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The Policy Delusion Of Allocative Efficiency In Connection With gTLD Auctions

  • To: auction-consultation@xxxxxxxxx
  • Subject: The Policy Delusion Of Allocative Efficiency In Connection With gTLD Auctions
  • From: go2ao@xxxxxxx
  • Date: Tue, 12 Aug 2008 00:20:46 -0400

The following  text is excerpted from a three-part essay
titled ”Three Steps Toward An Ecology For The Digital Commons”. Part
three of the essay  (here) discusses  from a systems perspective the present 
of the digital commons which arises from interest accommodations that might in
the end turn out to have unintended consequences. Policy accommodations that
favor this or that “interest” sometimes result in unintended consequences that
do not make practical sense from the standpoint of public choice policy making.
In other words, systems theory shows how unintended consequences from policy
options often occurs when a smaller system, in this instance ICANN which
represents the regnant political and Internet governance model, attempts as a 
matter to regulate the larger system which is the global Internet. 



Policy Delusion Of Allocative Efficiency
In Connection With gTLD Auctions

Derick Harris


Authoritative allocation in the policy-making
process in one way or another eventually reduces to “who gets what”. In “The
Economic Case for Auctions in New gTLDs, ICANN’s consultants point to
“allocative efficiency” as a policy option for “putting scarce resources into
the hands of those who value them the most”. 


The ICANN policy paper states
that “the results of auctions tend to create greater social value than
alternative allocation mechanism
s.  The
paper also states the following: “For example, suppose that one applicant for a
gTLD has the true intention and capability of serving many users, while a
second applicant has in mind a narrow application that would serve only a few
limited interests. The first applicant would generally be able to justify a
higher bid for the gTLD than the second applicant; consequently, the first
applicant would be likely to win the gTLD in an auction. 


“By contrast, in a comparative
evaluation, the second applicant might be able to win the gTLD if it were more
persuasive (or hired the more effective consultant or lobbyist); and in a
lottery, the two applicants are by definition equally likely to win. Similarly,
an auction process would tend to favor a high-quality, low-cost applicant over
a low-quality, high-cost applicant. And an applicant who intends to develop the
gTLD immediately would be able to justify a higher bid than an applicant whose
purpose is to hold the gTLD, unused, for speculative purposes.”


It is difficult to see the actual
rationale behind such “allocation efficiency” from the standpoint of public
choice policy making, meaning accommodations to self-interested agents. The
simple reason for this is because interest accommodations from the standpoint
of public choice policy  have a
demonstrated tendency to favor certain class interests at the expense of other
classes. In fact,  instrumental reasoning
by which we mean “theories0that focus on the most efficient or cost-effective
means to achieve a specific end, but not in itself reflecting on the value of
that end”, shows why it is difficult to imagine “greater social value” “
stemming from an allocative process where 
social utility becomes a function of an auction of a gTLD, presumably to
the  highest bidder. This makes no sense
if the stated policy goal is “greater social value”.


Whereas in a perfect situation
with perfect information as to the eventual social utility of this or that
policy option across a broad range of interests might make sense; to argue that
“allocative efficiency” can possibly stem from interest accommodations, large or
small, does not square with a situation that is far removed from allocation
models  that relate to radio spectrum
auctions in the past. 


ICANN apparently agrees that  “no allocation mechanism will perfectly
address needs for transparency, objectivity and scalability, and auctions have
received severe criticism in some contexts.” For one thing the context of the
Internet “commons” consists of magnitudes of difference in connection with
utilization by end users who have direct access to the means of intellectual
production which takes the form in many cases of both free and
transparent access to the necessary productivity tools, meaning the
intellectual and technical capital without which the Internet is irrelevant.


Moreover, this has never
been the case with all antecedent mass media which have historically required
vast amounts of capital in order to create content; and, thus, “allocative
efficiency” might figure into the allocation process.  However, this is 
demonstrably not the case in
the present situation. To argue in the instance of a global collective commons
that allocative efficiency and greater social value require auctions simply is
not the case. In fact there is no reasonable rationale for an auction system 
allocates gTLDs if the reason given by the entity providing such allocations is
social utility. Here from a systems perspective it is feasible to see why
the result of the gTLD process as presently contemplated by ICANN simply
reproduces an ideological component that is inconsistent with “greater social
value”, if by “value” we mean social utility spread across the arc of the
Internet itself.


