Universal Translator

Saturday, May 7, 2011

Why Does America Hate Free Market Capitalism?

Over at Balloon Juice, mistermix reports on how America’s internet service is being left in the dust by . . . wait for it . . . Lithuania.  Lithu – fuckin – ania.  Apparently, service (10/1 Mbps) that costs $40 - $60 here (depending on where you live) used to cost only $14.72 in Lithuania.  I say “used to cost” because Lithuania just doubled its speed with no increase in cost.  Which means that right now we in America are paying 3 or 4 times what Lithuanians pay and getting internet service at half the speed. 

(Click through and read mistermix’s entire post; weep at the fact that American internet service is half-speed compared to Lithuania’s worst service, and that if you were in Lithuania and willing to pay a little more you would have access to internet speeds that you can only dream about here in America.)

Look, I’ve resigned myself to the fact that the United States isn’t going to even make an effort to keep up with Korea or Japan – I mean, they’re supposed to be the high-tech havens of the world.  And I’ve even resigned myself to the fact that the United States isn’t going to even make an effort to keep up with Western Europe.  But when our tech infrastructure is being left in the dust by Lithu – fuckin – ania, a former Soviet bloc country . . . Jesus! we aren’t even trying anymore.

What really ticks me off about this is that there is absolutely no reason for us to lag so far behind the rest of the developed world.  But by our policy decisions we have chosen to do so – it didn’t just evolve this way in the United States, we picked this outcome because, basically, we don’t understand what “free market capitalism” means.

In American discourse the phrase “free market capitalism” has evolved to mean something very specific:  a market for goods and services entirely free of any government involvement or regulation.  But this is a perversion of what the term originally meant.  The “free market” as originally conceived, meant a market in which all suppliers and consumers of goods and services were able to compete with each other in pursuit of their own self-interest, free of coercion from any single or small group of economic actors (which includes the government, but which also includes any extraordinarily powerful private actors as well). 

As originally conceived, in order for a “free market” to exist at least three factors have to be present:  (i) there must be a sufficient number of suppliers competing with each other to sell products/services, and no single supplier or small group of suppliers can be large enough to set prices on its own; (ii) there must be a sufficient number of consumers competing with each other to purchase products/services, and no single consumer or small group of consumers can be large enough to set prices on its own; and (iii) there must be transparency of information, such that all consumers and suppliers in any particular market can bargain rationally, and no particular economic actor can use superior information to obtain an advantage over another when bargaining.

Only if all three factors are present are market participants truly free to make rational decisions in pursuit of their own self-interests.  But – very often – one or more of these factors is missing.  When that happens, and in direct furtherance of free market principles, the government needs to step in and correct the system so that the benefits of free market capitalism can flow once again to society. 

In fact, this is the entire point of our antitrust, labor protection, and consumer protection laws.  We have laws to prohibit (or, in the case of utility companies, regulate) monopolies because monopolies give too much power to a single economic supplier and that distorts the market until it no longer is “free” – it is enslaved to the monopolist.  We have laws establishing minimum wages, overtime pay, standard workweeks, and union protection because otherwise employers have too much economic power to “consume” labor, and can very often essentially force people to work for slave wages.  And we have anti-fraud regulations and truth-in-advertising laws so that the sellers of goods and services, who naturally have an information advantage over buyers, can’t take advantage of their superior knowledge in order to cheat their customers.

All of these are examples of government interference in the market, and all of them are examples of the government interfering in order to promote free market capitalism.  Contrary to the way “free market capitalism” is casually understood in this country, the fact is that without necessary government interference and regulation there would be no free market.

This seems to be recognized throughout most of the developed world except, curiously, here in America.  And it is our lack of understanding what the phrase “free market capitalism” truly means that is responsible for the pitiful state of our telecommunications infrastructure.

