The Role of Government

The current Administration has identified the right goal: Reinventing
government for the 21st Century. To accomplish that goal is another
matter, and for reasons explained in the next and final section, it is not
likely to be fully accomplished in the immediate future. This said, it is
essential that we understand what it really means to create a Third Wave
government and begin the process of transformation.

Eventually, the Third Wave will affect virtually everything government
does. The most pressing need, however, is to revamp the policies and
programs that are slowing the creation of cyberspace. Second Wave programs
for Second Wave industries–the status quo for the status quo–will do
little damage in the short run. It is the government’s efforts to apply its
Second Wave modus operandi to the fast-moving, decentralized creatures of
the Third Wave that is the real threat to progress. Indeed, if there is to
be an “industrial policy for the knowledge age,” it should focus on
removing barriers to competition and massively deregulating the
fast-growing telecommunications and computing industries.

One further point should be made at the outset: Government should be as
strong and as big as it needs to be to accomplish its central functions
effectively and efficiently. The reality is that a Third Wave government
will be vastly smaller (perhaps by 50 percent or more) than the current
one–this is an inevitable implication of the transition from the
centralized power structures of the industrial age to the dispersed,
decentralized institutions of the Third. But smaller government does not
imply weak government; nor does arguing for smaller government require
being “against” government for narrowly ideological reasons.

Indeed, the transition from the Second Wave to the Third Wave will require
a level of government activity not seen since the New Deal. Here are five
proposals to back up the point.

1. The Path to Interactive Multimedia Access

The “Jeffersonian Vision” offered by Mitch Kapor and Jerry Berman has
propelled the Electronic Frontier Foundation’s campaign for an “open
platform” telecom architecture:

“The amount of electronic material the superhighway can carry is dizzying,
compared to the relatively narrow range of broadcast TV and the limited
number of cable channels. Properly constructed and regulated, it could be
open to all who wish to speak, publish and communicate. None of the
interactive services will be possible, however, if we have an eight-lane
data superhighway rushing into every home and only a narrow footpath
coming back out. Instead of settling for a multimedia version of the same
entertainment that is increasingly dissatisfying on today’s TV, we need a
superhighway that encourages the production and distribution of a broader,
more diverse range of programming” (New York Times 11/24/93 p. A25).

The question is: What role should government play in bringing this vision
to reality? But also: Will incentives for the openly-accessible, “many to
many,” national multimedia network envisioned by EFF harm the rights of
those now constructing thousands of non-open local area networks?

These days, interactive multimedia is the daily servant only of avant-garde
firms and other elites. But the same thing could have been said about
word-processors 12 years ago, or phone-line networks six years ago. Today
we have, in effect, universal access to personal computing–which no
political coalition ever subsidized or “planned.”

And America’s networking menu is in a hyper-growth phase. Whereas the
accessing software cost $50 two years ago, today the same companies hand it
out free–to get more people on-line.

This egalitarian explosion has occurred in large measure because government
has stayed out of these markets, letting personal computing take over while
mainframes rot (almost literally) in warehouses, and allowing (no doubt
more by omission than commission) computer networks to grow, free of the
kinds of regulatory restraints that affect phones, broadcast and cable.

All of which leaves reducing barriers to entry and innovation as the only
effective near-term path to Universal Access. In fact, it can be argued
that a near-term national interactive multimedia network is impossible
unless regulators permit much greater collaboration between the cable
industry and phone companies. The latter’s huge fiber resources (nine times
as extensive as industry fiber and rising rapidly) could be joined with the
huge asset of 57 million broadband links (i.e. into homes now receiving
cable-TV service) to produce a new kind of national network–multimedia,
interactive and (as costs fall) increasingly accessible to Americans of
modest means.

That is why obstructing such collaboration–in the cause of forcing a
competition between the cable and phone industries–is socially elitist.
To the extent it prevents collaboration between the cable industry and the
phone companies, present federal policy actually thwarts the
Administration’s own goals of access and empowerment.

