Tag: regulation

What Caused the Crisis?

Last night National Government Radio promoted a documentary on National Government TV about the financial crisis of 2008, which concludes that the problem was … not enough government.

If the “Frontline” episode mentioned any of the ways that government created the crisis – cheap money from the central bank, tax laws that encourage debt over equity, government regulation that pressured lenders to issue mortgages to borrowers who wouldn’t be able to pay them back – NPR didn’t mention it.

For information on those causes, take a look at this paper by Lawrence H. White or get the new book Financial Fiasco by Johan Norberg, which Amity Shlaes called “a masterwork in miniature.” Available in hardcover or immediately as an e-book. Or on Kindle!

And for a warning about the dangers lurking in Fannie Mae and Freddie Mac, see this 2004 paper by Lawrence J. White.

Online Privacy and the Commerce Clause

I fear that with the PATRIOT Act on the brain, I’ve been remiss in continuing the colloquy on behavioral ads and privacy regulation that I’d been having with Jim Harper—who flattered me by responding in a long and thoughtful essay a couple weeks back. Because there’s so much interesting stuff there, I hope he won’t mind if I restrict myself to the first part of his reply here, in the interest of making this all a bit more digestible to those whose fascination with the topic may not be quite as consuming as ours. I’ll consider briefly the constitutional issue Jim raises, and turn to some of the specifics of the issue—and the relative merits of the common law alternative—in another post.

So like every good dorm room bull session, we begin in the weeds of  policy and quickly find ourselves breathing the rarefied air of constitutional theory. Supposing for the moment that we thought it were a good idea on policy grounds, would it be within the power of Congress to set ground rules for online advertisers who gather personal data from Web browsers? Recall that there are two particular rules that I’ve said I’d be tentatively open to, but which Jim rejects: a requirement of notice when information is being collected (say via a small link from the adspace to a privacy policy) and a rule establishing that privacy policies are enforceable, so that individual users can sue for damages if a company knowingly  violates its stated policy (thus far, courts have not generally found these to be binding). Does this fall within the power to “regulate commerce … among the several states”? I think so. I’ll start with what I hope will be some uncontroversial arguments and go from there.

So first, let’s grant that there’s one type of “original intent” that everyone ought to care about, whatever their more general interpretive stance: what Ronald Dworkin calls the linguistic intent of the Framers. That is, if words like “commerce” and “regulate” had narrower meanings in 1787 than they do today, we must, of course, read them now in that light: “Commerce” means actual interstate traffic in goods and services, rather than economic activity more generally, and “regulation” is centrally about establishing uniform rules and procedures.  With these appropriately narrowed readings in mind, I think it’s still a slam-dunk that online ads are covered.

There are, in fact, at least three different senses in which behavioral ads might be classed as interstate commerce. First, the purchase of the ad space itself is obviously a commercial transaction—frequently though not necessarily between entities in different states—and there’s a reasonable question of whether a host site with posted privacy policy is implicitly committed to applying that policy as a condition on ad space sold to third parties. The ads themselves will typically propose a commercial transaction, and in a more direct way than other ads are, can plausibly be seen as the first step in the transaction itself, as clicking on the ad will often bring you directly to a page where you can complete the purchase it recommends. Finally, the personal and behavioral user data collected is itself a valuable commodity, and many sites function with a pretty explicit informational quid pro quo: You will receive access to our content in exchange for registering and providing us with certain data. Since the Internet is borderless, most sites will be getting most of their traffic from people located in different states or countries, and even narrowly state-focused sites are likely to have substantial border-crossing traffic. So on a pretty straight reading of the constitutional language, I find very little reason to doubt that Congress may set uniform default rules for these interstate transactions, rather than leaving it to a patchwork of state rules.

