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Radio Regulation Revisited: Coase, the FCC, and the Public Interest

Published online by Cambridge University Press:  27 April 2009

David A. Moss  and
Michael R. Fein
David A. Moss
Affiliation:
Harvard University
Michael R. Fein
Affiliation:
Brandeis University
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Extract

It is now more than forty years since Ronald Coase's seminal article on the Federal Communications Commission first appeared in the pages of the Journal of Law and Economics. The article remains important for a number of reasons, not least of which is that it offered his first articulation of the Coase Theorem. Of even greater importance for our purposes, the article literally redefined the terms of debate over American broadcast regulation, in both historical and contemporary treatments of the subject.

Type
Articles
Information
Journal of Policy History , Volume 15 , Issue 4 , October 2003 , pp. 389 - 416
Copyright
Copyright © The Pennsylvania State University, University Park, PA. 2003

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References

Notes

1. Coase, Ronald H., “The Federal Communications Commission,” Journal of Law & Economics 2 (1959): 1–40CrossRefGoogle Scholar.

2. Ibid., 26–27.

3. Ibid., esp. 12–40.

4. Hazlett, Thomas W., “The Rationality of U.S. Regulation of the Broadcast Spectrum,” Journal of Law & Economics 33 (1990): 137–138CrossRefGoogle Scholar nn. 12–14.

5. Ibid., 175.

6. Hazlett, Thomas W., “Assigning Property Rights to Radio Spectrum Users: Why Did FCC License Auctions Take 67 Years?” Journal of Law & Economics 41 (1998): 529CrossRefGoogle Scholar. See also Hazlett, “Rationality of U.S. Regulation,” 174.

7. Hazlett, “Rationality of U.S. Regulation,” 138.

8. Since 1959, of course, the public-interest theory on which Coase relied has fallen into disrepute, with the study of policy formation focusing increasingly on economic explanations, in which lawmakers are assumed to behave as simple rent-seekers rather than as guardians of the public interest. This change was first evident in the works of Stigler, Posner, and Pelzman with respect to regulation; but it subsequently reached the study of legislation as well. See Stigler, George J., “The Theory of Economic Regulation,” Bell Journal of Economics and Management Science 2 (1971): 3–21CrossRefGoogle Scholar; Posner, Richard A., “Theories of Economic Regulation,” Bell Journal of Economics and Management Science 5 (1974): 335–358CrossRefGoogle Scholar; Pelzman, Sam, “Toward a More General Theory of Regulation,” Journal of Law & Economics 19 (1976): 211–240CrossRefGoogle Scholar; Priest, George L., “The Origins of Utility Regulation and the ‘Theories of Regulation’ Debate,” Journal of Law & Economics 36 (1993): 289–223CrossRefGoogle Scholar.

9. With regard to the equal-time rule, for example, a Senate report stated explicitly in 1959, the year Coase published his article: “If the number of radio and television stations were not limited by available frequencies, the committee would have no hesitation in removing completely the present provision regarding equal time and urge the right of each broadcaster to follow his own conscience…. However, broadcast frequencies are limited and, therefore, they have been necessarily considered a public trust” (Senate Report No. 562, 86th Cong., 1st sess. 1959, 8–9, as cited in Red Lion Broadcasting Co. v. FCC, 395 U.S. 367 [1969], 400).

10. Coase, “Federal Communications Commission,” 25.

11. National Broadcasting Co. v. United States, 319 U.S. 190 (1943), 213, as quoted in Coase, “Federal Communications Commission,” 12–13.

12. Coase, “Federal Communications Commission,” 14.

13. The phrase “mysterious technology” appears in Coase, “Federal Communications Commission,” 40.

14. Coase, “Federal Communications Commission,” 25–26.

15. For historical treatments of American radio regulation prior to Hazlett, see esp. Minasian, Jora R., “The Political Economy of Broadcasting in the 1920s,” Journal of Law & Economics 12 (1969): 391–403CrossRefGoogle Scholar; Barnouw, Erik, A History of Broadcasting in the United States: A Tower in Babel, Vol. 1—to 1933 (New York, 1966)Google Scholar; Rosen, Philip T., The Modern Stentors: Radio Broadcasters and the Federal Government, 1920– 1934 (Westport, Conn., 1980)Google Scholar.

