The Market Demands Rules

[R. A. Hettinga]

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Status:  U
Date: Thu, 29 Nov 2001 16:01:50 -0500
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From: "R. A. Hettinga" <rah@shipwright.com>
Subject: The Market Demands Rules
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[Right. And, on the net, the protocols rule? :-)]

Cheers,
RAH
-----


November 29, 2001

Capital

The Market
Demands Rules

NOT SO LONG AGO, it was common to hear sober, thoughtful people declare
that old laws were inadequate for new technology, that music companies
could never stop people from downloading music for free, and that
empowering government to intercept encrypted private e-mail messages was
both wrong and technologically impossible.

The Internet, it was said, was the ultimate frontier beyond which
government would wither and cyber-freedom would reign forever and ever.

Today, Microsoft Corp. has been snared by a 100-year-old antitrust statute.
Napster Inc., the online song-sharing outfit, has been put into suspended
animation by the courts. And, though the U.S. government has yet to reopen
the encryption fight, recent antiterror laws give the police new electronic
snooping authority.

It turns out this new technology isn't so different from new technologies
that preceded it. Eventually, the market demands rules, and government
often, though not always, ends up the supplier of choice.

In the 15th century, the perfecting of the compass and other innovations in
navigation made possible the pioneering voyages of Columbus, Vespucci and
Magellan, and the treasure-seeking commercial voyages that followed. As
riches from the New World sailed to the Old, piracy prospered. There was no
law of the sea. States didn't patrol the oceans. Some even sponsored their
own pirates, called privateers, among them England's Sir Francis Drake.

Eventually, merchants and trading companies demanded protection. "Commerce
caught up with anarchy," says Debora Spar of Harvard Business School, who
retells this story in a new book, "Ruling the Waves." States outlawed
piracy and privateering in the 1856 Declaration of Paris, and their navies
enforced the new rules.

"The world always looks chaotic when the technology is new," Ms. Spar says
in an interview. "Nobody thought you could rule the sea or the airwaves or
the Net. It turns out that you can, and that it's generally in the interest
of the public at large and the market that rules be created."

TO RECORD COMPANIES, Napster was a modern-day pirate, plundering their
intellectual property. The companies turned to the courts and Congress for
help and prevailed. Napster clones persist. But property owners are
aggressive and armed with new technology of their own that helps enforce
the rules. A British firm, NetPD Ltd.(www.netpd.com1), sniffs out songs
that U.S. college students have downloaded and are sharing illegitimately,
and sends stiff warning letters to college computer-network administrators
on behalf of copyright holders.
1See more information about some of the items mentioned in this column.

* * *

Please send comments to capital@wsj.com2. We'll post selected replies at
WSJ.com/CapitalExchange3 on Sunday.

Even without pirates, the attraction of a rules-free market diminishes as a
technology is commercialized. The full potential of the telegraph in the
early 19th century was unrealized until the cacophony of competing
standards was silenced. In the 1850s, telegrams from France to the
neighboring Great Duchy of Baden had to be translated from French to German
in Strasbourg, carried physically across the Rhine and then retransmitted.
Incompatible standards persisted until an 1865 conference set pan-European
technical standards and conventions for calculating charges.

In the U.S., the telegraph industry found avenues to coordination without
government. At first, rules were made by private alliances that were
hampered by internal feuds. Then Western Union emerged as a private
monopoly that set nationwide standards. But its clout stirred such strong
opposition -- think Microsoft -- that Congress gave the Interstate Commerce
Commission authority to regulate it in 1910.

THE CYCLE IS REPEATED. A revolutionary new technology emerges -- the
compass, the telegraph, the radio, the Internet, the mobile phone, the
science of cloning. Pioneers profit, enjoying the gold rush. Pirates
arrive. Pioneers seek to protect their property rights. Problems of
coordination emerge. Government appears impotent. "It often looks like this
stage will last forever," Ms. Spar says.

But it doesn't. "The cost of anarchy is too high even for those inside the
market," she argues, building on work that won economic historian Douglass
North a Nobel Prize. The demand for rules and standards grows, and is
satisfied by private cartels or monopolies or, more frequently, by
governments, either singly or internationally.

The arrival in Washington of platoons of Silicon Valley lobbyists with
sacks of campaign contributions was a sign that information-technology
pioneers, even the libertarians, were seeking government protection and
rules, if only to protect profits. The struggles of the Internet
Corporation for Assigned Names and Numbers, the private organization
established to govern the Internet and known as Icann, illustrate the
difficulties of setting rules without the clout of government. Debates over
setting boundaries for scientists experimenting with cloning human beings
and patenting forms of life suggest the importance of government rules to
biotechnology.

So the issue isn't whether government has a role. History suggests its
intervention is almost inevitable. The issue is how. The way in which the
government crafts rules for information technology and biotechnology will
influence the speed with which we realize their potential to improve our
lives.

-- David Wessel

Write to David Wessel at capital@wsj.com4


------------------------------------------------------------------------

Resources

For more on Debora Spar, see,
directory.hbs.edu/phonebook/results.jhtml?email=dspar5

For more on Douglass North, see,
www.nobel.se/economics/laureates/1993/press.html6

------------------------------------------------------------------------
URL for this Article:
http://interactive.wsj.com/archive/retrieve.cgi?id=SB1006985494915297920.djm
Hyperlinks in this Article:
(1) http://www.netpd.com/
(2) mailto:capital@wsj.com
(3) http://WSJ.com/CapitalExchange
(4) mailto:capital@wsj.com
(5)
http://directory.hbs.edu/phonebook/resultsDetailShow.do;jsessionid=N0YRM2O52C4SXR04CROSFFQ?rowid=6558

(6) http://www.nobel.se/economics/laureates/1993/press.html
------------------------------------------------------------------------


-- 
-----------------
R. A. Hettinga <mailto: rah@ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'

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--- end forwarded text


-- 
-----------------
R. A. Hettinga <mailto: rah@ibuc.com>
The Internet Bearer Underwriting Corporation <http://www.ibuc.com/>
44 Farquhar Street, Boston, MA 02131 USA
"... however it may deserve respect for its usefulness and antiquity,
[predicting the end of the world] has not been found agreeable to
experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'