Software design by competition law

Europe is providing a steady stream of wrongheaded and counterproductive regulations — good for anecdotes, bad for Europeans.

When Windows Vista, the long-awaited successor to Microsoft’s operating system Windows XP, is released to the general public on January 30, some consumers around the world will have an additional product available. But, if the sales records of Windows XP ‘N’ are any indication, then Vista ‘N’ will be Microsoft’s most unpopular product in a long time.

The ‘N’ series is a special variety of Microsoft’s operating systems designed specifically to comply with antitrust rulings in the EU and in South Korea, which also has aggressive competition laws. In order to do so, XP ‘N’ shipped without Media Player, the free video and audio player which, for users outside these jurisdictions, is bundled with a standard XP installation. Both versions, ‘N’ and the bundled package, were available to European consumers at the same price.

Unsurprisingly, there have been no reported sales of XP ‘N’ to consumers since it was released in mid-2005. It would be hard for a market to reject a product any more entirely.

As has been argued, as long as competition is a download away, the law has done its job. But a steady stream of regulatory intervention and litigation in the computer industry over the last ten years disagrees.

Microsoft has been a staple target of antitrust authorities across the world. In 1998, the US Government sued the software manufacturer for tightly integrating its Internet browser with its operating system. The litigants alleged that their victory in the ‘browser wars’ — a period of vigorous competition between Microsoft’s Internet Explorer (IE) and Netscape Navigator — was due to IE being bundled with XP. Both products were free — but free and bundled can’t compete with free and downloadable, the critics alleged.

Experience suggest otherwise. Mozilla’s Firefox, the heir to Netscape Navigator, is rapidly gaining a share of the browser market. Firefox’s success has largely been due to a perceived lack of security and performance with Microsoft’s bundled product. Consumers are fickle enough to choose between competing products.

Indeed, there is good reason to suggest that the death of Netscape Navigator in the late 1990s was not due to predatory bundling by its powerful competitor, but to consumer disappointment with the software itself. Navigator had undergone a complete rewrite, and was buggy and bloated. When consumers were looking to upgrade their browser for the new features and web specifications becoming available, Internet Explorer was simply the better choice.

In the highly competitive computer industry, technological change makes pronouncements of such-and-such company as ‘anti-competitive’ laughable. IBM is no longer the terrifying anti-competitive monster that prosecutors described it as in the 1970s — in part because of Microsoft’s aggressive marketing of MS-DOS in the first years of the 1980s, and then the Windows 3.1x family of operating systems.

The 2004 competition actions in the European Union against Microsoft were encouraged by organisations such as Real Networks, which publishes a competing product to Windows Media Player. Again, Microsoft’s rivals allege that the competitiveness of their product is harmed by the product bundled with Windows. The EU regulators forced Microsoft to provide European consumers the option of buying XP ‘N’ — without the bundled Media Player. Microsoft wanted to call the package ‘Reduced Media Edition’ until the EU objected.

But again, reality intervenes. While Real Networks may have been disappointed with the popularity of their product, many of Microsoft’s rivals should not be. Apple’s iTunes, for instance, has ridden the popularity of its portable music player, the iPod.

In 2006, before it has been officially released, Windows Vista is under heavy fire from its competitors, and they’re going to the European Union for help. The new operating system includes an array of new features for which, presumably, Microsoft foresees a demand. Producers of anti-virus and security software object to the new low-level enhancements to security—a feature that consumers have desperately sought for a long time. Adobe, which invented the PDF document format, objects to the new document format XPS — a more dynamic format than the now standard PDF.

The EU fined Microsoft €497 million for bundling Media Player with XP, and it has been remarkably vague about Vista’s prospects when it comes before the European regulators. While Microsoft is already obligated to produce the Europe – only Vista ‘N’, the European regulator’s role, the EU argues, is not to give a ‘green light’ before Vista is available to consumers. If Adobe and others have their way, Microsoft could be lumped with another massive fine or have its product crippled for providing new features that consumers demand.

The nineteenth-century French liberal economist Fredric Bastiat divided human activity into two categories: ‘harmonious’ and entrepreneurial, or ‘antagonistic’ and rent-seeking. Unfortunately, as the vibrant, innovative technology industry becomes bogged down in competition litigation, too many are showing themselves to be the latter.

