SOLAR NANOTECH BREAKTHROUGHS

Lynne Kiesling

Over at Truck and Barter Ian cook has a post on a new nanotech solar achievement. This company claims to have used nanotech’s self-organizing properties to get the cost of generating power using solar energy to 5 cents per kilowatt hour.

I hope that this breakthrough is robust. Another solar nanotech entrepreneur is Konarka, which is focusing on thin film polymers.

I would be interested to know if that 5 cent per kwh estimate takes into account that nanotech solar only produces electricity at 7-10% efficiency.

ADAM THIERER ON TELECOM MERGERS

Lynne Kiesling

I don’t read or link to Technology Liberation Front frequently enough. I typically find that the authors there make arguments similar to ones I would make, and do so with more eloquence and expertise.

Take, for example, this recent post from Adam Thierer on telecom mergers, which provides some useful analysis of why we shouldn’t be getting our knickers in a twist about the SBC/ATT and the Verizon/MCI mergers and their purported anti-competitive effects. After saying that those worries arise from an outdated, 1980s-style approach to thinking about telecom as distinct local and long distance, Adam goes on to say

OK, so you might agree with all of this but say “There’s just not enough competition out there if these mergers go forward.” More than a few lawmakers on Capitol Hill are already saying as much.

The problem with this thinking is that fails to understand the nature of competition in network industries. The economics of network industries are not those of a corner lemonade stand. We’re never going to have hundreds or even dozens of companies providing the underlying backbone over which bits of information travel. There are significant sunk costs associated with providing network services. Deploying all the wires alone is a nightmare, but just the cost of every truck roll to a neighborhood to fix tiny problems can get incredibly expensive. Wireless networks help lessen some of these costs, but its still costly to deploy a sophisticated and reliable wireless architecture. Just siting all the towers, for example, can get quite expensive.

The economics of network industries is different from the allegedly “perfect competition” blackboard model of atomistic producers and consumers. You can have “anticompetitive” outcomes with very few firms, but you can also have robust competition with very few firms. The information content of observing number of firms in the telecom industry has fallen over the past two decades, because there is no longer a strong correlation between the number of firms and the ability to sustain prices above long-run average cost.

THIS IS NOT TO SAY THAT THE NETWORKING BUSINESS IS A NATURAL MONOPOLY. Indeed, from everything we know today, we can safely conclude that the communications / broadband networking business can be very competitive with 2 or 3 or even 4 major backbone providers in each region providing some mix of voice, video and data services. If you don’t believe that, I encourage you to take a look at two articles in today’s papers. Today’s Wall Street Journal features a cover story entitled “To Meet the Threat From Cable, SBC Rushes to Offer TV Service,” which outlines the significant investments telecom giant SBC is making to become a full-fledged video competitor to cable and DBS. And then on page A5 of today’s Investors Business Daily you will find an article entitled “Comcast Counting on a Phone Pickup” discussing the efforts by the cable giant to become a major player in the telephone business.

No one knows how this battle will play out, but the important point is that you now have large telco and cable giants spending significant sums of money to compete in each other’s traditional lines of business as well as new businesses, such as broadband.

Or, to put it the way I did the other day, competition is for platform dominance, beyond the traditional industry boundaries of telecom/cable/electric, and beyond the blackboard-style static competition to provide Q* at a P* equal to minimum long-run average cost. Adam concludes that we are living in exciting times, with entrepreneurial firms gearing up so that they can provide consumers with unforseen and unforeseeable value in the future as robust, healthy network firms.

ADAM THIERER ON TELECOM MERGERS

Lynne Kiesling

I don’t read or link to Technology Liberation Front frequently enough. I typically find that the authors there make arguments similar to ones I would make, and do so with more eloquence and expertise.

Take, for example, this recent post from Adam Thierer on telecom mergers, which provides some useful analysis of why we shouldn’t be getting our knickers in a twist about the SBC/ATT and the Verizon/MCI mergers and their purported anti-competitive effects. After saying that those worries arise from an outdated, 1980s-style approach to thinking about telecom as distinct local and long distance, Adam goes on to say

OK, so you might agree with all of this but say “There’s just not enough competition out there if these mergers go forward.” More than a few lawmakers on Capitol Hill are already saying as much.

The problem with this thinking is that fails to understand the nature of competition in network industries. The economics of network industries are not those of a corner lemonade stand. We’re never going to have hundreds or even dozens of companies providing the underlying backbone over which bits of information travel. There are significant sunk costs associated with providing network services. Deploying all the wires alone is a nightmare, but just the cost of every truck roll to a neighborhood to fix tiny problems can get incredibly expensive. Wireless networks help lessen some of these costs, but its still costly to deploy a sophisticated and reliable wireless architecture. Just siting all the towers, for example, can get quite expensive.

