 The internet revolution has been the great equalizer for the Libertarian movement and it's also made the works of Austrian economics available to anyone with an internet connection. But political rulers around the world hate the internet for a very simple reason. The free flow of information across borders threatens to expose them and the governments they run for what they are. Now the US federal government wants to regulate and tax broadband providers and you under the guise of net neutrality. The latest proposal is a monstrous 332 page administrative policy from the Obama administration, one that won't be voted on by Congress. Our own Peter Klein, a senior fellow here at the Mises Institute and a professor of economics at the University of Missouri, is an expert on entrepreneurship and capital from an Austrian perspective. He joins us this weekend to explain the net neutrality scam, the debunked monopoly and antitrust arguments used to promote it and how the internet would work in a world of truly unregulated entrepreneurship. Stay tuned. Ladies and gentlemen, welcome back once again to Mises Weekends. I'm your host Jeff Deist and this weekend we welcome our own Dr. Peter Klein. Great to have you with us Peter. Hi Jeff, thanks for having me. Well you notice I'm going to go ahead and take the liberty since I feel like I know you pretty well that I'm not going to call you Dr. Klein. I'm just going to go with Peter. Yes, please, please don't. To begin, Peter, let me just summarize the basic argument that supporters of so-called net neutrality offer. It goes like this, broadband services, especially that last mile of pipe or fiber into your home is a uniquely capital intensive industry and so capital intensive that broadband is similar to a road or a common carrier utility and thus it's susceptible to natural monopolies. And if we don't regulate the internet, we'll end up with a few major carriers charging high prices, discriminating against some content providers and favoring others who pay to play. So what's your response to this basic argument? That's a very old argument, 150-year-old argument that's been used to regulate all kinds of businesses. There's a number of problems with it. I'll leave aside for the moment the kind of moral or ethical issues associated with appropriating private property for public use. In other words, even if it were true that for efficiency reasons, it only makes sense to have one firm in the market, one firm providing that service. There might still be issues with violating the private property rights of the owners of those resources. But fortunately, we don't even have to go there because the argument is deeply flawed just on technical grounds, on efficiency grounds. And I think the easiest way to see this is to realize that the natural monopoly argument, like most standard monopoly arguments, relies on a very sort of static worldview. In other words, the way things are right now with the sort of technology and organizational knowledge that we have right now, it so happens there is only one firm providing this particular good or service. It has high upfront capital costs, low marginal costs, so it's difficult for other firms to come in and compete with the incumbent. I mean, there are plenty of markets, retail distribution with large players like Walmart, Aviation, some kinds of manufacturing, where we do see high fixed costs and low variable costs. But it doesn't follow that the most efficient way to organize that industry will always be a single firm or a small group of firms with high fixed costs and low incremental costs. All of that is dependent on entrepreneurship and innovation. It's dependent on technological progress. It's dependent on the cleverness of business people in finding out new ways to organize. But one very easy way to see that is to think about telephones. You and I grew up in an era where there were only wireline telephones and everybody knew. I mean, everybody believed that there was no way you could have competition between alternative providers of voice signals that come to your home or business. You could only have one wire. There's no way you could lay two big grids. You can only have one grid. And so you may have to have a government monopoly, the telephone company, Mabel. It's inconceivable that we could do it in any other way. Well, of course, anybody listening to the show who's 30 or under is going to think that's some kind of ridiculous fantasy land. Because when those arguments were made, there was only one way to get those signals effectively to your house through a big, fat wire. But of course, now we have all kinds of competing wireless alternatives. We have wireline alternatives. You can record someone's voice or some information onto a CD or a DVD. And you can truck it to your home or walk it to your home. There are all kinds of alternative means to exchange voice and even video signals between homes, between businesses and so forth. If we believed that the only way we could do this was with the old-fashioned incumbent technology and the government acted to make sure there was one and only one provider, no one could legally compete, massive subsidies and price controls and so forth. We're making the market structure, keeping the market structure the way it is. Well, then we'd still be in that world today. We wouldn't have wireless telephony. We wouldn't have internet-based telephony. You and I are doing our interview now on a Skype call. That was not conceived of by regulators in the 1930s through the 1990s, or at least not in the 1980s. And the way the point is, whether it's internet, whether it's electricity, whether it's transportation, whether it's energy, we don't know what solutions creative entrepreneurs can come up with. And as long as we ask the government to maintain the status quo to keep the snapshot looking exactly the way it is, we're just harming