I am greatly honored to be here today. I would like to thank the sponsors of this conference, the Japan Society and Consect. It is also a great privilege to be introduced by Professor Eli Noam who, like me, is both an economist and a former regulator.

I would also like to thank James Miller, who worked in my office at the FCC until my recent departure. Mr. Miller has spent many years in Japan, including working for an Internet company. He has helped prepare me for this conference, and he knows more about the Internet in Japan than anyone else I know.

My brief comments today are on the proper role of government, both here and perhaps in Japan, in handling issues related to the Internet and wireless technologies.

We have heard today many wonderful presentations by private parties well informed of new technologies of the Internet, wireless services, and other services, particularly those in Japan. The exact future of these services in uncertain. The speakers believe they know what technology is, or will be, or ought to be. In their private roles, they have been kind enough to share some of that information with us.

Businesses have a substantial interest in new technologies. Through new, more useful, and lower cost products and services, consumers as well as businesses benefit from the private sector’s thorough understanding of new technology frontiers. By understanding technology better than its competitors, a firm believes it has an advantage in the market.

We have also heard from several private sector experts on demand for new technologies related to the Internet and wireless services, particularly in Japan. In order better to target and to market products and services, private firms have a substantial interest in understanding the details of the frontiers of consumer demand. As with the supply of new technologies, businesses have different beliefs and hunches about consumer demand. The exact contours of future demand are unknown.

Business interest in consumer demand is neither academic nor passive; based on their understanding of consumer demand, businesses make decisions to better serve—and profit from—that demand. The more businesses understand consumer demand, the more consumers benefit. Most businesses believe that they understand consumer demand as well as their competitors, if not better.

An unmistakable feature of the presentations at this conference, or at conference, is that businesses have different perceptions of the future of technology and demand for that technology. The future is uncertain, and different businesses have different hunches about where it will go. For new technologies such as the Internet and wireless services, the future is particularly uncertain; hopes about the potential upside and the likelihood of success are particularly sanguine. Businesses develop plans based on their hunches about the future.

Some businesses will make the wrong plans and fail.

Others will survive.

And a very few will do substantially better than the others.

The beauty of an unknown future is that, today, every one thinks they will fall in this last category of the unusually successful. Disappointment is ultimately the norm rather than the exception, but disappointment is largely delayed while dreams persist.

How do businesses implement their plans for wireless and the Internet in an uncertain world? They do this through the use of property, the assets they have to deploy to implement a plan. They also use contracts through which they exchange for other assets, make investments, and bind themselves—and others—for performance of future services. They also rely on liability rules to protect them when other parties fail to perform promised services, or when other parties unlawfully interfere with them.

Because different businesses have different views of both the present and future, and of how well they can serve those future markets, businesses have different plans. How well business plans for wireless services and the Internet will work is never known in advance, but all businesses rely on property, contracts, and liability rules for their business plans to work. Certainty reinforces these instruments; ambiguity, uncertainty, and the possibility of future changes erode them. The more certain these instruments are, the more businesses can rely on them for the implementation of plans. Without these instruments, businesses have little basis to implement business plans, and they consequently would have little reason even to dream about what future technologies and demand might look like.

Even without any government involvement, markets for new technologies such as the Internet and wireless services are risky places. Business success is far from guaranteed. And yet many people, both inside and outside of the business community, look to government to help cultivate new businesses and new technologies. They look to government to lessen the uncertainties that are inherent in new technologies, and in consumer reactions to those technologies. What is the government to do?

While neither a technologist nor an experienced marketer of consumer services, I am nonetheless an economist. And an all too experienced observer of government institutions and behavior.

For practically all purposes, including the Internet and wireless services, consumers and businesses are better off left to their own devices, without the heavy hand of government interference. This is certainly the case for allocative decisions and price signals. Yet government plays an important role in preserving faith and reliance on certain market institutions: property rights, contracts, and liability rules. Without government codification and enforcement of these rules, markets would advance little beyond brute force. Consequently, I am a firm believer that government has an important role to play in markets, particularly markets for new technologies, including the Internet and wireless services. And as such, government has an important role in the welfare of Nations.