The other major effect of prohibiting the “manifest destiny” of cable
preserves the broadcast (or narrowband) television model. In fact, stopping
an interactive multimedia network perpetuates John Malone’s original
formula–which everybody (especially Vice-President Gore and the FCC)
claims to oppose because of the control it leaves with system owners and

The key condition for replacing Malone’s original narrowband model is true
bandwidth abundance. When the federal government prohibits the
interconnection of conduits, the model gains a new lease on life. In a
world of bandwidth scarcity, the owner of the conduit not only can but
must control access to it–thus the owner of the conduit also shapes the
content. It really doesn’t matter who the owner is. Bandwidth scarcity will
require the managers of the network to determine the video programming on

Since cable is everywhere, particularly within cities, it would allow a
closing of the gap between the knowledge-rich and knowledge-poor. Cable’s
broadband “pipes” already touch almost two-thirds of American households
(and are easily accessible to another one-fourth). The phone companies have
broadband fiber. A hybrid network–co-ax plus fiber–is the best means to
the next generation of cyberspace expansion. What if this choice is

In that case, what might be called cyberspace democracy will be confined to
the computer industry, where it will arise from the Internet over the
years, led by corporate and suburban/exurban interests. While not a
technological calamity, this might be a social perversion equivalent to
what “Japan Inc.” did to its middle and lower classes for decades: Make
them pay 50% more for the same quality vehicles that were gobbling up
export markets.

Here’s the parallel: If Washington forces the phone companies and cable
operators to develop supplementary and duplicative networks, most other
advanced industrial countries will attain cyberspace democracy–via an
interactive multimedia “open platform”–before America does, despite this
nation’s technological dominance.

Not only that, but the long-time alliance of East Coast broadcasters and
Hollywood glitterati will have a new lease on life: If their one-way video
empires win new protection, millions of Americans will be deprived of the
tools to help build a new interactive multimedia culture.

A contrived competition between phone companies and cable operators will
not deliver the two-way, multimedia and more civilized tele-society Kapor
and Berman sketch. Nor is it enough to simply “get the government out of
the way.” Real issues of antitrust must be addressed, and no sensible
framework exists today for addressing them. Creating the conditions for
universal access to interactive multimedia will require a fundamental
rethinking of government policy.

2. Promoting Dynamic Competition

Technological progress is turning the telecommunications marketplace from
one characterized by “economies of scale” and “natural monopolies” into a
prototypical competitive market. The challenge for government is to
encourage this shift–to create the circumstances under which new
competitors and new technologies will challenge the natural monopolies of
the past.

Price-and-entry regulation makes sense for natural monopolies. The tradeoff
is a straightforward one: The monopolist submits to price regulation by the
state, in return for an exclusive franchise on the market.

But what happens when it becomes economically desirable to have more than
one provider in a market? The continuation of regulation under these
circumstances stops progress in its tracks. It prevents new entrants from
introducing new technologies and new products, while depriving the
regulated monopolist of any incentive to do so on its own.

Price-and-entry regulation, in short, is the antithesis of dynamic

The alternative to regulation is antitrust. Antitrust law is designed to
prevent the acts and practices that can lead to the creation of new
monopolies, or harm consumers by forcing up prices, limiting access to
competing products or reducing service quality. Antitrust law is the means
by which America has, for over 120 years, fostered competition in markets
where many providers can and should compete.

The market for telecommunications services–telephone, cable, satellite,
wireless–is now such a market. The implication of this simple fact is also
simple, and price/entry regulation of telecommunications services–by state
and local governments as well as the Federal government–should therefore
be replaced by antitrust law as rapidly as possible.

This transition will not be simple, and it should not be instantaneous. If
antitrust is to be seriously applied to telecommunications, some
government agencies (e.g. the Justice Department’s Antitrust Division) will
need new types of expertise. And investors in regulated monopolies should
be permitted time to re-evaluate their investments given the changing
nature of the legal conditions in which these firms will operate–a luxury
not afforded the cable industry in recent years.

This said, two additional points are important. First, delaying
implementation is different from delaying enactment. The latter should be
immediate, even if the former is not. Secondly, there should be no half
steps. Moving from a regulated environment to a competitive one is–to
borrow a cliche–like changing from driving on the left side of the road to
driving on the right: You can’t do it gradually.

