In Theory...

Spectrum Policy - What about Congestion?

Stephen Kirchner (via Arnold Kling) points to this debate about spectrum pricing, which has arguments from Eli Noam, Lawrence Lessig, Richard Epstein, and Thomas Hazlett. Noam argues for a spectrum commons but with congestion pricing; Lessig argues for a pure commons; Epstein and Hazlett argue for selling of spectrum as private property and letting the holder do whatever they want with it (as opposed to the current system where the FCC specifies exactly what the band can be used for). When looking at this issue previously, I hadn't thought through the potential implications for congestion of the commons approach. Once I started thinking this through, the approach lost a lot of its appeal. Noam's proposed solution of overlaying peak pricing on a commons system is difficult to understand from either an economic or a technical perspective - who would determine the acceptable level of congestion and the appropriate pricing mechanism? Apparently the government, which seems to leave us pretty much where we are today. Lessig notes the likely immense cost to implement a peak pricing system, such as that advocated by Noam, and compares spectrum to the Internet, which, he argues, has seen tremendous innovation due to the fact that there is no congestion pricing system. I agree that TCP/IP, the end-to-end packet-based system of the Internet, has resulted in signficantly greater innovation than would have been likely if the Internet was built on ATM (the phone companies' desired protocol). This doesn't mean that there aren't problems with congestion, and that congestion pricing wouldn't unlock yet more innovation and more effective use of what is, ultimately, a scarce amount of bandwidth. For example, my cable modem service here in Hong Kong slows down considerably in the evening, which is peak time for home use. The problem is not with the local loop but rather with their connection to the US. It is sometimes impossible for me to retrieve email from my US-based server, or to view web pages on US-based sites. Clearly Internet congestion is a problem. One way of addressing peak congestion is for the ISP to require that everyone access the web through a proxy server. A proxy server reduces redundant downloads, but introduces an aspect of centralization that requires significant monitoring, maintenance, and upgrading, and may become a source of congestion itself. In addition, the required use of proxy servers has privacy implications, makes end-user configuration more complex, and can limit the ability of end users to run new services. A better solution would be to price bandwidth within the ISP's network differenly than external bandwidth. Different pricing for different 'types' of bandwidth would have higher mental transaction costs in the short term. However, there already are applications out there for decentralized distribution; widespread congestion pricing would increase the use of these and other as yet undeveloped apps, leading to rapid improvements and refinements, and eventually applications that even a non-technical user could easily install and run. This solution would increase the transparency of the network and further push innovation and control outwards to the edge, replacing the centralized (and unenforceable) rules limiting the number of computers 'allowed' to use each broadband connection, and increasing the overall quality of service for everyone. I do agree with Lessig that we are better off for not having spent the time and money on congestion pricing back in the early days of the Internet. Today though, we have the technology, it's not expensive, and it would cost-effectively encourage even further innovation and efficiency. Coming full circle back to wireless, the fastest way to implement new types of pricing mechanisms (which will be necessary at some point, even if not just yet), is through clear private property rights that encourage lots of experimentation by private firms. If we put government in charge of the pricing mechanism, even just for peak usage (as Noam seems to be endorsing), we will end up with an extremely expensive, monolithic system, that will be built to meet the needs of the past.

