Cyberspace and the American Dream: A Magna Carta for the Knowledge Age

Release 1.2 // August 22, 1994
This statement represents the cumulative wisdom 
and innovation of many dozens of people. It is based 
primarily on the thoughts of four "co-authors": Ms. 
Esther Dyson; Mr. George Gilder; Dr. George 
Keyworth; and Dr. Alvin Toffler. This release 1.2 has 
the final "imprimatur" of no one. In the spirit of the 
age: It is copyrighted solely for the purpose of 
preventing someone else from doing so. If you have 
it, you can use it any way you want. However, major 
passages are from works copyrighted individually by 
the authors, used here by permission; these will be 
duly acknowledged in release 2.0. It is a living 
document. Release 2.0 will be released in October 
1994. We hope you'll use it is to tell us how to make 
it better. Do so by: 

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(The Progress & Freedom Foundation is a not-for-
profit research and educational organization 
dedicated to creating a positive vision of the future 
founded in the historic principles of the American 
idea.) 

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PREAMBLE

The central event of the 20th century is the 
overthrow of matter. In technology, economics, and 
the politics of nations, wealth -- in the form of 
physical resources -- has been losing value and 
significance. The powers of mind are everywhere 
ascendant over the brute force of things. 

In a First Wave economy, land and farm labor are 
the main "factors of production." In a Second Wave 
economy, the land remains valuable while the 
"labor" becomes massified around machines and 
larger industries. In a Third Wave economy, the 
central resource -- a single word broadly 
encompassing data, information, images, symbols, 
culture, ideology, and values -- is _actionable_ 
knowledge.

The industrial age is not fully over. In fact, classic 
Second Wave sectors (oil, steel, auto-production) 
have learned how to benefit from Third Wave 
technological breakthroughs -- just as the First 
Wave's agricultural productivity benefited 
exponentially from the Second Wave's farm-
mechanization.

But the Third Wave, and the _Knowledge Age_ it 
has opened, will not deliver on its potential unless it 
adds social and political dominance to its 
accelerating technological and economic strength. 
This means repealing Second Wave laws and 
retiring Second Wave attitudes. It also gives to 
leaders of the advanced democracies a special 
responsibility -- to facilitate, hasten, and explain the 
transition. 

As humankind explores this new "electronic 
frontier" of knowledge, it must confront again the 
most profound questions of how to organize itself 
for the common good. The meaning of freedom, 
structures of self-government, definition of property, 
nature of competition, conditions for cooperation, 
sense of community and nature of progress will each 
be redefined for the Knowledge Age -- just as they 
were redefined for a new age of industry some 250 
years ago.


What our 20th-century countrymen came to think 
of as the "American dream," and what resonant 
thinkers referred to as "the promise of American 
life" or "the American Idea," emerged from the 
turmoil of 19th-century industrialization. Now it's 
our turn: The knowledge revolution, and the Third 
Wave of historical change it powers, summon us to 
renew the dream and enhance the promise.

THE NATURE OF CYBERSPACE
The Internet -- the huge (2.2 million computers), 
global (135 countries), rapidly growing (10-15% a 
month) network that has captured the American 
imagination -- is only a tiny part of cyberspace. So 
just what is cyberspace?

More ecosystem than machine, cyberspace is a 
bioelectronic environment that is literally universal: 
It exists everywhere there are telephone wires, 
coaxial cables, fiber-optic lines or electromagnetic 
waves. 

This environment is "inhabited" by knowledge, 
including incorrect ideas, existing in electronic form. 
It is connected to the physical environment by 
portals which allow people to see what's inside, to 
put knowledge in, to alter it, and to take knowledge 
out. Some of these portals are one-way (e.g. 
television receivers and television transmitters); 
others are two-way (e.g. telephones, computer 
modems). 

Most of the knowledge in cyberspace lives the most 
temporary (or so we think) existence: Your voice, on 
a telephone wire or microwave, travels through 
space at the speed of light, reaches the ear of your 
listener, and is gone forever.

But people are increasingly building cyberspatial 
"warehouses" of data, knowledge, information and 
_mis_information in digital form, the ones and 
zeros of binary computer code. The storehouses 
themselves display a physical form (discs, tapes, CD-
ROMs) -- but what they contain is accessible only to 
those with the right kind of portal and the right kind 
of key.