The economics of network industries is different from the allegedly “perfect competition” blackboard model of atomistic producers and consumers. You can have “anticompetitive” outcomes with very few firms, but you can also have robust competition with very few firms. The information content of observing number of firms in the telecom industry has fallen over the past two decades, because there is no longer a strong correlation between the number of firms and the ability to sustain prices above long-run average cost.

THIS IS NOT TO SAY THAT THE NETWORKING BUSINESS IS A NATURAL MONOPOLY. Indeed, from everything we know today, we can safely conclude that the communications / broadband networking business can be very competitive with 2 or 3 or even 4 major backbone providers in each region providing some mix of voice, video and data services. If you don’t believe that, I encourage you to take a look at two articles in today’s papers. Today’s Wall Street Journal features a cover story entitled “To Meet the Threat From Cable, SBC Rushes to Offer TV Service,” which outlines the significant investments telecom giant SBC is making to become a full-fledged video competitor to cable and DBS. And then on page A5 of today’s Investors Business Daily you will find an article entitled “Comcast Counting on a Phone Pickup” discussing the efforts by the cable giant to become a major player in the telephone business.

No one knows how this battle will play out, but the important point is that you now have large telco and cable giants spending significant sums of money to compete in each other’s traditional lines of business as well as new businesses, such as broadband.

Or, to put it the way I did the other day, competition is for platform dominance, beyond the traditional industry boundaries of telecom/cable/electric, and beyond the blackboard-style static competition to provide Q* at a P* equal to minimum long-run average cost. Adam concludes that we are living in exciting times, with entrepreneurial firms gearing up so that they can provide consumers with unforseen and unforeseeable value in the future as robust, healthy network firms.

COMPOSED, ELEGANT, AND AUTHORITATIVE

Lynne Kiesling

I follow in the footsteps of the super-fantastic Manolo and Ann Althouse to agree that it’s incredibly refreshing to see authoritative women like Secretary of State Condoleezza Rice dressing in a fashionable, complex, not-safe-and-blend-into-the-background manner.

And as a fellow knee-high boot afficionado (and athlete), I sense a kindred spirit there …

I think this is a good example of how to combine femininity and authority without being provocative, and I think we need more role models for doing so. Too many women in authoritative positions intentionally dress in “safe” ways to blend into the background, which I think is a damn shame. Your mileage may vary, but I find that walking that authoritative+feminine line makes me more effective at what I do because it makes me feel confident, assertive, and honest, because I’m not trying to hide something or be something I’m not. Honestly, I think it’s an advantage we have over the social constraints on men’s professional fashions (if it’s not blue or white it’s not a shirt, if it’s not red or blue it’s not a tie, etc.).

We should work it, ladies!

UPDATE: Thanks to John Chilton at Emirates Economist for his comment here and this post reminding us that my ruminations about the returns to “dressing for success” have some academic grounding in Dan Hamermesh’s work.

HOW MUCH MORE OBVIOUS DOES RETHINKING SPECTRUM POLICY HAVE TO BE?

Lynne Kiesling

Thanks to Stuart Benjamin at Volokh Conspiracy for his post on spectrum poicy, including a reference to this National Journal article on spectrum. The evidence keeps mounting that a spectrum policy that 1. is based on licensing and not ownership, 2. protects the fractured incumbency, and 3. is so clearly a political and not an economic process is failing us miserably even as we develop new, creative ways to use it more intensely and effectively.

The bottom line is that the war over the airwaves has continued to drag on because generations ago, the government handed out valuable frequencies to broadcasters for free, and other industries haven’t been able to buy these desirable frequencies. For the broadcasters as well as their competitors, the battle over spectrum space has been a lobbying game.

The article does a couple of things that I think are important. It points out that the politicization of spectrum is at the root of a lot of scarcity and security issues involving communications. I would also argue that it is at the root of some of the “media concentration” and obscenity controversies that enable the FCC to continue to nanny increasingly engaged media customers who are well-supplied with alternatives. The article also points out that before Marconi invented radio, “airwaves were only air”, meaning that technological change created a commodity that was scarce and had value where no such thing existed before.