3. Defining and Assigning Property Rights

In 1964, libertarian icon Ayn Rand wrote:

It is the proper task of government to protect individual rights and, as
part of it, formulate the laws by which these rights are to be implemented
and adjudicated. It is the government’s responsibility to define the
application of individual rights to a given sphere of activity–to define
(i.e. to identify), not create, invent, donate, or expropriate. The
question of defining the application of property rights has arisen
frequently, in the wake of oil rights, vertical space rights, etc. In most
cases, the American government has been guided by the proper principle: It
sought to protect all the individual rights involved, not to abrogate
them. (“The Property Status of the Airwaves,” Objectivist Newsletter,
April 1964)

Defining property rights in cyberspace is perhaps the single most urgent
and important task for government information policy. Doing so will be a
complex task, and each key area–the electromagnetic spectrum,
intellectual property, cyberspace itself (including the right to
privacy)–involves unique challenges. The important points here are:

First, this is a “central” task of government. A Third Wave government will
understand the importance and urgency of this undertaking and begin
seriously to address it; to fail to do so is to perpetuate the politics
and policy of the Second Wave.

Secondly, the key principle of ownership by the people–private
ownership–should govern every deliberation. Government does not own
cyberspace, the people do.

Thirdly, clarity is essential. Ambiguous property rights are an invitation
to litigation, channeling energy into courtrooms that serve no customers
and create no wealth. From patent and copyright systems for software, to
challenges over the ownership and use of spectrum, the present system is
failing in this simple regard.

The difference between America’s historic economic success can, in case
after case, be traced to our wisdom in creating and allocating clear,
enforceable property rights. The creation and exploration of cyberspace
requires that wisdom to be recalled and reaffirmed.

4. Creating Pro-Third-Wave Tax and Accounting Rules

We need a whole set of new ways of accounting, both at the level of the
enterprise, and of the economy.

“GDP” and other popular numbers do nothing to clarify the magic and muscle
of information technology. The government has not been very good at
measuring service-sector output, and almost all institutions are incredibly
bad at measuring the productivity of information Economists are stuck with
a set of tools designed during, or as a result of, the 1930s. So they have
been measuring less and less important variables with greater and greater

At the level of the enterprise, obsolete accounting procedures cause us to
systematically overvalue physical assets (i.e. property) and undervalue
human-resource assets and intellectual assets. So, if you are an inspired
young entrepreneur looking to start a software company, or a service
company of some kind, and it is heavily information-intensive, you will
have a harder time raising capital than the guy next door who wants to put
in a set of beat-up old machines to participate in a topped-out industry.

On the tax side, the same thing is true. The tax code always reflects the
varying lobbying pressures brought to bear on government. And the existing
tax code was brought into being by traditional manufacturing enterprises
and the allied forces that arose during the assembly line’s heyday.

The computer industry correctly complains that half their product is
depreciated in six months or less–yet they can’t depreciate it for tax
purposes. The U.S. semiconductor industry faces five-year depreciation
timetables for products that have three-year lives (in contrast to Japan,
where chipmakers can write off their fabrication plants in one year).
Overall, the tax advantage remains with the long, rather than the short,
product life-cycle, even though the latter is where all design and
manufacturing are trending.

It is vital that accounting and tax policies–both those promulgated by
private-sector regulators like the Financial Accounting Standards Board
and those promulgated by the government at the IRS and elsewhere–start to
reflect the shortened capital life-cycles of the Knowledge Age, and the
increasing role of intangible capital as “wealth.”

5. Creating a Third Wave Government

Going beyond cyberspace policy per se, government must remake itself and
redefine its relationship to the society at large. No single set of policy
changes that can create a future-friendly government. But there are some
yardsticks we can apply to policy proposals. Among them:

Is it based on the factory model, i.e. on standardization, routine and
mass-production? If so, it is a Second Wave policy. Third Wave policies
encourage uniqueness.

Does it centralize control? Second Wave policies centralize power in
bureaucratic institutions; Third Wave policies work to spread power–to
empower those closest to the decision.

Does it encourage geographic concentration? Second Wave policies encourage
people to congregate physically; Third Wave policies permit people to work
at home, and to live wherever they choose.

Is it based on the idea of mass culture–of everyone watching the same
sitcoms on television–or does it permit, even encourage, diversity within
a broad framework of shared values? Third Wave policies will help transform
diversity from a threat into an array of opportunities.

A serious effort to apply these tests to every area of government
activity–from the defense and intelligence community to health care and
education–would ultimately produce a complete transformation of government
as we know it. Since that is what’s needed, let’s start applying.