The key is software, a special form of electronic 
knowledge that allows people to navigate through 
the cyberspace environment and make its contents 
understandable to the human senses in the form of 
written language, pictures and sound.

People are adding to cyberspace -- creating it, 
defining it, expanding it -- at a rate that is already 
explosive and getting faster. Faster computers, 
cheaper means of electronic storage, improved 
software and more capable communications 
channels (satellites, fiber-optic lines) -- each of these 
factors independently add to cyberspace. But the real 
explosion comes from the combination of all of 
them, working together in ways we still do not 
understand.

The bioelectronic _frontier_ is an appropriate 
metaphor for what is happening in cyberspace, 
calling to mind as it does the spirit of invention and 
discovery that led ancient mariners to explore the 
world, generations of pioneers to tame the 
American continent and, more recently, to man's 
first exploration of outer space. 

But the exploration of cyberspace brings both greater 
opportunity, and in some ways more difficult 
challenges, than any previous human adventure. 

Cyberspace is the land of knowledge, and the 
exploration of that land can be a civilization's truest, 
highest calling. The opportunity is now before us to 
empower every person to pursue that calling in his 
or her own way. 

The challenge is as daunting as the opportunity is 
great. The Third Wave has profound implications 
for the nature and meaning of property, of the 
marketplace, of community and of individual 
freedom. As it emerges, it shapes new codes of 
behavior that move each organism and institution -- 
family, neighborhood, church group, company, 
government, nation -- inexorably beyond 
standardization and centralization, as well as beyond 
the materialist's obsession with energy, money and 
control. 

Turning the economics of mass-production inside 
out, new information technologies are driving the 
financial costs of diversity -- both product and 
personal -- down toward zero, "demassifying" our 
institutions and our culture. Accelerating 
demassification creates the potential for vastly 
increased human freedom.

It also spells the death of the central institutional 
paradigm of modern life, the bureaucratic 
organization. (Governments, including the 
American government, are the last great redoubt of 
bureaucratic power on the face of the planet, and for 
them the coming change will be profound and 
probably traumatic.)

In this context, the one metaphor that is perhaps 
least helpful in thinking about cyberspace is -- 
unhappily -- the one that has gained the most 
currency: The Information Superhighway. Can you 
imagine a phrase less descriptive of the nature of 
cyberspace, or more misleading in thinking about its 
implications? Consider the following set of 
polarities: 

Information Superhighway

The highway analogy is all wrong," explained Peter 
Huber in Forbes this spring, "for reasons rooted in 
basic economics. Solid things obey immutable laws 
of conservation -- what goes south on the highway 
must go back north, or you end up with a mountain 
of cars in Miami. By the same token, production and 
consumption must balance. The average Joe can 
consume only as much wheat as the average Jane 
can grow. Information is completely different. It can 
be replicated at almost no cost -- so every individual 
can (in theory) consume society's entire output. Rich 
and poor alike, we all run information deficits. We 
all take in more than we put out."

THE NATURE AND OWNERSHIP OF PROPERTY

Clear and enforceable property rights are essential 
for markets to work. Defining them is a central 
function of government. Most of us have "known" 
that for a long time. But to create the new cyberspace 
environment is to create _new _ property -- that is, 
new means of creating goods (including ideas) that 
serve people.

The property that makes up cyberspace comes in 
several forms: Wires, coaxial cable, computers and 
other "hardware"; the electromagnetic spectrum; 
and "intellectual property" -- the knowledge that 
dwells in and defines cyberspace.

In each of these areas, two questions that must be 
answered. First, what does "ownership" _mean_? 
What is the nature of the property itself, and what 
does it mean to own it? Second, once we understand 
what ownership means, _who_ is the owner? At 
the level of first principles, should ownership be 
public (i.e. government) or private (i.e. individuals)? 

The answers to these two questions will set the basic 
terms upon which America and the world will enter 
the Third Wave. For the most part, however, these 
questions are not yet even being asked. Instead, at 
least in America, governments are attempting to 
take Second Wave concepts of property and 
ownership and apply them to the Third Wave. Or 
they are ignoring the problem altogether.

For example, a great deal of attention has been 
focused recently on the nature of "intellectual 
property" -- i.e. the fact that knowledge is what 
economists call a "public good," and thus requires 
special treatment in the form of copyright and patent 
protection. 

