Tag Archives: Internet

Free-market, Small Government and Regulations

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The free-market has been used to argue against regulations and for small government for years. However, I believe that the major supporters of using the free-market argument are disingenuous in their application of the argument. In addition, the free-market is a flawed theory which needs to be revisited by neoclassical scholars and adjusted.

The free-market theory comes from the idea that there is an invisible hand that guides the market towards equilibrium between supply and demand. This assumes that once the equilibrium is hit it will stay at that point until there is some shock to the system which would find a new equilibrium. Each time that there is a shock, the invisible hand would push the market into a new equilibrium. This idea came as a side comment in the Wealth of Nations. This idea has become enshrined in the minds of neoclassical economics in a manner that Newtonian Physics was presumed to be accurate. In both cases the theory is incorrect. Relativistic Physics has replaced Newtonian, but in Economics the free-market is still the prevailing mechanism for policy creation. There has been no evidence for an invisible hand at all. In fact Metcalf created the theory of a networked economy which argues that the value of a good becomes more valuable as more people use it. I’ve mentioned this in the past. Essentially, this will prevent any equilibrium from every being found as the price can increase and people will still adopt the networked item because it’s becoming more valuable to the user. Or the price can remain constant even when it should drop for other factors such as a reduction in cost of production. A perfect example is the iPhone. According to research Apple has a whopping 72% margins on the iPhone, even if production was moved to the US Apple would still make 42% margin on the iPhone. There also is an over production of the iPhone and strong competition, which would indicate that the iPhone should drop prices as they are capable with that large of a margin. This market has a great deal of competition and has a large number of companies producing, which indicates that it Apple should be under pressure to drop prices. However this isn’t happening because of the networked value of the iPhone. There are a huge number of apps for the phone, the apps are high quality and the product works well with other iPhones. The market has had no impact on the cost of the iPhone.

However, free-market champions would look at any effort to change the labor practices of Apple as wrong headed and regulation that isn’t required. The Market isn’t demanding any change to labor practices because the market can bear the current prices and the demand indicates that people don’t care about labor practices. However, it’s well known that there are no alternatives to Apple’s iPhone that are produced in an ethical manner. So voting with your money wouldn’t actually work here. The problem arises because there is something of a monopoly in the manufacturing of the smart phones in FoxConn. In this case there is a market failure. Which is something that neoclassical theorists argue cannot occur. The market cannot send a signal to firms because there is no mechanism in which the market could send a signal. This is can be understood if you view this industry as a networked economy. Where you see the ties between manufacturers and handset companies, which would show a massive connection to FoxConn.

Efforts to regulate the manufacturing of devices have been argued as the reason for moving the manufacturing to other countries. However, this is not the case in the case of Apple, as they would still have huge margins. It’s because the company is attempting to maximize profits, not reduce costs to be profitable. The same arguments have been used to argue for smaller government. Saying that since there are no market failures the government should not intervene in the industry.

The unfortunate thing is that these arguments immediately disappear when it comes to protecting the profits of record industries. The same free-market advocates then move to argue that intellectual property must be protected. Essentially, creating protection for a specific product through IP causes a market failure and prevents the market from operating at its most efficient because there are not other competitors in the market. Creating IP requires a huge regulatory framework from the mechanisms of registering, logging complaints and prosecuting actors that infringe on the IP.

This type of industrial policy is typically derided by the small government fans, as it is a type of regulation that selects a “winner” (IP owners) over “losers” (non IP owners). Which may be fine. However, whenever this selection pushes our government to select a winner (Music) over the fastest growing, possibly only growing, part of our economy (internet based companies) there is a serious risk to the future. As I’ve mentioned before these laws represent huge risks for innovation.

These laws are SOPA and PIPA, which I’ve discussed extensively. However, the next round of internet regulations come in the form of CISPA. This bill, which requires allows companies to share extensively with government agencies. This type of sharing of user data and information about the activities going on at the company would not go over very well from the the free-market advocates if this was a request for data about customer data for car dealerships or steel mills. Essentially, this is going to increase the cost of doing business in the US. This may prevent companies from working in the US and prevent innovation. If I was to create a company that dealt with social data I would not want to do so after the passing of this bill. It would be likely that I would be blackmailed into giving the government data about my users that I had no desire to give them.

The internet is the perfect example of a networked economy. Facebook’s value comes from the fact that it has a huge user base. This is true for Google, Amazon and Instagram (List of companies that support CISPA). Without the users the services is literally worthless. With the users a company without any revenues can be worth $1 Billion (Instagram). The difference between this bill and other bills like SOPA and PIPA is that the agreement is bidirectional. The government will likely help Facebook and Google fight Chinese attacks and give information to each other about the activities of online hacktivist groups like Anonymous. It is likely that 4chan will end up giving over IP data and other information related to anonymous and Anonymous users.

