Net Neutrality Means an Unfree, Slow, and "Stupid" Internet

by Raymond C. Niles

(This introduction was originally posted at the "Principles in Practice" website where a free version of Mr. Niles' article originally in The Objective Standard, "Net Neutrality: Toward a Stupid Internet," has been made available.)

The chairman of the FCC recently called for applying “net neutrality” to the wireless spectrum. Such a measure would dramatically extend the reach of proposed “net neutrality” rules, which were originally slated to govern the delivery of Internet content via wire—cable and DSL lines—but not via wireless signals. The expanded rules would govern the delivery of Internet content to cell phones, iPhones, Kindles, and other wireless devices. The advocates of net neutrality claim they are seeking to preserve a “free” and “open” Internet and to prohibit the “unfair” policies of Internet service providers that favor some content over others. According to them, to preserve this openness and freedom, the FCC must be granted vastly greater powers to coercively determine the business practices of Internet service providers.

That claim, however, is a sham.

An “open” and “free” Internet cannot be achieved by means of further FCC regulations. Extending FCC controls to the wireless spectrum would not “open” anything or free anyone; rather it would further violate the rights of Americans to produce and trade according to their own judgment and thus thwart this vital new realm of life-serving technology. It would unleash a torrent of government control over every aspect of the Internet, granting the government power to dictate how content is to be delivered and at what price, making it less profitable for Internet service providers to invest in costly infrastructure, and thereby quashing their incentive to innovate.

To the extent that “net neutrality” is implemented, the result will be a slower, less robust Internet—a “stupid” Internet, as one of the chief advocates of this pernicious idea aptly describes it. For an elaboration on how “net neutrality” violates the rights of Internet service providers and users alike, and why it is a bad idea for the wired Internet and by implication the wireless spectrum, read my article “Net Neutrality: Toward a Stupid Internet.”

Stealing the Commanding Heights

The Federal Reserve recently announced that it would establish rules governing the pay of employees at essentially all bank and financial corporations in the United States. This goes well beyond just targeting CEOs at banks who received federal bailout money last year. According to the New York Times, the proposed rules would apply to 5,000 bank holding companies and state-chartered banks. And it would apply to traders, loan officers and other employees, not just top bank executives.

Ostensibly, the purpose of the rules is to reduce “systemic risk.” Allegedly, by having government regulators determine the pay of bankers, those bankers will no longer have the incentive to make risky loans to individuals and corporations.

Such a policy evades the fundamental cause of that risky behavior, namely government policies that fostered artificially cheap credit and mandated risky loans. The Fed itself is the author of these policies. It flooded the economy with cheap credit and 1% interest rates in 2003-2004, which fed the orgy of subprime borrowing. The Fed also enforced the Community Reinvestment Act that forced bankers to meet quantitative targets of loans to uncreditworthy borrowers. Moreover, Fannie Mae and Freddie Mac, two government-sponsored enterprises, guaranteed mortgages against default, thus ensuring that bankers would have no incentive to monitor credit risk.

The government’s subsidies, guarantees against default, and promiscuously cheap credit created an atmosphere in which private bankers were rewarded for taking excessive risks, and made to look like suckers if they prudently restrained themselves.

Yet the government blames the bankers for this mess and now wants to control their pay.

Over the past year we have seen Barney Frank (October 2008) call for a moratorium on Wall Street bonuses and President Obama (February 2009) call for limiting the bonuses of CEOs to $500,000. At the time, I warned that when government arrogates such a power to itself, do not assume that it will be confined to a few Wall Street executives. Now we see the Fed claim for itself the power to control the pay of tens of thousands of employees at every banking institution across the land.

Government fostered the financial crisis by violating the rights of private citizens through its reckless policy of subsidy and cheap credit. Now it proposes to “solve” the problem by further violating rights, including the right of employer and employee to voluntarily agree on the terms of employment.

