Monday, July 28, 2008

Primitive understanding of money

"Money is a man made creation and in itself worth nothing. Why are we compelled to affix price tags to everything?" I'm going to try to explain:

Money is just our convenient measure of the worth of things. It's a bit like saying gallons aren't worth anything, but at the same time more gallons of fuel are worth more than less gallons of fuel.

Perhaps some people might benefit by having a fresh look at money to realise why we measure things in this way. Some people have a very simplistic view of money and of economics in general. The kind of view you develop when you're a child in your parents' house.

Your mother is the source of a cake and other such treats, and if your brother gets more of the cake it means there is less cake for you. All pocket money and decisions about freedom comes from your parents, and you grow up to realise the importance of some of the rules they have established with you when you were young, like not letting you run across the highway when you're 6 years old. You learn that money for material things like video games, music, bicycles, skate boards and clothes comes from your parents, and you know that you can't have more of these things because your parents won't give you more money for these things, and they tell you that they don't have more money to give, so you realise that this money is important and you learn that the money at their disposal is finite just like the size of the cake is finite.

After school you might go and study, where it might be paid by your parents, or paid or subsidised from tax money, you go to educational institutions filled with teachers who normally have never achieved success in the commercial world outside of academia, or only know about getting education or educating others and getting paid by their employer, the educational institution, who gets their money from your parents either directly or indirectly through taxes.

Up to this point you learn that money is important, and that the disposable amount that anyone has is finite, and that it's their choice as to how much of that amount they want to give to others or not. You know that they get their money from employers, and employers decide how much they get or they don't get and that if they want to have more they have to convince these employers to give them more money.

Then you develop the belief that those who are poor are so because someone has decided to give them less money, and there are others who have a lot of money at their disposal who can afford to give these people more money, but don't. This seems all very unfair and is a bit like your mother deciding to give your brother two thirds of the cake and you only a third. You feel that to correct this, the employer or the government has to fix it by adjusting the portion of the handouts fairly. You also develop the idea that your mother, employer or government are what controls the allocation of money, and that you need to combine the strength of everyone in the same position in order to campaign and persuade these authorities to give you more. For instance if you and two of your siblings tell your mother that you don't want to eat asparagus, and want carrots instead, your mother is more likely to comply especially if you all refuse to eat or refuse to stop screaming together. The same goes in forming unions to prevent employers from exploiting you and your fellow workers, or forming lobby groups or nationwide strikes to convince the government. You develop the belief that this is the only way to bring chance and establish fairness.

I can easily see how this thinking develops. It's a product of the way we grow up and the society we grow up in. It's hard for us to understand how this came to be. We learn about previous kings, dictators and rulers of the past, so there's always been an elite class with more control over the distribution of wealth, just like our parents had more control over our lives while we were growing up. This way of perceiving the system is familiar to us, and we see the suffering of others, just like we suffered when our mothers took away a treat, freedom, privilege or pocket money if we didn't do something in a way she wanted. We focus on those in control, since they obviously have the means, and hold them responsible for the suffering of ourselves and others.

Perhaps you can start seeing it in a different perspective if you take a society from scratch. Let's start with a small family, mother, father and three children. The father goes hunting, the mother prepares food and feed the kids. The oldest child makes sure the younger children won't kill themselves by going out too far and fall into the river or get eaten by lions. The older child has learned that his mother and father is angry at him in unpleasant ways if he doesn't do what they say. They instruct and teach him to do things in this way because they want him to know what to do to stay alive and succeed, and help them stay alive and succeed at that. The younger children learn this at the same time. No money is involved in establishing the worth here, only love and the will to survive and better their life and chance of survival. When facing external danger like predators or food shortages, they help each other at fighting, hunting and sharing the food. Within the family you have natural solidarity, or socialism.

Brothers and sisters could implement some kind of measurement between each other when it comes to the value of their acts, for example if one gets more honey than the other they might fight over it to settle that and decide everyone should get an equal amount except for the one who's hurt the others on purpose during play, but if the oldest brother gets more meat then they could all agree that it is fair since he needs to be strong in order to protect the younger children from predators. See, even now you have to put a measurement on the worth to the older brother, even in a family structure driven by love and solidarity.

Let's say you have two families like this, the father of one family is good at hunting while the father of the other family is good at finding edible fruits and mushrooms. Since it's better to live on a diet of meat and fruits instead of just meat and just fruits because of the pattern of migration of the animals and the seasonality of the fruits, the two families share with each other.