Major changes in U.S. copyright and patent law 
during the past two decades have broadened these 
protections to incorporate "electronic property." In 
essence, these reforms have attempted to take a body 
of law that originated in the 15th century, with 
Gutenberg's invention of the printing press, and 
apply it to the electronically stored and transmitted 
knowledge of the Third Wave.

A more sophisticated approach starts with 
recognizing how the Third Wave has fundamentally 
altered the nature of knowledge as a "good," and 
that the operative effect is not technology per se (the 
shift from printed books to electronic storage and 
retrieval systems), but rather the shift from a mass-
production, mass-media, mass-culture civilization 
to a demassified civilization.

The big change, in other words, is the 
demassification of actionable knowledge.

The dominant form of new knowledge in the Third 
Wave is perishable, transient, _ customized_ 
knowledge: The right information, combined with 
the right software and presentation, at precisely the 
right time. Unlike the mass knowledge of the 
Second Wave -- "public good" knowledge that was 
useful to everyone because most people's 
information needs were standardized -- Third Wave 
customized knowledge is by nature a private good.

If this analysis is correct, copyright and patent 
protection of knowledge (or at least many forms of 
it) may no longer be unnecessary. In fact, the 
marketplace may already be creating vehicles to 
compensate creators of customized knowledge 
outside the cumbersome copyright/patent process, as 
suggested last year by John Perry Barlow: 

"One existing model for the future conveyance of 
intellectual property is real-time performance, a 
medium currently used only in theater, music, 
lectures, stand-up comedy and pedagogy. I believe 
the concept of performance will expand to include 
most of the information economy, from multi-
casted soap operas to stock analysis. In these 
instances, commercial exchange will be more like 
ticket sales to a continuous show than the purchase 
of discrete bundles of that which is being shown. 
The other model, of course, is service. The entire 
professional class -- doctors, lawyers, consultants, 
architects, etc. -- are already being paid directly for 
their intellectual property. Who needs copyright 
when you're on a retainer?"

Copyright, patent and intellectual property represent 
only a few of the "rights" issues now at hand. Here 
are some of the others: 

* Ownership of the electromagnetic spectrum, 
traditionally considered to be "public property," is 
now being "auctioned" by the Federal 
Communications Commission to private 
companies. Or is it? Is the very limited "bundle of 
rights" sold in those auctions really property, or 
more in the nature of a use permit -- the right to use 
a part of the spectrum for a limited time, for limited 
purposes? In either case, are the rights being 
auctioned defined in a way that makes technological 
sense? 

* Ownership over the infrastructure of wires, coaxial 
cable and fiber-optic lines that are such prominent 
features in the geography of cyberspace is today 
much less clear than might be imagined. Regulation, 
especially price regulation, of this property can be 
tantamount to confiscation, as America's cable 
operators recently learned when the Federal 
government imposed price limits on them and 
effectively confiscated an estimated $___ billion of 
their net worth. (Whatever one's stance on the 
FCC's decision and the law behind it, there is no 
disagreeing with the proposition that one's 
ownership of a good is less meaningful when the 
government can step in, at will, and dramatically 
reduce its value.)

* The nature of capital in the Third Wave -- tangible 
capital as well as intangible -- is to depreciate in real 
value much faster than industrial-age capital -- 
driven, if nothing else, by Moore's Law, which states 
that the processing power of the microchip doubles 
at least every 18 _months_. Yet accounting and tax 
regulations still require property to be depreciated 
over periods as long as 30 _years_. The result is a 
heavy bias in favor of "heavy industry" and against 
nimble, fast-moving baby businesses.

Who will define the nature of cyberspace property 
rights, and how? How can we strike a balance 
between interoperable open systems and protection 
of property?


THE NATURE OF THE MARKETPLACE

Inexpensive knowledge destroys economies-of-scale. 
Customized knowledge permits "just in time" 
production for an ever rising number of goods. 
Technological progress creates new means of serving 
old markets, turning one-time monopolies into 
competitive battlegrounds. 

