Norms, mechanisms and policy imperatives

As I stumble towards a paper about changes in governance required by changing technology (part of the Silicon Flatirons New Models of Governance project) I’ve found Peter Cowhey and Jonathan Aronson’s magisterial new book on the political economy of global communications [1] very useful.

In the Summary and Conclusions, co-written with Don Abelson, they introduce four “principles” for market governance in the light of current conditions, and ten “norms” needed to implement the principles (see Appendix 1 below). They define market governance as “the mixture of formal and informal rules and the expectations about how markets should logically operate.”

When I look at their norms, I see a set of choices for the set-points of a small number of governance mechanisms:

• Subsidy (Norm 2)
• Competition policy (Norms 3, 5)
• Regulatory “touch” (Norms 1, 4, 6)
• Property rights (Norms 8, 9, 10)

As one might expect from a work devoted to the governance of markets, the norms (and the governance mechanisms they imply) do not address some non-economic public policy imperatives. [2] For contrast, consider the “permanent policy imperatives” I introduced in my paper “Internet Governance as Forestry” [3]

1. Public Safety. Protecting citizens is a primary responsibility of government.
2. Consumer Protection. Policy makers take action when lawmakers conclude that commercial activity needs to be circumscribed in the public interest.
3. Culture and Values. In order to protect and express a culture’s values, policy makers seek to limit some kinds of speech and promote others.
4. Government Revenue. Money needs to be raised and redistributed by federal, state and local treasuries; this includes taxes, fees, levies, subsidies, and tax breaks.
5. Economic Vitality. A healthy market produces goods and services that citizens value.

Now, these two lists are different in kind; Cowhey & Aronson’s norms and implied mechanisms are means, and my policy imperatives are ends. However, the mismatches are revealing.

My list of policy imperatives does not include subsidy, which is implied by Cowhey & Aronson’s Norm 2, “Invest in virtual common capabilities”. In the light of their work, I now realize that this is an omission; distributing government largesse is a permanent policy imperative.

The mechanisms of competition policy and property rights are means to the end of economic vitality, my fifth policy imperative. The mechanism of regulatory “touch” is a means that I address in my paper under the heading of Principles (see Appendix 2, below); as it happens, I concur with their recommendations for light touch regulation.

The difference in emphasis is perhaps most noticeable in the absence of norms/mechanism that speak to the “soft” policy imperatives. While Cowhey & Aronson’s Norm 7 addresses media content, and thus recognizes some value in “culture and values”, my third policy imperative, it is not implementable in the way the others are; it merely recommends a balance between encouraging trade and protecting cultural values. The “public safety” imperative is completely absent. While one may argue that Imperative 2, “consumer protection”, is to be achieved through competition policy (Norms 3 and 5), Cowhey & Aronson do not explicit mention of consumers.

Footnotes

[1] Cowhey, Peter F. and Jonathan D. Aronson, Transforming Global Information and Communication Markets: The Political Economy of Innovation, MIT Press (February 15, 2009). Softcopy available at http://globalinfoandtelecom.org/book/ (look for the “Download free under Creative Commons license” link)

[2] It is telling that Cowhey and Aronson seem to equate the public interest with consumer welfare, an economic construct. For example, on p. 17 they write: “The main challenge for governance is creating appropriate new spaces for market competition that allow the most important potential for innovation to play out in a manner that enhances consumer welfare (the public interest).”

[3] De Vries, Pierre, “Internet Governance as Forestry: Deriving Policy Principles from Managed Complex Adaptive Systems”, TPRC 2008. Available at SSRN: http://ssrn.com/abstract=1229482

Appendix 1: Four guiding principles and ten norms to help implement them
(Cowhey & Aronson (2009) Table S.1, p. 265

Principles

1. Enable transactions among modular ICT building blocks.
2. Facilitate interconnection of modular capabilities.
3. Facilitate supply chain efficiency, reduce transaction costs.
4. Reform domestically to help reorganize global governance.

Norms

1. Delegate authority flexibly.
2. Invest in virtual common capabilities; be competitively neutral.
3. Use competition policy to reinforce competitive supply chains.
4. Intervene lightly to promote broadband networks.
5. Narrow and reset network competition policy. All networks must accept all traffic from other networks. Narrow scope of rules to assure network neutrality. Separate peering and interconnection for provision of VANs.
6. Government should allow experiments with new applications.
7. Create rules for globalization of multimedia audiovisual content services that encourage international trade and foster localism, pluralism, and diversity.
8. Tip practices toward new markets for digital rights.
9. Promote commercial exchanges that enhance property rights for personal data and mechanisms to do so.
10. Users own their information and may freely transfer it.