16. Hazlett, “Rationality of U.S. Regulation,” 138 (where the first reference to “error theory” appears). A survey of “error theory” literature can be found at 142, notes 25–27. See also Hazlett, “Assigning Property Rights to Radio Spectrum Users.”

17. Ibid., 151.

18. Ibid., 152.

19. Hoover, Herbert C., “The Urgent Need for Radio Legislation,” Radio Broadcast 2 (1923): 211Google Scholar, as quoted in Hazlett, “Rationality of U.S. Regulation,” 152.

20. How important the Oak Leaves decision was in prompting federal action is a matter of some debate. Charlotte Twight, in particular, has argued that the ruling could not have been a pivotal factor since Congress had already begun moving toward enactment months before it was issued. See Charlotte Twight, “What Congressmen Knew and When They Knew It: Further Evidence on the Origins of U.S. Broadcasting Regulation,” Public Choice 95 (1998): 247–76. Rather more sympathetic to Hazlett's account, Hugh Aitken concedes that it “is a heavy burden to place on a single decision in a single state court. Oak Leaves, however, was no ordinary decision. It was widely noted and widely discussed. It had the potential, if accepted as a precedent, to determine the future of the broadcasting industry” (Aitken, Hugh G. J., “Allocating the Spectrum: The Origins of Radio Regulation,” Technology and Culture 35 [1994]: 712)CrossRefGoogle Scholar.

21. Hoover v. Intercity Radio Co., 286 Fed. 1003 (1923); United States v. Zenith Radio Corp., 12 F. 2d 614 (1926).

22. Hazlett, “Rationality of U.S. Regulation,” 158.

23. Ibid., 158; Rosen, Modern Stentors, 93–95.

24. Radio Act of 1927, P.L. 632, 44 Stat. Chap. 169, 23 February 1927, section 11, 1167.

25. Hazlett, “Rationality of U.S. Regulation,” esp. 160–61.

26. Ibid., 175.

27. Hazlett, “Assigning Property Rights to Radio Spectrum Users,” 541.

28. Hazlett, “Rationality of U.S. Regulation,” 162.

29. As quoted in Hazlett, “Assigning Property Rights to Radio Spectrum Users,” 542.

30. Hazlett, “Rationality of U.S. Regulation,” 172.

31. See esp. Hazlett, “Assigning Property Rights to Radio Spectrum Users.”

32. Significantly, no other nation opted for a market-based solution. For a comparative international perspective on radio regulation, see Aitken, “Allocating the Spectrum,” 688–89; Keller, Morton, Regulating a New Economy: Public Policy and Economic Change in America, 1900–1933 (Cambridge, Mass., 1990), 82Google Scholar.

33. House of Representatives, Committee on the Merchant Marine and Fisheries, Hearings on H.R. 7357 To Regulate Radio Communication, 11–14 March 1924, 8, 10. The first sentence of this passage has been modified to correspond to the version, presumably corrected, that appears in the Congressional Record. See Congressional Record, 69th Cong., 2d sess., 1927, 68, pt. 3:2571.

34. House, Hearings, To Regulate Radio Communication, 36.

35. Ibid., 201, 202.

36. Ibid., 202.

37. Ibid., 202.

38. Hazlett, “Rationality of U.S. Regulation,” 144.

39. See esp. House of Representatives, Committee on the Merchant Marine and Fisheries, Hearings, To Regulate Radio Communication, 6, 7, 14, 15 January 1926, 207–8.

40. Senate, Committee on Interstate Commerce, Hearings on S.1 and S.1754 Radio Control, Part I, 8–9 January 1926, 34.

41. Ibid., 39.

42. Ibid., 43–44.

43. Ibid., 42–44.

44. Ibid., 46.

45. Ibid., 47.

46. Congressional Record, 69th Cong., 2d sess., 1927, 68, pt. 3:2572. Ewin L. Davis was the ranking Democratic member of the radio subcommittee.

47. Congressional Record, 69th Cong., 1st sess., 1926, 67, pt. 5:5558. Johnson himself ultimately opposed the House bill because he did not think it went far enough in preventing monopoly.

