Hayek, Stiglitz and the FCC

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Everyone thinks that they are smarter than Michael Powell. The chairman of the Federal Communications Commission is at least as "mis-underestimated" as the man who appointed him, President George Bush.

Michael Copps, a Democrat on the FCC, routinely defies Mr. Powell, and on several occasions has succeeded in embarrassing him. Kevin Martin, also appointed to the FCC by Mr. Bush, deserted Mr. Powell on an important vote on telephone deregulation. The House of Representatives voted overwhelmingly to overturn a seemingly minor loosening of media ownership restrictions.

The FCC regulates broadcasting and telecommunications. Conditions in these industries are a far cry from the "perfect competition" of economic theory. Instead, these markets are a dynamic struggle for technological edge and short-term monopoly power.

By defending markets even when competition is messy, Mr. Powell is being Hayekian. Friedrich A. Hayek, awarded the Nobel Prize in economics in 1974, viewed "Competition as a Discovery Procedure." In a lecture of that title, he wrote, "market theory often prevents access to a true understanding of competition by proceeding from the assumption of a 'given' quantity of scarce goods. Which goods are scarce, however, or which things are goods, or how scarce or valuable they are, is precisely one of the conditions that competition should discover."

Mr. Powell's opponents are Stiglitzian. Joseph Stiglitz, awarded the Nobel Prize in 2001, wrote, "But information economics does not agree with Hayek's assertion that markets act efficiently. The fact that markets with imperfect information do not work perfectly provides a rationale for potential government actions."

Mr. Stiglitz's outlook is that markets are imperfect, but he is not. Where Marx offered dictatorship of the proletariat, Stiglitz would give us dictatorship of the Nobel Laureate. Between the two, we might be safer with Marx.

In Washington, the conventional wisdom is Stiglitzian. People do not run for office or seek appointments to high-level regulatory positions out of humility and respect for market processes. It is not surprising the Beltway views Mr. Powell as at best eccentric and at worst a heretic.

Perhaps nothing illustrates better the contrast between Powell's Hayekianism and his opponents' Stiglitzianism than the issue of broadband -- the deployment of high-speed Internet connections. Mr. Powell is willing to let the market decide the outcome, with messy competition that includes cable companies and telephone companies, as well as underdogs and upstarts ranging from electrical power lines to wireless networks. Most important, he is willing to leave the decision of how much to spend on broadband up to the consumer.

Opposing this laissez-faire approach is Reed Hundt, FCC chairman in the Clinton administration. At a conference this summer, Mr. Hundt sketched a proposal to have taxpayers spend $40 billion to $50 billion to subsidize broadband rollout. In defending this large expenditure, Mr. Hundt explicitly invoked economist John Maynard Keynes, saying it would provide an economic stimulus.

Mr. Hundt's proposal is Keynesian indeed. Keynes reportedly said that when there is unemployment, the government might as well pay workers to dig ditches and fill them in again. Under Mr. Hundt's proposal, many ditches would be dug to lay more communications cable.

Mr. Hundt appeared surprised his proposal received only a lukewarm reception. This was because many of the conference attendees were geeks who have moved on from Mr. Hundt's fixation with fixed-line broadband to the New, New Thing of wireless networks. They are finding Mr. Powell more receptive to their ideas.

One of Mr. Hundt's arguments against Mr. Powell's approach of setting different broadband providers competing against one another is that "somebody is bound to fail." He regarded the failure of a cable firm or a telephone company as unthinkable. However, several months earlier, in an open letter to the FCC that they posted on the Internet, a number of prominent conference participants had argued in favor of letting telecom firms fail. In fact, they urged the FCC to let telecoms fail faster.

The geeks are in favor of something called "open spectrum," which would take spectrum licenses away from incumbent owners and free it for wireless applications. Mr. Powell is trying to do just that. One recent proposal is to allow a huge swath of spectrum previously allocated to religious and educational institutions to be resold into the market. Mr. Copps, the FCC Democrat, once again stands in reflexive opposition, defending the status quo of FCC command-and-control over spectrum utilization.

Many of the geeks are Stiglitzians in general, but Hayekians when it comes to the Internet. Mr. Powell consistently believes in decentralization and spontaneous order.

Congress thinks it knows the optimal fraction of the television market that can be owned by one media firm. Reed Hundt thinks he knows better than consumers themselves how much they want to pay for fiber to their homes. Michael Copps thinks he knows how to manage phone lines and how to allocate spectrum.

Unlike his detractors, Michael Powell thinks he knows less than the market. And in my view, that makes Michael Powell a man of rare and precious wisdom.

Arnold Kling has a Ph.D. in economics from the Massachusetts Institute of Technology. He is a contributing editor at TechCentralStation.com, Corante.com, and www.econlib.org