. Argumentum ad verecundiam.”

http://www.goodart.org/aa.htm

re: Argumentum ad verecundium

Petards, as there are Wars on, are in short supply, please use them sparingly.

Max Chiz June 14, 2006 at 11:45 pm

Mr. Swanson deserves a reply.

>I personally know quite a few engineers with varying degrees of expertise, as I am sure Dr. Klein does as well, none of whom got hung up over this “technological valuation” you lambast

I don’t know where or when they went to school, but I was taught to collect voice of the customer data and establish critical to quality requirements so that I’d have a quantitative estimate of what exactly customers would pay for before I sat down at the drawing board. Given that many large firms are paying to have older engineers retrained to use these techniques, I’m going to have to say that your friends are in the minority. I’ll ask you the same question I asked Dr. Klein, if such a concept exists, what does it mean? Can you define it without reference to market dependant valuations?

This is not some minor technical quibble, it is one of the primary arguments by which statists try to claim that the government can effectively provide services to the public and that the markets do not provide customers with “truly valuable” goods but with “profitable” ones. This myth has done almost as much damage to the credibility of free markets as the exploitation theory. That’s why I’m appalled to find two contributors to this blog defending it.

>And I do not think Klein insinuates in any remote manner, the need or justification for State intervention.

See my previous post. While it was most certainly not his intention, in many ways it was the result.

>You’re Nirvana-like interpretation of how packets are transfered from computer-to-computer appears uninformed.

Those “chaotic” peering arrangements are surprisingly effective. They are also determined on a mostly unregulated market. Furthermore, the result is that people are in fact billed for different usage patterns, something Dr. Klein repeatedly asserts is not the case.

>Here is a list of other good articles which detail both the technical and economic fallacies enshrined by “net neutrality” legislation.

Now you’ve started talking about something totally different than I am. I am referring to the current policy of the FCC, which is to weigh certain factors that are conventionally part of peering agreements when making a regulatory decision. When most people involved in the Internet hear “net neutrality” this is what they think of. It is entirely true that some special interest groups have attempted to co-opt the term in an attempt to establish special legislation to benefit themselves at the expense of the consumer. It is also true that the opposite side of the dispute has tried to use the opportunity to get regulations passed to benefit them. If you intend to bring the issue up, you need to specify which “net neutrality” you are referring to and to point out that your proposal should not be confused with the various “pro-market” proposals that propose a massive government wealth redistribution in the other direction. The statists are trying yet again to transform a perfectly useful word into something that means almost the opposite in an attempt to garner public support. Personally, I’m against letting them have it. Fortunately, most of the commentators seem to have seen through the ruse.

Ideally we’d privatize the whole thing, but until then, resisting the expansion of regulation is a good policy. I think you would agree with this. I’m just concerned that Dr. Klein was so vague with the point that he was attempting to get across that he may have inadvertently lent support to the opposing special interests.

>Bit discrimination is not a bad thing. Variable pricing is not a bad thing.

I certainly don’t think I implied that they were. In fact I tried to go out of my way to explain that that is actually the status quo. Packets are discriminated on a regular basis. The Wired article you linked even mentioned that two of the major network providers refused to route each others’ packets at all because they were unable to reach an agreement for several days.

>Charging higher prices for premium access is well within the right of any property owner to practice

As I stated above, this is already done. Dr. Klein seemed to be oblivious to these facts. That’s why I corrected him. If providers actually did what Dr. Klein accuses them of doing, they wouldn’t stay in business; their networks would be so congested and service so poor that their customers would be effectively without service.

>And yes, one of the reasons we are in this quagmire is because of how the government originally funded and later subsidized various aspects of the Internet.

And as I’ve pointed out above, all of the real problems with the Internet, as opposed to the ones that Dr. Klein seemed to be imagining, are caused by CURRENT regulation. It is ridiculous to say that in the many years since the government privatized the Internet that the inefficiencies caused by the initial government funding have not yet been fixed.

The devices and standards that run the modern Internet out competed the alternative offerings from private firms. The underlying technology was already in existence before the government funded it — Leonard Kleinrock had discovered packet switching, Bell Labs had invented UNIX, DEC already made the VAX, UCB was already doing BSD, etc. Most of the networks that eventually merged and formed Internet were built privately with private funds (BITNET, Usenet, Compuserve, Janet, Telnet, etc). The computer revolution that was going on all over the country is what ultimately brought us the Internet. The government, as usual, just got in the way. Dr. Klein, either does not know, or omitted these critical facts. As a result he has given the government a substantially bigger role in the creation of the Internet than it deserves.

>Deregulation and the abolishment of the FCC could potentially create a different land use and bandwidth allocation.

This is the real solution to real problems.

Peter June 15, 2006 at 12:48 am

If one provider decided to charge more for traffic on TCP port 80 (by convention this would be HTTP), everyone would simply route port 80 traffic around their network.