Now, Jim’s reason for questioning this seems to be that the primary concern of the Framers was to prevent states from creating trade barriers. That may be, but if we skip ahead to Article 1, Section 10, we find that Congress knew perfectly well how to enact general and purely prohibitory bans on such shenanigans  using more apt “no state shall” language. Instead, they used precisely the same language for interstate commerce as they did for international commerce, where history suggests that the Framers (many of them steeped in the mercantilist economic theories of the day) had been above all concerned to preserve the ability to erect protectionist trade barriers. So we’re left with a choice between ascribing to the Framers a frankly stunning level of linguistic incompetence or supposing that the Constitution actually does grant the affirmative power that a facial reading suggests.

Needless to say, this does not require us to adopt the post–New Deal reading that places anything with the least potential influence on economic activity under Congressional purview. But we’re pretty close to the core here. Indeed, one of the early cases I know Jim considers a lodestone for the “no trade barriers” reading, Gibbons v. Ogden, involves a congressional grant of a license to operate steamboats. The court found that this superseded the monopoly New York had sought to grant another steamboat operator, which fits Jim’s point to an extent, but it’s crystal clear from that (1824) ruling that the power of Congress here is a broad authority to grant or withhold a privilege to operate interstate vessels, and establish conditions on such vessels, including restrictions on ownership and personnel. It seems to me you’d have to get awfully creative to read the clause in a way that authorizes that kind of authority over an “instrumentality” of commerce (water navigation) but forbids Congress from specifying the kind of notice a merchant must provide when initiating an actual interstate commercial transaction.

A slightly more controversial suggestion: When the specific substantive intent of the Framers is not explicitly embedded in the Constitution’s language—by which I mean, the specific use they thought a wise Congress would make of enumerated powers in light of contemporary economic theories, whether liberal or mercantilist—I am not inclined to give it very great weight. Or more bluntly, when the legal language is abstract, I don’t think we’re bound by an original conception of how or where it applied in specific cases—to the extent such a consideration is even intelligible when we’re talking about Internet advertising. Manifestly, very few people at the time of the passage of the Fourteenth Amendment believed that the abstract guarantee of “equal protection” entailed a substantive right of black children to attend public schools the states restricted to whites. But insofar as what they wrote into law was the abstract guarantee, I don’t think we’re required to care what they believed. Our modern reading should be constrained by the original sense of the words used, and to some extent by the original structural purpose served (translated as necessary). But in specific application—whether privacy rules for online ads are encompassed within “regulation” of “commerce”—then even if you pulled out the Ouija board and got a personal verdict from James Madison, it would just be one more opinion.

Finally, and maybe most controversially: What kind of recommendations should we make in a world where our preferred interpretation of the Constitution lost the fight a long time ago? If the question is what we should recommend to judges, presumably we want to recommend that they start shifting back in the direction of a reading we regard as better justified. But what about when, as Jim imagines, we’re advising legislators? Should we only recommend what we believe to be authorized by what we hold to be the best reading of the Constitution, or will it sometimes make sense to endorse legislation that is plainly allowed by the current regnant interpretation, but that might be outside the scope of the interpretation we regard as superior? I think it will, partly for theoretical, and partly for pragmatic reasons.

At a practical level, both legislators and citizens widely believe Congress to have broader policy discretion than most of the authors here. So very generally speaking, I don’t think it serves limited government to refrain from weighing in on the relative merits of policy options that wouldn’t be on the table at all if our arguments had fared better at the meta-level. (Recall the old joke about the principled pacifist answer to how to respond to World War II: Don’t sign the Treaty of Versailles!) Now, on this particular question it’s not a sure thing that Congress or the FTC will act, and maybe “hands off” is the best advice to give. But there are plenty of areas where there’s no realistic chance that Congress is going to abstain altogether, even if we think that’s what the best interpretation of the Constitution requires. In those cases, I think it’s at least sometimes appropriate to flag the meta objection and then say something about the policy merits. Obviously there are limits—I don’t expect I’ll ever express a view on the “best” way to run a torture chamber—but there are plenty of issues where it seems perverse for the people most concerned with limited government to sit out the day-to-day debates and focus on getting Wickard v. Filburn overturned, glad as I am that there are folks hammering that.