Containers and their enemies

A review of The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger by Marc Levinson (Princeton University Press, 2006. 392 pages)

Strictly, the father of the modern international shipping container, Malcolm Mclean, didn’t invent his own invention. It wasn’t even new.

When the shipping container was first deployed on McLean’s converted World War II tanker Ideal X in 1956, experiments with its ancestors had been being conducted for nearly a century. British and French railway operators tried using custom-made wooden boxes for household furniture shipment in the second half of the nineteenth century. After the First World War, entrepreneurs experimented with interchangeable truck bodies and steel containers for railroads.

The problem was simple: none of these efforts ever demonstrated any cost savings to transport. Malcolm Mclean’s innovation was not the box itself, but the systematised, standardised, international network of shipping containers, freighting massive quantities of goods speedily and efficiently across the world.

Marc Levinson’s The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger illustrates clearly how great risks are taken by entrepreneurs when entrenched interests and government regulators conspire against them. Even after these opponents are dispatched, technological and economic uncertainty plague the entrepreneur just as much as the vaunted ‘first-mover advantage’ blesses him, perhaps more.

The story of the shipping container is the story of the opponents of innovation.

Unions

Before the shipping container, the job of a longshoreman was brutally physical. Longshoreman could utilise winches to load and unload ships, but, as the unsorted cargo was dumped on the dock after its trip by railway or truck, and squeezed into every irregular space in the ship’s hold, human force was resorted to more often than not. Levinson quotes a former pier supervisor: ‘Because they had to bend over to do that, you’d see these fellows going home at the end of the day kind of like orangutans. I mean, they were just kind of all bent, and they’d eventually straighten up the next day’.

Not only this, but as pallets were packed and unpacked to squeeze into irregularly shaped cargo holds (the shipping fleet used after the war was mostly converted military surplus, not custom-made cargo vessels) damage — and ‘damage’ — were common. Longshoremen would pride themselves on such skills as the ability to tap whiskey form a sealed cask supposedly stored deep in the ship’s hold.

Automation, in its full-blooded shipping container form, came as a shock to the highly parochial and defensive maritime unions. Containerships could be loaded and unloaded in one-sixth of the time it took for traditional cargo ships. Sealed containers dramatically reduced theft. More disturbingly, containerisation required one-third of the labour. When the first shipping line asked to hire a smaller work gang in New York, the unions announced boycotts. The industry was to become bogged down in union disputes for ten years after the Ideal X first sailed.

Levinson details carefully the internecine rivalries of competing unions and the negotiations needed to relax the rigid contracts which had dominated maritime work. The radical changes that were re-negotiated slowly modernised the docks, but also spurred a massive boost in productivity for non-containerised cargo loading, as employers were suddenly given the capacity to change previously entrenched work practices on the docks. The casual conditions and practices were, in the ensuing decades, converted into highly paid, highly structured and highly secure jobs. But one unionist lamented: ‘the fun is gone’.

Regulators

Unions desperate to preserve existing work practices present a huge challenge for entrepreneurial innovation, but, as Mclean and other adopters of the shipping container discovered, the challenge posed by regulators can be even larger. By the mid-twentieth century, the United States’ Interstate Commerce Commission (ICC) had developed a firm regulatory structure which was being undermined not only by the nascent shipping container, but also by the increasing dominance of trucking.

The ICC, which regulated the rates and services of both trains and interstate trucks, struggled to adjust its regulations to the new dynamics of trucking and shipping. Rates were previously set depending on the commodity being carried, but in an era of homogenous containers distinguishable only by weight, this rate-setting principle began to make less and less sense.

But the ICC’s primary error was not practical but philosophical. The ICC’s brief, which was reiterated in the Transportation Act of 1958, was to block the chimeras of unfair or destructive competition. In the highly dynamic transport industry of the 1950s and 1960s, this instruction encouraged the ICC to protect existing operators from innovative practices such as the shipping container, and ‘piggy-backing’ — that is, placing a truck’s body on rail for the long legs of its journey.

A regulator briefed to defend an industry against ‘destructive’ competition — a phrase which is antithetical to an entrepreneurial economy — is not uncommon. It is just as antithetical to economic growth. Regulatory frameworks which are built around specific technologies or business models have no reason to promote innovation within that industry, and firms which benefit from the confines of those frameworks have every reason to prevent or resist change.