Preferably, the provider shouldn’t know that it’s directed to port 80…or even that it’s a TCP packet at all: everything above the raw IP headers (i.e., just the source and destination addresses) could – and should – be encrypted, and not visible to anyone else along the way. The only thing the provider needs to know is the destination (and even that may only be a stepping stone to the real destination)

Of course, you could choose to move everything though the onion router network today.

Peter G. Klein June 15, 2006 at 6:23 am

My exchange with Mr. Chiz has reached the region of negative marginal returns, so I think I’ll stop now. But to the charge of facilitating statism I plead Not Guiltyt. According to Mr. Chiz, pointing out the costs of government intervention somehow argues in favor of more intervention, while claiming that government intervention is harmless makes the case for laissez-faire. I suppose the best way to eliminate Social Security or public schools or antitrust law is to claim that they, too, are harmless. After all, people can voluntarily save for retirement already, so why should we care about the Social Security program? This is certainly a novel strategy for libertarians.

Oh, and one more point. I’m not sure what “propitiating the myth of technical value” means, exactly, but the concept of technical value dominates the economics literature on standards (with which Mr. Chiz seems wholly unfamiliar). Indeed, the allegation that because of network effects, markets fail to chose the “best” technical standards, is becoming the standard statist argument for correcting “market failure.” It was that argument I was addressing, claiming that the only concept of “best” relevant to economic efficiency is that which survives the market test. In dozens of economics papers by Paul David, Farrell and Saloner, Katz and Shapiro, and others, Dvorak is alleged to be “better” (in an engineering sense) than QWERTY, Betamax “better” than VHS, PC-DOS “better” than MS-DOS, and so on, implying that government agencies or government-appointed experts, not markets, should set technical standards. Mr. Chiz seems to take this as a slight against engineers. If so he’s completely missed the point.

Fernando June 15, 2006 at 9:17 am

Peter said,

It was that argument I was addressing, claiming that the only concept of “best” relevant to economic efficiency is that which survives the market test.

How can you decide that some technology is the “best”? By austrian methods you can only see that some individual chooses some technology in a particular point in time. Next time he can choose a different one. And that technology is choosen to best suit his needs (in his perception) at that time.

From my point of view, a follower of the Austrian School cannot state that something is the “best”, he aknowledges that something is the best for a particular human at a particular time.

“The Market” is a collective thing. Human action deals with individuals as far as I know.

Peter G. Klein June 15, 2006 at 11:00 am

Fernando, yes, of course, there is no such thing as a collectively “best” technology, praxeologically speaking. I’m using the concept more loosely, as Mises does when he writes (Liberty and Property, sec. 7): “It is not the fault of capitalism that the masses prefer a boxing match to a performance of Sophocles’ Antigone, jazz music to Beethoven symphonies, and comics to poetry.” Perhaps I should have written: “It is not the fault of capitalism that the masses prefer Qwerty to Dvorak, VHS to Betamax….”

Fernando June 15, 2006 at 11:36 am

But, then, you agree with me that you don’t have a “best” from the “economics” (at least, austrian economics) point of view. If we talk about group preferences, then a government will be able to know those preferences “in loosely terms”!!.

As I see it, there is no global concept of “best” regarding quality, capacity, efficiency, etc, because all these concepts are subjetive (if we follow the austrian method), and therefore talking about those things from economics is useless.

But, nevertheless, if we agree in a certain context (technological) we can decide what is globally “best”.

So, in the realm of technology, there is a, among several, a better network mechanism: packet switching, which can be measured using standarized and generally accepted procedures (i.e. throughput).

Max Chiz June 15, 2006 at 12:25 pm

Dr. Klein,

Thank you for an interesting and spirited discussion. I regret that I was unable to explain my position clearly enough, as it seems you still misunderstand it. On the question of “technical value”, however, I may have misunderstood you. It was my impression from your statement, “technological value is not the same as economic value”, that you actually recognized the existence of “technological value” as a valid concept with a meaning totally divorced from the market place.

That said, your summary of my position is entirely inaccurate. I am not supporting more government intervention; I am opposing it, on BOTH sides. While, I am supporting the status quo as opposed to an expansion of government power to favor either of the two warring factions, I think I have made it clear that the best decision would be total deregulation. I am not claiming that the government intervention in the Internet was “harmless” either. On the contrary, I am claiming that the intervention diverted millions of dollars that would have gone into producing new capital goods. Our difference on this point seems to be that you believe the government had a much larger role than it actually did, particularly in the development of the underlying technology, and therefore that the effects of the intervention are correspondingly much larger.

The point I was attempting to make was that by giving the government more credit and the market less, you had inadvertently supported the statist position. Obviously you do not see it that way. My other point was that much of what you wrote in the article was based on a poor grasp of how the Internet came to be and how it actually operates. Given that you have not responded to any of my factual corrections, I must presume that you take no issue with them.