These phenomena are altering the nature of the 
marketplace, not just for information technology but 
for all goods and materials, shipping and services. In 
cyberspace itself, market after market is being 
transformed by technological progress from a 
"natural monopoly" to one in which competition is 
the rule. Three recent examples: 
* The market for "mail" has been made competitive 
by the development of fax machines and overnight 
delivery -- even though the "private express 
statutes" that technically grant the U.S. Postal 
Service a monopoly over mail delivery remain in 
place.
* During the past 20 years, the market for television 
has been transformed from one in which there were 
at most a few broadcast TV stations to one in which 
consumers can choose among broadcast, cable and 
satellite services.
* The market for local telephone services, until 
recently a monopoly based on twisted-pair copper 
cables, is rapidly being made competitive by the 
advent of wireless service and the entry of cable 
television into voice communication. In England, 
Mexico, New Zealand and a host of developing 
countries, government restrictions preventing such 
competition have already been removed and 
consumers actually have the freedom to choose.

The advent of new technology and new products 
creates the potential for _ dynamic competition -- 
competition between and among technologies and 
industries, each seeking to find the best way of 
serving customers' needs. Dynamic competition is 
different from static competition, in which many 
providers compete to sell essentially similar 
products at the lowest price. 

Static competition is good, because it forces costs and 
prices to the lowest levels possible for a given 
product. Dynamic competition is better, because it 
allows competing technologies and new products to 
challenge the old ones and, if they really are better, to 
replace them. Static competition might lead to faster 
and stronger horses. Dynamic competition gives us 
the automobile.

Such dynamic competition -- the essence of what 
Austrian economist Joseph Schumpeter called 
"creative destruction" -- creates winners and losers 
on a massive scale. New technologies can render 
instantly obsolete billions of dollars of embedded 
infrastructure, accumulated over decades. The 
transformation of the U.S. computer industry since 
1980 is a case in point. 

In 1980, everyone knew who led in computer 
technology. Apart from the minicomputer boom, 
mainframe computers _were_ the market, and 
America's dominance was largely based upon the 
position of a dominant vendor -- IBM, with over 
50% world market-share.

Then the personal-computing industry exploded, 
leaving older-style big-business-focused computing 
with a stagnant, piece of a burgeoning total market. 
As IBM lost market-share, many people became 
convinced that America had lost the ability to 
compete. By the mid-1980s, such alarmism had 
reached from Washington all the way into the heart 
of Silicon Valley. 

But the real story was the renaissance of American 
business and technological leadership. In the 
transition from mainframes to PCs, a vast new 
market was created. This market was characterized 
by dynamic competition consisting of easy access and 
low barriers to entry. Start-ups by the dozens took on 
the larger established companies -- and won. 

After a decade of angst, the surprising outcome is 
that America is not only competitive 
internationally, but, by any measurable standard, 
America dominates the growth sectors in world 
economics -- telecommunications, microelectronics, 
computer networking (or "connected computing") 
and software systems and applications.

The reason for America's victory in the computer 
wars of the 1980s is that dynamic competition was 
allowed to occur, in an area so breakneck and pell-
mell that government would've had a hard time 
controlling it _even had it been paying attention_. 
The challenge for policy in the 1990s is to permit, 
even encourage, dynamic competition in every 
aspect of the cyberspace marketplace.

THE NATURE OF FREEDOM
Overseas friends of America sometimes point out 
that the U.S. Constitution is unique -- because it 
states explicitly that power resides with the people, 
who delegate it to the government, rather than the 
other way around.

This idea -- central to our free society -- was the 
result of more than 150 years of intellectual and 
political ferment, from the Mayflower Compact to 
the U.S. Constitution, as explorers struggled to 
establish the terms under which they would tame a 
new frontier. 

And as America continued to explore new frontiers -
- from the Northwest Territory to the Oklahoma 
land-rush -- it consistently returned to this 
fundamental principle of rights, reaffirming, time 
after time, that power resides with the people.

Cyberspace is the latest American frontier. As this 
and other societies make ever deeper forays into it, 
the proposition that ownership of this frontier 
resides first _with the people_ is central to 
achieving its true potential.

To some people, that statement will seem 
melodramatic. America, after all, remains a land of 
individual freedom, and this freedom clearly 
extends to cyberspace. How else to explain the 
uniquely American phenomenon of the hacker, 
who ignored every social pressure and violated 
every rule to develop a set of skills through an early 
and intense exposure to low-cost, ubiquitous 
computing. 

Those skills eventually made him or her highly 
marketable, whether in developing applications-
software or implementing networks. The hacker 
became a technician, an inventor and, in case after 
case, a creator of new wealth in the form of the baby 
businesses that have given America the lead in 
cyberspatial exploration and settlement. 