There is a so-called   “law”
of unintended consequences isn’t a law if by a law we mean a rule. Common sense
tells us that certain things happen not by design standing alone, but by
accident as the result of an action that was intended to arrive at a perceived
but nonetheless wrongheaded solution to a problem. The unintended result of
such happenings occurs when the means used to deal with the problem creates
another problem that turns out to be worse than the problem the original
solution was intended to cure.


AOne of the better known and more
spectacular examples of unintended consequences involves the collapse of the
Tacoma Narrows Bridge in November 1940 What happened from an engineering
standpoint to Tacoma Narrows Bridge was that of a freakish accident with causal
relationships that with hindsight were subsequently understood.  What caused 
the bridge to collapse?  The reason for the occurrence was what
engineers referred to after the fact as “transverse vibration” caused by the
way the wind on that particular day interacted with certain structural
characteristics unique to that bridge. In systems this is sometimes referred to
as "turbulence". However, a better way to consider unintended
consequences from our present (contemporary) perspective is to think of
"negative resonance".  From a
systems standpoint an unintended consequence is this. "[It's] what happens
when a simple system tries to regulate a complex system.... A political system
is simple. It operates with limited information...short time horizons, low
feedback, and poor and misaligned incentives. Society in contrast is a complex,
evolving, high-feedback, incentive-driven system.  When a simple system
tries to regulate a complex system you often get unintended consequences.”


At Tacoma Narrows the unintended
consequence of the method used to construct the bridge was that it was from the
get go aerodynamically unstable. This would have induced what engineers refer
to as “turbulence”. However, to attribute the bridge problem to simp
turbulence is to fail to come to grips with complex interactions that occurred
between the bridge and its environment. Thus, to attempt a causal explanation
is really to fall into the chicken and egg (either/or) trap such as whether it
was ultimately the bridge design or the wind that caused the collapse. 


The ultimate collapse of the
bridge apparently was a systemic matter where a number of variables came
together even though each one of them standing alone was not problematic in and
of itself. Therefore, at least one way of looking at what occurred is to see it
in terms of a cascade of events where the unintended consequence of a bridge
design whose structural components interacted in an unforeseen manner with its
larger environment. The collapse of the first Tacoma Narrows Bridge
(subsequently replaced) was an example of what happens when a relatively simple
system (the bridge) inadvertently tried to control its relationship with a more
complex system (the totality of its environment), and failed.


Why use the word
"resonance" instead of "turbulence"? Resonance in physics
is “the tendency of a system to oscillate at maximum amplitude at certain
frequencies”. Too much oscillation (resonance) and the system goes out of
whack. It is true that turbulence in the vicinity of the bridge as well as
design flaws both contributed to the eventual outcome. But
"resonance" is a more accurate way to describe the complex sequence
of interactions upon which the outcome was20predicated. Accordingly, the
"happening" at Tacoma Narrows is instructive for getting a systems
perspective on resonance in a public policy environment where authoritative
allocations that respond to interest accommodations can be seen to portend the
possibility of a collapse of a different kind. In other words, the systems
perspective provides  a  tool for us to see  from a policy standpoint that 
"interest accommodations", meaning "who gets what",  that do not coincide with 
the broader
interests of a larger system, might be a prescription for trouble. 


The political “system we
are looking at is at present the regulatory environment within which the
technical infrastructure of the Internet is "managed" by a small
system, in this case ICANN , whose existence itself is a function of the
dominant or regnant intellectual paradigm that defines the larger political
environment which is the U.S. Government. It is clear from a structural
perspective that the dominant policy model for Internet governance at present
arises from the political culture of America.  Resonance in that sense is an 
political process within which the present regulatory apparatus that manages
the technical infrastructure of the Internet can be seen to be a smaller system
that presently  exerts "control" over a more complex
system  which is the Internet "commons" itself. The question
that thus arises from a systems perspective is whether  at present we are
beginning to see the first intimations of20something mindful of the (previously
discussed) "tragedy of the commons", where policy accommodations that
favor certain interests will always tend to result in those interests
extracting as much "utility" from the commons as they possibly can.


 As was noted in part one of
Three Steps Toward An Ecology For The Digital Commons”, the so-called  "tragedy 
of the commons” occurs when
self-centered interests are allowed to overcome the capacity of the "commons"
as a common communal system to deal with self-centered demands. The eventual
result is a breakdown of the entire system. Thus, it is arguable that an
unintended consequence of future policies imposed on the larger system (the
Internet) by the smaller system (ICANN) could if not properly attenuated might
result in an unhealthy transformation of the entire Internet as we know it. Why
is this the case? To consider whether certain policy options that favor this or
that interest might become problematic, one has only to look at the present and
past behaviors of the smaller system from the standpoint of  the policy
outputs that are impacting the Internet commons at present. The “commons” is a
structural apparatus that contains elements of regulation at the center, as
well as elements of regulation from the Internet's constituent elements on the
periphery, which means the in-country bureaucracies that control access to the
Internet around the world.

