Net Neutrality And The Broken Windows Fallacy

Economics

from the ajit-pai,-read-your-bastiat dept

I’ve mentioned the idea of the broken windows fallacy — not to be confused with the long debunked broken windows theory of policing — twice in the past in reference to net neutrality, including in my recent post about what Ajit Pai should have said about repealing net neutrality. But both times I talked about it, it was kind of buried in much longer articles, and the more I think about it, the more important I think it is in understanding why Pai and his supporters are so far off in their thinking and understanding on net neutrality. What I find most perplexing about this is that people who often position themselves as doing away with overly burdensome regulations — which is a stance that Pai has staked out pretty clearly — are usually the kind of folks who talk frequently about the broken windows fallacy. And yet, here, those same folks seem to be missing it.

As background, the broken windows fallacy comes from Frederic Bastiat, the French economist often associated with free market and libertarian thought, and it’s his clever and highly evocative way of explaining why destructive behavior — while it may generate economic activity, is not good for the economy, because it misses all of the other (often hidden) costs, including the opportunity cost of investing that money in more productive activity. Bastiat’s version went as follows:

Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son has happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation ? “It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?”

Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.

Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier’s trade ? that it encourages that trade to the amount of six francs ? I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.

But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, “Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen.”

It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented

Let us take a view of industry in general, as affected by this circumstance. The window being broken, the glazier’s trade is encouraged to the amount of six francs; this is that which is seen. If the window had not been broken, the shoemaker’s trade (or some other) would have been encouraged to the amount of six francs; this is that which is not seen.

And if that which is not seen is taken into consideration, because it is a negative fact, as well as that which is seen, because it is a positive fact, it will be understood that neither industry in general, nor the sum total of national labour, is affected, whether windows are broken or not.

Now let us consider James B. himself. In the former supposition, that of the window being broken, he spends six francs, and has neither more nor less than he had before, the enjoyment of a window.

In the second, where we suppose the window not to have been broken, he would have spent six francs on shoes, and would have had at the same time the enjoyment of a pair of shoes and of a window.

Now, as James B. forms a part of society, we must come to the conclusion, that, taking it altogether, and making an estimate of its enjoyments and its labours, it has lost the value of the broken window.

When we arrive at this unexpected conclusion: “Society loses the value of things which are uselessly destroyed;” and we must assent to a maxim which will make the hair of protectionists stand on end ? To break, to spoil, to waste, is not to encourage national labour; or, more briefly, “destruction is not profit.”

In short, breaking windows may generate economic activity for the glazier, but that doesn’t count the economic cost to whoever had his window broken, or the opportunity costs of how the money spent on fixing the window could have been fixed.

So how does this apply to net neutrality? Well, Ajit Pai and nearly all of the rather vocal supporters of taking away net neutrality rules continually go back to the claim that the rules harmed broadband infrastructure investment. We’ll leave aside the (rather important point) that this claim is not even remotely close to true — but even assuming it is, it’s still a broken windows fallacy.

That’s because broadband infrastructure investment is not the entire market, and focusing just on that is the same as just focusing on the economic activity for the glazier created by a broken window. To take this to the extreme case: if we want to stimulate broadband infrastructure investment, just rip up the current internet — and then we’d need to spend a ton on rebuilding the internet. Yes, that would be the best way to “stimulate” a massive internet infrastructure investment, but the costs to everyone else would be dire.

In the same way, when the FCC focuses just on broadband infrastructure, it is ignoring the costs on everyone else who use the internet. Or, as per Bastiat’s story, the FCC is ignoring the costs to the guy whose window is broken as well as all of the opportunity costs from the money he spends on the glazier that doesn’t go towards more productive pursuits.

In the net neutrality world, those costs are massive. It is the costs of nearly all internet platforms and services, which now have massive levels of uncertainty about whether or not ISPs will end up abusing their power to limit access (or, more likely, charge for preferred access). It includes the uncertainty of the big broadband companies favoring their own content and service partners to effectively shut out independent services. It includes the costs to the public who have less choice and fewer services that they can use, and who are more locked in to a dwindling number of giant broadband companies.

In short, Ajit Pai’s FCC has fallen completely for the broken windows fallacy, by focusing just on one narrow area of economic activity, without even being willing to acknowledge that it will negatively impact a much wider swath of the economy. This is especially disappointing to see, considering that Pai and his supporters keep claiming that they are the ones to “bring economics back” to the FCC, and they are the ones who argued that the Tom Wheeler FCC ignored economics. Yet, when you look at the details, it’s Pai and his supporters who seem to be the ones sticking their heads in the sand here and, as Bastiat noted, confining their theory to “that which it seen” and taking “no account of that which is not seen.”

In economics this is a pretty 101-level mistake. That the FCC is making it in dismantling a key concept that makes the internet function competitively is particularly disappointing.

Filed Under: ajit pai, broadband investment, broken windows, economics, fcc, innovation, make work, net neutrality