Appendix 2: Four ecosystem management principles

De Vries (2008), Table 3, p. 26

1. Flexibility: Determine ends, not means.
2. Delegation: Most problems should be solved by the market and civil society.
3. Big Picture: Take a broad view of the problem and solution space.
4. Diversity: Multiple solutions are possible and desirable.

Ecosystems: sustainability or innovation, pick one (at a time)

Business folk, particularly those in IT, love the ecosystem metaphor (perhaps erroneously). One of the reasons, I realized listening to Pamela Passman on a panel at the Silicon Flatirons annual conference, is that it provides validation to both incumbents and challengers. Passman advocated creating a healthy internet ecosystem, and emphasized the importance of both sustainability and innovation. [*]

Both of these are characteristics of ecosystems, but not, as I understand it, at the same time. For example, mammals could only start rise after the extinction of the dinosaurs, prompted by a massive meteor strike or large-scale volcanism. The innovation that led to Homo Sapiens resulted from a catastrophic breakdown in ecosystem sustainability.

The adaptive cycle model developed by Buzz Holling and his collaborators has ecosystems constantly cycling through four stages: exploitation or growth, a mature conservation phase, a catastrophic release, and finally reorganization leading to new growth. To take the example of a forest: a fire, drought, or insect infestation triggers the breakdown (release) of the intricate and productive biological web that had been established during the preceding conservation phase. This sets the stage for reorganization, during which species that had been excluded in the prior conservation phase move in. As they become established, exploitation of open niches leads to growth. Eventually, we reach another conservation phase. Everything settles down; all the niches become filled, and the network of connections between biomass and nutrients becomes increasingly tight. This is a stable and very productive stage, from the point of view of resource utilization and biomass production. However, the tight linkages make it fragile to sudden release, starting the cycle again.

Ecosystems therefore oscillate between stability and innovation, swinging through repeated crises. By focusing on the appropriate phase, both incumbents and newcomers can see themselves in an ecosystem view. During an exploitation/growth phase, which we have with the Internet at the moment, newcomers are validated by looking back to the preceding reorganization phase which led to their rise, and (re-)emerging incumbents look forward to the impending conservation phase during which they will reap their reward.

What does sustainability mean in this context? Certainly not eternal stability, since that’s not possible. At best, it’s management the ecosystem to limit the severity of the release phases while still generating enough restructuring to allow innovation.

The moral of this story is that ecosystems talk hides but does not end the endless tussle between newcomers and incumbents. Wise governance needs to find a way to extract the social benefits of both, while recognizing that each represents the eclipse of the other.

Note

[*] Shane Greenstein had a great paper at the conference on what makes for "healthy" behavior in the internet industry; forthcoming in the Journal on Telecommunications and High Technology Law. For a brief summary, see Rocky Radar

Reforming the FCC: Diagnosis

The financial crisis has called into question how markets are regulated; calls for reforming the FCC have been growing louder for some years. The legal/regulatory shortcomings of the FCC are a topic of frequent conversation (e.g., GMU Sep 08, PK/Silicon Flatirons Jan 09. It is therefore instructive to ask why it has ended up in this situation. Some of the problems are due to the personalities and politics of the moment, and are thus transitory. Some are due to its terms of operation; the FCC’s structure and mission are determined by the Communications Act, and won’t change fundamentally unless the Act changes. The deeper cause, which most interests me, is a change in the nature what is being regulated: the transformation of the communications business from telecoms+broadcasting to the internet.

Since the mid-90s, the computer, information and communication services have come to dwarf telecommunications services. For example, the graphic at the top of this post charts the service exports of the OECD countries according to the OECD Communications Outlook 2007 (p. 256). This was not only a quantitative change; computing brought a qualitative change. The internet/web is modular, decentralized, self-organizing, adaptive and diverse on a fundamentally different scale to telecommunications (Internet Governance as Forestry). These are all characteristics that distinguish complex systems from merely complicated ones.

An analogy may help: the FCC in the telecoms era was like a farmer managing agricultural production; today it is like a ranger responsible for a wilderness. A farmer can decide which crops to cultivate, where to plant them, and when to rotate – though the plants do the work of converting sunlight to carbohydrate, and the animals convert food to meat. Some inputs, like weather and market conditions, are unpredictable, but many – irrigation, fertilizer, seed type, antibiotics – are under the farmer’s control. (And even weather and market risk is mitigated by massive government subsidies for major crops.) The desired output is well-defined and easily measurable. Rangers, on the other hand, have to deal with a very different balance of power and responsibility. They have to protect endangered species, prevent catastrophic fires, and provide access to citizens, but have little or no control over the animals and plants in the ecosystem, or the inputs in the form of weather, migrating animals, or pests.

