Megalextoria

Free markets can be hard. They might not produce outcomes you personally like. This is why we have such extensive literature on economic inequality, public goods, or merit goods, among other alleged market failings.

Government provision or regulation is usually the proposed solution to these market failings. But advocates for free markets will point out that this cure is, in many cases, worse than the disease. Economics undergraduates will hear much in their classes about “market failure,” but the problem of “government failure” is at least as widespread.

However, even for free-market advocates, it can be a tough principle to cling to when the market isn’t doing what they would like. For some, it is too tough. When faced with a market outcome they disapprove of, some embrace the very government intervention they usually oppose.

A case in point is the Internet, specifically websites such as Twitter, Google, and Facebook. Many conservatives believe these companies are politically biased and are “censoring” conservative content in various ways or promoting their opponents. They propose increased government regulation of these companies. They are said to be “public utilities” that require the hand of government a little heavier on their shoulder than other businesses.

Personally, I can readily believe these websites are biased and do discriminate against certain political views. But what should the government do about that? Should it do anything?

The Myth of Public Utilities

Underlying this argument is the notion that public utilities are a class of producer apart from most others we leave to the discipline of the market. What sets public utility producers apart?

Nothing. My old (1992) edition of the Penguin Dictionary of Economicsdefines a public utility as follows:

An industry supplying basic public services to the market and possibly enjoying monopoly power. Usually, electricity, gas, telephones, postal services, water supply, and rail and often other forms of transport are regarded as public utilities. These services all require specialized capital equipment and elaborate organization.

Capital is heterogeneous; it is all, to some degree, specialized. Is the capital required to produce automobiles more specialized than that required to produce postal services? Is the organization of a bus company really so much more elaborate than that of Amazon that it belongs in a different, more tightly regulated class of business? More useful is my old (1965) Everyman’s Dictionary of Economics definition:

Public Utilities, groups of industries in a monopoly position supplying “essential” goods and services, subject to public regulation designed to ensure that they operate “in the public interest.” It is difficult to say which industries fall within this definition since what constitutes “the public interest” or “essential goods” is a matter of personal and political opinion.

The Mirage of Monopoly and the Real Danger of Regulation

In an age where we can choose between countless different handsets and competing networks, where I can watch live English football on my phone while traveling through rural Minnesota, it might seem bizarre that telephones were once considered something that should be provided by the same people who brought us the Veterans Administration. At one time, even such a staunch advocate of free markets as Milton Friedman thought this. In the 1975 edition of his book An Economist’s Protest, he wrote that “there are some cases, of which telephone is probably one, where technical considerations enforce monopoly.”

Why has our attitude toward telephones changed?

Technological progress is part of the answer. This has changed the “technical considerations” Friedman cited back in 1975. There is no longer any technical argument that all telephone users need to be on one network that government is required to regulate.

But the proximate cause is a change in regulation itself. In the 1920s and 1930s, government became concerned that “competition resulted in duplication of investment.” It stepped in to restrain such duplication by granting monopolies. In an attempt to safeguard the consumer from the effects of this intervention, government intervened again. The Communications Act of 1934 authorized the Federal Communications Commission “to impose service requirements priced at regulated rates. Any deviations in product or service required government approval, a laborious process then as now,” explained Diane S. Katz in a 2004 paper published by the Mackinac Center for Public Policy.

This is how “AT&T secured its dominance over telephone service for decades to come, controlling more than 80 percent of all telephone lines and assuming family status as ‘Ma Bell.’” There was nothing “natural” about the monopoly—it was created by government regulation in the first place.

And, when regulation changed, the monopoly it had created collapsed. As LiveMint has pointed out:

The company’s monopoly was broken up in 1984, with the parent retaining long-distance telephony and the seven regional “Baby Bells” becoming de facto local monopolies providing local services. Long-distance services became heated with competition, with the entry of MCI and Sprint. Due to AT&T’s break-up, the charges that long-distance carriers had to pay regional Bells became transparent. Until 1984, these charges were opaque, and mother AT&T actually used to subsidize local calls. In fact, after the break-up, the local calls became more expensive, rising faster than the rate of inflation. This was also the period of the entry of VOIP (voice over Internet protocol) into telephony.

As we look back at the saga of the AT&T break-up, it looks strange and archaic. That’s because the emergence of the Internet, the mobile phone and cable plus satellite television was mostly post 1984…

Just as the monopoly in telephony was a consequence of government regulation, so, also, was the technical progress that makes such a mockery of the notion that telephony is a monopoly a consequence of deregulation.

Market Failure or Government Failure?

In contrast to the blunt instrument of government regulation, producers in free markets are regulated by competition and consumer tastes.

Facebook, Google, and Twitter may look like monopolists requiring tighter government regulation now, but so did MySpace back in 2007.

In February 2007, The Guardian asked: “Will MySpace ever lose its monopoly?” In April 2008, Facebook overtook MySpace in the Alexa rankings, and in 2009 Myspace lost half of its user base. As the example of telephony after 1984 demonstrates, if individuals and businesses are allowed to innovate in a free market, they will. For all the talk about “network effects,” “economies of scale,” or whatever else, MySpace’s vaunted “monopoly” was destroyed in a year by such innovation. In contrast, government regulation granted AT&T a monopoly and protected it.

Facebook, Google, and Twitter may look like unbeatable monopolists requiring tighter government regulation now, but so did MySpace back in 2007. If Facebook’s potential competitors are allowed to innovate in a free market, they will. And, one day, perhaps Mark Zuckerberg will simply be an affectionate memory, like Tom of MySpace fame.