* * *

Obviously, the provision of high-speed internet access requires a significant capital expenditure.  DSL and/or high-speed fiber-optic lines need to be laid in order for consumers to have physical access to the World Wide Web.  (Although it is to be hoped that increasing gains in our ability to transmit data wirelessly at high speed might eventually allow for the replacement of these more expensive lines with a relatively inexpensive system of wireless towers, much the same way the advance of cell phone technology made it possible for telephone service to finally cover poorer, developing countries.)

This means that there is a significant “barrier to entry” for new service providers.  Unless a new service provider is permitted to make use of existing lines, that new provider is going to have to lay a new system throughout the community in order to compete with existing providers.  But this would be insane.  First, it doesn’t make any sense for 2 or 3 or however many potential competitors exist to lay multiple high-speed lines parallel to each other in order to connect users; particularly not when the existing lines are quite capable of carrying additional traffic.  Insisting that each potential new servicer provide its own physical infrastructure essentially places a huge barrier to any new servicer getting into the market in the first place.

Throughout most of Western Europe they resolved this problem by simply mandating that the companies that laid the existing lines must allow other, competing companies to use those lines as well (I believe, however, that they can charge rent for these other companies’ use).  If the existing companies want to provide internet service they are free to do so, but they have to do so in direct competition with other service providers and they are not permitted to use their existing infrastructure (which is their private property) to “fence out” competition.  As a result, there is a wealth of competing internet services to choose from in Europe, this competition has fostered the development of higher internet speeds, and all of this greater service comes at a much lower price for consumers.

 (I remember, about 3 years ago, reading a post about this by “Chris in Paris” over at AMERICAblog, and was stunned to see the level of competition fostered in France, the amount of data access Chris in Paris could get – including not only internet service, but also television channels and cellular service – and the small amount of money he had to pay in order to obtain all of this.)

This is free market capitalism at its finest, working exactly the way it is supposed to work . . . but it is only possible because the government stepped in and made some policy decisions that valued the provision of high quality, low-cost telecommunications services for its citizens over the right of private companies to use their private property to establish a monopoly.

* * *

Lithuania, in contrast, seems to have taken a different strategic approach to achieve the same goal.  The news from Lithuania indicates that internet service is provided by Teo LT, a “part-state-owned telephone company,” and that the government, through Teo LT, essentially is setting prices and providing faster speeds in hopes of achieving broadband prosperity.  That is, the government is directly regulating what Teo LT can charge and the service it will provide.  The Lithuanian government’s direct approach perhaps arises from its prior experience as a former Soviet bloc country with central government “command and control” economic planning, but it should be stressed that Lithuania isn’t really doing anything that we don’t do routinely in the United States.

Essentially, the Lithuanian government is treating Teo LT the same way we treat utility companies.  Again, the significant capital investment necessary to build a power plant operates as a huge barrier to entry to electricity providers.  This necessarily means that in pretty much every single community in America a monopoly exists on the provision of electricity.  But electricity, like running water, is considered essential to American society; accordingly, in order to ensure that most Americans can afford to purchase electricity, the government regulates these monopolies and especially sets the prices these monopolies can charge.  “You can make profit,” the government says, “but not so much profit that half our citizens are forced to live in the cold and the dark.”  And everyone in America is used to this, everyone thinks this is a good idea, and no one thinks to scream that this constitutes “socialism.”

Lithuania is merely doing the same thing here.  I have no doubt that Teo LT is generating a profit, but the Lithuanian government seems to have decided that the provision of high-speed internet access to its citizens is a higher social goal than is simply allowing Teo LT to charge the highest prices necessary to maximize its private profit.  Internet access, in other words, is perceived to be a public good like electricity and clean running water.

* * *

But in America we’ve chosen not to follow either of these approaches.  In America we understand “free market capitalism” to mean simply that the government must never, ever interfere with or regulate private economic actors.  (Despite the fact that, as utility companies demonstrate, we don’t really always mean that.)  So there is absolutely no way we could ever follow Lithuania’s route and have direct government regulation of private internet service providers’ prices and services.

