Net Neutrality? There's No Such Thing.

Net Neutrality? There's No Such Thing.

Its supporters have fallen victim to sloppy thinking.

The term “public good” is a nuance of “commons.” Their supply generates costs, but their consumption is (somewhat) free. Typical examples are public parks, defense or, yes, broadcasting. The difference between a common and a public good is that the common good does not cost anything to produce, whereas the public good does. Their similarities are that their use is generally free of cost and that they do not belong to any private entity. Common- and public-good economics, based on this, makes a semi-normative claim about these goods: they are both non-excludable and non-rivalrous, in that individuals cannot be effectively excluded from use, and use by one individual does not reduce availability to others.

Economics has a rather unfavorable view of common and public goods. Since they are supposed to belong collectively to the community and are free of charge to consume, commons and publics are usually abused—and there is also a great deal of free riding. Why is this? Because leaving the cost of maintaining something to the collective is tantamount to leaving it to nobody. Collective responsibility is contrary to individual responsibility. And being free of charge, commons and publics are a boon for free riders. Keep in mind: just because something is free, it does not mean that its creation or maintenance does not come with costs. That is the problem of common and public goods: their maintenance still bears costs and, more often than not, the community cannot summon enough means for compensating use and abuse. Generally, publics and commons ends in a state economists prefer to call a tragedy.

Naturally, there are possibilities for the social management of common and public goods. But usually, social management is pretty coercive. Most of the time, it means that every participant of common  or public goods has to put in some work for it. And try to apply it to the net: does that mean that everyone should have a duty to expand broadband and manage it? This is hard to believe and much harder to implement.

Of course, government is the last resort in trying to avoid the tragedy of common and public goods. But government will use taxes to provide for common goods and at the same time to provide for its own institutions. These taxes are usually higher than the private production of a similar private good would cost. And it is more effective, too. A tax has to be paid by everyone, regardless of how much the public good is used. Private production follows individual interests, as users want to use the private good.

Again, applied to the internet: would this mean that the government should expropriate all private investors that have built the web so far? And then what? Will taxes for social programs or defense be used to build broadband? Or will there be tax increases? The theoretical solutions to all public-good problems are usually more complicated than the problem itself.

Is it then a mistake to imagine the internet as a common or public good (remember, this is the intellectual cornerstone of net-neutrality advocates and of the FCC’s ruling)? Yes, it is. In reality, there are two faults within the same claim. The first is a fundamental error in economic reasoning. The second is a more preoccupying normative claim disguised as a factual statement.

Bad—and good—economics: The free-of-charge use of some of its applications doesn’t make the whole internet a public good. Granted, there are many free places in the web, and even in its infrastructure: think of forums, newspapers, magazines and even games—as well as free hotspots, free broadband, free data packages. But usually, the nonpaying consumer is paying for the used service in another way, whether by willingly becoming the target of advertising, or by making a particular page more attractive in accessing it, or by sharing data with the service’s provider. For the infrastructure provider it is even simpler. Diversity of users brings traffic, and traffic is good news. Also, most web users pay flat rates, and other prices that are not directly linked to the traffic they generate. So, there is already a price for using the web, which makes it a private good. The internet is like the proverbial free lunch: there is almost never one.

Now to the more important error in the net-neutrality argument: it disguises a normative claim as a factual one. Normativity means saying what something ought to be; factuality, on the other hand, is an assessment of things as they are. Why is this second error so troublesome? Saying that the internet is a public good because it should be one is a normative claim, even a political program. It takes a desired end state while disregarding all factors that might influence it—in this case, the private nature of the web, the individual incentives to invest and, most importantly, the business cases that maintain service levels and quality. Think of it this way: in physics, the earth’s gravity generates friction and that might be problem. Many physical experiments and applications would work much better if there was no friction. But just assuming that there is none is not a formula for success. Good physics has to deal with gravity, in the same way that good economics has to deal with the nature of private property.

But in this case, the web being a system of private goods is the good news. Private interests built the net in the first place, and they will continue to expand and make it better. In the case of the internet, private property is the motor of innovation. There is no net without private investment; understanding this also means getting the economics of the internet right. There are no websites without agents spending money on them. There is no content without its development envisaging some sort of monetary return. And there is no infrastructure without a for-profit business model at its base.

From the private nature of the internet, it necessarily follows that the infrastructure provider can use those principles for managing the web as they see fit. Indeed, the net is as valuable as its management, and management is never neutral. All businesses are by necessity non-neutral. How would restaurants manage if they were neutral? Instead, they choose their customers by the cuisine they offer, by their price range, by allowing for reservations and setting aside tables for preferred customers. Financial-services providers have specialized products according to clients’ profiles—for example age, risk propensity, financial goals or experience. Non-neutrality in these and other business models increases profits and customers’ welfare. In fact, managerial non-neutrality is very often the core of value added.

Why should it be different with the web? In order for the system to work, internet providers will have to discriminate according to traffic, data usage, data package and, yes, special agreements, reciprocity contracts and the like. This is what makes the net usable in the first place. If there were no active management, the internet would be congested with pornography and drug traffic taking up most of its space. Thanks to non-neutral management, important (messages, health, financial) and entertaining (music, games) data packages have a measure of priority. Keep in mind: management is always discretionary, but management of goods is rules-based discretion. While the web’s providers have a right to non-neutrality as they deem fit, they will bear users’ response to their non-neutral policies. The clearer they are, the better they will be rewarded by customers.

Getting It Right

“Net neutrality” is not even a romantic dream. It is a series of mistakes flanked by misconceptions. Putting it into practice jeopardizes the web, making it slow, lowering its service levels and finally delaying all investment cycles. The internet is a bundle of private goods. Business models are behind every offer in the web, and especially at the base of its infrastructure. And business models are there for profit. In order to make profits, infrastructure providers must be able to manage the traffic. And management is by necessity non-neutral. But this is good news, since it is the rule-based discretionary management of the web that makes it usable in the first place. Accepting non-neutrality is simply good economics. And it is win-win for all involved, especially users.

The internet is a bundle of privately owned and privately run businesses. And it is only successful and helpful to all people if it continues so.

Henrique Schneider is chief economist of the Swiss Federation of Small and Medium Enterprises.

Image: Part of the new Dutch petascale national supercomputer, “Cartesius.” Flickr/Dennis van Zuijlekom