The end game of this dangerous grab for power should be obvious. The government will not stop until it has taken complete control of the commanding heights of the economy. And it has already largely succeeded. With its progressive takeover of banking, government is now assuming control of the most important sector of the economy. The banks are fundamental in economic importance because their lending and capital raising decisions directly affect the growth of all other industries. Now the government, through its control of banking, will decide whether a particular company or industry is to receive credit, and succeed or fail.

Do not doubt that the government will use this power. Recently, for example, the Wall Street Journal reported that former Vice President Al Gore used his influence to steer two $500 million federal loans to cronies planning to make expensive “environmentally friendly” cars. Imagine what Al Gore or others will be able to do when the Fed controls the salaries of thousands of private bankers. To whom will they be able to direct loans, and for what type of quid pro quo?

Statist governments operate under a rule. They always seek to control the commanding heights of the economy. Statists know that if they control the key industry upon which all others depend, they can control all industries. Our government is seizing the commanding heights of our economy right before our eyes.

The Human Face of Socialized Medicine

Some weeks ago a reader of my blog posted the story of his father-in-law, who received treatment under Canada's system of socialized medicine. With his permission, I reproduce his story below. As President Obama this week begins his congressional push for further socializing medicine in America, consider the story of his father-in-law, and think about what socialized medicine will mean for you. Consider the "human face of socialized medicine." My response to him follows his story.

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"I was born in Canada and have taken Canada’s socialized health care system for granted all my life that it was good - until we needed it.

My father in law, a Filipino immigrant, wasn’t feeling well so we took him in for a check up. We waited for a few more months until the testing could be arranged, and then more waiting since there were, “complications.” He had a lung cancer and we would have to wait for “6 to 8 months” before scheduling treatment.

I think he knew he was going to die and took charge. After a few months of constantly coughing, we tried to pester the doctors to speed up the waiting time. He tried his own remedies to alleviate his worsening condition like drinking Ginger soup but he could delay no longer. He and his wife decided to go back to the Philippines for treatment. The doctors there had immediately started treating him with radiation but it was already too late. He had developed a fast growing form of lung cancer and died a few weeks later.

The doctors seemed concerned but wouldn’t change the waiting times due to limited available machines and Canada’s administrative central control in this field.

The fact the Canadian health care system pretends to be based on equality hides the fact it is a socialist experiment that destroys human life and can never be sufficient enough to heal life when needed. The carrot in Canada’s healthcare system is the so called “affordability for everyone” promise, but it is an inherently bad way to go due to its built in socialization. Lives are constantly lost. Ted Harlson (Toronto, Canada)"

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Galileo Blogs' response to Mr. Harlson:

Your story saddened and angered me. It is criminal that your father-in-law had to die because of socialized medicine.

Socialized medicine harms everyone, doctors, patients, and their families. It is deadly to human health, as your story illustrates. Socialized medicine kills.

The alternative is to recognize that doctors have the right to freely charge for their services, just as patients have the right to freely select their doctors. No one has a "right" to medical care. That care must be paid for, and when government is the payer, it means rationing care and killing off the "excess" patients that "the system" cannot afford.

No one worries about there being a shortage of cars. People do not wait in line to buy cars, clothing, or houses. That is because those markets are largely free. Each party voluntarily deals with the other. The result is an abundance of these goods willingly bought and sold in the marketplace, at times and in quantities, and at quality levels that both parties mutually and voluntarily agree on.

Recall the long lines in the Soviet Union for bread, shoes, and toilet paper. That was because their entire economy was socialized. Those Soviet-style lines have now come to medical care, because it too has become socialized in Canada and, soon I fear, the United States. Your father-in-law died waiting in one of those lines.

Please take your grief and fight back by denouncing this injustice, as you have by sharing your story.

Please accept my condolences and best wishes.

The Europeans Punish Success, Again

The European antitrust regulator has just announced it will fine Intel Corporation $1.44 billion (1.06 billion euros) because it "harmed millions of European consumers by deliberately acting to keep competitors out of the market for computer chips for many years." It did this, essentially, by discounting the price it sold chips to stores that agreed to sell computers containing them in bulk through exclusive agreements.

