Innovation Versus Privacy

Innovation Versus Privacy

Singleton Commentary Published by The Cato Institute
August 13, 1999

Intel is now under fire for designing unique identifier codes into its new Pentium III chips, and Microsoft is taking heat for its document codes. Sun's Jini software would let any digital device talk to any other, and some critics are apoplectic. What about privacy? Why are computer companies building identification devices and codes into chips, programs and networks?

It's called innovation – you know, that Information Age thing. And its benefits will prove enormous. But innovation is now bumping up against a barrage of criticism from self-styled privacy advocates. Sun CEO Scott McNealy's ruffled a few feathers when he suggested that worrying about Jini's privacy implications was something we should get over. But he was right on track.

The barriers to the free flow of information that privacy regulation would create are pointless. We are moving to a world of electronic commerce where strangers do business with strangers, separated by vast distances and complex networks. Our machines and intelligent agents will want to talk to one another and trade the information they need for trust to develop. Why stop them?

The concern for privacy begins with the Fourth Amendment to the United States Constitution. It limits the unique and terrifying powers of government to conduct searches and seizures, to arrest citizens, to try them, and to seize their assets.

But computer companies don't wield that kind of government power. What can they do with information they gather about their customers? Use it to send them information. To develop new products. To improve their service. To cut costs. To bring us faster connections. There's no need to protect consumers from this normal commercial activity.

Privacy advocates are urging the FTC to create a world where every new network technology conforms to the bizarre idea that trade in information that simply reports facts about real people and real transactions is wrong. If this rule had been in place 100 years ago, regulators might have effectively made credit reporting too expensive to operate as a business, and we'd still be stuck in a world where poor people couldn't buy goods on credit. Telephone books, Internet Protocols, e-mail addresses and Ethernet cards might have been regulated out of existence.

This is not an exaggeration. European privacy bureaucrats recently reported that “Presently it is almost impossible to use the Internet without being confronted with privacy-invading features which carry out all kinds of processing operations of personal data in a way that is invisible to the data subjects.” And Dutch regulator Diana Alonso warned that “We just want to let (companies) know when they are making new software and hardware, they should pay attention to [privacy] principles.”

This nonsense should raise red flags for business and consumers alike. The Internet works as an affordable communications medium because it is designed to facilitate cost-effective, fast, and seamless communications. Period. It is not and should not be designed to ameliorate groundless technophobia.

Human beings always have been and always will be eager to learn about one another. One of the hardest problems any economic system must solve is the question of “who needs what, when, and where, and how much will they pay for it?” This is a problem of how to get information from one place to another, from business to business and from buyer to seller.

Regulatory barriers to the flow of information impedes finding answers to this question, and makes everyone poorer. The free flow of information will make us all richer – but not if misdirected privacy concerns get in the way of designing new information-age gadgets.

What does the future hold for privacy? Privacy remains important as a check on the unique powers of government. And some businesses will learn that protecting confidentiality will win the loyalty of certain groups of customers. But others will be eager to trade information about their ecommerce habits for goods and services; most will not care much either way. Entirely new business models will spring into existence--and some will require the processing of massive amounts of information about consumers, while others will offer anonymity. Privacy preferences may vary widely from year to year or from minute to minute. Privacy is a vastly complicated question of business ethics, not a simple problem answered by the refrain "Privacy good, network technology bad."

We have much to learn about how the Information Age economy will work. It is vital that businesses remain free to experiment in an endless, bottom-up learning process--the essence of a free market. The top-down, regulators-know-best approach to privacy is a disaster.