with this: “(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.

Posted by: Peter G. Klein at June 14, 2006 12:48 AM

I was under the impression that you had an alternative pricing schema in mind.

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?

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?

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.

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”.

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.

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.

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).

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.

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.

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.

>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.