This limited control implies that detailed, rule-based regulation is no longer sustainable. An approach based on principles, supported by tools such as transparency and computer simulation, is the only viable strategy. Rules can determine which crop hybrid to use for a particular market need given climate and soil type; but principles – such as flexibility, taking a big picture view, fostering diversity, and delegating responsibility – are unavoidable when managing an ecosystem.

In a New Yorker article about the financial crisis, James Surowiecki uses a sport analogy to explain the difference between principles and rules:

It’s something like the difference between football and soccer. Football, like most American sports, is heavily rule-bound. There’s an elaborate rulebook that sharply limits what players can and can’t do (down to where they have to stand on the field), and its dictates are followed with great care. Soccer is a more principles-based game. There are fewer rules, and the referee is given far more authority than officials in most American sports to interpret them and to shape game play and outcomes. For instance, a soccer referee keeps the game time, and at game’s end has the discretion to add as many or as few minutes of extra time as he deems necessary. There’s also less obsession with precision—players making a free kick or throw-in don’t have to pinpoint exactly where it should be taken from. As long as it’s in the general vicinity of the right spot, it’s O.K.

--- James Surowiecki, Parsing Paulson, The New Yorker, 2 Dec 2008

Pursuing this metaphor, the FCC is not only the referee of a football game, it also makes the rules – often as the game goes along.

I’ll suggest some possible ways for a new FCC to manage the new communications business in an upcoming post. However, a caveat: The ICT business hasn’t had a crisis of melt-down proportions, as finance has had, to concentrate the mind. It remains to be seen how the change in power in DC will affect this process. Some of the loudest calls for change at the FCC have come from the Right, arguing that the FCC regulates too much and too intrusively; the Left has chimed in, arguing that it regulates too ineffectively. With Democrats now in control of both Congress and the Administration, and the GOP in some disarray, the pressure to reform the FCC may well abate; calls for its abolition will certainly have less resonance.

The Finance Goose and the Telecoms Gander

I’ve been trying to think through the analogies between finance and ICT (aka telecoms [1]) in the hope of gleaning insights about ICT regulation from the market melt-down. (Recent posts: From transparency to intelligibility in regulating finance, Lessons for communications regulation from banking complexity, More on Intelligibility vs. Transparency.)

While finance and ICT are both complex adaptive systems, there are some deep differences [2] – deep enough that “Re-regulate, Baby!” thinking about financial markets shouldn’t automatically include ICT. In other words: while self-regulation on Wall Street may be anathema in the current climate, it should still be on the menu for ICT.

Money is a core commodity

The dotcom bust of 2001 was severe, but pales in comparison to the Savings & Loan debacle, let alone the current crisis. The ICT business doesn’t have the societal or financial leverage to drive meltdowns that rock society. Finance is about making money with money, and money drives the economy. Money is the ultimate commodity; when you can’t get money, nothing works.

ICT is not (yet?) so central. Information, for all the talk about bits and bytes, is not really a commodity. A dollar is a dollar is a dollar, but a brother could be a sibling, a comrade in arms, or any human being, depending on the context [3]. Distortions of information transfer, whether in transport or content, are therefore not as leveraged as bottlenecks in the money supply.

Information flows are undoubtedly important, and their interruption would cause disruption. For example, cargo ships need to provide electronic manifests to their destination ports 24 hours before arrival in the US. If this data flow were blocked, the movement of goods would stop. However, this is a point failure; it isn’t obvious to me how something like this could cause a cascade of failures, as we saw when banks stopped lending to each other [4].

Leveraged Intangibles

Finance is more leveraged than ICT. It’s more abstract, not least because money is a more “pure” commodity than information; that is, it’s more generic. The sub-prime crisis was the collapse of a tower of derivatives: loans were bundled into CDOs, which were then re-bundled into CDOs, and again, and again. There was double leverage. First, the obvious leverage of betting with borrowed money; second, the recursive bundling of financial instruments to magnify even those inflated returns. The tower of derivatives was possible because its bricks were intangible; failure only came when the conceptual opacity of the structure overwhelmed our individual and institutional comprehension, rather than when its weight exceeded the compressive strength of its materials.

ICT also has its fair share of intangibles; many problems of large-scale software development are due to the opacity of boundless webs and towers of abstractions. However, the recursiveness is not as thoroughgoing, at least at the lower levels of the stack. The risks of network infrastructure companies misusing their market power in interconnection, say, is limited by the fact that no part of the network is many abstraction steps away from tangible wires and routers.

