Netizens and Protecting the Public Interest in the Development and Management of the Internet:

1. Netizens and Protecting the Public Interest in the Development and  Management of the Internet: • An Economist's Perspective • Anders Ekeland, NIFU STEPanders.ekeland@nifustep.no • Past, Present and Future of Research in the Information Society, • Tunis, 13th – 15th, 2005

2. The role of “economic theory” • What is the role of “economic theory” in the discussion about Internet development and governance? • There is not “economic theory” in singular. There are different paradigms in economics, different schools of thought inside each paradigm, • There are “main-stream” neo-classical theory, but also evolutionary, post-keynesian, Marxian theories, radical institutionalist theories. • But the neo-classical is special in its theoretical foundations, it is static, ahistoric, has very special theory of human rationality – this is the fundamental reason why “economics” and “economists” are in perpetual conflict with the other social sciences – if they have not succeeded in imposing the Gary Becker world view on the topic (crime, suicide, marriage).

3. The role of “economic theory” cont. • What is the role of “economic theory” in the discussion about Internet development and governance? • The fact that one paradigm, the neo-classical theory, poses as the “economic theory” is in itself a phenomenon that needs critical analysis. • Since neo-classisical theory is so extremely dominant - has a profound influence on policy formulation – including Internet governance we need to understand it, need to develop a theoretical and empirical critique. • Most people, including most economist do not realize the extreme static nature of this theory. They think that it is the result of a process where prices change – firms compete – and then equilibrium is reached. That is not case.

4. The extreme static nature of neo-classical theory • The core of this theory proposition that perfect competition creates the maximum social welfare, i.e. a static general equilibrium is the benchmark for all policies. • Competiton is a profoundly dynamic phenomenon, but in perfect competition everything is given – preferences, technologies, initial endowments and prices. In everyday language competition is not competition at all but a total standstill, it is actually “perfect stagnation” (Nature mort, Stilleben) • As is pointed out by many leading economists – there is no way to make it dynamic, i.e. realistic. All the fundamental results – the most efficient use of resources, Pareto optimality – vanish completely. (Haavelmo, Stiglitz, H. Simon)

5. The limits and limitations of neo-classical theory • When there is “asymmetric information” – no reason why government, the research community should not know better than “Markets” – which of course has happened and happens all the time. • By habit neo-classical theory takes the “initial endowments”, the is the distribution of wealth as given. “We study efficiency, politicians handle distribution” – this is only possible in complete static framework. Important for the self-image of “objectivity”, of “rigorousness” in contrast to other social science disciplines. • The Clinton – Gore privatization of the Internet: In July 1997 Clinton directed the Secretary of Commerce to privatize the Domain Name System. The Federal Regulation became know as the “Green Paper”.

6. The limits and limitations…. • When there is “asymmetric information” – no reason why government, the research community should not know better than “Markets” – which of course has happened and happens all the time. Internet is of course a prime example of that. • By habit neo-classical theory takes the “initial endowments”, the is the distribution of wealth as given. “We study efficiency, politicians handle distribution” – this is only possible in complete static framework. Important for the self-image of “objectivity”, of “rigorousness” in contrast to other social science disciplines. • The Clinton – Gore privatization of the Internet: In July 1997 Clinton directed the Secretary of Commerce to privatize the Domain Name System. The Federal Regulation became know as the “Green Paper”.

7. Optimum welfare demands competition, competition demands privatizaton • The Green Paper is important because of its vision of the governance of the DNS • Beside stability, three main points: • Competition: . Where possible, market mechanisms that support competition and consumer choice should drive the management of the Internet because they will lower costs, promote innovation, encourage diversity, and enhance user choice and satisfaction. (That markets where not essantial to develop the Internet is out of sight and out of mind in this neo-classical vision of the world.) • Private Sector, Bottom Up Coordination: The private process should, as far as possible, reflect the bottom-up governance that has characterized development of the Internet to date. • Representation: Management structures should reflect the functional and geographic diversity of the Internet and its users. Mechanisms should be established to ensure international participation in decision making.