But let's say one of the families don't provide as much of something as the other one, or not all the time, how do you determine how much fruit and meat do you share with the other family? What happens when the other family just eats a lot and get fat, and only bring food to you from time to time? So you learn to trade, the families swap fruit and meat with each other, but not in equal amounts because certain factors determine their value. In winter it takes triple the effort to find fruits as it is to do hunting, so you learn that you need to give triple the amount of meat for the same amount of fruit during winter. If the hunter doesn't agree that value with the fruit picker, he could decide not to trade at that value. He could either decide to stick to meat in winter or dry some fruits during summer to eat in the winter, or both. The fruit picker wants access to meat in winter so he decides to lower his price. Alternatively the hunter could decide that hunting is still less effort and a lot better than doing the whole dried fruit thing, so he decides that during winter it's worth paying more meat for fruit. In summer he has to hunt less for fruit since fruit is cheap. Hey presto, efficiency reached, in winter the hunter works harder and ends up providing meat for his family and the fruit picker's, and the fruit picker works harder during the end of summer so that he has enough fruit to provide for both families over winter. All this happened without having to rely on a higher authority, campaigning or violence in order to make things fair and efficient.

Anyway, that's Econ101. Unfortunately it's hard for people to take that concept and scale it up to more complex arrangements, like we have today. Where the hunter subcontracting the hunting duties to younger and healthier males to do the running around, where the price of meat is affected by running out of animals in the forest, where the fruit picker starts to grow foods, and find foods that can store through a whole winter, where they develop a medium of exchange (money), one that can be stored and traded later, where governments starts to determine the value of the medium of exchange and can create fake money out of thin air and the distortion and loss of value is called inflation, where the hunter can give meat to the fruit picker in exchange for a promise that he'll be given more fruit in summer, plus some extra since he had to wait so long etc.

We have the vast and complex system as we have today. Even while it's efficient, and everyone is better off exponentially more than before, and exponentially more than other older or failed experimental systems like socialism, communism, anarcho-syndicalism, feudalism and the likes, there are still some who suffer. We still want to blame the winners for the losers.

Unfortunately it's hard for people to understand exactly how and why, even many smart people. Instead we fall back to the way we understand the system as we learned to discover it as we were growing up under our parents and while being students. Some deny the fact that it was the system we have that gave us the platform to develop all the technologies we have today that makes life so easy for us that we can sit in an air conditioned office all day and work light and socialise with people around the world over the internet and get drunk afterwards, or at the bottom of the scale make it so cheap to produce food that there isn't a democratic and capitalistic country in the world where people die of hunger.

I hope I'm doing a charitable deed by trying to help educate people who struggle to understand all of this, since the well intended solutions to try help those who suffer can actually bring terrible suffering to this world.

Wednesday, May 7, 2008

Net Neutrality Myths

I'm getting a bit concerned over this whole net neutrality issue. People campaign for net neutrality legislation as if it's needed in order to save the internet. What worries me is that people don't know what they're asking for.

The public is being put under the impression that without net neutrality legislation, broadband users will be restricted by their access providers on what content they can access and practically hold them at ransom to force them to pay extra for popular services (e.g. Google, Wikipedia, YouTube etc.), and when that happens it will destroy the internet as we know it.

If that was really the case, we would certainly have something worth campaigning for. The internet is wonderful and standing up against the big evil corporations who are intent on destroying it for profit seems like a noble effort. Unfortunately campaigning to regulate net neutrality isn't, and it shows a lack of understanding of so much of the history and the nature of the internet, economics and the role of governments and completely ignores how the internet came to be as neutral as it is today.

This is my attempt to put together a guide in order to explain many of the myths driving net neutrality activism.

Myth 1: Net Neutrality laws have been protecting us but evil corporations wants it to go away.

This is about the biggest misunderstanding. First I have to make clear what is defined by the term 'Net neutrality'. Net neutrality is the principle that all traffic from all content providers should be considered equal at a broadband provider level. This has never been a law. This has never been explicitly dictated in any set of principles, apart from common sense between those rolling out the commercial internet in the early 90's. It just happens to be the way the internet turned out and is the reason why the internet turned out to be such a success. It's the result of voluntary contracts between consumers and suppliers of the services.

Some people claim that this principle existed in legislation long ago, for example in the US telegraph system, or in the early Acceptable Usage Policy of the internet which was withdrawn before commercial internet providers even existed.

Myth 2: Broadband providers will do certain evil things to us in the future.

Since there have been no laws in place to regulate net neutrality, since the beginning of the commercial internet providers we have been open to all these dark scenarios painted by net neutrality advocates. In other words no laws have been protecting us from evil broadband providers throttling our lines or shutting off access to sites at will. Certainly outside of the US no such laws existed either.