Notwithstanding what ICANN imagines itself to represent, which is part20and
parcel of an apparently "open" process that emphasizes regulatory
outputs based on certain consultative processes, we also see that for practical
purposes and notwithstanding "open-ness", certain stated policy
outputs such as the method for awarding new generic top level domains (gTLDs)
are so-called "program implementations" that ultimately stem from a
U.S. government mandate that can be seen to contradict that which the Internet
Society previously set forth in documents as a "code of conduct" for
the public Internet. In other words, for practical purposes "the system
itself" will be closed by default to certain interests in respect of
certain authoritative allocations such as the new generic TLDs if the
contemplated process which is predicated on the "economic case" for a
policy option that where "contenders" for an authoritative allocation
(a new gTLD)  simply pony up dollars to
secure the new TLDs. Notwithstanding transparency and efficiency, the plain and
simple fact of the matter is auctions favor the moneyed classes and, thus,
efficient allocation of public resources is a non-sequitur if by efficiency we
mean the social utility referenced by ICANN itself in its economic case for


 There is no genuine “economic case” if
by “economics” we actually mean political economy. In contrast, if by economic
case ICANN actually means an argument that will raise substantial amounts of
money for ICANN by handing out pure public goods to private corporations that
can afford such
 “goods”, then perhaps such a “case” can be made. Nor is this the
first time such a policy option has been considered. For example, in March 2203
the Social Science Research Network at Loyola Law School in Los Angeles framed
a similar "compelling case for 
allowing the market to operate in the creation of new gTLDs". However,
even in in that instance the Loyola study also questioned whether "ICANN
itself should act as a profit-maximizer. Instead, we reason that, because ICANN
is a non-profit corporation and because it is the trustee for a natural


 That being the case and because ICANN is in
fact a natural monopoly, the onus is upon ICANN to act as conservator of the
public interest writ large. Moreover, and 
given its present master which is at a superficial  level U.S. Government 
policy imperatives, it
is reasonable to ask whether there is something that works at a deeper level in
policy making,  which is a particular
"way of thinking" about Internet governance. That deeper something
(or way of thinking) can be characterized as a policy perspective that 
stems from the ideology of the empire of business, which is the regnant
policy paradigm that manifests itself throughout American political
culture. Thus, and without worrying about moral imperatives such as what ICANN
"ought" to do in connection with the ultimate well being of the
Internet commons, it is interesting to consider whether ICANN is capable
as an institution of
 utilizing a policy option that favors "the public
interest" instead of  this or that interest, which is the precisely
the policy option that ICANN apparently favors, given its present mandate. To
see why such is the case, all that is required is to examine that mandate in
juxtaposition with the above-mentioned Internet "code of conduct", as


“From the early days, the
Internet pioneers recognised that many Internet functions required trust and
that, in effect, the Internet was a public "commons", relying on the
good conduct of those who used it to operate to its maximum technical and
social potential. The demographics of Internet use today are very different and
many of the trust relationships are now being formalised with technical and
administrative processes. Nevertheless the statements in these early
Internet  "code of conduct"
documents remain a very good guide for responsible Internet operators and users
and a useful historical reference for technical operations.”


If by "the Internet" we
limit our definition to the technical infrastructure behind the network of
networks of distributed computers through which universal connectivity is
facilitated, the problem is attenuated by the fact that the overall technical
integrity of the Internet covers every aspect of the "commons".  Thus, from the 
standpoint of public choice
policy making, technical supervision of the root zone by a natural monopoly
pursuant to general IETF specifications makes sense. However, what we ar
seeing from the apparent and present policy framework at ICANN vis-á-vis
Internet “governance” or "regulation",  is that "technical stability" has
somehow transformed itself into a much broader mandate that contemplates a
"control" function, where non-technical specifications relating to
high-level access from the privileged perspective of ownership of  the means of 
Internet connectivity becomes an
artifact of  "official" U.S. government policy, and ideology,
both of which amount to the ideology of the empire of business.