After a lengthy series of court decisions and regulatory pronouncements, the full influence of containerisation, which both ripped up the transport industry and pumped up the world economy, is obvious.

Levinson spends time trying to tease out the quantitative benefits of the box — as he notes, ‘a near impossible task’ — but he quotes Edward L. Gleaser and Janet E. Kohlhase who argue that, ‘it is better [now] to argue that moving goods is essentially costless than to assume that moving goods is an important component of the production process’.

Levinson convincingly credits McLean’s shipping container as a major, if not definitive, cause of the boom in world trade since the 1960s.

Ports

There was a boom for the international economy, but like so many economic revolutions, the benefits were diffuse. There were definite losers, particularly if you were a mayor in a town traditionally based around a port. The new breed of ship quickly outgrew the available space in ports designed before the container. Furthermore, older ports tended to have entrenched unions with just as entrenched antagonism towards change.

But some of the largest problems for older ports stemmed from the rapid change in business models caused by dramatically cheaper ocean transport. Immediately, the cost advantages of a factory location in New York, right next to the port, were eliminated. Between 1967 and 1976, New York lost a quarter of its factories and one-third of its manufacturing jobs.

In 2006, with ‘essentially costless’ transportation, it is possible to distribute the production of goods across the globe. The sudden rise of ports at Busan in Korea and La Havre in France and new ports at Felixstowe in England and Tanjung Pelepas in Malaysia, capable of processing super-sized container ships is just as much a factor in the deindustrialisation of the Western world as is industrial relations.

Once the impact of containerisation was clear, traditional port cities unleashed vast sums of money during the 1970s and 1980s to upgrade their infrastructure. In some cases they were successful. Seattle’s docks saw 10 per cent less cargo in 1960 than 1950, but had managed to resuscitate their traffic by the 1970s. Others, such as New York, tried and failed to do so.

But by the 1990s, not even the largesse of government was sufficient to make or break ports. Seven of the top 20 ports in 2003 had seen little or no traffic in 1990. Tanjung Pelepas, which now handles three and a half million 20-foot containers a year, did not exist in 1990. These new ports are mostly privately financed and managed — as Levinson describes them, ‘investments in globalisation’. As container ships inevitably grow, new ports will be built to service them.

In 2006, the revolution in international transport is obvious, but not complete. All innovation is incremental; steady computerisation and automation is cutting down the time spent at port and streamlining the processes. Reduced paper handling in Australian ports, and the reduction in manpower and human error it has brought, has already brought greater productivity for shipping lines. The upheaval brought about by containerisation has cleared many of the entrenched obstacles to change.

For the dock culture in the old, traditional, highly-unionised ports, the fun may be gone, but the benefits to all consumers brought about by costless shipping are clear.

Lucky Australia Hasn’t Avoided Mistakes

Australia has been relatively lucky. The ‘tyranny of distance’ has isolated us from the disastrous wars of Old Europe. Our huge land can support many times our population, and throughout history its resources have supplied our economy with boom after boom.

As a consequence, Australia entered the 20th century with the highest living standards in the world.

But by the 1970s, we couldn’t even crack the top dozen.

Australians are an entrepreneurial, creative and diverse people. The blame for this fall can be placed solely at the feet of government decision makers, propelled by ideology, the lust for power, or unfortunate ignorance of the consequences of their actions.

Some of these mistakes are obvious. In 1935, the Queensland Government introduced cane toads into Australia to combat pests in sugar cane crops without full understanding of the consequences. Cane toads are now considered one of Australia’s worst environmental disasters, breeding freely and poisoning native animals.

Many of the most harmful policies were the earliest ones, and have been the hardest to repeal.

The Immigration Restriction Act was the first bill passed in the new Federal Parliament and inaugurated the national White Australia Policy. This terrible policy gave bigotry the legislative blessing it was to enjoy for more than half a century.

Another early policy established the doctrine of wage fixing in Australia, rigidly setting workers’ salaries to enable a man with an average sized family to live in ‘frugal comfort’. Sounds like a good thing, unless you are one of the workers who, through no fault of your own, are suddenly priced out of the market and condemned to unemployment.

Centralised wage fixing has been devastating for low-skilled and migrant workers, and it is only recently that it has been substantially pruned back. Even now, many politicians still don’t understand that government can’t set wages, only the market can.