The first commercial internet providers were anything but neutral. They only offered a few protocols and a few sites, and even had control over the software that you use to access it with, and many even charged per hour. It's market demands that have driven internet service providers to be open, and neutral.

Those of us who's been around since the beginning of the commercial internet will know that some providers have actually tried to do just that from time to time, but common sense prevailed and we have little evidence of it happening in the long term. The bottom line is that for a provider to do this is bad for business.

Without naming the name of a particular company, I can relate the story of an ISP in a country that I am familiar with. I'll call it Meganet. A large media group owned and launched an ISP, leveraging the huge marketing ability they had through their satellite and terrestrial televisions channels and printed newspapers and magazines. They were responsible for a significant amount of new users on the internet in the country, and managed to gain over a third of the home user market. Much of Meganet was started from buying an existing ISP, one that was a commercial entity that was created by a government research institution that had its funding cut. The ISP they bought were failing despite having a strong marketing budget, mostly because they charged for access per hour, where other ISP's were all charging a flat rate per month. They also tried to have an advantage over ISPs by claiming that they could provide content that other providers didn't have, this strategy also failed. Why Meganet continued some of their failed ideas, I don't know.

Along with other acquisitions that took place in order to create Meganet, they also ended up hosting a lot of very popular content providers including some news sites. When they reached the point where they were a significant ISP, having more than a third of the home user market, they tried to use their position in order to bully people from other ISPs into joining them. They started to block access to some of the popular sites to users who aren't their own customers. For obvious reasons this strategy failed, this created opportunities for competing content providers hosted elsewhere. The restricted content providers lost a lot of visitors, permanently. They tried to block their own visitors from accessing the new competing sites, but simply lost customers quicker, permanently. These actions by them were the best thing that could have happened to their competitors. Common sense eventually prevailed and they reversed all these restrictions. It didn't take long, maybe a few months.

This same issue came back to bite Meganet again, when other ISPs refused to route their multicast video. Eventually after periods of stupidity the net returned to normal.

Myth 3: Broadband providers use the excuse of cost.

Some people say that broadband providers want to charge more is simply because they want to extract more cost out of the user by using the excuse that it costs more to provide them a service. It's certainly true that private companies want to extract as much money out of their customers as the market allows them to, that's the job of a private company. Whether consumers put up with it or switch to a provider that charges less instead is the job of the consumer.

Networking equipment and nationwide cabling usually have quite a high upfront cost, but after that the costs often stand still while customers have an ongoing monthly cost. This is part of how the business model for ISPs work. The alternative would have been that providers would charge you a joining fee, which would cover the cost of your portion of the cables and switches that makes up your access to their network and those they peer with. This fee would be very high, about 40-60 times as much as the normal subscription model. But after that for the next 3-5 years you would have to pay almost nothing for your access.

After 5 years practically all the equipment except for the much of the long distance cabling would have to be upgraded to cater for increased capacity, because unlike utilities like water and electricity, we keep on finding new uses for the internet requiring more capacity.

Myth 4: Net neutrality regulation is going to ensure faster speeds at cheaper prices in the future.

Unfortunately it's going to do the opposite, that's why it's so dangerous. Domestic broadband connections are cheap, but come with very little guarantees. It's wrong for broadband providers to place restrictions on the customers without specifying or agreeing it with customers. If it's in breach of the contract between the provider and the customer it's a matter for the courts. If it's not in breech, but something customers don't like, then they can change providers. That's why I'm in support of users testing the filtering policies of their providers and publishing the details. That way consumers can be aware of what service providers do and have a choice.

Most providers will give you a connection with guarantees. That's the kind of connection that most businesses that rely on the internet gets. To provide this level of service costs more, that's why business connections cost more. The contracts specify certain service levels and the provider has to make sure they can guarantee delivery within those service levels.

To force providers, through regulation, to guarantee service levels closer to that of business customers, would mean that they have to invest in the kind of infrastructure to meet that, and they would have to raise prices in order to stay in business. In other words regulation would mean that everyone should have something closer to the style of a business connection, you won't be able to get a cheap connection with little guarantees anymore.

Myth 5: Without regulation, the internet as we know it will be destroyed.

The internet has never been as we know it. It's constantly evolving. The best thing that happened to the internet was when commercial companies were allowed to connect to it and sell access to the internet. They were free to do it in many ways, and many creative businesses created the internet as we know it today, from content providers like Google, to service providers that used their cable television infrastructure to provide internet access, to network equipment companies like Cisco that made cheap and reliable IP routers.

