Created 1999-02-03
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Comments at Berkeley Conference: The Legal and Policy Framework for Electronic Commerce: A Progress Report

What's Next? What's Missing in the Magaziner Report?

J. Bradford DeLong

Let me begin by saying that I hold valid rights to very little of what I am about to say. Most of it comes from an article I wrote a couple of your ago with Michael Froomkin to my right, an article that will appear in a Harvard book edited by Deborah Hurley sometime in the next millennium. He is responsible for somewhat more than half of any smart things I might say here. Of the rest--most of the rest of my smart thoughts I learned from either Hal Varian (from whom you heard earlier today) or from Paul Romer of Stanford University, who in my view at least is worth listening to very very carefully.

I, of course, remain completely and totally responsible for and am the sole originator of any dumb things that I might say.

As I read over the Magaziner report, and think about how what it says and leaves unsaid interacts with the other pressures on government policy, I find myself more worried about the future than most of the speakers at the conference. Look at the principles of the Magaziner report: "the private sector should lead," "avoid undue government restrictions," "government should provide a predictable, minimalist, consistent, and simple legal environment," "recognize unique qualities," and "facilitate global electronic commerce." Look at how they are applied: No internet taxes, but also no pools of government money to help provide the public-goods commons for our global electronic village. An information superhighway, as the Vice President used to say, but one without federally-funding. A heavy push to embrace and extend private intellectual property rights. A push to end, worldwide governments' ability to require compulsory licensing as a matter of course. Extension of the property rights of current trademark holders, at least for those with deep pockets. Privacy principles which seem to be honored in the breach because the private sector has not yet led.

It seems to me that Ira Magaziner and his political masters have a view that government is the surveyor of the electronic frontier. The government's job is to draw the property lines--the north boundary of parcel 24 runs from the cottonwood tree to the waterhole--set up rules for selling off the plots, make sure that the railroads get their share of the land, and provide a judge to rule on disputes and a sheriff to enforce the judge's orders.

Now when you are settling a real frontier, this kind of "letting the private sector lead" works pretty well. We may not like what happens to the Indians, or what happens if the judge decides that no witness born in Mexico is credible, or how much land the railroads get, or what happens when the cattle baron has his hired hands homestead all the waterholes in the county. But in the main letting the private sector lead works very well. The Invisible Hand of the marketplace does a good job at guiding people to reach productive and fruitful decisions as to how to use resources as they settle the frontier.

But I suspect that the information economy is going to be different. I may be wrong, but I think it is going to be different enough that the market economy is going to work much less well than we are used to. I suspect that going down the road marked by the Magaziner report is going to leave us suffering from carpal tunnel syndrome of the Invisible Hand.

For one example, consider the push to embrace and extend intellectual property rights. The idea is that by making more information appropriable, we are making incentives better. After all, who is going to finance work if you cannot make money off of it? But when I look at current stock market valuations, I find it hard to believe that many internet enterprises today cannot find financing because investors fear that they will not be able to profit from the consumer value they create. And the dangers of providing broad rights to intellectual property are great.

You see, information goods are what economist Paul Romer calls non-rival. You can sell it more than once. Just because one of your customers is "using" a piece of information doesn't mean that another--or many others--cannot be. This non-rivalry gives the largest producer the potential of unlimited economies of scale. It means that, as Carl Shapiro and Hal Varian write in their Information Rules book, information goods markets will not, cannot look like the competitive markets in which the Invisible Hand works well.

So do we break up every very successful company once a decade? Do we learn to live with natural monopoly and be happy about it? Bear in mind that this time the economies of scale or so large that it is monopoly, and not the early twentieth-century oligopolies that we face. I suspect that in many cases in the future we will find that in market after market the most powerful competitor of the dominant firm is its own installed base, the products that it sold to end users as it was becoming dominant. It seems to me that some leakage or slippage in control over intellectual property may well be desirable.

I'm out of time.

But let me end with a thought. There's a possible world--once more in synch with the philosophy of the Magaziner report--in which legal doctrines were different and Apple prevailed over Microsoft in its attempt to enforce the intellectual property that it bought (long after the first Macintosh was made) from Xerox PARC. In such a world Apple's (and Motorola's, and Xerox's) stock prices are higher. In such a world Microsoft's (and Intel's) stock prices are lower. In such a world it is Steven Jobs rather than Bill Gates whose videotaped deposition is being ripped into virtual shreds and gobbets.

And in such a world most of you are still running DOS, and my computer costs twice as much.

I like this world better. I fear that the Magaziner report is part of a process that is nudging us toward that world.

Thank you.

Feedback is always very welcome...

Professor of Economics J. Bradford DeLong, 601 Evans Hall, #3880
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax

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