It is hard to imagine hackers surviving, let alone 
thriving, in the more formalized and regulated 
democracies of Europe and Japan. In America, 
they've become vital for economic growth and trade 
leadership. Why? Because Americans still celebrate 
individuality over conformity, reward achievement 
over consensus and militantly protect the right to be 
different.

But the need to affirm the basic principles of 
freedom is real. Such an affirmation is needed in 
part because we are entering new territory, where 
there are as yet no rules -- just as there were no rules 
on the American continent in 1620, or in the 
Northwest Territory in 1787. 

Centuries later, an affirmation of freedom -- by this 
document and similar efforts -- is needed for a 
second reason: We are at the end of a century 
dominated by the mass institutions of the industrial 
age. The industrial age encouraged _conformity_ 
and relied on _standardization_. And the 
institutions of the day -- corporate and government 
bureaucracies, huge civilian and military 
administrations, schools of all types -- reflected these 
priorities. Individual liberty suffered -- sometimes 
only a little, sometimes a lot:
* In a Second Wave world, it might make sense for 
government to insist on the right to peer into every 
computer by requiring that each contain a special 
"clipper chip."
* In a Second Wave world, it might make sense for 
government to assume ownership over the 
broadcast spectrum and demand massive payments 
from citizens for the right to use it.
* In a Second Wave world, it might make sense for 
government to prohibit entrepreneurs from 
entering new markets and providing new services. 
* And, in a Second Wave world, dominated by a few 
old-fashioned, one-way media "networks," it might 
even make sense for government to influence 
which political viewpoints would be carried over 
the airwaves. 

All of these interventions might have made sense 
in a Second Wave world, where standardization 
dominated and where it was assumed that the 
scarcity of knowledge (plus a scarcity of 
telecommunications capacity) made bureaucracies 
and other elites better able to make decisions than 
the average person.

But, whether they made sense before or not, these 
and literally thousands of other infringements on 
individual rights now taken for granted make no 
sense at all in the Third Wave.

For a century, those who lean ideologically in favor 
of freedom have found themselves at war not only 
with their ideological opponents, but with a time in 
history when the value of conformity was at its 
peak. However desirable as an ideal, individual 
freedom often seemed impractical. The mass 
institutions of the Second Wave required us to give 
up freedom in order for the system to "work."

The coming of the Third Wave turns that equation 
inside-out. The complexity of Third Wave society is 
too great for any centrally planned bureaucracy to 
manage. Demassification, customization, 
individuality, freedom -- these are the keys to success 
for Third Wave civilization. 

THE ESSENCE OF COMMUNITY
If the transition to the Third Wave is so positive, 
why are we experiencing so much anxiety? Why are 
the statistics of social decay at or near all-time highs? 
Why does cyberspatial "rapture" strike millions of 
prosperous Westerners as lifestyle _rupture_? Why 
do the principles that have held us together as a 
nation seem no longer sufficient -- or even wrong?

The incoherence of political life is mirrored in 
disintegrating personalities. Whether 100% covered 
by health plans or not, psychotherapists and gurus 
do a land-office business, as people wander aimlessly 
amid competing therapies. People slip into cults and 
covens or, alternatively, into a pathological 
privatism, convinced that reality is absurd, insane or 
meaningless. "If things are so good," Forbes 
magazine asked recently, "why do we feel so bad?" 

In part, this is why: Because we constitute the final 
generation of an old civilization and, at the very 
same time, the first generation of a new one. Much 
of our personal confusion and social disorientation 
is traceable to conflict _within us_ and within our 
political institutions -- between the dying Second 
Wave civilization and the emergent Third Wave 
civilization thundering in to take its place. 

Second Wave ideologues routinely lament the 
breakup of mass society. Rather than seeing this 
enriched diversity as an opportunity for human 
development, they attach it as "fragmentation" and 
"balkanization." But to reconstitute democracy in 
Third Wave terms, we need to jettison the 
frightening but false assumption that more diversity 
automatically brings more tension and conflict in 
society.

Indeed, the exact reverse can be true: If 100 people all 
desperately want the same brass ring, they may be 
forced to fight for it. On the other hand, if each of the 
100 has a different objective, it is far more rewarding 
for them to trade, cooperate, and form symbiotic 
relationships. Given appropriate social 
arrangements, diversity can make for a secure and 
stable civilization.