Philosopher of Islamic Terror

Paul Berman (via Virginia Postrel) has been reading the newly-translated books that comprise Sayyid Qutb's massive In the Shade of the Qur'an. Qutb, an Egyptian philosopher of Islam who spent years in Egyptian jail under Nassar and was eventually hanged in 1966, is the 'Karl Marx' of radical Islam, according to Berman; Qutb believed that Christianity made a critical error at the start by moving away from the prescriptive rules of the Torah, and towards the separation of spirituality from daily life, eventually leading to that concept that we hold in such high regard, the separation of Church and State. This separation leaves people feeling empty and unfulfilled. (My few sentences here do not do any justice to Berman's fascinating and much longer summary of Qutb's complex theological philosophy - I highly recommend reading the entire article). Berman concludes that we need to address the underlying philosophical basis for the Islamist movement by responding with ideas of equal complexity and depth: bq. It would be nice to think that, in the war against terror, our side, too, speaks of deep philosophical ideas -- it would be nice to think that someone is arguing with the terrorists and with the readers of Sayyid Qutb. But here I have my worries. The followers of Qutb speak, in their wild fashion, of enormous human problems, and they urge one another to death and to murder. But the enemies of these people speak of what? The political leaders speak of United Nations resolutions, of unilateralism, of multilateralism, of weapons inspectors, of coercion and noncoercion. This is no answer to the terrorists. The terrorists speak insanely of deep things. The antiterrorists had better speak sanely of equally deep things. Presidents will not do this. Presidents will dispatch armies, or decline to dispatch armies, for better and for worse. However, our best argument against ideologues of any type is not a reasoned refutation of their arguments; first, because we cannot reason across their leap of faith, and second, because the theoretical advantages and benefits of a decentralized, liberal, democratic, capitalist society are very difficult to grasp intuitively. Our best argument is the contrast between our society and theirs (best represented today by Iran) - the vastly differing levels of personal freedom and economic success. Thousands upon thousands of Iranians leave for the West each year, and those that remain agitate for change. This is the strongest argument against Islamist ideologues. Ideally we could leave the rest of the Muslim world to its own devices; encourage and aid moves towards liberalism, but when absent, extricate ourselves from the situation, wait for counterrevolution, and let in everyone who wants out. After all, it only took 20 years in Iran. Unfortunately, this option is not (or at least no longer) available. The world's dependence on Middle East oil, and the resulting wealth in what would otherwise be backward desert kingdoms, coupled with our own open societies, has given the Islamists the ability and opportunity to take the war to us. Given this situation, we are left with little choice but to attempt to integrate the rest of the world into our interconnected society, by force if necessary. At the same time, we may also need to rethink the traditional concept of sovereignty, if only to rationalize our own foreign and trade policies. Karl Marx was not defeated by Hayek, even though The Road to Serfdom was published back in 1944. Marx was defeated by the failure of Marxist society. And so it must be with the Islamists.

One of the Few

Arbinet is one of the few former Breakaway Solutions customers/ICG companies (the two were unfortunately almost synonymous) still around, and it is thriving. Arbinet provides a platform for telcos to trade IDD minutes amongst one another. The platform apparently is quite effective at lowering transaction costs, particularly now that they also offer credit to customers (from GMAC). They are growing very quickly and anticipate continued growth - 2002 volume was around 5.9 billion minutes, and they think they'll hit 9 billion this year. It's a great business model providing a clear value to customers - so much for disintermediation. Like the analyst at the ITU, Arbinet wants to see prices 'stabilize' ("nobody can make a business out of 1-cent minutes," says the CEO) and says that they appear to be stabilizing right now. Unfortunately for the telcos, the cover article in the same issue of Telecom Asia reports on the expected 'second bandwidth glut' anticipated for 2004 as all of the major players emerge from Chapter 11 minus their debt obligations. The pricing trend downward is likely to continue. A good deal of Arbinet's current business will be gone within five years - customers will transition to VoIP and long distance (and many IDD) rates will plummet to one cent per minute or below. Arbinet will need to quickly switch focus to both the countries where state-owned telcos are effectively resisting/preventing change (which they are doing with their increasing focus on Europe and Asia), and to IP transit-related services. In the world of IP transit, Quality of Service is much more of an issue. Instead of providing a circuit connection from, say, New York to Shanghai, bandwidth providers just provide a connection in one point with a certain throughput (a T1, for example, is 1.5Mbps) and charge either based on the total amount of data transfer or percentage of bandwidth used (it is possible to buy point to point connections but much more expensive and increasingly uncommon). With a standard contract, there's no guarrantee that that speed of the connection to any other specific location will be acceptable. Part of the reason is because most traffic goes through the big exchanges such as MAE-East where everyone interconnects with everyone else - this allows bandwidth providers to say that they don't have control over the packets for the entire trip and therefore can't be held responsible for QoS. The end-to-end, packet-switching architecture of the Internet is its greatest strength - new applications don't have to get approval from any central authority, and any point can easily connect to any other point on the network. However, the lack of accountability from bandwidth providers is very frustrating for their customers. In response, number of new companies have been workign on this problem over the past few years. At Breakaway, we worked closely with InterNAP. InterNAP avoids the big exchanges and instead establishes private peering points with all of the major networks. They then continuously test the throughput and latency of each connection, and send customer traffic down the fastest pipe. As Arbinet transitions to IP transit services, it will need to beef up its QoS-related capabilities - bandwidth will never be as one dimensional a commodity as voice minutes. Partnering or merging with a firm such as InterNAP would create a very compelling value proposition.