That dovetails with the theoretical reason, which has to do with the broader question of why constitutional principles are binding on us at all. I assume it is not because the Founders, brilliant though they were, enjoyed some divine right of command that the inheritors of their institutions are compelled to obey. Partly it’s that the principles embedded in the Constitution are good ones, but a substantial piece of the answer, I think, is that they provide a stable framework within which we conduct our political and private lives. Judges give weight to stare decisis even when they think the case at the fountainhead of a line of precedent was poorly decided, in part because the legitimacy and authority of law are to a great extent a function of its predictability, of the way it allows us to take actions and make agreements and know pretty much what the legal consequences will be, however much else may remain unpredictable. Constitutional restraints do this one level up, establishing (albeit roughly) a domain of legal variation over the longer term. This is  not, for what it’s worth, wacky postmodern Critical Legal Studies stuff; it’s an extrapolation from Hayek. To imagine that you can remake a society’s institutions wholesale—even if your guide is the best interpretation of a founding document, and even if you’re pretty sure that interpretation held sway a couple centuries ago—is the fallacy of constructivist rationalists.

Now, I think the right account of why we should regard the Constitution as binding starts with considerations along these lines, but this has the (perhaps unfortunate) consequence that even if you had a super-awesome unanswerable argument for why the Constitution mandates libertopia, at least when read properly absent the accretions of precedent, you still wouldn’t have an argument that judges, legislators, and government officials must all start acting on this understanding as of tomorrow. What you’d have is a good starting point for a much more gradual process of paring government back down. Not, to be clear, because I think the Constitution “means whatever the Supreme Court says it does”—that would be incoherent, since the court’s practice is unintelligible, and its legitimacy illusory, unless we assume there’s an independent meaning for them to strive toward.  But an “independent” meaning can be located in a community of interpretation and practice that extends beyond the framing generation. By analogy: If I want to use language “correctly” to communicate, I don’t get to just assign whatever meanings I like to words. It’s even possible to make a strong argument that the majority of speakers at a particular historical moment are using a word—like “decimate” or “hopefully” or “brutalize”—improperly. But neither does it mean that the first person to coin the term gets to specify its legitimate uses forever. And, in fact, anyone who insisted on using “decimate” to mean only “reduce by ten percent” would probably find his attempts at communication misfiring badly. To say that meaning is necessarily public and independent—consult Hayek’s cousin Wittgenstein here—does not require a baptismal view of meaning. Or at any rate, whether it does or not depends on the function your interpretive practice serves.

So yeah, that’s all pretty far removed from our original discussion—and I’m hoping far enough below the fold that it doesn’t put me on the wrong end of another dozen arguments with colleagues. I’ll do another post later this week where I actually get to the policy question, and some potent objections that both Jim and Tim Lee have raised.

What Is Regulation?

The New York Times tries to spin the work of Nobel laureates Elinor Ostrom and Oliver Williamson as not anti-regulation:

Neither Ms. Ostrom nor Mr. Williamson has argued against regulation. Quite the contrary, their work found that people in business adopt for themselves numerous forms of regulation and rules of behavior — called “governance” in economic jargon — doing so independently of government or without being told to do so by corporate bosses.

But none of us “anti-regulation” folks are against “rules of behavior that people in business adopt for themselves independently of government.” The world is full of rules, from wearing clothes in the office to customary trade practices to the rules for managing common-pool resources that Ostrom studied. Anyone who opposed such “forms of regulation” wouldn’t be a libertarian or even an anarchist – he’d be a nihilist. (Of course, one could sensibly oppose particular rules; but no one seriously wants a world without rules of behavior.)

David Henderson analyzes one of the misunderstandings about the laureates’ findings:

Some have summarized their work by saying that institutions other than free markets often work well. But that statement can mislead you to conclude that government solutions are the answer. Free markets are only a subset of free institutions. A better way to sum up their work is that what Ms. Ostrom and Mr. Willamson really show is that voluntary associations work.