Governments are powerful institutions. When governmental power is used lawfully and wisely, within the bounds of fundamental prudence, it can be an agent for great good in society, particularly with new technologies. But I am a skeptic that the government can and will always act wisely within the bounds of fundamental prudence, or that it will even necessarily act in a lawful manner.

The government may legitimately seek to understand nuanced differences in new technologies, such as wireless and the Internet, the better to clarify property rights, contract rights, and liability rules. But these clarifications should merely be to reinforce the underlying rights and the workings of the market. Such clarifications rarely depend on costs, much less merely current costs. The clarifications should not be for the express purpose of benefiting one party or another, or to increase or decrease the availability of one or more products.

The government may legitimately seek to understand consumer demand for new technologies the better to clarify property rights, contract rights, and liability rules. But these clarifications should merely be to reinforce the underlying rights and the workings of the market. Such clarifications rarely depend on the current distribution of demand. The clarifications should not be for the express purpose of benefiting one party or another, or to increase or decrease the demand of one or more products.

The improper role of government regulation for wireless services and the Internet

The uncertainty surrounding future markets for wireless services and the Internet is instructive of some of the improper roles of government regulation. At least three come to mind: (1) restrict or preordain technological outcomes; (2) restrict or preordain demand outcomes; and (3) limit or create uncertainty about property rights, contract rights, and liability rules.

Until last week I worked for the federal government. Other than the technologies that it uses for its own internal purposes, such as defense, the government is not an expert on technology. I am not personally a technologist. I have nothing to add to the description of the new technologies—and the uncertainty surrounding them--that have been highlighted in this conference. Nor frankly would many people in government. Different businesses have different views of the future of technology, and, doubtlessly, many government employees have different views as well. There is no single governmental view of future technology.

The private sector does not have a collective, uniform view of future markets. Businesses make different decisions based on their views of unknown and uncertain future technologies. Some of those views will prove to be wrong; others less so. Today, it is impossible to tell which views fit in which category.

Similarly, government does not have a collective uniform. Nonetheless, government is often called upon to make decisions that, knowingly or not, affect future technologies. How are these decisions made, particularly without a collective governmental view? Do individuals in government make different governmental decisions based on their individual views of an uncertain future? In a democracy, the role of government cannot be to allow individual employees to pursue personal views or hunches. It must rather be to follow the law. Unless the law requires a specific technological outcome, for what purpose can government possibly seek a specific technology?

The proper role of government cannot possibly be to reduce the uncertainty of the direction and outcome of technological progress. The government should be largely indifferent about exactly where the technology frontier advances. Some businesses will succeed, and others will fail, if technology of a specific form evolves; slight differences in technological outcomes will favor a different set of companies. The foundations of government do not rest on a specific technological outcome, while the foundations of individual businesses do. For the government to seek by fiat a specific technological outcome is nothing short of industrial policy.

Government often seeks to collect and to analyze substantial information with respect to the supply of new technology, its costs, and its availability. Such is the case with both wireless services and the Internet. Yet such technological information is collected and analyzed in the private sector at great expense. Why must the pubic sector replicate what the private sector does on its own? There are legitimate governmental interest in independent information and analysis on new technologies for decisions in which a private party generating information may have an interest. But often the government collects technological information for decisions in which private data collectors have no direct interest, or for no purpose at all. The various putative purposes for this governmental understanding often betray an underlying purpose of favoring one business or industry over another, but not generally benefiting market expansion, innovation, or consumers.

What tools might a government agency employ to implement any decision based on information about private sector technologies and technology frontiers? The government cannot profit from their innovation, sale, or dissemination – that is the role of the private sector. The instruments the government can employ with respect to technologies are usually limited to interfering with them, often distorting the outcomes that would obtain to the benefit of consumers.

I am not an expert in consumer demand for new services. Few people, if anyone, within government can claim such expertise. Other than in the area of antitrust, the government is rarely an expert in analyzing the demand for goods and services, either new nor old.

