A History Lesson For Those Advocating Network Neutrality Laws

from the unintended-consequences dept

Over at News.com, Declan McCullagh writes that Barack Obama's election as the next president of the United States has bolstered the hopes of those hoping to impose network neutrality regulations on the Internet. While Obama's key advisors have been cagey about precisely what the new administration's stance on the issue will be, it's a safe bet that we'll be hearing a lot about the issue in the coming months. This seems like a good time for a long-overdue conclusion to my ongoing series on network neutrality regulation.

One of the things that has been missing from the network neutrality debate has been a sense of how it fits into the broader history of government regulations of network industries. It's easy to imagine that the Internet is so new and different that historical comparisons just aren't relevant. But as we've seen with copyright and patent debates, we can learn a lot from historical experiences that may not seem immediately relevant.

I think this is equally true in the network neutrality debate. While the specifics of network neutrality are unlike anything that has come before, the general principles involved—non-discrimination, competition, monopoly power, and so forth—have actually been with us for more than a century. Indeed, today's network neutrality debate bears a striking resemblance to the debate that led to the very first American regulatory agency: the Interstate Commerce Commission, which was created to regulate the railroad industry.

The railroad industry was the high-tech industry of its day, and it had many of the same kinds of transformative effects on the 19th Century American economy that the Internet is having today. As with today's Internet, some parts of the railroad market were highly competitive, while other markets were served by only one or two firms. And people had concerns about the behavior of the largest railroad firms that echoed those that people have about large Internet providers today: that they restrict competition, discriminate among customers.

In 1887, Congress passed legislation (you can read an abridged version here) that is strikingly similar to the proposed network neutrality legislation that we're debating today. The Interstate Commerce Act declared it illegal to charge different prices to different customers for "the transportation of a like kind of traffic under substantially similar circumstances and conditions." It also said that railroads may not "make or give any undue or unreasonable preference or advantage to any particular person, company, firm, corporation, or locality, or any particular description of traffic." Compare that to the leading network neutrality proposal during the last Congress, which would have required network providers to deliver content on a "reasonable and nondiscriminatory" basis without imposing "a charge on the basis of the type of content, applications, or services made available."

Unfortunately, the story of the Interstate Commerce Commission does not have a happy ending. Grover Cleveland appointed a railroad ally named Thomas M Cooley as the first chairman of the ICC. The ICC was widely regarded as toothless for its first couple of decades, largely rubber-stamping railroad industry decisions. Things got even worse after the turn of the century, when the ICC began actively discouraging competition in the railroad industry. The ICC had the power to decide when new firms were allowed to enter the railroad industry, and by the 1920s, the FCC was actively working to discourage competition and push up railroad rates. In the 1930s, the ICC gained authority over the infant trucking industry, and used its authority to slow the growth of the trucking industry to protect the railroads from competition. By 1970, things had gotten so bad that a Ralph Nader report described the ICC as "predominantly a forum at which transportation interests divide up the national transportation market."

What went wrong? The story is too long and complicated to fully describe in a blog post, but I think there are two key lessons. First, the authors of the ICA dramatically underestimated the complexity of the railroad industry and the difficulty of government oversight. One of the reasons the ICC was relatively toothless in its early years is that it was completely overwhelmed with paperwork, as dozens of railroads sent it information about thousands of routes. The railroad industry was simply too complex and dynamic for a few Washington bureaucrats to even understand, to say nothing of regulating them effectively.

Second, the ICC's failure is a classic example of what economists call "regulatory capture": the ability of special interests to gain control of the regulatory process and use it to their advantage. Because the railroads cared more about railroad regulation than anyone else, they were adept at getting their allies appointed to key positions at the commission. Over time, the ICC not only ceased to be an effective watchdog of consumer interests, but actually began actively defending the interests of the railroads at consumers' expense. For about six decades—from about 1920 to 1980—the ICC pursued policies that reduced competition and raised prices in the railroad industry. And when trucking emerged as a potentially disruptive innovation, the ICC helped to limit its growth and slow the corresponding decline of the railroad industry.

The story of the ICC is not an isolated case. Similar stories can be told of the Civil Aeronautics board, which limited competition in the airline industry until the 1970s. And, of course, there's the example of that the FCC actively promoted AT&T's monopoly in the telecommunications market until it was broken up in 1984.

We can certainly hope that Congress has learned from the experiences of the 20th century and will avoid the most egregious mistakes it made in the 20th century. But it's worth remembering that many of the conditions that led to the ICC's problems are still with us. Today's FCC, like the ICC of the 20th Century, has a revolving door between the commission and the firms they regulate. And the Internet, like the railroad industry of the 19th century, is extraordinarily dynamic and complex. As a result, there's a real danger that if Congress gives the FCC the power to regulate the Internet, it will make things worse, either because it cannot keep up with the Internet's rapid evolution, or because industry incumbents will succeed in getting their own allies in key positions within the commission. Either way, the results could be very different from what network neutrality proponents are hoping for.

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Filed Under: history, net neutrality, regulations, regulatory capture, trains, unintended consequences