Time to Move On

From the Ditherati:

"If this was taking place in an inner-city, where kids were basically stealing other people's intellectual property, you'd see some movement. ... They're breaking the law. And it's a double standard."

- Rep. Maxine Waters, D-CA (not quite Hollywood, but pretty damn close)

This quote is from the recent hearing on file-sharing held by a House Committee. It took me a minute to figure out what she meant...oh right, racism. We don't care that kids are stealing because they're white. If they were black, we'd have had them all arrested already.

'Stealing' intellectual property is of course very different from stealing any sort of physical object - I can still listen to my song/watch my movie/use my software even after you have made a copy for yourself (or even a copy for everyone else in the world). In fact, activists are constantly berating some other IP holders for 'exploiting' the poor by requiring that everyone pay for the IP. These IP holders, of course, are the pharmaceutical companies. This other 'outrage' was the main source of my confusion...

I initially thought maybe Maxine was saying that if poor kids were illegally copying music and movies, then we as a society would finally motivate to do something about our copyright system, which is clearly in need of an update. Alas, she meant exactly the opposite.

The other source of my confusion derived from our recent trip to Burma (Myanmar). Our guide in Rangoon was 21 and completely fluent in English. The citizens of Burma have no access to outside written media - no books, no magazines, no newspapers, no Internet. What they do have, in vast quantities, are 'pirated' VCD's. And that's how Min Min learned English and how he learns about the rest of the world - from watching a movie a day. His favorite move is Forrest Gump, which he can recite line by line (he does the accent perfectly). He also really liked the Matrix and the Truman Show, both of which resonated with his experience of living under totalitarianism (or as he put it, "living in a country run by the mob").

I asked Min Min how much a VCD costs, and when he told me sixty cents, I said that they must be pirated. He didn't know what that meant, so we started explaining traditional pirates, who would take over ships on the high seas, raping and pillaging (and still do in the Straits of Malacca and elsewhere). Before I had stated the connection between pirates and his VCD's, I realized the absurdity of the equivalence - how could I really equate his only access to the outside world with the brutal theivery and assaults of real piracy?

We all gain from the increasingly widespread distribution of information and knowledge; the world's poor benefit the most. While it is vitally important to maintain protection of intellectual property in areas such as pharmaceutical development, in order to ensure investment incentives, in other areas of intellectual property, the opportunity cost to society (of the existing laws and their associated enforcement activities) is growing, while the benefits shrink. I'm confident that we can find a way for musicians and other content creators to be compensated without locking down technological innovation. But that will mean changes - it's time for new laws and a new model.