We've been down this path before. The railroads that served Standard Oil charged him a lower rate because Rockefeller could guarantee large, steady shipments of oil, which the railroads could ship more cheaply. For providing the railroads with product in a way that reduced their costs, and being charged less for providing that, Rockefeller was prosecuted.

In the same manner, a retail store that can guarantee large, steady sales of computers containing Intel chips is more valuable to Intel than a store that buys some of its chips and some of its competitor's chips. Intel can afford to provide a discount.

Those never-to-be-denied European customers benefit from this by getting cheaper Intel chips, yet they were supposedly harmed according to the European antitrust commissioner.

But also evaded by the European antitrust commissioner is that a market for computer chips would not exist at all if Intel did not invent, develop, and constantly innovate the chips that become the brains of computers. Because of Intel's work, each year the chips are faster and smarter. Each computer sold with those chips can do more -- faster processing of material from the Internet, simultaneous handling of video and audio, and numerous other tasks -- because of the relentless intellectual effort of Intel's scientists and engineers.

That is part of what the never-to-be-denied European consumers and all others who buy Intel chips are getting.

To steal $1.44 billion from Intel is to demand that these scientists and engineers work for free. It is to steal the fruit of their effort, which we all benefit from by voluntarily buying their products that they create. As their property created by their minds, they have the right to set the terms under which we gladly buy these products, which we buy because of the great benefits they offer us.

Into all this steps the punishing European antitrust commissioner. She violates Intel's property rights and the rights of Intel's customers to do business with Intel on mutually agreed-upon terms. And by so doing, she ensures that Intel has $1.44 billion less in which to reward the efforts of those scientists and engineers who create the marvelous Intel chips.

If our computers are a little slower than they could be and our freedoms more diminished, thank Neelie Kroes, the European antitrust commissioner, and the legions of apologist economists who rationalize the pernicious doctrine of antitrust that gives her this power.

New York Tea Party

I joined thousands of other protesters yesterday at the "Tea Party" protest at City Hall Park in downtown New York. My sign read on one side, "Reason & Capitalism. No Creeping Socialism!" On the other, it read, "Ayn Rand Is Right." I saw many signs referring to Atlas Shrugged and Ayn Rand. One Objectivist joined me with his sign that read, "Who Is John Galt?"

We found a strategic spot right alongside Broadway. Many busloads and carloads of commuters got to see "Ayn Rand Is Right" and "Who Is John Galt?" on their way home from work. One person asked us who John Galt was. We told him that if he wants to understand what is wrong with the world and what should be done about it, read Atlas Shrugged. He said he would.

I was pleased overall by the event. It was remarkably secular. There were few references to God and the conservative Republicans only showed themselves in a tentative manner. (I think they know how responsible the Bush-era Big Government and Religious Right Republicans are for the crisis we're in.)

Overall, the impression I had was one of a true grassroots protest. People were angry at the violation of our rights. People expressed it in terms of outrage over spending and taxation.

The speakers weren't very good overall, but they were sincere and angry.

This is the first protest I have ever gone to. I have always thought that the battle of ideas is won through conventionally intellectual pursuits: writing and teaching.

But there is a time to speak out in the form of a protest. This was one of those times.

I hope we see more Tea Parties.

Thank you, Rick "Sam Adams" Santelli for issuing the clarion call that was heard around the country.

The Case for Bankruptcy

What is bankruptcy?

Bankruptcy is the financial state that occurs when a person or business can no longer repay its debts. In the legal sense, bankruptcy begins when a court recognizes that the financial state of bankruptcy exists. The bankruptcy court takes charge of the bankrupt entity and disposes of its assets or reorganizes it to pay off as much of the debts as possible.

A bankruptcy proceeding recovers money for the creditor, but both parties benefit.

The purpose of a bankruptcy proceeding is to facilitate the maximum recovery of the money owed to the creditor. But it also benefits the debtor. After the debtor pays off what he can, his remaining debt is extinguished. This is not a “get of jail free” card; the debtor, whether a person or business, must face the damage to its reputation and a greater difficulty in obtaining credit for a long time into the future. Rather, it is an acknowledgement that the debtor simply cannot repay his debt. For both parties, bankruptcy offers timely resolution to an otherwise unsolvable dilemma. The creditor regains a portion of the money owed, and the debtor, relieved from the burden of a debt he cannot pay, can move on with his life.