Here’s the insidious political bargain that allows this regulatory arrangement to persist, even in the face of its increasing obsolescence:

The NAB’s [National Association of Broadcaster's] clout in Washington stems from the fact that broadcasters operate in every congressional district, and they control what gets on the tube. The long-standing bargain with Capitol Hill legislators has been this: Broadcasters deliver free television to voters, make money by selling advertising time to sponsors, and make sure lawmakers get airtime and the ability to buy advertising time at the cheapest available rates. This arrangement helps most incumbents get re-elected. In return, broadcasters have the right to use the airwaves free of charge, and they are protected from anyone who wants to take away their exclusive right to the beachfront.

It’s a very good article, thoroughly covering a lot of political machinations that I frankly find disgusting but that reveal a lot about the potential value that we give up by not clearly, transparently and specifically treating airwaves as an economic resource and enabling users to buy *and sell* actual spectrum. Note, however, that I don’t mean that we should “privatize the commons” across the whole spectrum, but that we should have the right to buy and sell spectrum, and if we want to aggregate some section of it into a commons a la the 802.11 slice, so be it.

This “property rights in spectrum” is not a new idea; it was provocative, ahead of its time, and bang-on correct in 1959 and 1960 when Ronald Coase first proposed it to the FCC. As Tom Hazlett noted in 2001 (among other places),

In seminal papers written in 1959 and 1960, Ronald Coase began by pondering how society managed to waste hugely valuable radio spectrum. His discovery–that a lack of private ownership was the culprit–was an epiphany for Coase, who in 1991 became a Nobel Laureate in Economics for his theorizing on the matter.

Yet, federal policy continues to deny the market permission to trade spectrum. This made Kennard’s query a trick question. Indeed, just days after his challenge was issued, Commission staff commented to reporters that they wanted to move towards a “radical overhaul” of FCC policies to make wireless bandwidth markets possible. The story made the lead headline in the New York Times because trading radio spectrum like a commodity is largely illegal today.

Where it isn’t illegal–in bandwidth confined inside fiber optic cables–capacity exchanges are popping up everywhere. RateXchange, Arbinet, Enron, Pulver.com, and Bandwidth Market operate domestically, with international trading active at Band-X (London), Cape Saffron (London), and Interxion (Amsterdam). These markets materialize precisely because the airwaves are housed in wires–”spectrum in a tube.” While technically identical to wireless, wireline bandwidth is privately owned. Capacity can be sliced and diced, bought or sold, rented or leased as the tube owner sees fit. New users can easily get access to the communications grid, instead of being shut out while idle capacity is wasted.

Four years later, after FCC staff said they wanted a “radical overhaul” of spectrum policy, and we still find ourselves lacking one of the most important and valuable features that property rights in spectrum would provide: alienability. Yet another disappointing instance of the glacial pace of institutional change in the face of politically power entrenched special interests.

DIFFICULT THINKING ABOUT INSTITUTIONAL CHANGE II: ORGANIC OR ORDERED COMPETITION?

Lynne Kiesling

My first stab at answering the question at the end of my previous post starts with what I think is a basic claim, but one that does not get discussed much, or well, in electricity policy debates:

All other things equal, organic competition outperforms ordered/managed competition in delivering long-run dynamic benefits to both consumers and producers and in increasing total surplus.

By organic competition I mean the development of institutions supporting exchange (i.e., markets and the rules that govern them) through the interaction and mutual interest of potential buyers and sellers. Organic competition “arises spontaneously from human action and economic evolution based on choices and change over time” as Adrian Moore and I wrote in a Reason Public Policy Institute study from 2003 about competition in electricity transmission. As my great friend and co-author Dean Williamson puts it, this is the process by which markets do that voodoo they do so well, and this idea is precisely what is at the foundation of the long-standing notion of spontaneous order and the “invisible hand”. Millennia of human history suggest that organic competition can be very robust, and that the co-evolution of market processes and the institutions governing those processes is an important part of that robustness. It leads to robustness through decentralized mutual benefit.

By ordered competition, I mean competition engineered, controlled and managed to approximate some idealized notion of competition.

My interest here is not just in articulating the general distinction between organic competition and ordered competition, but is primarily in trying to articulate and understand an organic process of institutional change versus a more typical “control and manage” process of institutional change.

Note here a couple of things. First, I am not using any idea of efficiency or so-called “perfect competition” as a benchmark. Such benchmarks only exist on the blackboard or in the laboratory, and while they are useful in those contexts they are nonexistent in the real economy. The language of economic efficiency and perfect competition has sidetracked electricity policy debates for a decade, and has given political opponents to market liberalization a useful weapon — “If you don’t achieve perfection, your markets have failed, right? Well, isn’t that what we told you market fundamentalist types was going to happen?” Perfection is consuming, costly, and unattainable, so let’s recognize that and move on. As a related aside, I think this point is one reason why FERC Chairman Pat Wood III goes to such great lengths to point out that he views the objective as “workably competitive” markets. While I’m not enamored of the phrase, I think the concept is the same.