innovation and entrepreneurship. We're making it less likely that creative new solutions will be developed for the future. Peter, isn't the real danger that the state creates monopolies? If you consider the Rothbardian view of monopoly as fundamentally a state privilege. Oh, that's absolutely right. And in fact, the kinds of examples that I've been giving with communications, energy, transportation and so forth, the reason that those through most of the 20th century were highly concentrated industries was because the government restricted entry into them. Transportation's a great example. In the 18th and 19th centuries in the US, in Europe, there weren't any number of competing privately owned turnpikes and other sorts of private roads. It was the action of governments to say, no, no, no, we can't have any private commercial for-profit roads. We can only have government provided roads that eliminated most of those competing private providers. So not only is government not necessary to maintain some kind of optimal structure, in fact, the inefficient structures that we have, as Rothbard pointed out, are the result of exclusive grants of government privilege. Net neutrality advocates claim that they want the FCC to force broadband providers to be transparent, to not discriminate against or block particular content, and not to favor other content in a pay-to-play type scenario. So are these real problems in the first place, and how would the market deal with them? I think the fallacy that regulators and other proponents of net neutrality are embracing is to think that there could be some sort of ideal situation where there really is genuinely neutral infrastructure. In reality, there's no such thing as neutrality. For any kind of medium for delivering information or for facilitating transactions, imagine that we enforced retail neutrality so that when you walked into the grocery store, the grocery store was forbidden from negotiating with manufacturers to set up displays. Now, you go into the convenience store, there's a big Bud Light display there, allowing Anheuser-Busch to pay to have the Bud Light in the front of the store and other beers in the back of the store. That would be illegal if we had sort of grocery store neutrality. But then what would that mean? The store is a certain shape. Certain products have to be closer to the front door than other products. And there's no way actually to lay things out on the shelves of the grocery store so that no product service has any potential advantage in reaching the customer, which shelf it's on, shelf height, the lighting, and so forth. I mean, it's sort of a mirage to think that any kind of neutrality in pricing, in play out, in display, in facilitating transactions could ever exist. And of course, it doesn't exist with the internet either. I mean, there's no way that data, even technologically, there's no way actually to implement any kind of pure neutral rule with regard to data transmission. Data is transmitted in different formats. There is, contrary to what some people think, I mean, it's not an unlimited infinite resource. Anybody who's ever had to watch the buffering on Netflix, it's not because your internet provider is artificially lowering the speed. Even without any such arrangements, I mean, there simply isn't enough pipe. The pipes aren't big enough so that everyone could instantaneously have all the data he or she could ever want. You only have so much bandwidth. You need some mechanism for prioritizing the information that flows through that bandwidth. And I would be very happy if we had a market system where private non-governmental subsidized or protected firms, network providers, content providers, and other participants were free to negotiate over what kinds of arrangements, maximize their profits, what kinds of arrangements best suit the needs of consumers. Not every data, not every packet of data that flows through the internet is of equal importance. This conversation that you and I are having now, I think is very important. And if you and I were not able to have this conversation or if someone were not able to listen to our conversation because the network is clogged because some teenagers are Instagramming selfies back and forth and that's clogging up the network, well, to me, that's not a very effective use of scarce bandwidth. You and I would be willing to pay, and probably some of our listeners would be willing to pay some modest amount to get to the head of the line. Right, just as you can buy a first class or a business class ticket and get to the front of the line when you board an airplane and have a special check encounter, neutrality would eliminate all differences in how customers are treated, the prices they pay, the services they get, and it's simply impossible to implement anything like that nor would it be desirable in any realm of commerce, not just the internet. Peter, why is prioritization of content such a problem in the minds of people who advocate net neutrality? How would the market deal with content providers like, let's say, Netflix and YouTube that require more bandwidth, for example? Look, this is the old argument that let's say I have a preference for some obscure kind of food where I live in Columbia, Missouri. It's a college town. It's not a big city. It's a modestly sized town. Suppose that I just have this passion for Indonesian food and there's no Indonesian restaurant in my town because the majority of diners in my town prefer hamburgers and pizza and Chinese food. As my friend, you might say, gosh, Peter, that's too bad. I feel for you. I wish the market could support an Indonesian restaurant in your town, but too bad. That's sort of the way it goes, but why should other people in Peter's town be forced to patronize a restaurant they don't really want just so the restaurant can be profitable for Peter's benefit? Likewise, I