The Australian media also provides an example of disastrous government policy. If it wasn’t for political control over the airwaves, which the government also gained quickly after federation, perhaps media policy could’ve avoided a century-long comedy of errors.

Over the last century, with their power over the broadcast media governments, have held back the introduction of AM radio, television, FM radio, subscription TV and now digital television. Never mind the consumers, media policy since the signing of the 1905 Wireless Telegraphy Act has been designed to protect the established media from so called ‘harmful competition’.

If a service like YouTube required government-managed airwaves to operate, rather than the free-for-all internet, there is no chance it would have been given a license to operate in Australia.

Patrick White’s Nobel Prize in 1972 was a notable success for Australian literature, and the government speedily inaugurated the Australian Council for the Arts. But by isolating artists from their commercial audience, they may have condemned much of Australian art to mediocrity.

How would Charles Dickens’s have novels read if he had not been exposed to the demands of a fickle public?

The steady production of publicly funded Australian films, so many unwatched, is not a failure of Australian taste, but of government policy.

When we failed to win a single gold at the Montreal Olympics, the government’s response was, unfortunately, predictable. The Australian Institute of Sport, modelled on similar institutions behind the Iron Curtain, spends an enormous sum of taxpayer’s money on elite athletes, despite the huge commercial power of sport in this country.

After both success – Patrick White’s Nobel – and failure – the Montreal Olympics – the government has responded by creating vast new bureaucracies. This steadily increasing burden upon the economic and cultural life of Australia is not consequence free.

How has all this occurred?

Perhaps the worst mistake was Canberra itself. The invention of Canberra moved the bureaucracies and regulators away from the economic and cultural powerhouses of the nation, and dropped them into a new, meticulously planned ‘garden city’ in the middle of nowhere.

As the historian Keith Hancock wrote, ‘Canberra is a document of Australian immaturity’.

Isolated from the people they were supposed to be governing, it is little wonder that these vast Canberra bureaucracies increased their own size and influence. Many of the mistakes made in Australian history are a consequence of this. A lesson may be learnt for new and developing countries – never move your government away from your citizens.

Thankfully, steady reform since the 1970s has partly reversed some of the worst mistakes. But if we’d had a strong, liberal, free-trade party in Australia that embraced individualism and economic and social freedom throughout the course the twentieth century, perhaps we could have avoided some of these disastrous policies.

For a long time it has been common to talk about market failures. Let’s start talking about the failures of government.

No Net Gain In Beattie Plan

In the fall-out of Telstra abandoning its plans for a national fibre-optic network, Premier Peter Beattie has announced his own plans for super-fast broadband piped directly into Brisbane homes.

But there is much less to this proposal than he makes out.

Beattie’s plan to allow potential investors use of public assets to string fibre-optic cable offers those investors nothing they don’t already have. Infrastructure builders can already use these assets. Beattie expects private companies to foot the bill, but why haven’t they done so already without the Premier’s invitation?

Australia does not rate high on international broadband rankings. This is really the fault of the Federal Government and Beattie’s frustration with the situation is understandable.

Telstra’s fibre-optic plans were cancelled because of federal regulations. Our overzealous competition regulator, the ACCC, insisted that if Telstra built the $4 billion network, then it would be compelled to offer access to that network to its competitors.

The regulator would choose the price and conditions. Telstra’s competitors would bear none of the risk — and in the highly competitive and dynamic telecommunications industry, that risk is extremely high. If the network was successful, Telstra would see its rivals competing with it, using its own freshly built network. If it were unsuccessful, perhaps because newer technologies passed it by, Telstra would have wasted its money.

It is much easier to piggyback off another company’s network at prices set by a regulator than to have to invest in infrastructure yourself. This regulatory problem has not yet been solved.

Beattie’s announcement does nothing to change the underlying disincentives to broadband infrastructure investment. He offers, as a trade for the $550 million investment that he expects the private sector to fork out, access to public assets such as powerlines and sewer pipes. But such supply channels are already available. They do not need the Premier’s agreement for their use.

Nor do commercial businesses need a politician to point out such investment opportunities if indeed they are profitable. If a company declines to build a service, it is a fair bet that either it is uneconomical to do so or an external power, like a competition regulator, has made it uneconomical.

If the business case for investing in the kind of network Beattie would prefer is so obvious, then in all likelihood the network would have already been built.

