Hayekians, Stiglitzians, And Broadband Policy

On Monday Arnold Kling posted a a comment on a commentary he wrote comparing Hayek and Stiglitz on information. As those of you who have given thought to the name of this site probably realize, this is a topic near and dear to my heart and mind. Even more so, because his commentary involves FCC spectrum policy, another topic near and dear to my heart and mind.

Arnold starts with some setup on how much grief Michael Powell gets from all sides, including his fellow Commissioner from his own party:

Everyone thinks that they are smarter than Michael Powell. The Chairman of the Federal Communications Commission is at least as mis-underestimated as the man who appointed him, President George Bush.

Michael Copps, a Democrat on the FCC, routinely defies Powell, and on several occasions has succeeded in embarrassing him. Kevin Martin, appointed to the FCC by George Bush, deserted Powell on an important vote on telephone deregulation. The House of Representatives recently voted overwhelmingly to overturn a seemingly minor loosening of media ownership restrictions.

Arnold then goes on to make a crucial point for those of us trying to understand politics and regulation, and to affect meaningful change in them: when it comes to uncertainty, competition and markets, Washington is Stiglitzian, not Hayekian. Healthy, thriving, dynamic markets and competition are messy, and are Hayekian. What does he mean by this?

By defending markets even when competition is messy, Powell is being Hayekian. Friedrich A. Hayek, awarded the Nobel Prize in economics in 1974, viewed Competition as a Discovery Procedure. He wrote, “market theory often prevents access to a true understanding of competition by proceeding from the assumption of a ‘given’ quantity of scarce goods. Which goods are scarce, however, or which things are goods, or how scarce or valuable they are, is precisely one of the conditions that competition should discover.”

Powell’s opponents are Stiglitzian. Joseph Stiglitz, awarded the Nobel Prize in 2001, wrote, “But information economics does not agree with Hayek’s assertion that markets act efficiently. The fact that markets with imperfect information do not work perfectly provides a rationale for potential government actions.”

Hayek would have the government tolerate messy competition. His point is that with the optimal outcome unknown, government resolution of issues shuts off the learning process that market competition provides. …

Stiglitz’s outlook is that markets are imperfect, but he is not. Where Marx offered dictatorship of the proletariat, Stiglitz would give us dictatorship of the Nobel Laureate. Between the two, we might be safer with Marx.

Broadband is the telecom issue du jour that brings these conflicting visions of markets and competition to a head. The Stiglitzian among us, including Reed Hundt (former FCC Chairman), want government to provide a subsidy to stimulate demand for broadband. But as Arnold puts it, the telecom industry is becoming increasingly Hayekian in its understanding of the value and success inherent in messy competition:

One of Hundt’s arguments against Powell’s approach of setting different broadband providers competing against one another is that “somebody is bound to fail.” He regarded the failure of a cable firm or a telephone company as unthinkable. However, several months earlier Isenberg [a writer referred to earlier in Arnold’s piece] co-wrote a column in USA Today saying, “Instead of spending billions of tax dollars propping up the telephone companies and delaying the inevitable, let them fail and fast.”

The geeks are in favor of something called “open spectrum,” which would take spectrum licenses away from incumbent owners and free it for wireless applications. Powell is trying to do just that. One recent proposal is to allow a huge swath of spectrum that was previously allocated to religious and educational institutions to be re-sold into the market. Copps, the FCC Democrat, once again stands in reflexive opposition, defending the status quo of FCC command-and-control over spectrum utilization.

For more on the creeping baby steps the FCC is taking toward more market-based spectrum allocation, see this post from May, and this InternetNews article from March, link courtesy of Arnold.

But I think the best indication that Arnold “gets it” is his conclusion, which I think is deeply and utterly beautiful:

Congress thinks it knows the optimal fraction of the television market that can be owned by one media firm. Reed Hundt thinks he knows better than consumers themselves how much they want to pay for fiber to their homes. Michael Copps thinks he knows how to manage phone lines and how to allocate spectrum. Unlike his detractors, Michael Powell thinks that he knows less than the market. And in my view, that makes Michael Powell a man of rare and precious wisdom.

2 thoughts on “Hayekians, Stiglitzians, And Broadband Policy

  1. I find it fascinating that, when “managed markets” fail, the failure is always attributed to the markets, rather than to the managers. “Success has many parents; failure is always an orphan.”

    Regarding broadband, for many the question is not how much we would be willing to pay. We simply do not have access to DSL or cable modem service, regardless of price. T1 and ISDN services are available, but their cost exceeds my willingness to pay for personal use. The only reasonable broadband alternative available for many is satellite-based internet access. While this service requires capital investment and a monthly fee of $60, it at least is available.

    The issue in this case is not as much regulation as it is regulatory uncertainty. Investment by all potential competitors is being impeded by uncertainty regarding current and future regulation. In the absence of regulation, markets happen, services are offered, some are successful and some are not. In the presence of stable regulation, investments are made and services are available, even though neither the investments nor the services may be optimal, even initially. In the presence of unstable regulation, or the threat of impending regulation, little or nothing happens. Right now, ain’t much happening in broadband! Interestingly, ain’t much happening in electricity either. Hmmm.

  2. Outside of wartime or a national crisis, can anybody name one example of federal regulation that was beneficial in the long run? It always seems to add up to a short term fix at a long term cost.

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