Bankruptcy is economically valuable.

In economic terms, a speedy and fair process of bankruptcy allows both assets and people to resume being productive as quickly as possible. The creditor regains cash that it can redeploy as it sees fit. If it is a bank, it has regained funds that it can loan out again to more productive businesses or creditworthy individuals. The creditor can also redeploy the assets of the bankrupt entity into the hands of a more capable manager.

Take the financial malaise of General Motors as an example. Although effectively bankrupt, there has been no legal recognition of this fact (as of this writing in March 2009). As a result, its factories and workers continue to be tied up inefficiently making mediocre cars. General Motors is a drag on the American economy.

Bankruptcy would free General Motors’ factories and employees to be more productive. Once a court legally acknowledges General Motors’ bankruptcy, it could allow General Motors’ new owners, its creditors, to appoint a more competent manager. Or the creditors could sell the plants to a superior car manufacturer, such as Toyota. Either way, after reorganization under bankruptcy, the plants would be used to make cheaper, more attractive cars that customers want to buy.

The creditors may also choose to shut down some or all of the plants and sell them for scrap. But recycling the old plants into new steel that becomes the girders of modern, efficient factories is a better use for those plants if they are obsolete. No party is in a better position to make these judgments than General Motors’ creditors, who have their financial self-interest at stake.

While General Motors is just a single, albeit enormous, example, speedy and fair bankruptcies end the bleeding of money-losing operations across the economy, and re-direct inefficiently utilized assets and capital to more productive activities. In sum, bankruptcy facilitates economic recovery. A failure to permit bankruptcy prolongs stagnation.

Some fallacies about bankruptcy

Bankruptcy always means shutting down a business. This is not true. Creditors, in consultation with the bankruptcy court, decide whether to shut down and liquidate, or to operate under new management. Creditors have every incentive to make the decision that maximizes their pay-out over time, not just the amount of cash that can be had right now.

Bankruptcy is bad for employees. Considered in full context, bankruptcy is good for employees. An economy with speedy and fair bankruptcy procedures is one where healthy, growing companies predominate. Healthy companies can pay employees more because their labor is worth more to them. Therefore, employees benefit from bankruptcy, even if someone occasionally faces dislocation or the uncertainty of working for new management. But, even if employees dislike such occasional dislocation, there is no alternative to bankruptcy if their employer is not financially viable.

Bankruptcy allows deadbeats to avoid meeting honest obligations. When bankruptcy laws are properly drafted and applied, this is the exception rather than the rule. Bankruptcy laws are designed to protect the rights of all parties, not to unfairly favor debtor or creditor. Bankruptcy acknowledges a fact, that the debtor cannot repay all his debts, and it facilitates the repayment of all debts that can be repaid.

Government should stop bankruptcies. During financial panics, governments sometimes try to prevent bankruptcies by putting moratoriums on them, subsidizing bankrupt entities, or changing the laws governing bankruptcy to favor debtors. Such interventions are both unjust and impractical. They are unjust because they deny the legitimate right of the creditors to collect what they are owed. The money they are owed is their property, and they have the right to collect it, to the extent it is reasonably possible. Such interventions are unjust and impractical because they attempt to deny reality. “Stiffing” the creditors or forcing innocent third parties to bail out the bankrupt entity through subsidies does not change the fact that the bankrupt entity cannot repay its debts.

Bankruptcy is moral.

Bankruptcy is just, if resolved through a fair and speedy judicial process. A bankruptcy proceeding acknowledges the actual state of affairs that exists, that the bankrupt entity cannot repay its debts. It resolves this dilemma for the maximum benefit of the creditor, but in so doing allows both parties – debtors and creditors – to resolve this matter with finality, and move on with their lives. Bankruptcy only involves the parties to the debt obligation. It does not require that innocent, third parties be forced to subsidize or bail out creditors or debtors. In doing so, it respects the rights of all concerned.