The Queensland Government is not the only government prioritising access to broadband as an urgent policy matter. Since the Telstra decision, state and federal governments have been working feverishly to develop grand broadband “plans”. Federal Communications Minister Helen Coonan expects to come out with a national broadband strategy next month. The West Australian Government promises to come up with a similar plan to Queensland’s shortly.

High-speed broadband brings about enormous economic and social benefits, but the Queensland Government should be wary of trying to chaperone telecommunications investment into the state. Governments are remarkably ineffective at predicting future technologies and consumer demand. When they try, politics always intervenes.

Earlier this year, the San Francisco council teamed with Google and internet service provider Earthlink to provide blanket wireless broadband coverage across the city, supported by advertising. Inevitably, the negotiations over this have been bogged down in politics and no wireless network has emerged. The two companies have found that running between town hall meetings trying to keep up with political, rather than commercial, demands is more work than was expected.

The San Francisco network, if it ever gets off the ground, will be a snails-pace 300kbps — a speed that the Australian Labor Party decries as “fraudband”.

An earlier citywide wireless broadband network in Orlando, Florida, was shut down in January 2005 when the city realised that only 27 people a day were using the service at a cost to taxpayers of $US1800 a month.

If Beattie’s project goes sour, taxpayers will have to foot the bill or be saddled with a sub-par network. It is not hard to imagine the Government chipping in a few million here or there to seduce investors, as various governments have done in pilot programs around the country. But doing so would invite failure, as countless taxpayer-funded and government-initiated broadband projects around the world have shown. Most end up underutilised or rely on tax money to survive.

The solution to broadband backwardness is not press releases announcing grand “plans”, but comprehensive regulatory reform. If the State Government wants Brisbane to have access to new high-speed networks, they would be better to work with the Federal Government to lower the obstacles to investment nationally.

Only removing the disincentives to investment stemming from the ACCC will allow Australian consumers to get the broadband they deserve.

Media-Rule Horse Has Bolted

Communications Minister Helen Coonan’s attempts at policy reform have so far been conspicuous failures. Telstra’s fibre to the node network was scuttled by her requirement that Telstra build it and then give control over it to the regulator. And now what was already a timid “media reform” package has been watered down almost to the level of pointlessness.

The coalition’s proposed changes to media laws were obsolete on the day they were released. They were an attempt to deal policy into the frenzied technological change taking place in the unregulated parts of the media and telecommunications sector.

In March, the day the government released its media discussion paper, Apple released for download and purchase on its iTunes service High School Musical. The movie has been a huge success with the “tween” market (children between the ages of eight and 12). It cannot be seen at the cinemas, it’s available only on DVD and via the internet. Movie distributors had learnt the lesson from music distributors’ failure half a decade ago – consumers are migrating their entertainment onto the internet, and are happy to pay for the privilege.

This week we saw the final watering down of the media package and the sale of YouTube to Google – $US1.65 billion ($2.2 billion) for 67 employees and a website.

None of Apple, YouTube, Google or Microsoft made submissions or appeared at the Senate inquiry into the government’s media legislation. Telstra gave evidence only about the mobile television licence. These companies didn’t need to get involved in debates about old media. No reform package can stop the migration of consumers from traditional media into more exciting and more flexible formats.

Now, with the release of Telstra’s Next G network, the transition from old to new media is firmly under way. Certainly, the wireless network is slower than the scuttled fibre to the node network, but it doesn’t take much to happily stream a YouTube video onto a mobile phone. Next G speeds are already faster than those that many consumers have piped into their home, and are set to increase in speed tenfold.

When Prime Minister John Howard says media reform is only a second-order priority, he is more prescient than he realises. The creative storms of change will blow no matter what is in the Broadcasting Services Act.

The Holy Grail of modern communications has long been obvious: high-speed internet. If this is available on mobile devices, consumers can watch video from any service, read their email from any provider and browse any website with the same freedom they have in front of their computers at home. But Australia has a regulatory environment dramatically at odds with technological and cultural developments here and overseas.

What was the debate about? The “diversity” cry rings hollow – on the internet, an infinite array of content and opinion is available to anybody who cares to look. Online media services, still in their infancy, can deliver more diverse content than can be consumed in a lifetime.