have nothing against Reddit. I think Reddit is terrific, but if Reddit can't compete with Netflix and other large providers because the majority of consumers are willing to pay for the services that Netflix provides and are not willing to pay or not willing to pay as much for the services that Reddit provides, well, I mean, that's how the market works. That is the so-called democracy of the marketplace where consumers vote with their dollars and the market as a whole gets big goods and services that consumers desire, but that doesn't mean that every single individual will always be able to consume everything that he or she wants under all circumstances. Well, you mentioned the physical realities of the pipe bringing data into your household, for instance, and I wondered, do you think satellite broadband technology will ultimately defeat the arguments for common carrier or utility type regulation of internet service providers? Yeah, I think that's probably right, not only among the existing technologies like satellite and other kinds of wireless technologies that we have. A lot of them can effectively compete away some of the advantage that these last mile pipes supposedly have and all consumers are supposed to have access to, but I mean, there's any number of new technologies that haven't been invented yet, right, that you and I can't discuss because we don't know what they are, there's nobody's thought of them yet. I think a really interesting analogy here is with energy, because that's often seen as the closest, most similar case. You know, most people are hooked up to the electric grid, right, and they get their electricity through a pipe, they get your water through a pipe and your sewage and so on, but in principle, one can be totally off of the water grid and still they're just fine by getting bottled water, small quantities or having a large bottle delivered once a week or once a month by the colleague and man. Electricity is quite the same. I mean, we're only a few years away, most likely, from having, you know, hydrogen-based fuel cells. You could imagine someone, not somebody who lives out in the mountains, but somebody who lives in the city and says, I don't want to be connected to the electric grid and, you know, once a month or depending on the technology, maybe once every six months or once a year, you know, the colleague and electric man comes to my house and drops off a new fuel cell and that gives me all the electricity I need for the next six months or whatever. There's no technological reason why an electric grid is even necessary under a scenario like that. My point is with broadband connectivity, there may be any number of ways that people can get access to the information that they need in a timely fashion, using technologies that we're not even thinking about because they're sort of off the shelf. Again, take Netflix as a good example. Most of us watch our Netflix streaming online, but a lot of people remember the Netflix DVD in a mailer model, which of course Netflix still has. I mean, you could imagine a scenario where competing uses, alternative uses for the pipe were more valuable to consumers, to society as a whole, than watching streaming movies. We might go back to a red box model or the Netflix DVD model where the information is being delivered to your house and not through a pipe, but through the mailbox. We have to be open to those kinds of alternatives and allow the market to be freed up so that entrepreneurs can experiment and can come up with alternatives that work. Peter, I'd like to wrap this up by talking about content itself. Now, net neutrality is clearly not just about technology and monopoly. It's not just about regulator or controlling the means by which your internet signal comes into your home. It's also about controlling the content. It's about suppression, potentially politically unpopular views. It's about controlling information, controlling what people do and say online. Do you have a sense that most Americans understand net neutrality in this context, the context of liberty and the context of free speech? Absolutely right. Again, it's like the content requirements that already exist on network television. I mean, the reason you think about network news in the old days prior to the internet era and even now, people like Brian Williams. I mean, how many Brian Williamsons have there been in the 20th century sort of exaggerating and falsifying information? That's sort of the dominant model in network news. But many people forget that there are only three networks because of regulatory fiat. And there was pretty substantial content control. And the reason why the three networks were all pretty much the same were also bland and were always sort of giving information that supports the dominant view from coming out of Washington, DC is for precisely that reason. So once you allow, once you agree or establish, agree to or establish the principle that the government has the right and the obligation to regulate how communications pathways are used, you've opened up a huge Pandora's box, not only supposedly to enforce neutral pricing, which as we have discussed, you can't do anyway, but also to restrict content. And you can totally imagine that a regulated broadband world will not allow certain things to be said and will not allow criticisms to be made of certain important people and will not allow for politically incorrect dialogue. So I think that's a serious, serious concern that advocates of net neutrality have yet to grapple with. Peter, I agree that this is a very serious issue. It's certainly not the first time that the federal government has used benign terminology like net neutrality to describe what is really a very evil impulse by our rulers to control what we do and say online. I'd like to thank you so much for an interesting interview. Ladies and gentlemen, have a great weekend.