"This is starting to sound a lot like road pricing"

A recent conversation at the Civic Exchange Electricity Workshop, with a representative of one of the large HK property developers (he is P, I am S): bq. P: I just can't find a way for solar power to make sense for us from a financial perspective. bq. S: If the community's peak electricity usage coincides with maximum sun, due to increased use of air-con, solar power can lower peak demand. This means cheaper electricity and, in the long run, fewer plants. bq. P: Yes, but we still can't make any money on it. bq. S: One way to address this problem is through real time pricing - prices go up when demand goes up and down when demand goes down. This way, solar panels become cost effective (since they'd produce power when it is most valuable). In addition, large property developers such as yourself could save money on electricity by automatically turning down the air-con and so forth when electricity is at its most expensive. bq. P: Sounds pretty complex to me. You know, this is starting to sound a lot like road pricing. bq. S: I'm a big believer in road pricing. bq. Abrupt end of conversation. Real time retail pricing in electricity may still be years away (due more to this type of mindset than lack of technology), but road pricing is here today. The latest high profile example is the new charge for driving around central London during the day. I read an op-ed just before London's new pricing scheme launched (can't find the link now, sorry) that agreed with the concept 'in theory' but predicted failure due to the lack of other options - London's public transport sucks, so people have no choice but to drive around, even if it suddenly costs a lot more. This particular prognosticator, I'm happy to report, was dead wrong. It turns out that the ability to drive around a certain area at a certain time has different values for different people. That value may be easily quantifiable, if someone is conducting business, or not, if it's a trip for personal enjoyment. Regardless, when the price increases, a number of people find substitutes - they make the trip at night (when there is no charge), they do business somewhere else (at a different branch or firm), or they cancel the activity altogether. Markets in action. In terms of public transport, the cheapest form to build and operate is buses, which normally have the disadvantage that they too have to sit in traffic. Once road pricing has cleared up the congestion, bus transport becomes much more attractive. RPPI just released a related study on HOT (high occupancy toll) lanes. San Diego has a variably-priced HOT lane that has been working extremely well. RPPI illustrates, with detailed construction and financing plans, how the same system could work in the most congested areas in the US. Here in Hong Kong, we don't have real road pricing, although we do have multiple tunnels with different pricing, which itself makes a big difference. The old tunnel, with the lowest toll, always has a ton of traffic, while the Eastern and Western tunnels, both of which (particularly the Western) can be used instead, have higher tolls and significantly less traffic. In fact, I can't remember ever getting stuck in traffic in the Western tunnel (not that I don't use the tunnels during rush hour though). In addition, there are very large excise taxes on private vehicles here, and gasoline is extremely expensive, I think (but don't quote me) around 5x US prices. Excise taxes don't lower use of the car once you buy it, in fact they probably encourage additional use, to "get one's money's worth." Gas taxes affect use but don't have any effect on time-specific congestion. So what would congestion pricing look like here in Hong Kong? Certain areas such as Central do get quite congested at particular times of day. An easy first step would be to charge all private vehicles (everyone but buses and taxis) who enter some part of Hong Kong Island between 8AM and 10AM and between 5PM and 7PM. However, there's really no reason to treat taxis differently than private vehicles - especially since many cars are driven by drivers who leave the area immediately after dropping off or picking up - except that charging taxis introduces a whole host of additional complexities in terms of how to pass the charge on to the customer. In fact, there's no particular reason not to charge every vehicle who wants to use the road during peak usage; the more people in the vehicle (such as a bus), the smaller the impact of the toll on each individual. Hong Kong's roads are in fact dominated by buses, mini-buses and taxis, so a congestion sur-charge on all forms of transportation could eventually become a necessity.

All About Coase (and sidewalks, apparently)