Second, note that the concept of markets that I use here is one in which markets are primarily human institutions of trial-and-error learning processes, not one in which markets are mechanisms for the allocation of resources. This idea is basically a corollary to the “perfect competition” point made above. While obviously one of the consequences of market processes and prices as transmittors of information is that resources get allocated to their highest-value uses, I do not start from the claim that market processes are designed specifically as resource allocation mechanisms. The idea of markets as resource allocation mechanisms is a very constructivist one.

That distinction may be part of the problem, and here’s why. This is an industry and a set of regulatory institutions that have become enmeshed over 85 years. It is very much governed by, as my colleague Vernon Smith would put it, constructivist rationality and a constructivist approach to policy, meaning that in a Cartesian sense we derive conclusions/theories via logical deduction from theoretical postulates. Natural monopoly theory is pretty high up on my Most Wanted List of Criminals of Constructivist Rationality. But we have to take the historical hand that is dealt us (as Marx poignantly reminded us over and over and over …), and the historical hand we are dealt in electricity policy in 2005 is a constructivist one. Given the very constructed, consciously-designed-by-human-intention place where we are, how do we get from here to that desired outcome of organic competition?

To put it another way: institutional change is in many ways itself a constructivist exercise. Is there a way to make the process of institutional change more organic, and thus more likely to lead to “valuable, meaningful, forward-looking, robust, evolutionarily adaptive institutional change”?

DIFFICULT THINKING ABOUT INSTITUTIONAL CHANGE II: ORGANIC OR ORDERED COMPETITION?

Lynne Kiesling

My first stab at answering the question at the end of my previous post starts with what I think is a basic claim, but one that does not get discussed much, or well, in electricity policy debates:

All other things equal, organic competition outperforms ordered/managed competition in delivering long-run dynamic benefits to both consumers and producers and in increasing total surplus.

By organic competition I mean the development of institutions supporting exchange (i.e., markets and the rules that govern them) through the interaction and mutual interest of potential buyers and sellers. Organic competition “arises spontaneously from human action and economic evolution based on choices and change over time” as Adrian Moore and I wrote in a Reason Public Policy Institute study from 2003 about competition in electricity transmission. As my great friend and co-author Dean Williamson puts it, this is the process by which markets do that voodoo they do so well, and this idea is precisely what is at the foundation of the long-standing notion of spontaneous order and the “invisible hand”. Millennia of human history suggest that organic competition can be very robust, and that the co-evolution of market processes and the institutions governing those processes is an important part of that robustness. It leads to robustness through decentralized mutual benefit.

By ordered competition, I mean competition engineered, controlled and managed to approximate some idealized notion of competition.

My interest here is not just in articulating the general distinction between organic competition and ordered competition, but is primarily in trying to articulate and understand an organic process of institutional change versus a more typical “control and manage” process of institutional change.

Note here a couple of things. First, I am not using any idea of efficiency or so-called “perfect competition” as a benchmark. Such benchmarks only exist on the blackboard or in the laboratory, and while they are useful in those contexts they are nonexistent in the real economy. The language of economic efficiency and perfect competition has sidetracked electricity policy debates for a decade, and has given political opponents to market liberalization a useful weapon — “If you don’t achieve perfection, your markets have failed, right? Well, isn’t that what we told you market fundamentalist types was going to happen?” Perfection is consuming, costly, and unattainable, so let’s recognize that and move on. As a related aside, I think this point is one reason why FERC Chairman Pat Wood III goes to such great lengths to point out that he views the objective as “workably competitive” markets. While I’m not enamored of the phrase, I think the concept is the same.

Second, note that the concept of markets that I use here is one in which markets are primarily human institutions of trial-and-error learning processes, not one in which markets are mechanisms for the allocation of resources. This idea is basically a corollary to the “perfect competition” point made above. While obviously one of the consequences of market processes and prices as transmittors of information is that resources get allocated to their highest-value uses, I do not start from the claim that market processes are designed specifically as resource allocation mechanisms. The idea of markets as resource allocation mechanisms is a very constructivist one.

