Musings Of An Indie WriterScreeds
Tuesday, September 28, 2004
Battle Of The Networks
February 9, 2003
No, this isn’t about television.
Steven Den Beste has recently commented on the importance of “network effects” in raising some technologies high above others. He’s written of the steady retreat of Apple Computers before the Intel / Windows juggernaut, and has attributed a large portion of the cause to a network effect: the increase in value of a technology that arises from getting a lot of people to use it.
Some things are more apparent in a venue such as computer technology than in the more diffuse worlds of finance and law. Nevertheless, the importance of network effects reaches there too.
The European Union, whose progenitor was the Common Market, was inspired by the fabulous success of the American economy, whose productivity, dynamism, and high efficiencies stand in sharp contrast to the sluggishness, dirigisme and persistently high unemployment of Europe. By contrast to the many small states of Europe, America’s internal market:
- operates in a single currency environment,
- enjoys a largely uniform system of commercial law,
- is unhampered by tariffs or customs barriers.
All these things are expressions of the network effect. Obviously, with a common currency, merchants, producers and consumers are untroubled by inter-currency fluctuations that can cause malinvestment or the misperception of actual prices and costs. Any government-imposed devaluations will affect everyone the same way. A common commercial law makes it possible to sell nationally, without fear that what is legal and defensible in one place will cause liabilities in another. And of course, trade will always chug along more smoothly and profitably in the absence of tariffs and customs.
Europe’s masters, desirous of having America’s advantages for themselves, resolved to create a similarly unified economic domain in the Old World. It remains to be seen whether their regional economies will adapt, or will succeed in torpedoing the attempt to preserve their traditional mercantilist protections against competition.
What’s troubling is that, except for the common currency, America is slowly undoing her own advantages.
Ever heard of “forum shopping,” sometimes called “jurisdiction shopping”? It’s the practice of seeking out a court system that will allow you to sue a company for a product or service that’s legally protected in other jurisdictions. For example, if I wanted to sue a gun manufacturer for damages, on the theory that having made the gun some burglar used to shoot me made the manufacturer as liable as the wielder, I’d avoid the Southern and Southwestern states. I’d sue in a New England or Mid-Atlantic state, or perhaps in California, where judges and appellate courts are hospitable to the legal theory I’d need to propound.
The suits against the tobacco companies and Microsoft were very carefully placed, in forums and before judges who were favorably disposed toward that sort of legal predation. Obviously, the state tax ands regulatory bureaucracies were delighted to assist in locating the very best forums for the complainants’ purposes.
The legal network is in danger of being unraveled by this practice. Even clear-headed judges with extensive experience are prone to helping it along, though not always consciously. For example, Robert Sweet’s recent decision dismissing a suit against McDonald’s, brought by two persons of unusual girth who blamed the fast-food vendor for their obesity, simultaneously pointed the plaintiffs to a legal theory and a set of venues whereby they could renew their suit with improved chances of success. Yet Judge Sweet is a fine, experienced jurist, who was only doing his duty as he saw it.
“But we don’t have internal tariffs or customs barriers!” I hear you cry. Not in name, no. But we have something worse: state tax bureaucracies that are becoming increasingly aggressive about pursuing people who shop, sell, or work out-of-state.
An example: New York has begun sending tax agents as far as the Carolinas to pursue New York residents who shop out-of-state. These agents confront the purchasers of large items with the photographic evidence of their “crime,” usually a snapshot of a license plate in a retailer’s parking lot, and demand that the accused pay a “use tax,” equal to the sales tax a New York retailer would have collected for selling the same item.
Another example: New York City is trying to resurrect the old “commuter tax,” which penalized non-New York City residents who dared to hold down a job in the five boroughs. The claim is that those workers are parasites on city services and ought to bear some of the cost of supporting them. Though the revenue is undoubtedly much desired by the fiscally strapped Bloomberg Administration, I have little doubt that organized labor, which is unusually powerful in New York, has a hand in the matter as well.
A third example: Internet commerce has gotten to be a really big pie—and, unsurprisingly, the states want a slice of it. Private sector support for levying sales taxes on Internet purchases has arisen from large brick-and-mortar retailers who feel themselves losing market share to the Internet merchants. The ground-based companies claim they cannot compete with the Net-based ones with the millstone of sales taxes around their necks. Advocates of increased taxation use this argument almost exclusively, even though it’s really just the revenue and the political support they care about.
All of these things are harbingers of doom for the large, internally unsegmented, legally consistent American marketplace.
Don’t expect that to faze the politicians. Whether or not they recognize the importance of end-to-end consistency in our economic networks, their agenda is aimed elsewhere: power and perquisites for themselves, bought with as much of our money as they can grab. Your humble Curmudgeon hopes that the Europeans, and others around the globe who seek to emulate American economic success, will refrain from slavishly imitating us as we dismantle the very networks that made it possible.
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