The risks do become greater in the higher network layers, such as applications and content. Software carries more and more value, here; even though the bits and MIPS live in data centers somewhere, complex layers of abstract processing can create unexpected risks. One example is the way in which personally identifiable information doesn't have to be a name and address: when sufficiently many seemingly random items can be aggregated, someone becomes uniquely identifiable even though they didn't provide their name.

Subjectivity

The finance business is shot through with unquantifiable and unpredictable subjectivity, notably trust, greed, and panic. Of course, all businesses including ICT rely on trust, etc. However, in finance subjective assessments drive minute-by-minute market decisions. When banks lost faith that their counter-parties would still be solvent the next morning, all were sucked down a maelstrom of mutual distrust. Businesses all try to quantify trust, but it’s a fragile thing, particularly when assets are intangible and unintelligible. Investors thought they could depend on ratings agencies to measure risk; when it turned out that they couldn’t due to the agencies’ conflicts of interest, the downward spiral started (and was accelerated by leverage).

The ICT business, at least at the lower transport levels, is much less dependent on subjective assessments. One can measure up-time and packet loss objectively. Things are less sure at the content layers, as can be seen in the rumblings about the incidence of click fraud, and whether the click-through accounting of search engine operators can be trusted; so far, though, there’s been no evidence of a rickety tower of dubious reputation.

Conclusions

Finance today arguably needs more supervision because of the wide ramifications of unfettered greed, fear or stupidity. The impacts are so large because of the amplifying effects of leverage and intangibility; the risk is greater because of the opacity due to unintelligibility.

ICT also has leverage, intangibility and opacity, but not at the same scale. Therefore, objections to delegated regulation in finance do not transfer automatically to ICT.

Counter-intuitively (to me, at least), the parts of the ICT business that are most defensible against claims for re-regulation are those that have a great deal of physical infrastructure. The more software-intensive parts of the cloud are most vulnerable to analogies with the runaway risks we’ve seen in financial markets

Notes

[1] While telecoms is an easy old word that everybody knows, it really doesn’t capture the present situation. It connotes old technologies like telephony, ignores the media, and misses the importance of computing and software. There is as yet no better, commonly used term, and so I’ll reluctantly use the acronym ICT (Information and Communication Technologies). ICT is about business and policy as well as technology, but it’s a little more familiar, and shorter, than “connected computing”, my other preferred term.

[2] Jonathan Sallet observes that the financial crisis derives from market externalities that put all of society at risk (personal communication, 26 Nov 2008). The very large scope of this risk can be used to justify government intervention. We’re hoping to combine our thinking in an upcoming note.

[3] I’m toying with the notion of doing a metaphor analysis of information. At first sight, the discourse seems to be driven by an Information Is a Fluid analogy; it’s a substance of which one can have more or less. This metaphor is both pervasive, and open to criticism. Reddy introduced the Communication Is a Conduit metaphor for knowledge transfer; this is related to the Lakoff’s Ideas Are Objects. See here for his critique, and citation of his paper.

[4] Just because I can’t see a cascade doesn’t mean it isn’t there, of course; it may just be my uninformed and uninspired imagination. Network security analysts have, I’m sure, constructed many nightmare scenarios. The weakness of my analysis here is that my argument for the implausibility of a meltdown rests in part on the fact that it hasn’t happened – yet. The 9/11 fallacy. . . .

Lessons for communications regulation from banking complexity

A New Scientist story on Why the financial system is like an ecosystem (Debora Mackenzie, 22 October 2008) traces how the science of complexity might prevent future breakdowns of the world’s financial system.

The lessons apply to communications regulation, too. Both finance and the ICT business (“Information & Computer Technology”) are complex systems. The recommendations in the article resonate with the conclusions I came to in my paper Internet Governance as Forestry. This post explores some of the resonances.

New Scientist observes:

“Existing economic policies are based on the theory that the economic world is made up of a series of simple, largely separate transaction-based markets. This misses the fact that all these transactions affect each other, complexity researchers say. Instead, they see the global financial system as a network of complex interrelationships, like an electrical power grid or an ecosystem such as a pond or swamp”

Consequently, the accumulation of small, slow changes can trigger a sudden crisis. Johan Rockström of the Stockholm Environment Institute is quoted as saying,

"Slow changes have been accumulating for years, such as levels of indebtedness. None on their own seemed big enough to trigger a response. But then you get a trigger - one investment bank falls - and the whole system can then flip into an alternative stable state, with different rules, such as mistrust."

This is reminiscent of my Big Picture principle, which can be summarized as “take a broad view of the problem and solution space; prefer generic to sector-, technology-, or industry-specific legislation.”

