Friday, March 13, 2009

Implications of Post-neoclassical Economics on Telecom regulation and poilcy

[Here is an excellent conference/workshop on some of the issues of applying classical economic theory to telecom and ICT. Tim Cowen, Visiting Professor, City University School of Law also posted an excellent analysis of these issues on Gordon Cooks famous Arch-Econ list, reprinted with Tim’s permission –BSA]

The New Economics of ICT:
Implications of Post-neoclassical Economics for the Information & Communications Technology Sectors
March 20, 2009
Columbia Business School
Uris Hall, 116th & Broadway
Room 307
New York, NY

Neoclassical economics has long been a tool and model, albeit distorted on occasions, for policymakers in the development of legislative and regulatory rules. In particular it has been applied in the information & communications technology (ICT) sectors with such policies as the long-run incremental costs rules, appeals to economies of scale and scope or, inappropriately, reliance on two or three firms to emulate perfect competition’s results. However, economics has moved well beyond these simple, static concepts. Experimental, behavioral, developmental, institutional, neuro-, complexity and network economics are now part of the economists’ tool kit. Although not yet well integrated, they show the flaws in neoclassical analysis. Similar advances have been made in financial theory and practice and the disciplines are, finally, becoming linked.

While the “new economics” (and finance) has permeated many sectors, it has not yet had a significant impact on the ICT sectors. Reliance on the old paradigm are maintained. For example, Ofcom in the United Kingdom failed to adopt the real options methodology, or any other dynamic method in determining access pricing.
The objective of this Symposium is to understand the implications of the New economics & financial models for the ICT sector. What do they mean for policymakers, investors, and industry leaders?

[From a posting on Gordon Cook’s Arch-econ list by Tim Cowen, Visiting Professor, City University School of Law-BSA]

A few thoughts about the direction that policy is going in the EU and how that is relevant to this list below.

In the EU there are an increasing number of references to "behavioral economics" being made in speeches by policy makers and indeed EU Commissioners.e.g; - 28k - Cached - Similar pages -

For example I attended a presentation by Commissioner Kuneva at Kings College in London University last month where she was speaking about her approach to competition policy; she explicitly referred to behavioral economics in her review of the importance of the market as part of the mechanism that drives the EU. Interestingly she also made a point that is critical for all to understand: the market mechanism is the cornerstone of democracy and given her personal history of growing up in Eastern Europe, she felt strongly that the market is vital to ensure personal freedom, particularly from the perils of state control.

The basis of US anti trust came from similar thinking: anti trust was created to bust the trusts that developed as a consequence of free market capitalism in the late 1800s and strip power from the robber barons. The trusts were seen at the time as a threat to democracy as too much power was concentrated in too small a number of hands. The market wasn't working to provide opportunity innovation, growth, and personal freedom. It had become controlled and there was a threat to democracy.

I have provided the link to the behavioral economic conference held by the Commission on the 28th November last year above. In the comments that Commissioner Kuneva made, she drew out the thought that consumers do not always act in their best economic self interest. This is a challenge to much of classical economic thinking or at least to those people who read Adam Smith's Wealth of Nations without reading the Theory of Moral Sentimens.

Consumers have been shown by behavioralists to value many different things and their value systems drive their choices. As the Commissioner pointed out, this is important in formulating the extent and degree and the way in which regulation should be implemented. She drew out 4 different issues: Default Bias (in which when making decisions we default to a previously successful behavior or rule), Framing, (weighing losses above potential gains leading to risk aversion),Present Bias (or one in the hand is worth two in the bush),and Choice Overload.

In particular she pointed out that these issues are critical for the regulation of industries such as telecommunications and energy.

The thinking and references are useful in determining predictably irrational decisions. They inform policy makers when thinking about entrenched monopoly . For example understanding of the default bias idea is important when thinking about the extent of entrenched monopoly. It is also a bit more accessible than talking about switching costs or loosely covering different motivations with the redefinition of common phrases and words.

(I have always had a problem with talking about people's motivations in terms of 'utility' and other such expressions that are used to redefine commonly used language to mean the exact opposite of normal usage. How can happiness be encompassed by the word utility? to say that a social worker, often motivated by caring and feeling for common humanity is motivated by personal utility indicates more about the cynical mentality of the analyst/economist that has to see everything in terms of personal benefit, than the reality of people's motivations. We can define a pot as a pan handle but its still a pot to most people ).

Social good and pubic goods are at the moment being redefined and the role of the market is under intense scrutiny. I am not one that says Greenspan got it all wrong, but I don't think that Keynes was all wrong either. These issues are central to the regulation of telecommunications as those policy makers that are concerned with outcomes need to understand all aspects of market failure, not just the ones we have seen before.