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How a smaller government made the iPhone possible

From the inglorious year 1913 until 1984 the United States had a government sanctioned telephone monopoly, in some form or another, with very heavy government involvement in the industry. During that time many homes in America even had the same telephone. It was the Western Electric model 500 rotary phone. The U.S. Government limited what telephone company could be used and the Bell System (AT&T) limited what telephones could be used.

That anti-competitive system created by government likely slowed development in residential telecommunications. In 1984 those Model 500 rotary phones, very similar to the model that had first been developed in the late 1940s was still in use. It was said that telephone service was a “natural monopoly” so many people considered all of this an appropriate relationship between government and business.

1984 – Lots of telephones looked the same

I was 5 then. I remember that on the bottom of my family’s telephone was a sticker that said our phone was property of Illinois Bell. I had imagined that our telephone had somehow been accidentally stolen the first time I saw that sticker. “Why would something in our house belong to someone else?” I wondered. It was because government made the Bell System the official monopoly and the Bell System was able to make policies that consumers couldn’t really question, including the fact that millions of American households would rent their telephones from the phone company.

As I’ve travelled former communist Czecho-Slovakia over the years, and have so often seen the old model of phone that was used in communist times, I think about how similar the two countries (Czecho-Slovakia and the U.S.) were at times. Some Slovak houses, even today, have the same sleek, communist model of telephone. I assume that’s because that was the one phone that was available. I can’t help but look back on how very similar our monopoly telephone laws in America (along with a host of other laws) were to the communist countries.

While government didn’t own the telephone company in America, it’s foolish to pretend that there’s much difference between outright government ownership and heavy-handed control. Today, things look very different, and it’s almost impossible to imagine that the United States of America once had a telephone monopoly.

1998 – “Natural monopolies are a fact of life”

Almost fifteen years later, in 1998, an economics professor at the University of Illinois taught me that natural monopolies exist and are a fact of life. He cited telephone services and cable television as two examples. He professed this theory even as everyone on campus was slowly beginning to dial numbers like 10-10-220 or 10-10-321 in order to use cheaper long distance companies to call home.

That professor probably kept saying it the following year when cell phones finally became the rage on our campus, just five years after the U.S. Government in 1994 finally allowed phone manufacturers enough room in the radio spectrum for widespread mobile phone use.

Within two years, mobile phones went from being minimally used to being used by practically everyone on that campus and within the next decade, the iPhone would appear.

Government-enforced monopolies – stifling innovation

Who could possibly have imagined that in 23 years time America would go from having the same old AT&T 1940s style phones in so many homes to having iPhones in so many pockets? The Western Electric 500s were put there by a company both heavily regulated and heavily favored by government, a company that was largely disinterested in innovating. Heck, a company AND a government that were both largely disinterested in innovating.

The iPhone in contrast was made popular by companies, engineers, consumers, who moved too darn quickly for government to even be able to understand what was happening, let alone to have enough time to try regulating it.

As brilliant as everyone for the next few days and perhaps for the rest of the year will say Steve Jobs was, my guess is that not even Steve Jobs had any idea in 1984 that 23 years later something like an iPhone would exist. My guess is that almost no one anywhere in the world was able to predict that with much accuracy. When government took the power to make decisions out of the hands of entrepreneurs and consumers, there was a different group of people that they left the decision making authority in the hands of – the federal regulators and the members of the board of directors at AT&T.

In all likelihood, no one who sat in on AT&T board meetings 23 years ago was able to predict that an iPhone might one day appear. No one who regulated the telecommunications industry would be able to predict that. That probably didn’t matter to them though. The U.S. Government ensured that what was good for AT&T and what was good for the regulators would be what the rest of the US would abide by – even if that meant everyone would use the same rotary telephone for thirty-five years. Had residential telecommunications been left in the hands of government and AT&T it’s unlikely that anything like an iPhone would today exist.

We don’t need to rely on one “know-it-all” in a free market

If one person makes a mistake in a free market, it’s not that big of a deal the way it is in a controlled economy. The brilliance of allowing competition and a free market is that no one person needs to know everything. No one person needs to know the future. No one person needs to understand the desires of every other person. This is all quite convenient for us, since no one person can know the desires of every other person.

Had you asked someone in 1984 “What innovations will a more competitive marketplace in telecommunications bring over the next 23 years?” that person probably couldn’t have told you with any certainty. Twenty three years is a long time when technology is allowed to develop freely. But they would have been able to at least have told you that something better could come out of a freer system of competition.

That’s how the mechanism of competition works. You don’t need to be all-knowing to be able to believe that competition works. You don’t need to prove that competition is better by explaining specifically how competition will make health care better, will make automotive consumers happier, will make users of money better off. It’s enough to know that such happiness is part of the nature of competition.

While I don’t know what benefits competition will bring to industries that are heavily controlled by government, I do know that experience shows free competition will advance technology and respond to the needs and wants of the consumer in a way that protectionism in its many forms can’t. You may call it mercantilism, communism, cronyism or whatever other name you’d like to put on the law being used to protect a producer and to limit the choice of consumers and to limit the ability of competitors to enter a market freely.

By opposing government protectionism, you support a belief that better solutions can be had for any problem out there when a spirit of competition is allowed to drive innovation. By opening up the discussion and letting the profit-motive work its magic, better solutions can be found by a variety of enterprising people and not just whoever happens to be in the AT&T boardroom or in the office of a federal regulator at the time.