But political debate about media ownership always ends up with politicians pontificating about the relative merits of media content. Genuine deregulation means that this decision would be made entirely by consumers. In a deregulated market, what people want on television or radio, people get.

By forcing local radio stations to broadcast a minimum of local content, the politicians say they know better than consumers what should be broadcast. It is an attempt to force consumers to pay for politicians’ public visibility – elsewhere this would be called corruption. By restricting the ability for stations to respond to consumer demand, the reform package condemns many independent broadcasters to failure.

Local media produces niche products that can be supplied by other vehicles. Whether product is supplied on the same radio transmitter as 50 years ago, or a podcast inaugurated 50 days ago, should be of no concern to legislators.

Outside the realm of government regulation, we have innovative, dynamic companies responsive to market demand. Within its reach, we have an industry being variously protected and attacked by flawed public policy and political manoeuvring. Unsurprisingly, audiences for unregulated new media are growing faster.

Traditional media still have a role. But when the government imposes new regulations and fails to strip away the old ones, that role is looking more and more perilous.

Being creative has never been “un-Australian”

Holden’s blimp over the MCG during the AFL Grand Final might have upset Toyota, the AFL’s official sponsor, but it was hardly “un-Australian” marketing.

Holden saw a captive audience of thousands at the MCG, and took the opportunity to market to them. Since when has it been “un-Australian” to be creative? Holden was simply using public airspace to advertise its product and it broke no laws in doing so.

Cricket Australia are thinking about asking the government for legislation to stop the same thing happening during the Ashes. But is it the role of government to protect advertisers from other advertisers?

Even less is it the role of government to hand over an asset — in this case the rights to airspace — to an advertiser for free.

The solution lies in property rights. If advertisers wanted to stop competitors from flying giant blimps over their events they should pay to buy the airspace.

As it stands, the air has been designated by the government as a public asset, rather than property, and Holden has every right to fly through it. In a truly free-market economy, organisations and individuals would be able to purchase or lease the rights to airspace and utilise it in whatever way they chose.

There already exists a wide range of legislation designed to protect against many forms of ambush marking. The Trade Practices Act protects against ambushing companies engaging in deceptive or misleading conduct, or falsely representing sponsorship deals. Holden did none of these things.

“Ambush marketing” is the market in action. And it’s kind of funny.

In search of Smith’s legacy

Review of Adam Smith and the pursuit of perfect liberty, by James Buchan (Profile Books, 2006, 288 pages)

If an economic philosopher is to be judged by his sound bites, then Adam Smith’s best lines come not from his great masterpieces, but from a paper delivered in 1755, as reported by a friend:

Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes and a tolerable administration of justice.

All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.

Twenty years later, his masterwork An Inquiry into the Nature and Causes of the Wealth of Nations would contain nothing so radical. James Buchan’s short intellectual biography of Adam Smith pivots around the publication of his Wealth of Nations and the earlier The Theory of Moral Sentiments. Spartanly but engagingly written, Buchan depicts an Adam Smith cursed by ill-health for his whole life. The racy novelist Marie-Jeanne Riccoboni, who befriended him while he stayed in France, described him as ‘ugly as a devil’ – she hated his voice and found him terribly absent-minded, but loved his sentimental philosophy.

Buchan describes in his introduction how both sides of politics have tried to claim themselves as the heirs of Adam Smith – long adored by the free-market right, reform-minded Social Democrats now try to co-opt his legacy. Buchan chastises both Alan Greenspan and Gordon Brown for inappropriately calling upon Smith’s ghost, but it would be interesting to see where the biographer ultimately stands on this.

Certainly Smith was not a dogmatic libertarian by modern standards. He saw a role for the State in education, if under a peculiar justification. The division of labour, he worried, would make the poor into specialised idiots, men who were ‘mutilated and deformed’. Public education would help alleviate their intellectual isolation, and lower the chances that their minds could be corrupted by the baser elements of political thought. He had a remarkably unenlightened view of women, but subsequent feminist authors made much of his theories by applying them more equitably.

Buchan rightly makes note of the misuse of what has wrongly become Smith’s signature term ‘the invisible hand’. Indeed, the ‘invisible hand’ was rarely used in Smith’s writings, only once in each of the Wealth of Nations and The Theory. An out-of-context quotation from the Wealth of Nations has imparted upon it the meaning it has for modern commentators: an economic actor is ‘led by an invisible hand to promote an end which was no part of his intention.’ Smith, in this case, is talking about merchants who choose to store their wealth at home rather than overseas for security purposes, and therefore raise the aggregate wealth of their home nation.

