Friday, December 05, 2003

Lessig on Ownership of Advanced Fiber Networks - but what about Management?


Lessig on Ownership of Advanced Fiber Networks - but what about Management?

Lessig and McAdams in Wonderland


Via GrepLaw and their posting "Lessig's Take on Fiber" we are transported by the magic carpet of links to the Wonderland of Cornell Professor Economics Alan McAdams and Stanford Professor of Law Lawrence Lessig's take on McAdams' ideas.

I consider Lessig's book Code to be superb, am very much in accord with the problems he sees in applying traditional copyright and patent laws to the internet and to software, but I would suggest that he missed an important issue in his Wired article "Fiber to the People: When customers own the network, everyone wins." [LawPundit comment: it is seldom that everyone wins - caveat emptor.]

The word Management is missing

Who owns "the last mile" [i.e. the last stretch of "network" connection to the end user]?

The entire talk by McAdams and Lessig is about "ownership" of networks and how great it is that municipalities are building their own networks, OWNED by the community members [the "end-users"], something which ostensibly permits these networks to enjoy the advantages of a natural monopoly for single-wired network systems, allegedly without any of the disadvantages that attach to monopolies wielded by private corporations. But one important word is missing entirely from Lessig's article - and that word is MANAGEMENT.

Ownership is not the main issue

It would seem to me to be largely irrelevant on its face whether a network is owned by shareholders through a private company or whether those shareholders own the company through a government entity. You have an artificially-created legal person - an institution of some kind - private or public, which holds the stocks in the company, stocks which are somewhere in the hands of individual persons. There is NO advantage to that per se because the economic operation in question - here, networks - MUST be MANAGED, regardless of the "formal" ownership. And it is on that point that government ownership of "natural monopolies" has always failed dramatically - we need only look to the abysmal track record of Marxist systems. It is the CONTROL of management which is essential, and this is usually a function of ownership, and there, as Shakespeare would write "is the rub".

Ownership affects Management Decisions

Since governments do not work for profit but presumably "for the good of all", selection of the management as well as the management of operatons proceeds along entirely different decision-making trees than in the corporate world. In THEORY this should make no difference. In PRACTICE, experience has shown it makes a crucial difference, which can easily end in economic disaster.

Private vs. Public Universities?

That last statement applies regardless of whether the operation of the government entity is in traditional profit-making spheres or in non-profit spheres. We need look only at education. The top universities in the USA are? - take your pick, Stanford? Harvard? Yale? - ALL private universities. The worst educational establishments in the USA are - and there is no question about this - state run. Everyone knows there is a qualitative difference - so what is that difference? The difference is accountability.

UPS, Federal Express and the US Post Office?

United Parcel Service (UPS), Federal Express and other PRIVATE companies have been phenomenally successful in competing with the US Post Office - which long held a "natural monopoly" on mail and packages by mail, a natural monopoly which in theory should have been and should be MORE EFFICIENT than private enterprise but is NOT by any means. See John Stossel and "Signed, Sealed and Delivered", where the differences in management are cogently discussed.

Waiting in Line at the Beverly Hills Post Office

I remember once waiting for nearly an hour to buy a stamp for a letter while standing in a line of 25 people at the only teller working at the Beverly Hills Post Office in a well-to-do area of the United States which could normally afford to hire more postal employees. In fact, it was a time of great California UNemployment - so why where there not sufficient tellers? No private business in Beverly Hills would survive that kind of "natural monopoly" service for even a day, but standing in lines has always been a mark of government-run operations and still is today, wherever you go, because there is no option to their monopoly services. The "end-user" stands and waits because he has no alternative. The reason for governmental long lines of waiting is that governments - not being accountable to either the profit principle or to the CONSUMER, but being only accountable ONLY to THEMSELVES (as in any community ownership operation) - are notoriously wasteful, ineffecient, corrupt, usually subsidized as a result and undependable over time.

West German privatization of East Germany


When West Germany and East Germany merged nearly 15 years ago, the first entirely sensible thing that was done was the privatization of the East German economy, which had previously been run according to the flawed "McAdams Theorem" (as Lessig would like to call it) of "natural monopolies". One of the savings alleged by McAdams and Lessig in arguing for the advantages of community-owned networks is that you just have ONE set of wiring, owned by the community. Well, there was no duplication of "wiring" in East Germany in the old days, but only ONE wire for everything - and in many cases, NO wire at all. It did not work.

The West German solution was the only feasible one, and the reunited government sold the East German "government enterprises" to private entrepeneurs - often for the nominal fee of only one German Deutsch-Mark. It was not the FACT of ownership that was the difference. Rather, the German government recognized that business had to be put into private hands to be successful, because such operations would be MANAGED differently, i.e. according to the profit principle, whose main hallmark is accountability. That accountability is measurable, in cash.

What will Communities do when Modernization is Required?

What will happen, for example, when the "one-wired" system of the "natural monopoly" community network envisioned by McAdams and Lessig is suddenly faced with private "wireless" communications and other technical advancement? Since the community-owned enterprise has a community investment in the physically-wired infrastructure of the system (an investment which it will try to protect) and since this community (e.g. a municipality) also runs the political management of the community, experience has shown that the first thing that is done by such government entities is to wipe out the modernizing competition, either directly, or indirectly by passing laws and requirements making the competition unable to compete - all of which ultimately leads to the type of economic inertia which has always marked Marxist systems.

Look at Germany, where wireless antennas have recently been challenged by community powers as being possibly harmful to the health of the community. If communities owned the older, competing systems, these newer systems would have no chance. Governments in this manner would be able to stop and stifle competition. In the private corporate world, by contrast, the only way to survive is to keep up with the new developments and if possible to even be ahead of them.

McAdams and Lessig are merely advocating ideas which have been proven to be long-term unworkable time and time again in other economic spheres.

Another Voice contra McAdams and Lessig

Corante - Arnold King (Ph.D. Economics, MIT) - The Bottom Line: the Economics of IT - Lessig Again

Other Voices pro McAdams and Lessig

Venturpreneur - D. Gordon Smith and here

Hobbs Online A.M. - Bill Hobbs


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