Steve Jobs was a brilliant, charismatic man in the right place at the right time and my life is enriched because someone was there to do what Steve Jobs did. I don’t even use an iPhone, but I know that everything from my old Nokia to my sleek new Motorola has the imprint of Steve Jobs and dozens of other people like him. My time on the internet is influenced by him. My time on any computer today is influenced by him. The word-processing program I’m using to write this was influenced by him. Tomorrow when I go on to LRC to read this essay and others like it, I will be reading from a Jobs influenced font. I wonder how much less pleasant my work as a writer would be if in the year 2013, the U.S. was celebrating the 100th anniversary of the Ma Bell monopoly alongside the anniversary of another government enforced monopoly – the Federal Reserve Bank.

Free markets make it easier to help

I think competition is good for us. Freedom allows that competition to take place. I don’t know specifically how our lives will be made better through free markets in the future. I just know from past experience that it can and will. The existence of the iPhone today and not just the continued use of the Western Bell model 500 is an example of the victory of freer markets. I know over and over that when government allows people to get together and to freely help one another out, people are left better off than when government intervenes and slows that process.

By “helping each other out” I mean being kind and charitable, but I also mean things like – selling a product, selling a service, selling time, selling labor, selling advice. Those are all helping people out.

When I buy a book on Amazon, I go through the realization that my money is worth less to me than that book, and I have the entire team of people who have cooperated in getting me that product to thank for their help. They in turn consider my money to be more valuable to them than that book. We have helped each other out in that situation.

If we push government aside, people like Steve Jobs – brilliant, charismatic people – will step forward and lead the way. There will be dozens, maybe even hundreds of options that present themselves as solutions to every minute problem. There will be open dialogue and competition. Their will be lots of failure for daring entrepreneurs and investors. There will also be much success for all of us. We will be left with more than just the broken one-size-fits-all systems that are heavy and clunky like the “property of Illinois Bell” phone that I grew up calling my aunts and uncles on.

We will end up with some carrying around the newest and best iPhones and even with some of the poorest people in society being able to carry around second and third generation models of fantastic phones. No one is forced to use that old Western Bell clunker today. The Western Bell 500 and the iPhone are metaphors for what can happen in all spheres of life if government will just step aside.

Where there is only one manufacturer and where there is a market closed to competition, the improvements come slowly. A government sanctioned monopoly simply has such limited desire to innovate. It’s part of the natural corruption that comes from the state protecting manufacturers. The easier it is for a potential competitor to enter a market, the better it can be for us all. Standing in the way of easy barriers to entry, however, is the U.S. Government that puts into place a host of prohibitions (often called “regulations”) that ultimately make life more difficult and more expensive for consumers. Instead of letting consumers regulate their own buying, instead of letting markets regulate themselves, we are left with government interference sapping vital energy and resources from industries.

Not for a moment will I pretend that the competition created by a free market is flawless. But it does a pretty good job, allows for a great deal of personal freedom, and allows society to have more iPhone quality developments and fewer Western Bell 500 quality stagnations. The later stagnated for about 35 years. The former had five new “generations” in its first five years of existence. The later we were beholden to. The former we buy because we choose to have it.

Imagine this – if government steps aside today from health care, from medicine, from research, from education, from retirement funding, from charity, from banking, from agriculture, the automotive industry, and a host of other industries – if the government steps away from virtually any area of life it regulates, it is entirely reasonable to assume that in 20 years we will have seen our service and products in other industries go from the equivalent of “AT&T – standard issue and clunky” to iPhones, and maybe in 30 years you and I will be meeting on this website celebrating the life and mourning the death of some energized entrepreneur like Steve Jobs who was there to make that change happen.

Thank you, Steve Jobs, for having been one of those people who demonstrated how much can happen when government just steps aside.

This article was previously published on LewRockwell.com

3 comments to How a smaller government made the iPhone possible

  • Tim Lucas Tim Lucas

    What a nice article!

    I might also add that sometimes when government-sanctioned monopolies are broken, that service standards of the given industry may drop, due to the fact that consumers choose to spend less on the new goods and services for which they now have a choice. This does not alter the argument since the implication of this is that this lower-cost, inferior service is what they prefer, now that they have the choice, in order that they might spend their money elsewhere.

    This is particularly the case with directly government-subsidised monopolies. Should – for example – the government choose to stop subsidising bus transport within London, or the postal service in the countryside, I have no doubt that the number of bus routes and post offices would reduce amid a chorus of complaints. The less-visible and beneficial effect would be lower taxes for everyone, and would more accurately reflect consumers’ preferences. However, the inability of people to easily see this is easily used by special interest groups and is – in my view – one of the principal reasons that privatisation policies are not adopted.

  • Very good point Tim. Thank you for the reality check – a shift away from government sanctioned monopoly will not be sweet for everyone, because life will change and may bring with it a negative outcome for some according to the desires of the market.

    Thank you as well for your compliment.
    Allan

  • Croydonius

    Good article. Economics professors discussing a ‘natural monopoly’ will also hopefully one day be seen as an amusing relic of the past. I would add that stagnation relative to other economies is also very important. The UK has a dark history of maintaining ‘comfortable’ monopolies and state subsidy, often in areas in which we used to lead the world (coal, steel and car production for example), only to one day hit a brick wall of total uncompetitiveness that means adjustment is a desperate shock. Opinion formers must use this history to show the electorate that buying temporary comfort will make the long term pain all the worse.

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