Knowledge Problem

The telecommunications industry is currently in an incredible state of flux — financial concerns, business model issues, and regulatory treatment are all affecting the industry at once, in this uncertain investment climate. This fascinating InfoWorld article makes a crucially important point about technological change and the future of the telecommunications industry:

Keeping the Internet an open entity will depend largely on users’ abilities to set up ad hoc networks among themselves, instead of large telecommunications companies controlling the infrastructure and therefore the bits that travel across it, according to some members of the famed Massachusetts Institute of Technology (MIT) Media Laboratory. …

“What’s going on [in telecommunications] isn’t just that phone companies have taken on too much debt,” said Nicholas Negroponte, director of the MIT Media Laboratory, in Cambridge, Mass. There are changes under way that could mean the existing model of large telecommunications companies controlling the nation’s networks “may not bounce back with the rest of the market because we’re going to use telecommunications differently,” he said.

I think this is absolutely the case. Look at how much more mobile and autonomous we are with our technology than we were even three years ago. And what’s going to become more valuable to consumers as our technologies become more portable will be our abilities to interact and interoperate while mobile. The physical constraints of office and home continue to dissolve.

Negroponte advocates for a different model of spectrum management than I have been, though:

“Telecommunications [companies] are searching for the next generation [of services]; meanwhile, the computer industry is doing something viral on the side,” Negroponte said. Eventually, enough users will set up wireless LANs to create a web of interconnected systems that will be “a seamless broadband network built by the people, for the people,” he said.

“Spectrum used to be like real estate. [The U.S. Federal Communications Commission] would chop it up and sell it,” he said. “We can certainly use a lot of it to have people share it as a common, like 802.11 does.”

He is incorrect about the FCC chopping up and selling spectrum. The FCC leases licenses to use spectrum, but retains ownership. Licensees have no property right (which, incidentally, contributes to the transaction costs of dealing with interference through the FCC’s bureaucratic, administrative process, but that’s a topic I discussed here.). Thus the radio spectrum is still treated as a commons by the FCC. For an analogy, think about medieval agriculture and scattered-strip farming. Villages treated fields as commons, deciding jointly what to plant, when to harvest, etc., but each villager had an allocation of scattered strips that he owned within those fields.

I think this issue is worth exploring in more depth. The 802.11 slice of the spectrum is currently unlicensed, and right now over the short distances and for the uses consumers are choosing, there’s not a whole lot of interference. In other words, right now there’s plenty of 802.11 to go around because of how it’s being used. But as more users enter the commons that is 802.11, we should expect to see increasing interference and congestion problems that characterize the “tragedy of open access.” Note that I do not calll this the “tragedy of the commons” as in the seminal Garrett Hardin article, because the tragedy comes from open access with no rules governing exclusion or use of the common property. Most commons in the world, from college campuses to individual homes to parks, are governed by webs of formal and informal rules and norms establishing appropriate behavior. These rules and norms, particularly when they emanate from a spontaneous order process of user/owner interaction, reduce or eliminate the overuse problems that are the tragedy of open access. Thus “tragedy of the commons” is not a theoretically correct way to describe it.

In Hardin’s seminal article, he proposed two policy solutions to solve this tragedy — regulate it or privatize it. FCC regulation as we have endured in the past 70 years has not exactly fostered a dynamic, thriving, competitive use of our scarce radio spectrum resources. Privatization, or having the FCC sell actual slices of spectrum as fully defined, alienable, transferable property rights has been my preferred approach; fully defined and optimally enforced property rights reduce transaction costs and increase the ability of economic actors to achieve efficient, mutually beneficial outcomes.

The kicker comes, though, and this is where Negroponte’s point is interesting, when you think about the transaction costs involved in defining and enforcing those rights, and the benefits that would arise from it. To put it another way, Negroponte’s statement is a version of something I have said in other contexts — the two policy approaches that Hardin articulated for dealing with common pool resources (such as spectrum) are NOT the only two approaches; at the risk of sounding like Tony Blair, there is a third way. That third way recognizes that in the presence of transaction costs, the optimal institutional structure could well be a commons framework with rules and norms, preferably rules defined and enforced in a common law/jury trial deterrent framework as opposed to a regulatory, top-down framework.

I will flesh this model out in the future, based on a working paper that I wrote with my Northwestern colleague David Haddock about property rights evolution and the Black Death (the paper is currently under consideration at a journal).