The Concise Encyclopedia of Economics defines “regulation” this way: “Regulation consists of requirements the government imposes on private firms and individuals to achieve government’s purposes.” That’s the kind of regulation that is controversial among economists and often criticized by libertarians. It is entirely different from “rules of behavior that people in business adopt for themselves independently of government.” Those sorts of rules – often called “governance,” as the New York Times notes – are private and voluntary, made by the voluntary interactions of a few or many people.

The work of Ostrom and Williamson supports the idea of spontaneous order, an order that emerges as result of the voluntary activities of individuals and not through the commands of government. Spontaneous order can be hard to grasp, though it is the background of our entire world – language, common law, money, and the economy are all spontaneous orders (though government has intruded into some of those orders). It’s misleading to say that work of Ostrom and Williamson is somehow supportive of “regulation,” given the way that word is commonly used.

Sheldon Richman made a similar point back in June and wrote a Facebook note on the same paragraph that caught my eye.

Are Living Standards Higher in Denmark or the United States?

The left loves Scandinavia, but for the wrong reason. Nations such as Denmark and Sweden have much to admire, particularly their open markets, low levels of regulation, sound money, and honest governments. Indeed, if fiscal policy is removed from the equation, both Denmark and Sweden are more laissez-faire than the United States according to Economic Freedom of the World (as I noted in this recent video).

But fiscal policy is where the Scandinavians have serious problems. Taxes are confiscatory, punishing people who work, save, and invest. High levels of government spending, meanwhile, reduce economic growth by diverting resources from the productive sector of the economy and funneling them into the stifling welfare state.

Not surprisingly, this is the reason why statists admire Scandinavian nations. Matthew Yglesias, for instance, recently expressed his great admiration for Denmark. And I suppose I would agree with him if asked to pick the world’s best welfare state. I’ve been to the country several times and there is no question that laissez-faire policies in areas other than fiscal policy have helped the nation remain relatively prosperous.

But Yglesias is a bit lovestruck about the Danes (an understandable impulse for non-economic reasons), and it leads him to make some rather strange assertion — presumably because he wants us to believe that Denmark’s good points are because of (rather than in spite of) an onerous fiscal burden. What jumped out at me was his claim that Danes enjoy a “higher average material standard of living” than Americans. I’m not sure where he gets that, since the World Bank, CIA, United Nations, and IMF all show that the United States has more per-capita economic output.

To be fair, measures of per-capita gross domestic product are not a  perfect measure, even if they are adjusted for purchasing power parity. So let’s take a look at other statistics that try to compare living standards. The two that I found (perhaps Yglesias found others, in which case I look forward to his identifying the source) are from the Organization for Economic Cooperation and Development and, coincidentally, the Danish Finance Ministry.

The OECD, many of you already know, is not my favorite organization. The bureaucracy’s anti-tax competition campaign is a reprehensible attempt to hinder the flow of jobs and capital from high-tax nations to low-tax jurisdictions. So surely nobody will claim that the OECD is a collection of market fundamentalists trying to manipulate statistics to make high-tax nations look bad. So let’s now look at this chart, which is based on the OECD’s calculations of average individual consumption per capita, pegged against an average for member nations of 100. It certainly appears that living standards in the United States are much higher.

Table1

Now let’s look at numbers from the Danish Finance Ministry. The bureaucrats there, in response to a parliamentary request, put together figures on per-capita individual consumption and per-capita private consumption.

Table1

I suspect the Finance Ministry is not trying to make Denmark look bad compared to the United States, yet the data certainly suggest that Americans enjoy higher living standards than their Danish counterparts.

New Paper: Would a Stricter Fed Policy and Financial Regulation Have Averted the Financial Crisis?

Many commentators have argued that if the Federal Reserve had followed a stricter monetary policy earlier this decade when the housing bubble was forming, and if Congress had not deregulated banking but had imposed tighter financial standards, the housing boom and bust—and the subsequent financial crisis and recession—would have been averted.