Future demand for new services, such as the Internet and wireless technologies, are uncertain. The uncertainty surrounding demand for new services mirrors the uncertainty around new technologies. Different businesses have different views of the demand for new services; individuals within government, to the extent they have expert views, would likely differ as well.

Businesses make different decisions based on their different views of future consumer demand. Some will succeed while others will fail. There is no collective, private sector view of future consumer demand, nor is there a uniform governmental view. Yet governments are frequently called upon to make decisions that are influenced by perceptions of future demands. Will individuals in government make different governmental decisions based on their individual views of an uncertain future?

As with new technologies, government often seeks to collect and analyze substantial information with respect to consumer demand for services such as the Internet and new wireless services. Yet such demand information is collected and analyzed in the private sector at great expense. Why must the pubic sector replicate what the private sector does on its own? There are legitimate governmental interest in independent information and analysis of demand information for decisions in which a private party generating information may have an interest. But often the government collects demand information for decisions in which private sector data collectors have no direct interest, or for no purpose at all.

The various putative purposes for this governmental understanding often betray and underlying purpose of social policy, favoring one small group of consumers over another, but not generally favoring market expansion or innovation. Government instruments to alter demand are quite crude. Government cannot shift consumer demand frontiers, but government can shift market outcomes by giving some individual, or group of individuals, subsidies, special regulated prices, or restricted access to certain markets.

The government can do great harm to consumers and businesses alike by limiting, or creating uncertainty about, property rights, contract rights, and liability rules. If a business cannot understand the extent and the nature of the rights associated with its assets, it cannot fully and efficiently employ those resources. Similarly, if a business cannot predictably sell, lease, or exchange its assets, it cannot fully and efficiently employ those resources. Finally, if the assets of a business cannot predictably be protected from interference from a third party, a business cannot fully and efficiently employ its resources.

Government has substantial, but not enlightened, experience in heavily regulating many industries: rail, trucking, air lines, banking, insurance, electricity, and others. Government regulation of these industries has not been successful, but failure has not resulted from a shortage of talented governmental employees, or a deep understanding of economics. There were good employees and plenty of economists. The agencies understood all too well the intricate operations of the technology and consumer demand in the market. Rather, regulatory failure is attributable to government going beyond the basic fundamentals of good government: property rights, contract rights, and liability rules. Instead, government eroded these protections. Moreover, in each instance, government either sought to direct technology—industrial policy—or sought to direct consumer demand—social policy.

This past government experience with regulation of old economy businesses does not set a good precedent for regulation of the Internet and wireless technologies.

Politicians come to Washington and deliver the same messages:

"Don’t tax the Internet!"

"Don’t regulate the Internet!"

"Don’t regulate wireless!"

What government says, and what it does, are often two different matters. While political leaders claim not to tax the Internet, government agencies look to the Internet as a new source of government revenue: local sales taxes and federal telecommunications fees are but two examples. Privacy rules, federal common carrier regulations, special liability rules for indecent content, governmental restrictions on contracting for ISP access or search engines, and federal laws governing the use of the Internet in schools and libraries all await the previously "unregulated" Internet.

The same inconsistencies plague wireless services as well. Spectrum fees privacy regulations, looming common carrier regulations, and special public safety requirements all lessen incentives to develop new wireless services. Whether erosion of property rights, contracts rules, or liability rules, each of these actions limits the ability of businesses to plan, to invest, and to have any hope of meeting business plans. A government that today can impose a new unpredictable regime of regulation to limit the instruments of businesses is a government that can repeat the process tomorrow. A chilling exercise today sets a precedent that deadens any interest in innovation and technological progress tomorrow.

For businesses developing new Internet and wireless services, either here or in Japan, government should not be viewed as an ally in reducing either technological uncertainty or demand uncertainty. The uncertainty of the underlying product and service market should be confronted by business itself by outwitting competitors in better understanding the markets. Rather, businesses and consumers must look to government to fulfill its basic responsibilities: protect property rights, enforce contracts, and enforce liability rules. If these fundamentals are followed, businesses will be able to develop new technologies and services to the benefit of consumers.