Nor is this a value judgment. It
is what it is. The National Telecommunications and Information Administration
(NTIA) which is itself a part of the U.S. Commerce Department is in fact what
the Internet Governance Project as "rulers of the “root”.  These "rulers"  make 
sure that at the top of the Internet's
inverted tree hierarchy called the DNS there is a technical steady state
insofar as managing root zone files that list the names and numeric IP
addresses of the authoritative DNS name servers for all top-level domains.
 And, it is apparently the case that technical management of the root zone
from the standpoint of the Internet's technical infrastructure, achieves what
it was intended to do.


The authoritative allocation
problem arises because apart from managing the technical stability of the DNS,
the present ruling authority insists  on controlling certain parameters of
a larger system through legal agreements that invest the20smaller system with
authoritative allocations, meaning regulatory favors that are determinative of
who shall have access to the "commons" as a whole.

Here we see that ultimately it is the United States Government via the NTIA
which actually rules the root because NTIA has assigned a variety of tasks to a
subordinate organization (ICANN) where the mandate emphasizes "increase
institutional confidence...[in ICANN and thus ICANN should] ...implement
effective processes that will enable long term stability, accountability and
responsiveness through increased contract compliance".


It is apparently the case that
"stability" of the DNS, even though the stability process literally
from the beginning of ICANN has been politically problematic from the
standpoint of "who got what", has nonetheless been a reasonably
successful policy output.  However. from
the standpoint of policy articulations regarding governance, meaning control,
of the Internet commons per se, the most telling aspects of NTIA control over
ICANN can be found in language that states another policy objective of the
United States Government: namely, that ICANN's mandate shall also be aimed at
“continued private sector leadership” in order to foster “enhanced competition”.
In other words the public Internet is about to be privatized. Period. This is
notwithstanding rhetorical language about consultative processes, improving
institutional confidence, accountability, and the rest of it. In other words,
while on the surface is seems hard to find fault wi
th what appear to be
reasonable policy objectives, it is unavoidably the case that sooner or later
the present mandate given to ICANN by NTIA corresponds from a systems
perspective that results in a simple political system (ICANN) attempting to
regulate through control of the root zone, 
a complex global system by gate keeping access to the entire
"commons", while doing so at the expense of the peripheral spokes
that hold together the wheel (meaning the ISO 3166 code (ccTLDs). 


 From a policy perspective  the spokes that hold together the wheel,
meaning privatization as a function of the ideology of the empire of business,
amounts to a prescription for unintended consequences. Whether or not such
unintended policy consequences will arise from authoritative allocations of
certain Internet resources by ICANN to preferred third parties in the form of
interest accommodations in the form of new generic top level domains (gTLDs),
remains to be seen.  What is already clear,
however, is that notwithstanding the consultative process by which ICANN
appears to interact with a variety of Internet stakeholders in order to arrive
at regulatory consensus, the plain and simple fact of the matter is that the
actual day-to-day "interests" that have been and will continue to be
dominant, are commercial interests.


 From a systems perspective the
issue of "who gets what" only becomes problematic when vertical
integration of the means of intellectual production as well as ownership of the
uctural apparatus, meaning the pure public good which is "the
commons" itself, is subordinated to some interests at the expense of other
interests. When that happens the system as "a system" becomes
destabilized. Specifically, the means of production that supports the entire
structural purpose of the Internet is intellectual property of one kind of
another, meaning content. Internet connectivity is entirely pointless without
content. Advertising is one such element of content. Copyright is another
element. Intellectual property in the form of web logs, wikis and other forms
of content are another element. It follows that if in the interests of
bureaucratic efficiency as well as ideology, that which is nominally a pure
public good is subordinated to certain private interests that have no stake
whatsoever in the "ecology" of the commons, we then see the first
intimations of a systemic problem. 


Furthermore, all present
indications from ICANN in connection with a new round of gTLDs tentatively set
to begin  in 2009 point to increasing domination of  DNS name space
allocations by private sector interests in the form of   (a)
sponsored domains that correspond with corporate trademarks and generic word
classifications; and (b) what ICANN has itself referred to as the “economic
case” for auctions in new gTLDs, which for practical purposes means that
henceforth (and as previously mentioned), authoritative allocations for new top
domains will go to those interests that have the deepest pockets.


It would be unfair and, indeed,
somewhat off the mark to characterize present Internet governance as completely
one sided. It is not. Nonetheless, it is also clear that from the standpoint
of  world wide Internet governance that
the concept of the “public” Internet as a uniform and coherent
"commons" for global connectivity accessible to all comers on an
equal footing, is about to be challenged as never before. Will there in fact be
unintended consequences that arise from what are ultimately economic choices
that, if the present policy implementation goes forward, will in fact  favor 
business interests over all other
interests concerning "who gets what”? 
We will  have to wait and see.

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