In a new study, Cato scholars Jagadeesh Gokhale and Peter Van Doren investigate those claims and dispute them.

From the Oxymoron File: The Neutral Subsidy

Peter Van Doren points me to some revealing passages in a new article in the Journal of Economic Perspectives. In “Subsidizing Creativity through Network Design: Zero-Pricing and Net Neutrality,” Robin S. Lee and Tim Wu caution against tiered pricing for Internet access services, writing:

[U]nless sufficient bandwidth and quality of service can be guaranteed for the “free” Internet, there is a risk that … tiering will serve to sidestep de facto prohibition on termination fees… . [A] priced-priority system could simply become a de facto fee charged for all content providers if the “free” Internet was of sufficiently poor quality and consumers shifted their usage behavior accordingly… . [T]his might dampen the introduction of new content and services and eliminate the subsidy for content innovation currently provided by net neutrality.

Locking in net neutrality by regulation would lock in a subsidy to content providers. Lee and Wu prefer it, and many of us may like the results, but it’s hard to call a subsidy regime “neutral.”

On Notice

I’m delighted that Julian Sanchez has joined us at Cato. He’s as smart as they come. I’m equally pleased that I’ll have an intellectual sparring partner here on some of my issues from time to time. I encouraged Julian to share here some of what we had been discussing about privacy notices via email.

There are lots of dimensions to our conversation, but I’ll summarize it as follows: Can federal statutes protect Web surfers’ privacy? (We’re talking about privacy from other private actors, not privacy from government. Government self-control expressed in federal statutes could obviously improve privacy from government.)

Julian can see a couple of statutes helping: a requirement that third-party trackers provide a link explaining what they do, and a requirement that privacy policies be enforceable.

I think the former is a fine thing if people want it. I’m dubious about its benefits, though, and wouldn’t mandate it. The latter is the outcome I prefer—strongly!—but a federal statute is the wrong way to get there.

As you read Julian’s comment and mine, I think the divide you’ll see is a common one among libertarians. Some of us love efficiency and wealth creation, which is such a delightful product of free markets. And some of us love freedom for its own sake, not just for free markets, efficiency, and wealth creation. We’ll give up a little efficiency and wealth (in the short term) to protect liberty.

I’ll discuss the topic in the order I would as a legislative staffer (which I was), treating first the subject Julian left to last: whether the federal government has a constitutional role.

Is It Constitutional?

As we all know, the U.S. constitution gave the federal government limited powers, reserving the rest to the states and people. This was for a number of reasons, including contemporary experience with the imperiousness of a remote government.

Technology and communications might eventually change things, but so far nothing has overcome the proclivity of remote powers to misunderstand their subjects and act badly toward them, ignorant of their needs. (I’ll discuss how little the federal government—or anyone—knows about consumers’ privacy interests below.)

The constitution did give the federal government power to “regulate commerce with foreign nations, and among the several states, and with the Indian tribes.” Under the articles of confederation, the states had fallen into trade protectionism, and the purpose of this power was to suppress this form of parochialism.

It’s a straightforward inference from the grant of like authority over international, interstate, and tribal commerce that this was not a general grant to regulate all things we today call “commercial.” It was authority to make regular the buying and selling of things across jurisdictional lines. The Supreme Court allowed the limits on the commerce power to be breached in the New Deal era.

Has the constitutional design of our government been rendered quaint by the emergence of national markets for goods and services? By that international marketplace for goods, services, and ideas that we call the Internet?

No. Because the constitution and the commerce clause were not a commercial charter. They were the design of what we would today call a “political economy.” The framers designed in competition for power among branches of the federal government and between the states and federal government. Government powers contesting against each other would leave the people more free. I won’t recite how federalism works in every detail, but I encourage people to familiarize themselves with its genius.