48. Coase, “Federal Communications Commission,” esp. 7, 12, and 38.

49. Dill, Clarence C., Radio Law: Practice and Procedure, (Washington, D.C., 1938), 82Google Scholar.

50. Radio Act of 1927, sections 13 and 17. The Radio Act is reprinted in Dill, Radio Law, 255–71. As former FCC chief economist Dallas Smythe explained, “Congress was impressed with the dangers of monopoly control over broadcasting by means of patents or any of the other devices which the fertile human mind might concoct, and wrote special sanctions into its broadcast policy. Ordinary private enterprise was subject to the Anti-trust laws. Additional penalties were prescribed for broadcasters who violated those laws” (Smythe, Dallas W., “A National Policy on Television?” Public Opinion Quarterly 14 [1950]: 465)CrossRefGoogle Scholar.

51. Legislators of the time frequently worried about industrial monopolies, and kept a particularly close eye on AT&T. According to Ithiel de Sola Pool, the “frequent alarms [in the mid-1920s] about the threat of broadcasting monopoly” often had more to do with the specter of AT&T than with the nascent broadcasting networks. See de Sola Pool, Ithiel, Technologies of Freedom (Cambridge, Mass., 1983), 136Google Scholar.

52. See Godfrey, Donald G. and Limburg, Val E., “The Rogue Elephant of Radio Legislation: Senator William E. Borah,” Journalism Quarterly 67 (1990): 214CrossRefGoogle Scholar; Bensman, Marvin, The Beginning of Broadcast Regulation in the Twentieth Century (Jefferson, N.C., 2000), 189Google Scholar.

53. Coase, “Federal Communications Commission,” 16.

54. Friedrich, Carl J. and Sternberg, Evelyn, “Congress and Control of Radio-Broadcasting I,” American Political Science Review 37 (1943): 809Google Scholar.

55. Ibid.

56. Report cited in National Broadcasting Co. v. United States, 223.

57. Ibid., 224. See also discussion in section IV infra.

58. Radio Act of 1927, section 12.

59. Reaffirming the use of the ether for radio communication, or otherwise, to be the inalienable possession of the people of the United States and their government, House Report No. 719, 68th Cong., 1st sess., 13 May 1924, 3.

60. Coase, “Federal Communications Commission,” 19.

61. Ibid., 14.

62. National Broadcasting Co. v. United States, 217.

63. Ibid., 217–18.

64. Ibid., 219, citing FCC v. Pottsville Broadcasting Co., 309 U.S. 134 (1940), 137.

65. FCC v. Pottsville Broadcasting Co., 138.

66. Coase, “Federal Communications Commission,” 7.

67. National Broadcasting Co. v. United States, 227.

68. Red Lion Broadcasting Co. v. FCC, 387.

69. Ibid., 388–90. On Red Lion and the structure of radio regulation, see Baker, Edwin C., “Turner Broadcasting: Content-Based Regulation of Persons and Presses,” in Hutchinson, Dennis J., Strauss, David A., and Stone, Geoffrey R., eds., The Supreme Court Review 1994 (Chicago, 1995), 57–128Google Scholar.

70. Hazlett, “Assigning Property Rights to Radio Spectrum Users,” 568.

71. Rossiter, Clinton, ed., The Federalist Papers, “No. 10,” (New York, 1961), 77–84Google Scholar.

72. The Federal Radio Commission, for example, declared in 1928, “There is not room in the broadcast band for every school of thought, religious, political, social, and economic, each to have its separate broadcasting station, its mouthpiece in the ether. If franchises are extended to some, it gives them an unfair advantage over others.… As a general rule, postulated on the laws of nature as well as on the standard of public interest, convenience, or necessity, particular doctrines, creeds, and beliefs must find their way into the market of ideas by the existing public service stations, and if they are of sufficient importance to the listening public the microphone will undoubtedly be available. If it is not, a well-founded complaint will receive the careful consideration of the Commission in its future action” (Great Lakes Broadcasting Company, unpublished 1928 report of the Federal Radio Commission, as quoted in “The Federal Radio Commission and the Public Service Responsibility of Broadcast Licensees,” Federal Communications Bar Journal 11 [1950]: 8).

73. This story comes from the institutional economist John R. Commons, who claimed that it played an important role in inspiring his distinctive approach to economics. “Ever after,” Commons wrote in his autobiography, “I looked for the omitted factors, or the ones taken for granted and therefore omitted, by the great leaders of the science of economics. That was how I became an economic skeptic” (Commons, John R., Myself [New York, 1934], 28)Google Scholar.