This is regulation that the internet doesn’t need and will stifle innovation. The government already has these powers, which maybe why the Obama administration is opposed to CISPA. It is also ironic that Obama plans on sanctioning countries that use Tech to abuse human rights specifically committing genocide. A whistle blower has recently announced that the NSA has intercepted 20 TRILLION emails and likely has copies of all of these stored somewhere. The passing of CISPA and any other law of similar persuasion  would likely protect companies like AT&T from future lawsuits for being complicit with these activities.

For devotes of the Free-Market these laws create market distortions and will cause serious harm to innovation on the internet. For people that understand networked economies, this will greatly undermine the value of these networks as users will likely change their behavior to mitigate the amount of information the Government can compile on them. CISPA and its sister laws SOPA and PIPA represent big government actions attempting to control and regulate industries that do not need to be regulated. In this case there is no market failure that needs to be addressed. Privacy is something that the users have been pushing for and Facebook and Google have steadily improved on those accounts. Surprisingly industry is doing a decent job at regulating itself. Finally, regulations being pushed by advocates of small government and free-market smack of hypocrisy and a lack of understanding. These laws require a deep understanding of the internet and how the market of the internet works. Without this understanding terrible laws will be passed that will damage our privacy and freedoms. For the issues that this law would protect from there are other methods that could be employed to gain the desired results without passing laws.

Contact your congressional members to fight against this bill.

Are we talking past each other with the net neutrality debate?

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I started reading (yes another book) “Internet Architecture and Innovation” on my flight to Portland Tuesday night. It’s going to be a really interesting read, if you like the internet, economics and innovation of course. One of the first parts discusses the history of the internet and a design principle called end to end. This means that when something is transmitted certain events must happen. There are two meanings to the same principle though, which complicates things. In one version only peers can “talk” to each other and share the information. This isn’t exactly literal, because if I’m skyping the data isn’t just between skype on my pc and yours, it goes through many, but the idea is that only your pc and mine know we are skyping. In the second method, some intermediaries might know that we are skyping, through something called deep packet inspection where a router is able to read the information it processes. Both ways are still called end-to-end. Which is obviously a problem.

Another easy example. One version would require equal up and download speeds, the other doesn’t. Let’s say you have a picture and want to upload it, in the one version it would take you the same time to upload as to download it the next day back to your pc. We know this doesn’t happen.

Until reading this book I really thought that the internet was truly designed in an equal and neutral manner. However, this isn’t the case. Using these two design principles results in an internet that looks very different and we would expect it to evolve differently based on which understanding was applied.

It’s obvious that for consumers the first option is better. Where the network behind the internet is neutral and a “dumb” pipe. Why is it better? Because no one would be able to intercept your data or change the speeds you get your information or even cap your data downloads. This is bad for network owners because they can’t charge or filter as easily for specific content. They simply become a pipe that information flows through.

The differences in incentives and contexts which the design rules are applied drives this discussion. Since the participants believe they are talking about the same thing there is confusion over the disconnect. This leads to an obvious other problem, our clueless elected officials. They don’t understand how the internet works at the simplest level, let alone the esoterics of the minute differences in this argument. It is no wonder they have tried to do back door deals to get this topic to go away.

This also has led to confusion within the internet community of how the telcoms can say that the internet wasn’t developed as a neutral platform. In a way they are correct, in other ways they are wrong. It was just a matter of what was being discriminated. Before it was up vs down speeds, now it could be content. Which to them is no different. For us, it matters a whole lot more.

Content and implicit threats

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I’m reading “consent of the Networked” right now. The book is about digital rights, privacy, government and the internet. Once i finish I will write a review for the Urban Times. I found out about the book through TechDirt’s book club. One of the major points the author makes about repressive regimes is the activities of pronationalist actors that are not truly part of the government.

These actors are typically regular people and act as hackers, journalists or progovernment rally organizers. They are found in many countries including China, Iran, the former regime of Tunisia and Libya. In a way these groups are a counter weight to “organizations” like Anonymous, dissent groups and the “liberal” media. However, these organizations are unlikely in the US and Europe right?

Well according to the author now. These groups do exist in the US and in some cases are formal business like HBGary. Some of them actually work for the US government and others do with a wink and a nod. These groups help monitor internet users and potential members of groups like Anon. In many cases this extends the impression of continual  observation by the government and other actors, which can lead to self censorship and self selection for activities.

Has this happened to me? You bet it has, but I didn’t really think much of it at the time or how it could really impact me. One of the times happened during a Facebook conversation about Wikileaks, which I was supporting. The person I was discussing doesn’t like me much and thinks I’m “a rube.” He suggested that I should get a job which requires security clearance so I would get an understanding of how things actually work and that I was niave. Of course I disagree with the fact that I’m niave and I view the world in a much more complex manner than his black and white view. However, I had been thinking of applying to a government type position and he told me I should be careful what I say, which he is correct. This then led me to rein in my views and self censor. This had serious implications on how I discussed topics for some time.