That distinction may be part of the problem, and here’s why. This is an industry and a set of regulatory institutions that have become enmeshed over 85 years. It is very much governed by, as my colleague Vernon Smith would put it, constructivist rationality and a constructivist approach to policy, meaning that in a Cartesian sense we derive conclusions/theories via logical deduction from theoretical postulates. Natural monopoly theory is pretty high up on my Most Wanted List of Criminals of Constructivist Rationality. But we have to take the historical hand that is dealt us (as Marx poignantly reminded us over and over and over …), and the historical hand we are dealt in electricity policy in 2005 is a constructivist one. Given the very constructed, consciously-designed-by-human-intention place where we are, how do we get from here to that desired outcome of organic competition?

To put it another way: institutional change is in many ways itself a constructivist exercise. Is there a way to make the process of institutional change more organic, and thus more likely to lead to “valuable, meaningful, forward-looking, robust, evolutionarily adaptive institutional change”?

DIFFICULT THINKING ABOUT INSTITUTIONAL CHANGE I: A CLAIM AND A QUESTION

Lynne Kiesling

Those of you who read KP for commentary and analysis of electricity regulatory policy (and I thank you sincerely for doing so!) have probably noticed a relative dearth of such commentary and analysis in the past couple of months. I can’t speak for Mike, but the truth is that for my part, I have been trying to think clearly about and analyze a dizzying array of ideas. Instead of continuing to do so in private, and by inflicting my extroverted-thinker half-baked ideas on the KP Spouse over dinner, I am going to use KP as a means of helping me to organize these sometimes overwhelming and disparate ideas into something that I hope will become coherent. I also think these issues generalize to other contexts and other industries. Please be patient and give me comments that will help me to refine my arguments.

Let’s start with this claim: in the U.S. electricity industry we have had 85 years of symbiotic codependency between the regulator and the regulated. Over this time technology and economic activity have changed the underlying physical and economic fundamentals of the industry, making traditional natural monopoly regulation increasingly obsolete. We find ourselves in a situation in which the only part of the historically vertically integrated value chain that has any remaining claim to “natural monopoly” status is the wires network (and even that claim will erode over time). Generation’s “natural monopoly” characteristics have eroded, as have those of the retail/marketing/end-use customer interface part of the value chain. Thus the traditional regulatory institions have outstayed their welcome.

Yet we have inherited this regulatory system specifically and consciously designed to address the specific issue of economic efficiency in a vertically-integrated “natural monopoly”. It’s a complex system, with 51 state-level regulators and a federal regulator with divided jurisdictions between retail and wholesale, and another organization (NERC) that establishes voluntary industry standards for network reliability and safe operation. Much of the institutional roadmap on which this regulatory system rests derives from the Federal Power Act of 1935, a piece of New Deal legislation that may itself be obsolete in many ways. Although technology and economy have wrought changes in regulatory institutions, they remain inertial and woefully obsolete, but still in place, alive and kicking.

One reason for the persistence of obsolete aspects of regulatory institutions must be rent seeking and the ability of special interests to perpetuate arrangements beneficial to them. Over the 85 years of this symbiotic codependency’s evolution, there has been plenty of time for various parties to the traditional institutions (in particular I have in mind regulated investor-owned utilities) to adapt to the regulatory system and learn how to maximize profits within its context. Rule #1 of economics is that people respond to incentives, and utility executives are people. So are regulators. The public choice model illuminating the persistence of obsolete regulatory institutions also has to include the incentives of regulators, well-meaning civil servants who choose to work in the public interest, and who believe that regulatory control and management of utilities is the most effective means to do so. [Note that I could have made more cynical assumptions about the motivations of regulators and the ensuing public choice implications, but those assumptions are not necessary for my argument. I want to make the most generous assumptions possible that will still permit my argument.] I know of several counter-examples, utility executives and regulators who are forward-looking dynamists and are taking the small steps that they can within their constraints to promote insitutional change. But I also know of others who want the old system to persist, and the old system is persisting. Those interests reinforce the inertial trajectory of the system.

So, here’s the question: given the complexity of the system of regulatory institutions, the difficulties (technical, political, and economic) of changing them, and the ability of long-standing interests to increase the system’s persistence through their political power, what is the most effective way to bring about valuable, meaningful, forward-looking, robust, evolutionarily adaptive institutional change?

OTHER NEW READS

Lynne Kiesling

Here’s a placeholder link to some new (to me!) economics and technology sites, until I have time to update the links template:

Division of Labour (home of my long-standing and delightful acquaintances Larry White and Deirdre McCloskey, although DM has yet to post)
Market Power
Economics Roundtable (not really new to me, but needing a link)
Jonathan Schwartz of Sun Microsystems