Abstract: This article mainly discuss the production of regulation on Internet, as well as its anticipated consequence, grounded with the traditional economic theory. i argue the appropriate regulation on Internet is necessary due to the existence of naive users of Internet as well as the herding behavior. But I also argue that strict censorship can also mean cliff effect, which is a tragedy for the users. The contribution of this article is that it is the first time to link the development of Internet to the economic understanding. And the conclusion is also of practical meanings to the academics and practitioners who are focus on the investors protection in emerging markets.
Keywords: Internet Censorship, Naive Internet Users, Tendency Protection
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The gambling between the freedom and regulation on Internet in China is now becoming quite a popular topic, especially when Google announced a preliminary decision on its willing of exiting, a direct way expresses his arguments and annoy to the regulations in China. Various discussions and arguments are available in numerous BBS and blogs. Obviously, the freedom on Internet is becoming a new instrument for the US government to criticize the weak protection of human rights in China. A speech made by Hilary Clinton, secretary of US, would apparently concentrate the attention all around the world to this topic. I don’t know if it is necessary to treat it as an important speech or just some words by a politician, since such arguments in really common to see. But in fact, in this post, I would like to provide some deeper understanding on this topic, providing academic explanation for this gambling.
- Regulation: A Production of Non-Rationality.
- Internet Under Ideal Conditions: A Rationality Hypothesis
According to the traditional economic theory, we can suppose that the behavior of an individual would be unlikely important to the decisions of others’ given the setting that the participants in an environment is numerous and countless. In fact, the Internet can provide us such an ideal environment. Considering it as a globally connected network, and the cultural differences exist for users from different countries and regions, various concept of value would be conflict that eventually form equilibrium. But do remember that the equilibrium is a general one. Under such anticipation, the arguments and issues provided by individual to the Internet can hardly affect the others. In fact, the Internet is playing as an pot, integrating various opinions, understandings, and even trivialities. Thus, the regulation on such pot is meaningless since they can hardly affect any one else. The regulation on such behaviors would be meaningless and contradict to the principle of ‘cost-efficiency’.
- Internet in Real World: Naive Users and Harding Behavior
However, be aware that the setting described above is likely to be ideal, since there is a fundamental assumption of economics that, I assume the individuals using Internet are totally rational. That is, they can fairly judge and decide what to do without any influence from others, which are regarded as exogenous. While whether such assumption can fit the reality is a question. In fact, it is widely acknowledge that the knowledge an individual matters can significantly affect his attitude and depth of though for an event, and such attitude is also related to the characteristic and some psychological factors. For this reason,i shall hereby expand the rationality hypothesis, admitting that the attitude and style of decision-making is differentiated.
Given the differentiated understanding, the interacting influence between the individuals can be anticipated. For differentiated individuals, two types can be generally distinguished, one is holding information advantage and good master of knowledge, who can fully think and express their opinions independently, while the other is comparatively weak on their knowledge and expression. Under such pyramid structure, those individuals with full knowledge and comparative information advantage can thus conduct the fashion, while the others would follow. In such setting, the interacting influence is formed. And the equilibrium I argued in ideal settings are now transformed into a Nash Equilibrium.
- Regulation on Internet: A Protection Mechanism
Thus the herding among the Internet users forms. Following the terms in capital, I define the users without sufficient knowledge to conduct their own decision as naive users. Due to their disadvantage on knowledge, such naive users would prefer to follow the fashion conducted by certain mature users. Under most occasions, such following can help hide their weak mastering of knowledge, which can be regarded as tendency protection. It is easy to anticipate that the pursuing of such protection can, under some occasions, lead to misleading by those who are conducting the fashions. Such misleading is from the conflict between the personal understanding and accepted virtue given a specified social environment. Related explanation would not be given here since its complexity. And it is the misleading, or say gaps between the understanding and accepted virtue that form the regulation.
- Internet Under Ideal Conditions: A Rationality Hypothesis
- Regulation on Internet, Be Appropriate!
The regulation can be important to constrain the fashion that is contradicting to the accepted virtue. In fact, FBI is taking real-time monitoring on the Twitter, a popular micro-blog service in US, to find the clues for both existing and potential victims. And the Emails to and from US is also filtered by the network gate for security purposes. In China, such monitoring is more severe. Messages and posts on BSP and BBS are totally filtered. Any contradicting information is abandoned by such filtering. Undoubtedly, such filtering offers us a better environment, protecting us from harmful information. Just imagine the Internet without regulation, virus, Trojan and trivialities would be the main stream of the Internet.
But we must also be clear that the monitoring, or say regulation should be appropriate. Too strict censorship can lead to ‘cliff effect’, a term used in economics and finance, representing the depression on information announcement in capital markets due to a strict regulation unacceptable to the investors and managers. Similar effect can also be anticipated in Internet as well. A good example on the censorship from China can obviously provide such explanation. Since the 7*5 Event in Xinjiang, China, the Internet service in Xinjiang Province is strictly controlled till now. No Email service, no instant messaging. Taking a surf to the BBS in Xinjiang, though accessible to the citizens there, little information can be found. The other example is on Google.com. There is little report in China, but it becomes a hot topic in WSJ, a top newspaper in the field of finance, in the next two days. Obviously, the censorship in China leads to the serious cliff effect. While, jokingly, I wonder, is the cliff effect just what the government want?
- Censorship and Cliff Effect: A Tragedy for Most Chinese!
Admittedly, appropriate regulation on the Internet is unquestionable. Such behavior is meaningful to the protection of naive users, who takes up the majority. But too strict censorship in China has changed its purpose. In China, the censorships is being blindly expanded. Nearly all the excellent Web 2.0 service has been abandoned in China, the personal websites, including the BBS and blogs has been strictly controlled. Anything that is contradicting to the governmental willing, even the potential ones that can hardly be observed, would be deleted. Democracy has lost its meaning here. i don’t want to underestimate the brain power of the leaders, but frankly, such censorship is a tragedy.
- Enlighments to Research on Capital Markets: A Joke
Literature on accounting and finance provide us evidence that the protection of investors is quite weak in emerging markets, and the governmental organization for regulation is seeking for an efficient way for solution. Now I suppose the answer has been out. That is, they can learn from the censorship of Internet, a good lesson on how to build a solid firewall against its citizen!
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