National markets and the Internet do weaken federalism in some respects. They make it harder for businesses to exit states that make themselves unfriendly through high taxes, poor services, and inefficient regulation. Thus it is harder to hold state officials accountable. But this is no argument for removing their power to a more remote level of government, from which consumers and businesses have no power of exit save leaving the country! Establishing federal commercial rules would cut tendons in the political economy that the constitution created.

And with the whole country under the same rule, there would be almost no way to learn whether a better rule is preferable. A national rule established in ignorance of what the future holds (and they all are) stands a decent chance of being inefficient, unjust, or ill-adapted to new developments in technology, consumer demand, or business models. But there’s no corrective mechanism. Short-term efficiency gained by stabilizing expectations comes at the cost of long-term sclerosis.

There are ways consistent with the constitution to harmonize state laws while leaving states free to innovate in response to change, I hasten to point out.

The “national markets” argument for federal preemption is supported by many efficiency-oriented libertarians. But as markets globalize, the argument will support global regulation equally well. This is something that many of those same libertarians oppose. Perhaps they believe that American politicians can be trusted but not foreign ones—I don’t know, and I don’t see much difference between them. There are many good reasons for preferring local or personal regulation to national or global.

Does Notice Work?

But let’s assume the federal government is going to act in this area, and that we have been assigned to write a statute that promotes the privacy of Web-surfers. Does requiring third-party trackers to provide notice do that? I don’t think so.

First, let’s be more precise about the problem we’re trying to fix. Julian says that there exists a set of consumer expectations that are not being met. “Empirically,” he says, most people don’t expect to be monitored all the time unless they’ve been explicitly warned otherwise. I take Julian’s point to be that this lack of notice is depriving them of information they need to exercise privacy-protective self-help. The result is less privacy than consumers would have with notice and lower consumer welfare.

I haven’t seen the research on which Julian bases his statement about consumer expectations, and I don’t know of any public opinion research that has overcome the deficits Solveig Singleton and I identified in our 2001 paper on privacy polling.

If people have these expectations, they’re counterfactual. I’m willing to be corrected if it’s no longer true, but I believe that most servers record and store the IP addresses from which they have received requests for data, monitoring and archiving records of all visitors in at least an elemental sense.

I don’t think consumers’ expectations are terribly clear. Expectations are still being set, and my recent post about the White House’s cookie policy was a volley in the battle to set them.

My preference is for consumers to be empowered and required to protect themselves from cookie-based tracking that they don’t want. I believe consumers are responsible for their choices in computers, software, Internet connection, and security. No computer is ever “coaxed” into releasing information if it hasn’t been set up to allow it.

Protection against unwanted data release isn’t easy in a changing technology environment, but Internet users have a great deal of help in making their choices, and they will get better at it if their well-being requires it. The alternative is nannying and regulation of the type most libertarians object to.

In his post, Julian appears to agree that people shouldn’t expect privacy in messages posted to public fora but then switches the subject slightly. Drawing an analogy between Web surfing and a changing room at a clothing store, he suggests that much online behavior is like undressing in a cordoned-off area on someone else’s premises. Decency (and, Julian says, law) requires notice when people might be observed in that setting.

I fear that Julian has lumped a lot of very different kinds of interaction together, making the online world legible for the purpose of writing a uniform rule about how it should work. Planners must do away with complexity, of course, but that is why planning fails so badly compared to the self-organizing done in markets and reflected in common law rules.

Again, given the thousands of different contexts of online communication, I don’t think people’s expectations are settled or static. People’s expectations when clicking from site to site sweep across a much wider, newer landscape than when they are buying a toaster, in which expectations truly are relatively settled.

But assuming that people do have the expectations Julian says, will notice that their expectations are not being met make them aware of it? Will it empower them to protect their privacy? Our experience with first-party tracking suggests otherwise.

In the late 1990s, the U.S. commercial Internet adopted a strong custom of posting privacy policies. It’s worth noting that this was adopted without government coercion (though there was the threat of coercion—in our business, we never get controlled experiments). Well-intended though this was, it has not spawned a culture of privacy.