Lawrence Lessig and Thomas Hazlett organized a conference on Spectrum Policy, which was last weekend. The conference focused on whether spectrum should be auctioned off as property or instead opened up as a commons (like the 2.4GHz spectrum that is used for microwaves, cordless phones, and, most importantly, WiFi). I would have loved to have been there, but at least was able to read Cory Doctorow's great blogging live from the conference, all day long. And on, and on, and... I recommend reading it all if you have the time and interest, and especially the Moot Court, which was focused around "What Would Coase Have Done?" and whose judges included Vernon Smith, my favorite economist. It's a very complex issue with no easy answers. At this point, I think I have to side with Yochai Benkler, who suggests trying both for ten years (split the spectrum, make half a commons and half property, maybe with 10 year leases) and then re-evaluate. There appears to have been widespread agreement that we need to get the FCC out of the business of regulating speech ASAP. This is good news. Of course, ultimately Congress needs to be convinced as well, and the broadcasters, etc. are a bit more focused on Congress than on the conference participants. One analogy that came up and was repeated a few times was the necessity of commons to make private property valuable. The specific example was that free sidewalks and roads are necessary for private homes to be valuable (actually it was phrased as "privatize the sidewalks and roads and private home ownership becomes untenable."). I disagree with this statement not only in theory but also in practice - there are increasingly large numbers of private developments where the roads and sidewalks are privately owned, perhaps by the home owners, perhaps not. In many areas, this seems to increase the value of the homes. Now, spectrum, as Lessig emphasizes in the moot court, is not comparable to a house or to any sort of physical private property. Therefore, the success of privatization in this area does not necessarily indicate anything one way or the other about what would be the optimal system for spectrum allocation, particularly considering the speech implications of spectrum policy. But the home/sidewalk/road analogy should be discarded.

Globalization and its Discontents

Just finished Globalizaton and its Discontents, by Joseph Stiglitz. Stiglitz really doesn't like the IMF. He claims that the IMF (and its overseers at the Treasury Dept.) have a 'one size fits all' policy for every single 'client' country, that they refused to listen to people on the ground, and they even refused to listen to other economic voices within the administration - for example, Stiglitz's Councile of Economic Advisors or even the World Bank (Stiglitz was chairman of the Council of Economic Advisors under Clinton and then chief economist at the World Bank until 2000). He feels that the IMF is, in fact, intensely secretive and therefore undemocratic. Ultimately, this wouldn't be as much of a problem if their policies were succesful, but he also feels that their policy recommendations have gone horribly wrong to the point where they directly contradict Keynes's beliefs (the basis for the founding of the IMF) as well as modern economic consensus, and have resulted in far lower standards of living for many residents of the developing world. Stiglitz's arguments against the IMF are so convincing and damning that it convinced me that the IMF should be disbanded. But then I read a rebuttal by Kenneth Rogoff, the new director of the IMF, and I found that I agreed with him much more than Stiglitz. There _is_ much more governmental failure than market failure in developing economies, especially out here in Asia, and the problem with Stiglitz's approach, which involves lots and lots of government intervention, is that it's a very slippery slope that politicians just can't resist. For example, I came across an article a few months back (sorry can't find the link) about foreign investment in education in India - foreign firms are coming in and building universities. The response from the elite: University education should be an 'infant industry' until the domestic universities are strong enough to compete. Closer to home, the Philippines' protection and encouragement of the domestic rice industry, ostensibly to gain 'self-sufficiency', is a huge tax on the poor and removes the incentive for farmers to switch to more valuable, export-oriented crops such as fruits and vegetables. Plus, beyond the issues raised by Rogoff, I did some research to try to prove or disprove Stiglitz's claims that non-IMF countries (such as Poland and Malaysia) have done better than the IMF ones (such as the Czech Republic and Thailand), and the information that I found didn't really prove much one way or the other - Thailand has very strong growth at this point, as does the Czech Republic, and Indonesia, for example, would be going strong and back at '97 levels today, if it weren't for the Bali bombing (clearly no fault of the IMF's). So it's difficult to independently substantiate Stiglitz's claims on this fundamental issue. In the end, Stiglitz does at least bring a different perspective to a number of the IMF's actions in the 1990's. However, I have to agree with the Economist - this is not about globalization. It is about the IMF and its response to the crises of the nineties, with an emphasis of what Stiglitz would have done differently. It is not about the benefits from the freer flows of trade and information, and from the necessary transition of much of the world from an agricultural to an industrial and eventually service economy. While Stiglitz likely believes that all of these things are ultimately beneficial, he really only expounds on the negatives of the IMF 'rushing' things. So if you want to learn more about globalization, read Against the Dead Hand. But if you are interested in the arcane economic and political details of how the IMF functions and how it impacts the world, read Globalization and its Discontents. But read Rogoff's rebuttal first.