No one knows what the Third Wave communities 
of the future will look like, or where 
"demassification" will ultimately lead. It is clear, 
however, that cyberspace will play an important role 
knitting together in the diverse communities of 
tomorrow, facilitating the creation of "electronic 
neighborhoods" bound together not by geography 
but by shared interests. 

Socially, putting advanced computing power in the 
hands of entire populations will alleviate pressure 
on highways, reduce air pollution, allow people to 
live further away from crowded or dangerous urban 
areas, and expand family time.

The late Phil Salin (in Release 1.0 11/25/91) offered 
this perspective: "[B]y 2000, multiple cyberspaces will 
have emerged, diverse and increasingly rich. 
Contrary to naive views, these cyberspaces will not 
all be the same, and they will not all be open to the 
general public. The global network is a connected 
'platform' for a collection of diverse communities, 
but only a loose, heterogeneous community itself. 
Just as access to homes, offices, churches and 
department stores is controlled by their owners or 
managers, most virtual locations will exist as 
distinct places of private property."

"But unlike the private property of today," Salin 
continued, "the potential variations on design and 
prevailing customs will explode, because many 
variations can be implemented cheaply in software. 
And the 'externalities' associated with variations 
can drop; what happens in one cyberspace can be 
kept from affecting other cyberspaces." 

"Cyberspaces" is a wonderful _pluralistic_ word to 
open more minds to the Third Wave's civilizing 
potential. Rather than being a centrifugal force 
helping to tear society apart, cyberspace can be one of 
the main forms of glue holding together an 
increasingly free and diverse society. 

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 operators. 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 it. 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 blocked? 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 competition. 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 precision. 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.
GRASPING THE FUTURE The conflict between Second Wave and Third Wave groupings is the central political tension cutting through our society today. The more basic political question is not who controls the last days of industrial society, but who shapes the new civilization rapidly rising to replace it. Who, in other words, will shape the nature of cyberspace and its impact on our lives and institutions? Living on the edge of the Third Wave, we are witnessing a battle not so much over the nature of the future -- for the Third Wave will arrive -- but over the nature of the transition. On one side of this battle are the partisans of the industrial past. On the other are growing millions who recognize that the world's most urgent problems can no longer be resolved within the massified frameworks we have inherited. The Third Wave sector includes not only high-flying computer and electronics firms and biotech start- ups. It embraces advanced, information-driven manufacturing in every industry. It includes the increasingly data-drenched services -- finance, software, entertainment, the media, advanced communications, medical services, consulting, training and learning. The people in this sector will soon be the dominant constituency in American politics. And all of those confront a set of constituencies made frightened and defensive by their mainly Second Wave habits and locales: Command-and- control regulators, elected officials, political opinion- molders, philosophers mired in materialism, traditional interest groups, some broadcasters and newspapers -- and every major institution (including corporations) that believes its future is best served by preserving the past. For the time being, the entrenched powers of the Second Wave dominate Washington and the statehouses -- a fact nowhere more apparent than in the 1993 infrastructure bill: Over $100 billion for steel and cement, versus one lone billion for electronic infrastructure. Putting aside the question of whether the government should be building electronic infrastructure in the first place, the allocation of funding in that bill shows the Second Wave swamping the Third. Only one political struggle so far contradicts the landscape offered in this document, but it is a big one: Passage of the North American Free Trade Agreement last November. This contest carried both sides beyond partisanship, beyond regionalism, and - - after one climactic debate on CNN -- beyond personality. The pro-NAFTA coalition opted to serve the opportunity instead of the problem, and the future as opposed to the past. That's why it constitutes a standout model for the likely development of a Third Wave political dialectic. But a "mass movement" for cyberspace is still hard to see. Unlike the "masses" during the industrial age, this rising Third Wave constituency is highly diverse. Like the economic sectors it serves, it is demassified -- composed of individuals who prize their differences. This very heterogeneity contributes to its lack of political awareness. It is far harder to unify than the masses of the past. Yet there are key themes on which this constituency- to-come can agree. To start with, liberation -- from Second Wave rules, regulations, taxes and laws laid in place to serve the smokestack barons and bureaucrats of the past. Next, of course, must come the creation -- creation of a new civilization, founded in the eternal truths of the American Idea. It is time to embrace these challenges, to grasp the future and pull ourselves forward. If we do so, we will indeed renew the American Dream and enhance the promise of American life.
PFF Report from
Lisa Kimball, Metasystems Design Group

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