However misquoted or misunderstood, the ‘invisible hand’ has since become the universal metaphor for the workings of a free market. Buchan notes that while Adam Smith was not a particularly religious man, his metaphor helped illuminate his message to his students, most of whom were training for religious careers. The Theory is peppered with such references: Smith refers to the Great Superintendent, the Great Conductor, Benevolent Nature and the Superintendent of the Universe.

But, co-opted by economics teachers as a metaphor for Hayekian spontaneous order, its use just about gives the game away. If all that is required to shift resources efficiently throughout an economy is an omniscient designing mind, could not a sufficiently enlightened public servant, equipped with the best technology and intellectual expertise, do well enough to make it worth trying? But it is the process of voluntary exchange that creates the order of a market, and without perfect omniscience, no planner could replicate its results.

While the metaphor holds, it also leads to unfortunate hubris on the part of planners who presume to replicate the invisible hand with their visible fist.

A short postscript he wrote for his friend David Hume’s autobiography, who had attacked the religious sensitivities of establishment England at the time, caused Smith much greater problems than the Wealth of Nations, which had attacked the entire British commercial system. Buchan’s brief overview of Smith’s life gives us an engaging account of this man whose greatest work is now gathering the controversy it deserves.

Opening statement to Commonwealth Standing Committee on Environment, Communications, Information Technology and the Arts inquiry into the Broadcasting Services Amendment (Media Ownership) Bill 2006

As well as being a research fellow with the Institute of Public Affairs, I am the editor of our magazine, the IPA Review. The Institute of Public Affairs is a public policy think tank based in Melbourne. It was founded in 1943. We believe in small government, private enterprise, the rule of law, representative democracy. It is our position that any media reform should be clearly and unambiguously directed towards liberalisation and deregulation. We say this because, in cases where there are many potential or actual suppliers of goods and services—which is clearly the case in media—markets are far more efficient providers than government bureaucracies.

Technological and commercial innovation have provided Australians with a multitude of choice in the information and entertainment content we consume, the way we receive it and display it and our capacity to store it for future consumption. Therefore, any regulatory rationale based on assumed scarcity of media content or delivery mechanisms is no longer valid.

The IPA welcomes changes to media ownership regulations. The removal of foreign ownership restrictions is long overdue. Similarly, the removal of cross-media ownership restrictions is welcome. After all, millions of Australians each day already access foreign owned media through the internet. This access does not seem to have harmed us and certainly has not reduced the output of Australian produced and managed media. However, we believe that the proposed reforms do not sufficiently tackle the problem. Given the wide variety of choice available to Australians, we feel there is no longer any convincing case to maintain media-specific competition and ownership regulations. Instead, the government could better rely on the general economy-wide merger and ownership regulations to ensure competition. The ownership of media assets is no more sensitive than the ownership of, say, railroad assets.

While we welcome the release of two new television stations, we regret the imposition of regulatory requirements on both A and B. There appears to be no justification for these restrictions. They merely represent the elite imposing its preferences on consumers, and government technocrats seeking to impose their preferences on the way technology develops. Unfortunately, these provisions illustrate clearly that the lesson has not been learned for centre of government failure in introducing new media technology. We strongly oppose the imposition of any regulation which attempts to enforce local content requirements, plans or anything else on regional or rural media services.

In conclusion, the government has been presented with an opportunity to genuinely reform this regressive regulatory framework that the Australian media has been burdened with for over a century. This reform package makes a few minor adjustments, however its practical effect is not as large as the public debate has made out. Furthermore, in many areas it represents a significant re-regulation of the sector. This does not mean that the reforms are without value. The removal of the cross-media ownership restriction, as absurd an ownership restriction as can be imagined, is welcome, as is foreign investment deregulation. Adjustments to the digital transition are long overdue. The package needs significant revision. However, the need for reform is clear and should not be abandoned. It is less bad than the status quo.

Only The Market Can Properly Reshape The Media

Robert Menzies despised television and stated privately that he hoped it would not be introduced during his government. Does Communications Minister Helen Coonan have a similar attitude towards the next radical media change?