74. Importantly, several particulars of the history of radio regulation cannot be explained by our fear-of-monopoly logic and instead are more consistent with Hazlett's franchise-rents framework. For instance, the failure to increase the spectrum available to broadcasters, in accordance with the wishes of big radio corporations, suggests that more than anxiety over concentrated control of radio was at play. In addition, all users of radio waves, and not solely broadcasters, were subjected to extensive regulation. If only fear of political monopoly were at work, then nonbroadcast uses of the spectrum could have been left to the private market. Yet it appears from recent history that broadcasting is still regarded as special and that the fear of monopoly is still operative when it comes to the federal government's treatment of the spectrum. In the 1990s, Congress enthusiastically backed the auctioning of portions of the nonbroadcast spectrum but placed severe limits on the auctioning of broadcast licenses (Hazlett, “Assigning Property Rights to Radio Spectrum Users,” 560–70; Aitken, “Allocating the Spectrum,” 716; Keller, Regulating a New Economy, 81–85). As Hazlett himself acknowledged, “The broadcasting sector was pointedly singled out for special treatment” and “broadcasting license auctions have been authorized such that they will not much matter” (Hazlett, “Assigning Property Rights to Radio Spectrum Users,” 565, 568).

75. On criticism of the FCC, see, e.g., Hazlett, “Assigning Property Rights to Radio Spectrum Users,” 540–41, 544. On the preference for commercial broadcasters, see Horwitz, Robert, The Irony of Regulatory Reform: The Deregulation of American Telecommunications (New York, 1988), 167–174Google Scholar; McChesney, Robert, Telecommunications, Mass Media, and Democracy: The Battle for the Control of U.S. Broadcasting, 1928–1935 (New York, 1993), chap. 2Google Scholar; Rosen, Modern Stentors, 12–13; Godfried, Nathan, WCFL, Chicago's Voice of Labor, 1926–78 (Urbana, 1997)Google Scholar.

76. See also Kalt, Joseph P. and Zupan, Mark A., “Capture and Ideology in the Economic Theory of Politics,” American Economic Review 74 (1984): 279–300Google Scholar.

77. Statement of Reed E. Hundt, Chairman, Federal Communications Commission, on Spectrum Management Policy, before the Subcommittee on Telecommunications, Trade, and Consumer Protection, Committee on Commerce, U.S. House of Representatives, Federal Document Clearing House Congressional Testimony, 12 February 1997. See also Gregory L. Rosston and Jeffrey S. Steinberg, “Using Market-Based Spectrum Policy to Promote the Public Interest,” Federal Communications Commission Report, January 1997. Available at http://wireless.fcc.gov/auctions/data/papersAndStudies.html.

78. Rosston, Gregory L. and Hazlett, Thomas W. et al. , “Comments of 37 Concerned Economists,” in the Matter of Promoting Efficient Use of Spectrum Through Eliminating Barriers to the Development of Secondary Markets, Federal Communications Commission, WT Docket No. 00–230, 7 02 2001, 2, 4, 7Google Scholar.

79. As quoted in Nicholas Lemann, “The Chairman: He's the Other Powell, and No One Is Sure What He's Up To,” New Yorker, 7 October 2002, 48.

80. Hollings, Ernest F. and Dorgan, Byron, “Your Local Station, Signing Off,” Washington Post, 20 06 2001, A27Google Scholar.

81. See, e.g., Benkler, Yochai and Lessig, Lawrence, “Net Gains,” The New Republic, 14 12 1998, 12Google Scholar; Benkler, Yochai, “Overcoming Agoraphobia: Building the Commons of the Digitally Networked Environment,” Harvard Journal of Law & Technology 11 (1998): 287Google Scholar; Noam, Eli, “Spectrum Auctions: Yesterday's Heresy, Today's Orthodoxy, Tomorrow's Anachronism. Taking the Next Step to Open Spectrum Access,” Journal of Law & Economics 41 (1998): 765CrossRefGoogle Scholar; Lessig, Lawrence, Code and Other Laws of Cyberspace (New York, 1999), 182–185Google Scholar; Sunstein, Cass R., “Television and the Public Interest,” California Law Review 88 (2000): 511–512CrossRefGoogle Scholar; Hickey, Neil, “Power Shift: As the FCC Prepares to Alter the Media Map, Battle Lines Are Drawn,” Columbia Journalism Review 41 (03–04 2003): 26–31Google Scholar.

82. Hollings and Dorgan, “Your Local Station, Signing Off.”