What evidence there is suggests that people don’t read privacy policies. When people choose online service providers, they don’t compare the written policies of different providers. Their sources of information instead include news stories, friends, blogs—a marketplace of information much more robust than these privacy policies.

Consumers do adjust the online products and providers they use, mostly by shunning what they find scary. Firms adjust their privacy practices in light of their own and other firms’ flubs. I think much or all of this would happen regardless of whether there was a privacy notice on every homepage. (Again, we lack controlled experiments.)

The few privacy advocates who read notices—and even many privacy advocates don’t bother—routinely complain about how permissive they are. Many notices say, essentially, “We care about your privacy a lot! And we do whatever we please with the information you give us!”

Consumers do not seem willing to punish them for having such information policies. One possibility is that consumers don’t care about privacy in many circumstances. That’s not crazy. Another is that notices don’t inform. There’s a good chance that consumers take the existence of notice as an indication that they are being accorded privacy, regardless of what’s in the policy. Privacy notices may fool consumers into thinking they’re protected when they’re not.

In the main I can’t say our online culture is necessarily shaping up wrongly, but the presence of notice about first-party tracking has not made consumers much better off in terms of privacy. It may have given information to advocacy groups and watchdogs that they otherwise wouldn’t have gotten so easily, but links on every homepage are just ritual. The privacy conversation happens elsewhere. I don’t think this ritual should be extended and deepened with more notice about more things.

Julian is not alone in thinking it should, of course. There are many who would impose comprehensive notice regimes or refine the ones we’ve got. Many of these people confuse privacy notices with privacy, and privacy laws with privacy. I don’t think mandating privacy notices bears up as an effective consumer protection.

Easier Said Than Done

I also think there are a lot of practical problems and costs to mandating privacy notices.

As so many have before him, Julian asks for an “ordinary-language explanation” of what is going on. But we don’t yet have a reliable and well-understood language for describing all the things that happen with data. Much less do we know what features of data use are salient to consumers. Many blame corporate obfuscation for long, confusing privacy policies, but just try describing what happens to information about you when you walk down the street and the difficulty with writing privacy policies become clear.

Then there’s avoidance. A lot of tracking is fungible, and new innovations in tracking are sure to come, both on the technical side and the business side. If a notice regime were to stir consumer opposition to third-party tracking, the tracking could well shift back to first parties who could then serve up the products of tracking as third parties do now. What will the rule have done, then, but distort and raise costs in information markets without improving privacy?

The answer when notice fails to protect privacy, of course, is to ban tracking altogether, a goal that I think some privacy advocates maintain sub rosa. This would undercut the free-content Internet, which is supported by advertising, and which uses tracking for targeting. Mandating notice is a step toward giving people privacy they may not want while taking away content they do.

Julian would propose an elegant rule, of course, but would it survive the trip through a legislature? We have experience there, too, with California’s privacy policy mandate. Does it look simple to you? As statutes go, it actually is. (California Business and Professions Code Section 22575-22579, you’ve just been damned with faint praise…!)

There are plenty of seams in it, though. Take what it means to “conspicuously post” a privacy notice—a defined term in the legislation. Last year, a brouhaha broke out over the meaning of “conspicuously post” with regard to Google’s privacy policies. It would have been funny if it weren’t so stupid. By the reckoning of many, Google was failing to “conspicuously post” its privacy policy by failing to put a link to it on its homepage.

Google, of course, is a search engine. It helped bring about the end of the portal era, during which we went to sites with great masses of links. Google works hard to maintain a clean, crisp, “anti-portal” homepage, and its privacy policy was and is easily found via search. But it could not withstand the pressure to post a privacy link on its home page. Today, more people probably click on that link by mistake than on purpose.

Is html the last protocol? How do you implement a link to a privacy notice on services of the future that don’t necessarily use the Web? How much money and time should a revolutionary new Internet device or service using a new protocol spend arguing to the Federal Trade Commission that it should be allowed to proceed?