Given the opportunity to robustly liberalise the regulatory environment that the Australian media has been subject to for over a century, the government has declined to act.

There are big entrenched media companies which have made large investment decisions based on the current framework, and the political reality is that genuine deregulation would have to be a slow and careful process. But instead of attempting to unwind our Byzantine media regulations, at whatever pace, the government’s media reforms do nothing more than add more rope.

For instance, the proposed auction of two additional swathes of spectrum should have been greeted with enthusiasm. Entrepreneurial companies which had won these new licences could have used them to deliver whatever services they perceived to be in demand.

Instead, the government has chosen to dictate to potential users the terms and conditions of their licences, terms and conditions which will not apply to existing users of broadcast spectrum. This “command and control” approach to economic management has been discredited in both theory and practise. It’s ill-suited to managing a limited and static array of services, and it’s doubly unsuited to manage the fast paced and high-risk communications and media industry.

It does, however, allow the government to claim credit, as the Communications Minister did this week, for any potential new services delivered within their strict framework. What Coonan fails to mention is the services that the government will not allow us to receive. To this end the government has invented two terms, “narrowcasting” and “datacasting”, defined not by what they can do, but what they cannot.

One of the channels to be auctioned is allowed to broadcast free-to-air, but not replicate traditional TV services. Why not?

The government is not a suitable body to predict the possibilities of and the demand for newer forms of media. Only a market unhindered by restriction is capable of doing so with any success.

Similar objections can be raised to the government’s proposal to replace one elaborate formula for media ownership restriction within a market with another elaborate formula. While touted as a grand liberalisation of ownership regulations, they are in fact, little more than minor adjustments. For advocates of genuine deregulation throughout the economy, this should be a disappointment.

Many critics of the reform proposals hinge their arguments upon the potential lessening of diversity that could be the result of consolidation within the industry.

It is absurd to argue that media diversity will decline without stringent checks on the ownership of broadcast media outlets. In no era in history has this been less true. While the internet has been justifiably praised in bringing alternative viewpoints and independent media outlets to the home, rapid technological improvements in seemingly mature industries like printing have increased in the last few decades the volume of magazines, newspapers and printed material manyfold.

Anybody who doubts that minority or niche voices will not get heard after genuine media reforms should consult the vast ethnic press, made possible by dramatically lower print production costs.

In fact, mergers between media organisations could have tangible benefits. A fully vertically integrated corporation, able to command world-wide news gathering and content production, may be able to produce a far better and diverse range of services.

The massive competitive pressure exerted upon existing media companies from the proliferating new media compels dramatic change, even in such seemingly dominant organisations as News Ltd. Rupert Murdoch’s recent acquisition of the social networking website MySpace is a case in point.

These gains are not guaranteed, however. The US market, after a rush of media consolidation in the 1990s as companies rushed to prepare for the digital era, has been beset by a series of failures and divestitures. AOL Time Warner has been shedding assets now that the financial gains expected from its highly publicised merger have not appeared. Viacom, Disney, Clear Channel, Knight-Ridder and many others have downsized or spun off companies in the last few years.

But these companies need the freedom to experiment, and fail, with new business models.

New media organisations are popular and influential, and will become more so. Governments of all stripes across the world are struggling to predict its significance. That is understandable – nobody has any inkling of how these changes will pan out.

But instead of indulging itself in public consultations and submission processes, commissioning reports and carefully releasing sections of the spectrum with highly prescriptive regulations, the government would be far better to leave the future of the Australian media up to the market.

There is no convincing reason why entrepreneurs, allowed to experiment with new technologies and business models, cannot amply deliver the services that Australian consumers demand now and into the future.

Submission to the Inquiry into the Broadcasting Services Amendment (Media Ownership) Bill 2006 and related bills

Introduction: Reform to the regulatory framework of the Australian media should be unambiguously directed towards liberalisation of the sector. It is important to place the relatively recent, and highly publicised changes in production, distribution and consumption of media made possible by communications technology in a context of long term and continuous radical media change. Technological and commercial innovation have provided Australians with a multitude of choice over the content we consume, the way we receive and display it, and our capacity to store it for future consumption. Not only this, but the cost of production has rapidly dropped for seemingly mature industries like print, which has allowed niche and specialist publications to flourish. Never before have Australians had access to so much information packaged in so many formats.

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