8. The answer is not more market, more competition • “We think this [auction] system could break the logjams that have characterized the addition of new gTLDs to the root. A paradigm shift is required to make this work. ICANN has to stop treating the name space as a public good – requiring strict regulation in the public interest. Once it recognizes that domain names are private goods, and allows market allocation, a more efficient system of name space management should emerge.” (Mannheim and Solum (2004, p. 365, note 204). • And why not have auctions for competing Internets, so that “consumer choice and innovation” will be maximized? • What was the consequence of the successful UMTS auctions? Bankruptcy, monopolisation, transactions costs – we pay the bill for that. The costs of competition has no place in neo-classical theory. • The neo-classical theory will always strive to push policies in a liberal, deregulation direction = more power to the already powerfull.

9. A theory that cannot understand people… • A classical approach to the institutional economics of the non-profit firm would suggest that the managers of the firm (the Board of Directors, President of ICANN, and general Counsel) would seek to maximize their individual utilities. ICANN directors receive no direct monetary compensation beyond expenses. Nor is the monetary compensation for ICANN’s top management extraordinarily high by non-profit standards. There is no evidence of rent-seeking behaviour by the ICANN management (bribery). Rather, members of the ICANN board and management appear to derive utility from their participation in the ICANN process. Mannheim and Solum (2004, p. 365, note 204)

10. The proof of the pudding is the eating • The almost religious belief in the wonders of the Market led to the dotcom boom, the dotcom bust, the Enron scandal. • Billions of dollars squandered on badly desiged projects and outright fraud • Human and physical resources that could have been spent on giving more people and institutions access, closing the digitial divide rich-poor, North-South. • When you used it in Russia – a experiment – the dynamics “diverged” and a social catastrophy was the result. • The Nordic countries have done everything “wrong” , high-taxes, compressed wage scale, large income transfers – and is probably one of the best variety of capitalism. • The question of ”initial endowments”: • the Internet belongs to human kind – if the US captured it – we would have made a new Internet – technically not very difficult. • the fundamental aspect of the Internet is exchange of information, especially of opinions. Its commercial use – one form of information exchange – is secondary. This communication system belongs to us all. We have a “common”. • the Internet is a mighty mechanism for realising the visions of enlightened democracy – it can also be used for commercial uses, but they are secondary

11. An evolutionary, Netizen perspective on Internet governance • There should be democratic, representative control over the Internet. Not by one government, especially not by a private, US institution, that lacks legitimacy, representative electoral procedures and open procedures. • The Internet was shaped by a two social groups – the researchers and the first, enthusiastic and competent users. They are fortunately still with us. • The question of “by whom” cannot be seen in isolation from “for whom” and “for what purpose”. • The UN, the ITU, ICANN – all have their “imperfections”. Some governments are not representative of their inhabitants at all. The basic answer to these imperfections is to strenghten the Internat-based discussion, consiously empower the participants in structurally unfavorable positions. • Neither “Markets” nor “Bureacracy” is the solution.

12. Summary • There are several economic theories – neo-classical is clearly the most ideological of them. Weak scientific foundation, very strong policy, normative conclusions • Markets work, we must make them work for our purposes – a dynamic, realistic understanding of markets is crucial. The funamental law of markets is: competition creates monopoly, only innovation counteracts that tendency. • One must grasp the fundamental contradiction between a democratic system: • one man one vote • versus • one dollar one vote • Only democratic system can decide on the development of society – including the Internet. • A fundamental criterion for a real economic theory is that it is democratic, i.e. the society is primary in the theory and markets are secondary.

13. Competition – according to Morgernstern: • “Consider “competition”: the common sense meaning is one of struggle with others, of fight, of attempting to get ahead, or at least to hold one’s place. It suffices to consult any dictionary of any language to find that it describes rivalry, fight, struggle, etc. Why this word should be used in economic theory in a way that contradicts ordinary language is difficult to see. • No reasonable case can be made for this absurd usage which may confuse and must repel any intelligent novice. In current equilibrium theory there is nothing of this true kind of competition: there are only individuals, firms or consumers, each firm and consumer insignificantly small and having no influence whatsoever upon the existing conditions of the market (rather mysteriously formed by tatônnement) and therefore solely concerned with maximizing sure utility of profit – the latter being exactly zero. • The contrast with reality is striking: the time has come for economic theory to turn around and “face the music”. • Morgenstern, Oscar (1972), “Thirteen Critical Points in Contemporary Economic Theory: An Interpretation”, Journal of Economic Literature, Vol 10, No. 4 (Dec. 1972, 1162-1189).