Of course, every new regulation is wafer-thin. I don’t oppose them because each and every one of them lack any merit—only because the entirety of them do more harm than alternatives would. So let’s now turn to my preferred alternative: common law.

Common Law Rules Rule

Julian analogizes his third-party notice rule to the common law contract doctrine of implied warranty, of which I approve because it has shown over generations to be a fair and efficient rule. Things sold as toasters are supposed to toast bread. If you’re selling a toaster that doesn’t do that, and if you don’t make that clear, you violate a term implied by common law into sales contracts. But rules that haven’t been tested and proven over time like this don’t deserve to be laws.

Until recently (in historical terms), all law was common law. People made up the laws that suited their needs and passed them from generation to generation. Julian’s description of common law as “parasitic” on social practice is inapt. Social practice and common law are on a continuum. When a custom is so deeply ingrained and wrapped up with the rights we accord people, we treat that custom as law and penalize or punish deviations through coercive means. (I don’t think there should be a lot of law, of course.)

With our habit for personality cults, we like to think that Hammurabi, Justinian, and Napoleon were “law-givers,” but what they did was write down law that already existed in the practices of the people. (In an age of mass illiteracy, it’s doubtful that writing something down did much to affect people’s behavior.)

When civil law countries started writing summaries of their law, they took one road: expert lawmakers would decide the rules that govern society.  Common law countries went down another path, in which courts formalized the law discovery process but did not seek to supplant it.

Legislatures in both systems today are typically bodies of non-experts—neither legal experts nor subject matter experts—who deign to script how society should work rather than letting society decide for itself. As we see daily in Washington, D.C., the result is not a system that gravitates toward fairness or efficiency, but a series of compromises dividing goodies (money and rules) among the best-represented interests in society, the rest of the population be damned.

No legislature today, and for all his smarts not Julian, has the knowledge needed to write an appropriate rule about what (if anything) people should be told when they go to a Web site or click on a link. With users having the ability to discern what a link does, and having knowledge that the Internet is a big copying machine, I think that the most efficient, fair, and protective rule will probably be caveat clickor. But I am willing to wait and see if that is best.

If consumers want to know something before they click, they are well equipped to let Web sites know their preferences. Let social customs evolve to meet the needs of consumers in light of ongoing multi-layered change in the Internet and its use.

“But doesn’t an ever-changing Internet make the case for some modest regulation? The Internet is so new! We really must have baseline rules or we’ll have costly disorder! We pay the price every day for our failure to regulate because people aren’t going online like they would if they were confident of their privacy!”

These are arguments regulators and social engineers make to sound “market friendly.” The problem is that they rest on the same unsupported assertions that Julian has made about privacy expectations, notice, human wants, and the interactions among these things.

There is plenty of surmise but little good evidence that people are staying offline because of privacy concerns. There is little understanding of how to get people to protect their privacy. Notice is at best an unproven technique, more probably a waste of time.

You can regulate in haste, but you won’t necessarily achieve anything. And it’s not the job of legislators—certainly not Congress—to make the privately owned and operated Internet more user-friendly.

Julian has it backward to suggest that statutes should move in to stabilize expectations when technology is fast-changing. That’s precisely the wrong time to congeal the rules.

When existing law doesn’t serve new conditions, custom followed by common law slowly discover adaptations to satisfy them. It takes some time—and it’s time that should be taken. The alternative, statutory law, has no corrective function to undo regulations that fail to suit later circumstances.

The notice rule Julian proposes is planning of the type we deplore when it comes to industrial production, the layout of towns and cities, transportation, energy, educational curricula, and so on. Why support it when it comes to online rules of engagement?

In my withering, fun attack on Julian’s notice rule, I’ve left out whether privacy notices should be enforceable. They should. As contract terms. I look forward to that rule being adopted at common law. I regret it each time the Federal Trade Commission disrupts the conditions that would establish that rule. And I’m eager to learn how society will solve the problem of damages.