Thank you again for an interesting discussion.

Max Chiz June 15, 2006 at 12:35 pm

Fernando, you are making a common mistake in attempting to defend the idea of “technically best”. It is true that for the purpose of building a given device, there often is a “best” technology. However it is not “best” in some platonic sense. It is “best” precisely because it meets the needs of the consumer better than all other known options. In the case of networking, packet switching is generally preferred because consumers prefer that combination of quality (throughput, reliability, etc), cost, and time-to-market.

Fernando June 15, 2006 at 2:58 pm

Max,

Not in a platonic sense. You can define concepts like Shannon’s channel capacity, entropy, information, bandwith, throughput, etc. and give them a unique meaning for a given context (group of people). Using those definitions, we (the same given group of people) can reach an agreed and common definition of “best”. Context is the operative word here.

As far as I understand, and I could be perfectly wrong, you make a mistake, mixing the concept of a human individual acting and a costumer representing a collective known as “the market”.

From praxeology you can only assert that a given technology was choosen by a given individual at a given time.

Otherwise, you make some kind of statistical assertion: if a sufficient number of costumers prefer some technology then that technology is best suited for the “market”.

I repeat, as far as I understand, that is a mistake from an Austrian point of view. Economics (the Austrian flavor) deals with individuals acting.

max.chiz June 15, 2006 at 5:03 pm

“Best” doesn’t make any sense unless you have some idea of what makes one thing better than another, i.e. some valuation from a human standpoint, but that implies that you know how people are going to use it. Given two transmition lines, one may have double the bandwidth, that does not make it “better”; it could have 100x the cost, or you may need a high-Q line instead of a high bandwidth one. That’s why there are techniques like VoC and CtQ, so that the designers know how their device will be used by the consumer and what sort of requirements that use entails. “Better” means better for some purpose. If you ignore the valuations of the customers, you still have to substitue someone else’s in order to design a product.

I really don’t know what to make of your claim that this somehow entails considering people collectively. Obviously, each individual customer will only buy the product if they believe that it will actually satisfy their wants. My point is that you can’t go off and say, without reference to which wants you are satisfying, “this is better than that”.

Doug Wiltfong June 15, 2006 at 5:45 pm

The desire to network computers together or exchange information between them is as old as computers themselves, so I think it’s ridiculously funny to suggest that without government where would be on this matter. It’s kind of a funny suggestion.

Doug Wiltfong June 15, 2006 at 5:49 pm

The desire to network computers together or exchange information between them is as old as computers themselves, so I think it’s ridiculously funny to suggest that without government where would we be on this matter. It’s kind of a funny suggestion.

Peter G. Klein June 16, 2006 at 3:46 pm

Mr. Chiz, we agree that total deregulation is the best solution, and that neither content providers nor service providers should be granted special legislative favors. As far as the historical role of government intervention, and its effects on current practice, we seem to agree on the sign, but not on the magnitude. Fine, I can live with that.

I have not said much about your “factual corrections” because I am an economist, not an engineer or computer scientist, and have had to rely on the testimony of experts. My experts seem to disagree with yours (or, perhaps more accurately, with you). But this is of course a matter of judgment, not scientific fact.

At the end of the day, if you agree with me that the broken window fallacy applies to the internet, then I’m satisfied that my main message has gotten through.

M E Hoffer June 16, 2006 at 3:58 pm

For the young Grasshoppers among us, Wiki has an accurate story about said: broken window fallacy.

found here: http://en.wikipedia.org/wiki/Broken_window_fallacy

Now, Dr. Klein, Good Sport!~, would you be so kind as to give us a short course in why it is important for us to realize that, said, Broken Window Fallacy applies to our beloved i-net?

Peter G. Klein June 16, 2006 at 4:06 pm

You are joking, right? That was the whole point of my article! Obviously I did not succeed in convincing everyone. :-)

M E Hoffer June 16, 2006 at 4:28 pm

Dr. Klein,

Yes, and here: Libertarian internet enthusiasts tend to forget the fallacy of the broken window. We see the internet. We see its uses. We see the benefits it brings. We surf the web and check our email and download our music. But we will never see the technologies that weren’t developed because the resources that would have been used to develop them were confiscated by the Defense Department and given to Stanford engineers. Likewise, I may admire the majesty and grandeur of an Egyptian pyramid, a TVA dam, or a Saturn V rocket, but it doesn’t follow that I think they should have been created, let alone at taxpayer expense.– you do so.

Though, I do disagree with the idea that packet pricing should be based on the perceived value of the info within the packet. I think that any net that instituted such a schema would find itself, quickly, worked around.

But, given your proposal, how would various posts to this weblog be priced?

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