A just process of bankruptcy is also economically practical. Bankruptcy removes assets from those who have mismanaged them, and puts them into the hands of those who are most capable of putting them to productive and financially responsible use. The institution of bankruptcy is an essential part of a prosperous and just capitalist society.

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First published at The One Minute Case and Capitalism Magazine.

Smiling Daggers

Paul Hsieh has an interesting commentary on President Obama's embrace of something called "libertarian paternalism." Obama appointed Cass Sunstein, who authored this concept, as a senior regulatory official in his administration. The concept says that government should "nudge" us with coercive measures to do "good things" such as eating better foods, saving for retirement, encouraging our children to do their homework, etc.

The nudges involve handing back our tax money to us in the form of credits or deductions, or even paying us for performance, again using the tax money already taken from us. The "nudge" may also be more direct, such as New York City's ban on the use of trans fats in restaurants.

All of this is for our "good." But who determines this good? Answer: Cass Sunstein or sundry other regulatory officials who make it their life's work determining what is good for me, or even President Obama himself. Accepted in this premise is that the judgment of these individuals must forcefully supplant my own judgment about my own life. I am not permitted to make my own decisions on topics that these officials have determined are worthy of their attention.

These nudges come at the expense of my personal liberty. A society where people are nudged about is one where individual rights are absent. That is the society we are being nudged to accept.

As Mr. Sunstein and his cohort of regulators, led by the regulator-in-chief, President Obama, prescribe and proscribe in the minutest detail how we are to live our lives, don't be fooled by confusing phrases such as "libertarian paternalism," or by the broad smile of President Obama as he appoints Mr. Sunstein to take on his duties. "Libertarian" is seemingly based on "liberty"; "paternalism" derives from the Latin word for "father." There is nothing "fatherly" in government ordering adult Americans about; we are not children. Moreover, liberty cannot exist where government is telling us what to do. These terms are meant to confuse. In such confusion, government power is rationalized and expanded. It is a tactic that has been used by dictators throughout history.

In George Orwell's fictional 1984, the dictator "Big Brother" said, "Freedom is slavery." In the same oxymoronic manner, "Liberty is paternalism."

Don't be fooled.

As Wall Street Bonuses Go, So Goes the Liberty of All of Us

[See update to this post below.]

“There will be a time for [Wall Street executives] to make profits and there will be a time for them to get bonuses. Now is not that time.” So said President Obama on January 29 to reporters (source: “The Kudlow Report,” CNBC).

So we receive President Obama’s declaration that Wall Street bonuses must be cut. According to him, now is not the time for those bonuses, although he allows that there will be a time – determined by him – when bonuses will again become acceptable.

When Obama arrogates to himself the authority to determine whether, when, and in what amount payments shall be made by an employer to an employee, do not think that such power will only be used to lighten the wallets of Wall Street executives. Such a power demanded today becomes one that will be used in the future to cut the wage or bonus that any American is paid, if doing so should please the Presidency.

If you doubt that, consider that at several times in history the American government fixed the wages of nearly all Americans. It happened during World War II and it happened again in the early 1970s. It is neither a Democratic nor a Republican issue, with the former happening under Democratic President Roosevelt and the latter under Republican President Nixon.

It needs to be said, because Americans have become so used to having their liberties encroached: a man’s ownership of his labor is parcel of the ownership of his own life. If he cannot freely contract with an employer to offer his labor at voluntary, mutually agreed upon terms, then his life is no longer his own. Instead of being a free agent offering his services at a voluntary, mutually agreed upon rate to a willing employer, he becomes a serf, whose labor and life is controlled by his lord and master.

That is the meaning of Obama’s attack on Wall Street bonuses. Attacking the private right of employer and employee to voluntarily agree on salaries and bonuses is an attack on the freedom of both parties. In calling for Wall Street executives to be treated like serfs, President Obama is setting the precedent that will make all of us serfs in the future.