If regulation starts to limit them from doing stupid stuff, or limit them from providing cheap solutions but with no guarantee, then it's going to limit innovation. The internet will stay the same as we know it, which is not what we want, we want it to evolve.

Myth 6: Net neutrality legislation will benefit consumers.

If regulation prevents broadband providers from providing cheap service with low guarantees, they won't be able to choose to offer those services. Customers who want that kind of service will have less choice. We forget that not everyone wants a fast, guaranteed connection to download video material all the time, especially if it's going to cost as much as that connection would cost if it was guaranteed. Some people are happy to read e-mail, Wikipedia, some news sites and post on blogs and forums. Actually these people are in the majority, that's why broadband providers can provide a service at an almost wholesale level that's shared by many people. It's those people who are light users that allow others to enjoy fast throughput. The problem lies with when those heavy users, who only make up about 10% of the provider's customers, use more than 70% of the bandwidth.

Regulation will protect the rights of those 10% of the people, by forcing everyone else to have the same guaranteed throughput that those 10% use. That will mean the costs will have to rise to guarantee that kind of unrestricted access. This means the person who was happy to pay $5/month for an unreliable service that he can read his e-mail over will have to pay for a much better service he doesn't want.

What this really will do is kill competition. Perhaps there's a provider that wants to cater for those heavy users and offer them good deals. Perhaps there's providers who wants to offer cheap services to people who don't expect much from a cheap connection. Without regulation it's easy to provide the latter, you sell cheap connections with low guarantees to users, and build yourself a customer base. That's how new players enter the market.

With heavy regulation you take away that option, you force every provider to sell everyone a Rolls Royce when some people would be happy with a Ford. It means a new company would have to make Rolls Royces from day one cheaper than the large entrenched monopolies in order to break into the market. All this will do is protect the big players from competition, and drive the market towards entrenched monopolies. Regulation assisted monopolies are bad for the consumer.

Monday, February 11, 2008

How to pretend that you are a useful government

I'm starting to form a set of rules of how to pretend you're a useful government, while effectively not doing much, but also not harming anything that much either.

The first and most important stunt is to look at an industry where competition is unrestricted, then make an accurate prediction as to what the outcome on a component of it would eventually be as a result of competition, and make sure it's a popular matter. Or even better, look at all popular matters and determine which ones would be satisfied by the market eventually. Then introduce laws to tell the market to do what it would have done anyway.

Where this works better is where such things are delayed because it deals with issues between different competitors, where the best outcome would be if they all collaborate to a certain degree, since competitors normally take an awfully long time to come to agreement. Examples of these are: data and voice peer/routing, mobile roaming and inter-bank transfers. These are very good bets and earn lots of political brownie points with the electorate for making this happen quicker than the market would have come around to doing it by itself. It also creates the impression that without your brilliant powers of regulation this would never have happened.

If you're even more lazy and shy of a bit of controversy, implement a law which basically mandates the equilibrium in a market segment which has already been achieved by competition. Introduce this by citing possible dangers of it diverging too far from the equilibrium. For example put a cap on the price of some goods, either a minimum or maximum, or even the price of labour. Throw in some spin about how bad it would be if these things cost so much more or people get paid so much less. In the future this will create the impression that you are responsible for the fact that the current conditions are so because of your doing.

It doesn't matter if any of these laws are totally unnecessary in other countries, as we see with net-neutrality, even the intellectual geeks won't observe what happens in other countries with unrestricted competition and no such legislation. There's always a government protected monopoly somewhere that you can use as an example of the failures of the market. It also doesn't matter if your legislation will put restrictions on the market in the long run. On top of that, the most successful players in that market will actually be enjoying some protection by your legislation because it stifles innovation from small new competitors, so you'll have their wholehearted support.

Just remember to make your adjustments an accurate reflection of current conditions that work, not those that don't work or not at levels which is out of line with current conditions, or else you run the risk of getting the blame for something instead of the credit. You only have to worry about current conditions though. Whether any of your measures will fail in the long run isn't really your problem since you'll be out of office and retired by the time this happens, at least you've left something for future governments to do in order to look useful and to make their mark by making amendments, for example if you have aspirations for your son to get into politics.

For other popular issues that you feel you want to earn more points on, but know they're not entirely economical, fund it by taxing something considered to be undesirable, best place to look is what makes regular headlines in the media. Whether it's drinking alcohol or flying in a jet, just raise taxes on it and you'll have that extra cash to spend on big vehicles and energy consuming machines that are used to recycle plastic or extra police officers to catch people smoking in pubs.