The question for communications regulation is whether phase changes such as those we’ve seen in finance and ecosystems have occurred, or could occur in the future. Other than the periodic consolidation and break-up of telecom monopolies, and the vertical integration of the cable and media businesses in the 80s, conclusive evidence of big phase transitions in communications is hard to find. Is there currently a slow accumulation of small changes which will lead to a big shift? There are two obvious candidates: the erosion of network neutrality, and growth of personal information bases (cf. behavioral advertising, Phorm, more).

The New Scientist article suggests that unremarked linkages, such as the increase in cross-border investments since 1995, allowed the collapse of the US real estate market to reverberate around the world. The most obvious linkage in communications is “convergence”, the use of the same underlying technology to provide a myriad of services. Common technology facilitates commercial consolidation in infrastructure equipment (e.g. Cisco routers), tools (e.g. Microsoft’s web browser), and services (e.g. Google advertising). Convergence ties together areas of regulation that used to be distinct. For example, TV programs are distributed through broadcasting, cable, podcasts, mobile phones; how should one ensure access to the disabled in this situation? There are also links from one network layer to another, as internet pipe providers use Phorm-like technologies to track which web sites their users visit.

Increased connectivity makes the financial system less diverse and more vulnerable to dramatics shifts. “The source of the current problems is ignoring interdependence," according to Yaneer Bar-Yam, head of the New England Complex Systems Institute in Cambridge, Massachusetts. Telecoms convergence creates a similar risk, with substantial horizontal concentration: Cisco has 60% market share in core routers, Internet Explorer holds 70% web browser share, and Google has 60% search share and 70% online advertising share. While modularity and thus substitutability of parts in the internet/web may limit this concentration, it needs to be carefully monitored, as captured by my Diversity principle: “Allow and support multiple solutions to policy problems; encourage competition and market entry.” Integration is a successful strategy (cf. Apple) that some find disconcerting (cf. Zittrain); it is likely to become more pervasive as the industry matures.

Diversity allows ecosystems to remain resilient as conditions change. In the quest to achieve these results, regulators have to be careful to avoid rigidity, a temptation because the financial system is so fluid. Here’s Bar-Yam again, from the New Scientist article: “Governments will have to be very careful, and set rules and limits for the system without actually telling people what to do.” To manage this risk in the comms context, I proposed the principles of Delegation (most problems should be solved by the market and society, not by government; government's role is to provide proper incentives and guidance, and to intervene to solve critical shortcomings) and Flexibility (determine ends, not means; describe and justify the outcomes sought, not the methods to be used to achieve them).

The article closes by quoting Bar-Yam: “At its core the science of complex systems is about collective behaviour.” He goes on to say that economic policy has so far failed to take into account the complexity and consequent unpredictability of such behavior, and calls for the use of testable models. This will be important in communications regulation, too. Simulations of the internet/web can help to improve policy makers’ intuition about unpredictable systems with many variables. Exploring the consequences of policy choices in simulation can identify which courses of action are most robust under a variety of possible outcomes. It’s the 21st Century version of letting states and regions experiment with regulation, which is eventually pre-empted by federal rules. Policy simulation will allow decision makers to “sweat in training rather than bleed in combat.” Since any solution embodies a set of assumptions and biases, constructing a wide range of simulations can expose hidden preconceptions. They can then eliminate policy choices that work in only a narrow set of circumstances, leading to more resilient final measures.

Update 28 Nov 2008:

I came across a very apposite comment on the value of simulation in the New Scientist editorial for the July 19, 2008 issue (No. 2665). The editorial is a critique of mainstream economics disinterest in agent-based models. It closes by saying:

“Although the present crisis was not caused by poor economic models, those models have extended its reach by nurturing the complacent view that markets are inherently stable. And while no one should expect better models alone to prevent future crises, they may give regulators better ways to assess market dynamics, detect early signs of trouble and police markets.”

Cisco's 2007-2012 IP network traffic forecast

A Cisco outlook for IP traffic makes fascinating (if probably a self-serving...) reading: Cisco Visual Networking Index - Forecast and Methodology, 2007–2012.

• IP traffic will nearly double every two years through 2012. Total IP traffic will increase by a factor of six from 2007 to 2012.
• Despite the growth of P2P traffic, as a percentage of consumer Internet traffic it dropped to 51% at the end of 2007, down from 60% the year before.
• Video is now approximately one-quarter of all consumer Internet traffic, not including the amount of video exchanged through P2P file sharing.
• Internet traffic is growing fastest in Latin America, followed by Western Europe and Asia-Pacific

Thanks to David Hytha for the link.