Do not be fooled by the issue of government bailouts. Government had no right to hand out that money. It does not belong to government; it belongs to each one of us. Moreover, this crisis would have ended on its own without any government “rescues.” Recessions always end through the economic adjustments of all participants in the economy. It happens on its own, without a “rescue” or despite it. The current recession is no exception and will end, despite Presidents Bush and Obama’s profligate showering of trillions of dollars of taxpayer money on the problem.

However, government committing a wrong by handing out bailout money does not give it the right to compound its wrong by using that as a justification for further violating the rights of employers and employees. Government should not be handing out bailouts, nor should it be telling employers whether they can pay bonuses.

No one, including President Obama, has the right to forcefully tear apart the private employment relationship between employer and employee. When a private individual does it, it is considered fraud or theft. When the President does it, he takes on the scary personage of a dictator.

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2/4/09 UPDATE: President Obama now says companies that have been given (or forced to take) bailout money must cap the pay of their senior executives to $500,000 salary plus $500,000 bonus. For the morality of that, see above. In terms of its effect, government will get the quality of executives that it pays for. Guess who runs Wall Street now?

We could see this coming. See my October 27, 2008 post, "The Man Paying the Bill Gets to Determine Who's for Dinner."

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This post is re-posted. It was originally posted at www.simplycapitalism.com on February 1, 2009. Also published at www.capmag.com on February 4, 2009.

Dae Jang Geum -- Part II

I commend to you a new review of a great work of art, Dae Jang Geum. The author of the review contends that it is a "work of Romantic art of the top rank, well worth the attention of anyone who values Romantic art." I agree. Read his review to judge his argument. Better yet, watch the series. (See my review of Dae Jang Geum here.)

The Curiosity Seekers: Modern Economics Is Irrelevant to Life

When I was an economics undergraduate in the 1980s, I learned an astonishing “joke” among economists: “Torture the data and nature will repent.” My professor, a Chicago School economist who studied under Milton Friedman, used the joke to illustrate how a clever economist armed with the tools of statistics can “torture” the data to reach any conclusion he wished. My professor was an “empiricist” economist.

The other type of economists I encountered taught my classes in Keynesian macroeconomic theory. They spun intricate, mathematical theories divorced from the real world. They were the “theorists.”

Both approaches resulted in “conclusions” that, if they had anything to do with reality, it was only by smuggling in a better approach. Otherwise, the questions asked and answered by these economists were as relevant to human life as the questions debated by a group of peasants standing around a well in the Middle Ages or by a group of scholastic monks peering down at them from their monastery up the hill.

Now we have an article entitled “International bright young things” (The Economist, 12/30/08), which highlights the best and brightest new economists, as selected by their mentors.

One who calls herself a “randomista” uses randomized trials to answer economic questions. She recently demonstrated that “mothers in the Indian state of Rajasthan are three times as likely to have their children vaccinated if they are rewarded with a kilogram of [lentil beans].” The article wonderingly asks, “[who knew] such a modest incentive (worth less than 50 cents) [would] make such a big difference?”

Another has “proven” that regressive inheritance subsidies [that means subsidies for those who receive inheritances] would “take the edge off…the uncertainty” that results from the “biggest roll of the dice in life [which is] the family you are born into.”

Yet another “shows” that government must provide enough unemployment benefits so that “[t]he unemployed decide that an unhurried job search is worth the extra cost of depleting [their additional funds].”

Armed with rigorous tools of statistics and mathematics, and powerful computers, these economists are spinning their wheels answering questions about… nothing.

But they are missing the most powerful tool, the one that will give them the proper method and purpose for their efforts. Without that tool, these practitioners of a vital science have become seekers of unimportant curiosities at best and diminutive statist nostrums at worst.

That tool is a rational philosophy. Every scientist is guided by a philosophy that tells him what is the proper subject of study and how that knowledge can be gained. Today's economists are sorely in need of a rational philosophy, one that will point them to subjects that are more than a handful of lentil beans in importance, and to research methods that are more effective at discovering enduring principles than the randomista's spin of the wheel.

A philosophy like that exists. See Ayn Rand and her philosophy of reason called Objectivism.

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I originally posted a version of this piece on the Harry Binswanger List forum.