Hayek, Stiglitz, and Michael Powell

by Arnold Kling

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

Following the House vote, a front-page story in the Washington Post described Powell as beleaguered. "It would be impossible in Washington to have so much controversy over a public figure without some raising the possibility that he will soon step down. Some published reports have stated that Powell has discussed the issue with his staff."

Messy Competition

The FCC oversees industries in which competition is messy. Broadcasting and telecommunications do not resemble the economist's model of "perfect competition," in which there are no economies of scale or network effects or information asymmetries or dominant firms. In spite of all of these deviations from the ideal of perfect competition, Powell favors reducing the weight of the hand of government.

By defending markets even when competition is messy, Powell is being Hayekian. Friedrich A. Hayek, awarded the Nobel Prize in economics in 1974, viewed Competition as a Discovery Procedure. 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."

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."

Hayek would have the government tolerate messy competition. His point is that with the optimal outcome unknown, government resolution of issues shuts off the learning process that market competition provides.

Stiglitz sees the messiness in real-world economies, and he claims to have the right solution in every case. Even Berkeley economist Brad DeLong, who--like Stiglitz--served in the Clinton Administration, wrote that "I'm reading Joseph Stiglitz's brand-new Globalization and Its Discontents, and having trouble with it. It seems as though Stiglitz switches back and forth between different positions at blinding speed." 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 that the Beltway views Powell as at best eccentric and at worst a heretic.

The Broadband Issue

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. Powell is willing to let the market decide the outcome, with messy competition among cable companies, 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 recent conference, Hundt sketched a proposal for the government to spend $40 to $50 billion to subsidize broadband rollout. In defending this large expenditure, Hundt explicitly invoked economist John Maynard Keynes, saying that it would provide an economic stimulus.

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 Hundt's proposal, many ditches would be dug to lay more communications cable.

Lukewarm Reception

At the conference, Hundt appeared surprised that his proposal received only a lukewarm reception. This was because many of the conference attendees were geeks who have moved on from Hundt's fixation with fixed-line broadband to the New, New Thing of wireless networks. They are finding Powell surprisingly receptive to their ideas. For example, even as he was proudly pulling a "Re-defeat George Bush" bumper-sticker out of his briefcase, telecommunications consultant David Isenberg was paying Powell the ultimate geek complement on wireless: "Powell gets it," he said.

One of Hundt's arguments against 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 Isenberg co-wrote a column in USA Today saying, "Instead of spending billions of tax dollars propping up the telephone companies and delaying the inevitable, let them fail and fast."

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. Powell is trying to do just that. One recent proposal is to allow a huge swath of spectrum that was previously allocated to religious and educational institutions to be re-sold into the market. Copps, the FCC Democrat, once again stands in reflexive opposition, defending the status quo of FCC command-and-control over spectrum utilization.

Rare Wisdom

In the view of the geeks, Powell is a free-market ideologue, but he happens to understand wireless technology. The way I look at it, the geeks come from a Stiglitzian culture, but they happen to understand Hayekian spontaneous order as it pertains to the Internet.

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