April 14, 2000

Our political rhetoric is geared toward class struggles and to arguing over what the government ought to regulate. Meanwhile, the relevance of these issues is questionable.

Economic growth and the idea of class

High atop Anacostia Park, a rundown, working "poor" section of Washington, DC, sits the mansion of Frederick Douglass, the great nineteenth century orator and agitator for the rights of women and African Americans. Douglass, although born a slave, became a wealthy newspaper publisher. He came to Washington late in his life, as a U.S. Marshall in 1879. His 21-room mansion was on a 15-acre site and employed three servants. A reasonable guess is that he was in the top one or two percent of the wealth distribution at that time.

The Douglass mansion has been preserved today as a museum in its condition as of 1895, when he died. Below is a partial list of the appliances that can be found there, compared with their modern equivalents.

Item in the Douglass mansion, 1895	Modern equivalent
Rug beater	Vacuum cleaner
Chamber pots	Flush toilets
Ice box (one cubic foot)	Refigerator/freezer (16 cubic feet)
Washboard	Washing machine
Clothes wringer	Dryer
Irons	No-iron clothes
Indoor well	Plumbing
Kerosene lamp	Electricity
Dry sink	Dishwasher

Today's residents of Anacostia Park, although many would be considered poor by today's statistical measures, have all of the modern conveniences on the right hand side of the table. In addition, they can drive to work, while Frederick Douglass had to walk five miles to his job in the Capitol building. They have radios, televisions, and many other goods that the wealthy Douglass never possessed.

In the past few years, economists have started to notice the spectacular increase in the standard of living that has occurred in the past 150 years. Recent work by Brad DeLong, Richard Easterlin, and Michael Cox and Richard Alm, among others, has made this point. One could argue that this phenomenon ought to have been noticed sooner, but as Alan Blinder pointed out in his paper at www.internetpolicy.org, "it takes a long time to recognize a change in a long-term trend."

In 1848, Karl Marx published The Communist Manifesto (with Friedrich Engels). In that and later works, Marx articulated a theory of economic class differences. For Marx, the owners of the means of production were the ruling class. Those who did not own the means of production were the exploited class.

In Marx's system, landlords were the ruling class in an agricultural economy. In a capitalist economy, the owners of factories, railroads, and other large concentrations of machinery were the ruling class.

At the time that Marx wrote, his theories resonated rather well. The squalor of the working class was extreme. DeLong's calculations show that output per capita had only reached $300 per year by 1850. Ordinary people worked long hours, lived in crowded, unhealthy slums, and could scarcely be considered better off than their ancestors who preceded them by thousands of years.

Today, however, economic progress has reached more than just the upper elite. In fact, the median worker today has a higher standard of living than that of the richest capitalist 100 years ago.

Moreover, it now would seem preposterous to suggest that the riches of the wealthy are due to the exploitation of a large lower class. Instead, my impression is that the distribution of wealth reflects a multi-layered structure. At the bottom, the differences appear to me to be due largely to variations in mental and physical health. At the top, the differences appear to me to be due largely to differences in risk tolerance and luck. It is difficult to perceive any "class struggle" in which the top gains at the expense of the bottom.

Yet, public policy debates continue to be framed in terms of class struggle. It echoes in phrases such as "the digital divide."

The Art of the Impossible

Politics used to be described as the art of the possible. However, when it comes to the Internet, my impression is that politicians are obsessed with the impossible. They fail to appreciate the ways in which the technology is not conducive to the types of regulations that they wish to enact.

For example, a bipartisan coalition of the nation's governors objected strenuously to the recommmendations of the Internet tax commission to continue the moratorium on Internet taxation. The governors sputtered about the sanctity of the Constitution and the the importance of allowing states to choose their own tax rates.

Someone needs to explain to the governors the fact that location is no longer defined as clearly as it once was. In the physical world, if I buy something in the state of Maryland, then it is pretty clear where the purchase takes place and to which jurisdiction the taxes belong. On the Internet, the web server that handles the purchase could be located in the Netherlands, the product could be made in India, and I could be having it shipped to my father in Missouri.

As Hal Varian points out in another piece at www.internetpolicy.org, in theory the location issue can be resolved by converting sales taxes to "use" taxes. With a "use" tax, the tax jurisdiction is that of the purchaser of the good, regardless of the location of the seller. Conceivably, the onus could be placed on buyers to make sure that the tax is paid. However, in practice, as Varian puts it, "Experiments in collecting use taxes directly from consumers have not been successful."

The governors are upset about the potential disparity between the taxation of Internet commerce and ordinary commerce. Varian's solution to that is to get rid of sales taxes, which were never very popular with economists in the first place. He would substitute income or consumption taxes (a consumption tax would be an income tax with an exemption for savings). Somehow, I do not think that this is the answer that the governors were looking for.

On April 14, the following story came across the wires:

"Heavy metal rock band Metallica has sued song-swap software company Napster Inc. and three universities alleging they encouraged users to trade songs and recordings without the band's permission.

"The suit, filed in the U.S. District Court in Los Angeles on Thursday, accuses San Mateo, Calif.-based Napster, the University of Southern California, Yale University and Indiana University of copyright infringement and racketeering."

What is interesting about this is that none of the defendants in the lawsuit ever did anything with any Metallica songs. The universities are accused of racketeering because they provide Internet access to students, and Napster is accused of copyright infringement because it developed software that allows individuals to share songs.

In fact, this is not likely to be an isolated example of the legal process in the age of the Internet. Because the guilty are difficult to identify and prosecute, those who would enforce laws will have to fall back on the approach of targeting a random set of the innocent, under the theory that making examples of these folks will deter others from lawbreaking. This is the future of regulation.

The traditional view takes it for granted that if we want to regulate something we can. Conservatives argue that we should not want to regulate business as much as liberals would like, and liberals argue that we should not want to regulate pornography as much as conservatives would like.

But the conventional arguments about government regulation, pro and con, all start from the assumption that any and all regulation is feasible. Given the Internet, we may need to scale back our assumption of what it is feasible to regulate. Doing so would tend to shift the terms of the debate.