The other times are slightly different and after I started blogging. For one my brother is in the Boarder Patrol which gives him clearance and my sister does stuff she can’t talk about. So, to some extent, I don’t want to negatively impact their ability to work either. This does have a moderating affect as well.

The final source was actually my dad writing to me about my post about anonymous and my discussion of using DDoS as potentially a source of public demonstration on the internet. I was not surprised that he suggested I be careful, he did retire as a Major in the Army Reserves. However, when responding I told him I was already being careful with my wording due to self censorship. I already expect that I’m likely to have my material spring up on someone’s radar due to the content I write about. So, I do try to be careful.

In a democracy where these threats should be minimized we have to worry about it. Why should the rest of the world be different or any less oppressive?

Protecting the internet

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As I mentioned in my blog post from yesterday, the internet is extremely important. We all know that. It’s fun to use it’s become an incredibly important part of our economy and will continue to grow in general importance. In some ways Thomas Friedman is correct in the book the World is Flat, the internet has increased the ability for people all over the world to compete in the same way. However, where he goes wrong is that he assumes that this flattening and economic importance will protect the internet.

Unfortunately this isn’t the case. We, the users of the internet, will have to continually work to protect the internet from special interest groups that seek to control its use. We have seen this in the US with SOPA/PIPA and with ACTA in Europe (And now Trans Pacific Partnership). A small group of companies in an industry that isn’t really able to innovate is attempting to dominate the manner in which the internet is being used. Unfortunately, despite these efforts, there are already more agreements in the works. The most recent in the US is a bill being pushed by our dear friend Lamar Smith from Texas. Yup, same guy that did SOPA he’s pushing a law that will require all ISPs to collect data on their users and store it for over 6 months. In addition websites are going to be required to collect similar data. The goal of the bill is to prevent child pornography.

This type of law is also being considered in Canada and there was a recent protest where a twitter user was pretending to be Vic Toews. This has rather upset Mr. Toews an MP there. However, these bills essentially destroy any sort of privacy on the internet. In many cases web companies simply hand over data to law enforcement agencies and governments without any need for a warrant or a court order. Twitter is one of the few companies that puts up a fight about user data. As users we really don’t know how often our data is being handed over to any sort of governmental organization.

In addition to these individual laws and treaties China and Russia want the UN to become a governing body over the internet. I think this is a very interesting idea, however with the two countries that are pushing this change it also has cause for concern. Both of these countries really work to control the access of information for their respective peoples. A treaty at this level may make it more difficult for individual country’s industries really impact laws relating to the internet and freedom. I am going to be watching this very carefully.

As users we need to be aware of these sorts of developments and make sure that we are active in protecting the thing we all love and use on a regular basis. The internet.

The importance of the internet

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To all my loyal readers, I really apologize for my lack of posts this month. I’ve been busy with finishing my Master’s thesis, which I finished on Friday. I’m currently hunting for jobs, and will be able to post more diligently. Hopefully, I’ll get back into the groove I was in before I finished.

The Urban Times asked me to tweet some reasons why I love the internet. I think this was a great idea, it really got me thinking about how I use the internet and interact with the world. There are so many different levels possible to use the internet. In some ways, people look at the internet as something bigger than it is, and other times as less than it is.

For example. the RIAA and MPAA assume that Google is the end all be all of the internet. They act as if the internet is directed by and for Google. However, this isn’t the case, Google has to keep up high quality services and constantly be on the look out for new rivals. If Bing or some other search engine was significantly better, people would migrate to that service.

This brings up a larger point. In many cases it’s really simple to see the internet as simply websites and how we interact through these websites. Either through consuming content (many news websites), creating content (blogging and YouTube) or sharing and interacting with each other (Reddit, Twitter and Facebook). However there are many other routes to enjoy the internet. Gaming, discussion boards about specific topics, chatting through instant messaging programs and voice calls through Skype and other competing services. That doesn’t even touch upon the myriad of IRC channels and other systems users enjoy that I’m completely ignorant of the workings of and use of.

The problem with copyright activists and congressional leaders that are trying to restrict the internet, is that they don’t understand the different levels these things interconnect. Most likely they are concerned with the static pages of websites that link to content. It is through their ignorance that they do not understand how these laws would impact the highly fluid world of social media and content creation.

Memes are an important tool to remind us that we do not create content in a vacuum. Someone starts it with a picture or some turn of phrase and it catches on and some one remixes it and reuses it. However, that initial picture someone still owns. At the same time, the idea is like a dirty joke. It goes from person to person and no one really knows who created it. In the end we all own the joke or meme. Preventing the freedom to share, recreate, remix and reshare would destroy not the internet, but our culture. Our ability to share is what makes us human.

The internet has extended that ability to thousands of new people that had never been connected before in new and exciting ways. That is why I love the internet.