Net Neutrality and Hayek

What do economists do and what do they not do?  Alternatively, perhaps I should ask what should economists do and what should they not do?  What economists should not be in the business of making value judgments about many things in the economy?  We really are not qualified to do those things.  Therefore, economists should not declare that this firm is too big, or that this industry does not have enough firms or enough competition.

What we should be doing (and this is the belief of Chicago Economist John Cochran) is trying to find out if something is working:  are the incentives good?   Are there distortions?    What, if anything, is causing markets to work or fail to work?  What Cochran says about the financial sector of the economy, I’d say about everything, including the Internet.  This week we have a new court decision that strikes down “Net Neutrality,” the rule that insists that ISPs treat all internet traffic equally.   With the court decision, ISPs can now favor some content over others and restrict user’s access to certain content.

Certainly, this has the potential to have a huge impact on how the market works.  After all, this affects the institutional framework in which the Internet exists, so economists should certainly think about its implications and try to consider how this will make the Internet work better or worse.   What economists should not do is entertain notions that this new framework will allow firms to get too big or give existing big firms an unfair advantage at the expense of consumers.   Economist Don Boudreaux makes this point on his blog.  His point is that we perhaps have reason to believe that companies have incentives, more so than government regulators, to serve customers and further that large businesses may have become large because they have an advantage in serving customer needs. 

I would like some commentary on what will happen with the net neutrality decision instead of what might happen.  OK.  My ISP can now block my access to Facebook if it wants.  Those making that claim need to explain why that might happen.    My grocery store is not legally required to sell me Dr. Pepper, but it still seems to have it on the shelves.  Why?  Because I would go somewhere else if it did not.  When Net Neutrality became an issue 10 years ago, bandwidth was expensive and competition was nil.  In the last 10 years, bandwidth has become cheap and there are many substitutes.   At my house, I have many options for internet service:  ATT, Suddenlink, Dish TV, Direct TV, ATT wireless, Sprint, Verizon, etc.  Why should we think that the marketplace would not give us what we want?

Furthermore, not only are there many options right now for internet service, there is significant threat of even more firms entering to provide internet service.  If, one of the articles suggest, that firms will be able (or try to) to double charge content users and creators double on both sides, there is a considerable profit motive.  By striking down the FCC’s ability to regulate, maybe ISPs will discover ways to package their product in a way that serves consumers better.

In other words, Net Neutrality may have been a great policy 10 years ago.  Net Neutrality may have been even necessary for the internet to come into being.  But that does not mean it is good policy now.  Maybe it is time for the courts to force FCC to allow competitive forces to reign without restrictions on the agreements firms can make to try to make to serve consumers.

This idea is very optimistic and relates very nicely with my student’s impending assignment of Hayek’s Use of Knowledge in Society.  With Net Neutrality, the government placed a restrictive environment on the types of agreements that companies could make as they did business.   The court decision takes those restrictions off.  The question to me at least is what do you trust the most.  Which institutional framework will serve consumers better?    Now, in this narrow arena, businesses can use their particular knowledge of the market to operate.  Will that benefit us?  We will see.

Of course, there are many anecdotes that support and contradict my arguments here.  I will allow my students to fill in the blanks.  Educate me.