It also means that in America, despite a push from time to time to force cable and telephone companies to open up their lines to competing internet service providers, that won’t really happen either.  The idea seems to be that cable and telephone companies own those lines and that it would be an infringement on their private property interests to force them to allow competitors to use those lines – even if those competitors had to pay a fair rental fee for that use.

And what that means is that in most of America there is essentially a monopoly – or, at best, where the phone and cable service is not provided by the same company, a duopoly – and thus no competition for the provision of internet service.  A lack of competition means that the internet providers are free to charge the highest prices necessary to maximize their profits, and have no incentive whatsoever to provide better service to their customers (that might cost money, and thus decrease profit).  Where else will those customers go?  Truly, it is the worst of all possible worlds – except for the monopolists.

* * *

This is not free market capitalism.  This is the subservience of free market capitalism to what we now seem to consider a higher value:  the protection of powerful entities’ private property rights uber alles. 

And this is insane.  The protection of private property is, of course, a worthwhile goal, but as in almost all human endeavors competing goals exist and some of those goals have to be considered more important than a slavish obeisance to private property.  And “promoting the General Welfare” of society, as laid out in the Preamble to our Constitution, has got to be considered one of those more important goals.

To be sure, in today’s Information Age the ability to quickly, efficiently, and cheaply access, share and network data is one of the cornerstones of further economic progress.  Allowing private companies to make this activity both (i) slower and (ii) more expensive by the de facto enforcement of local monopolies has got to be a huge drain on our economy.  And there is absolutely no reason for this to be.

Look, I get it – I’m a big fan of private property rights too.  But just as we don’t allow private power companies to exploit their monopoly status at the expense of society as a whole, neither should we permit private internet providers to do the same.  If the companies that own the phone/cable lines want to stand on their “private property principles,” then they are asserting a right to monopolize the provision of internet service.  And that’s okay, provided We the People can step in – through the government - and regulate that monopoly so as to allow them “profit, but not too much profit.”  This at least would reduce transaction costs and economic friction in the new Information Age, even if it would do nothing to further innovation and better service.

But that isn’t really a great solution to this problem, and certainly it wouldn’t be my first choice.  Generally speaking, I am not a big fan of “command and control” economic regulation.  I would rather see us adopt the European approach to these matters.  Require the existing owners of cable/phone lines to allow competing service providers to use those lines – in exchange for a fair rental payment – and introduce competition back into this market.

Doing so would allow us to harness free market forces and let them work the way they are supposed to.  I cannot help but believe the market solution reached by myriad service providers competing with each other to provide the best service at the best price will both (i) lower prices and (ii) provide better, faster internet service.  And I can’t help but believe that this market solution would be superior to any decision reached by a government entity deciding for itself what to charge and what services to provide. 

Let’s embrace real free market capitalism again by enacting legislation to make it possible.  And let’s at least make our telecommunications infrastructure the equal of Lithu – fuckin –ania’s.


  1. Two points. First, Lithuania is 25,174 square miles while the United States is 3.79 million square miles, about 150 times larger. Easy to build a high speed system in a small area. Secondly, Lithuania is a modern country structured around a knowledge-based economy, so high speed internet makes sense.

  2. As to the first point, yes you are of course correct and this is something that I've seen argued before when it comes to internet service penetration in the United States: that we are just too big a country to make it as economically feasible as it is in small countries, like South Korea or Lithuania. And there is, of course, something to this and perhaps it explains why we don't have a great deal of high-speed internet service in Wyoming, or Montana, or the Dakotas. But it doesn't explain why we can't have high-speed access in New York, or Chicago, or Miami, or Charlotte,or RDU, or Atlanta, or, or, or etc. etc. etc. I think this point is underscored by the fact that the service providers we are discussing are not national providers but are instead regional providers.

    As for the second point, I am not sure what to make of that. "Lithuania is a modern country structured around a knowledge-based economy . . . . ." and, what, the United States is not?

    'Cause if that is the case, then I've been listening to the wrong politicians/social engineers for about 20 years. My understanding was that we were leaving behind that old school, old hat idea of actually manufacturing goods and now we were moving into the new Information Age. Were they all lying to me?