Convergences

Ronald Coase's Anniversary lectures at George Mason

Yesterday I attended "Coase's Federal Communications Commission at 50," at George Mason Law School, a discussion featuring FCC Commissioner Robert McDowell, Tom Hazlett, Jeff Eisenach, Evan Kwerel and John Williams. On the whole, a cheering event, for it was a strong reminder that truth will out, and advances can be made in government in spite of its being perpetually beseiged by opportunists.

Fifty years ago economist Ronald Coase wrote an article in which he challenged the conventional wisdsom that the electromagnetic spectrum used by wireless devices such as broadcasting had to be centrally planned by government. He argued that instead there could be property rights in spectrum, and it could be sold in the market. This would be a much less costly way of making sure services reached consumers. At the time this idea was considered absurd. But gradually as the FCC became overwhelmed by the problems with central planning for spectrum, they became willing to experiment with spectrum markets. John Williams, formerly an engineer within the FCC, quietly toiled away within the agency on the engineering end of this problem since 1965 (the year I was born); economist Evan Kwerel likewise for the economic end (not for quite so long). The experiments were successful--overwhelmingly so--and progress continues to be made today. Slowly.

But what does the future hold? Commissioner Rob McDowell pointed out that recent auctions show some backsliding on the part of the Commission. In the recent sale of spectrum for 700 Megaherz wireless services, the FCC insisted on describing services that the winners would have to provide, instead of granting flexibility. Commissioner McDowell suggested that the future is likely to prove this move was a mistake.  Economist Tom Hazlett pointed to the Commissions' slowness in recognizing that the spectrum now being used by televsion broadcasters is mostly wasted; to move more valuable services out to consumers more quickly, broadcasters should be free to sell their rights to other types of providers. Evan Kwerel cheerful identified those holding up more rapid progress--opportunists, who wish the government to hand out spectrum so long as it goes to their favorites; "taxation through regulation" forces within the public sector, who wish to hang on to it for government uses; "technology romantics" who see technology as being able to solve economic problems without property rights; and anti-capitalists, who fear private companies' power in the market--to such an extent that they are willing to forgo trillions of dollars in economic growth that would benefit consumers. Jeff Eisenach is concerned about current political trends, which look to government as the solution to all ills; if the "public option" is best for health care, why not for communications? (Indeed, one might ask, why not for food, clothing, shelter, transport?) .

What grounds for optimism are there? First, that Coase's ideas were tried and did, slowly, take hold, in spite of the mockery to which he was subjected when they were first pronounced. Second, the government-run systems are likely to collapse of their own weight. Third, and most importantly, the power of consumer demand. Businesses feel it; the FCC feels it; legislators feel it--it has become overwhelming, and it is driving change. Slowly. 

Having observed the policy process for twelve years now, I am beginning to feel that the power and importance of consumer demand *to policy* (as opposed to business matters like sales) has been greatly underestimated and overlooked. It is undeniably shaping spectrum policy. It is certainly shaping copyright policy. It is shaping privacy policy, another area I have observed for some years. It strikes me that it would be worth making a more systematic study of consumer demand and policy. Both the right and the left seem to leave it out as a force to be reckoned with. Daniel Spulber's recent work on consumer coordination is a good start.

Sketch shows Jeff Eisenach top left, Commissioner McDowell top right, and Evan Kwerel, lower down.

Bleeding Biotech

At The American, a new article Bleeding Biotech, arguing for better protection of intellectual property in data. I frame the question as

In the end, we will never be able to arrive at agreement on the perfect period for data protection for biological research. There is still no agreement on the proper period for patent protection, and that system has been around for hundreds of years. A 20-year period was picked for patents, and it seems to work well enough, so the failure to achieve perfection is not of great concern.

With regard to biotechnology and data exclusivity, we are and will remain similarly ignorant. So the question is actually quite simple: what are the costs of error in each direction?

The answer is that the costs of too much protection are low, or non-existent; the costs of too little are very high. Which should make the decision easy.

In re Bilski: Business methods, software patents, and beyond.

The deadline for filing amicus briefs in support of the Federal Circuit's attempt to trim back business method patents in Bilski passed on October 2. Many briefs have been filed, and much fuss has been made in the tech community, for business method patents are linked to the problem of software patents. Many software patents, such as Amazon's 1-click order patent, are for business methods.

If the courts ultimately trim back business method patents, will this take some of the software-patent-related pressure off both tech and the patent system? Not as much as many in the tech community or the patent community would hope, for reasons I examine below. Patent reform is now being driven by business constituencies, and these constituencies are not good at all at working on big picture institutional problems. There, in short, is a not-seeing-forest-for trees problem.

Patry on Copyright

Amazon just delivered Moral Panics and the Copyright Wars, by William Patry, who is Senior Copyright Counsel at Google.

The jacket copy says:

William Patry lays bare how we got to where we are: a bloated, punitive legal regime that has strayed far from its modest but important roots. Patry demonstrates how copyright is a utilitarian government program -- not a property or moral right. As a government program, copyright must be regulated and held accountable to ensure it is serving the public purpose.

On Wall Street, this is called "talking your book" -- forecasting events or advocating policies that will enhance the value of your investment portfolio. Google is not big on other people's property rights.

I expect to read it with dyspeptic interest, since I am considerably more on the side of creators, and of property rights generally, and start from a Lockean view rather than one based on the government as the bestower of all things. See Defending Intellectual Property.

Free

My review of Chris Anderson's Free: The Future of a Radical Price appeared recently in National Review Online under the title "The Problem With Zero."

As might be expected from someone who believes that property rights and markets are the roads to freedom and innovation, and are the best ways for communities to cooperate, the tone of the review is dyspeptic:

A line is drawn between those who “get it” and those (over 30) who do not. The focus is on people’s entitlements as consumers, not on their need and desire to be proud producers. An advanced economic machine is assumed, but the conditions necessary to maintain one are no responsibility of the author, or of the reader. Also lacking is any awareness that a working society requires concepts of duty and reciprocity, not just entitlements, that paying for what you get is an important form of morality, or that adapting to the digital age involves questions not resolvable by resorting to Condé Nast’s website-proclaimed mission “to ignite and nourish [readers’] passion.” 

Most of the space is devoted to the point that Anderson and the others in the "information should be free" camp are riffing on the economists' idea that efficiency is achieved when price equals marginal cost, only they fail to understand that this idea is not suitable for home use -- it works only on the blackboard, where capital is completely mobile. Turned loose in the real world, it has done great damage.

O Tenenbaum!

BU grad student Joel Tenenbaum's civil trial for music sharing is scheduled to go to the jury tomorrow, and copyright attorney Ben Sheffner is doing a great job of writing it up day by day for ars technica. (Start here.) Sheffner adds some thoughts at his own Copyrights & Campaigns.

The defense is being run by Harvard Law School's Berkman Center (ars technica also explained how this happened in a piece last February -- see "How Harvard Law threw down the gauntlet to the RIAA.")

The defense strategy is a bit murky. There were some claims that maybe someone else had used Tenenbaum's computer, but these did not stand up. Then there was an attempt to argue that P2P downloading is fair use, but the judge threw out this claim.

Tenenbaum has now admitted to infringment, and the defense seems to be asking for the jury to nullify the law, either by finding no liability nonetheless, or by assessing only token damages instead of the statutory damages of $150,000 per infringement for the 30 songs at issue in the trial.

This is a high-risk strategy, to put it mildly. The RIAA has these infringement cases organized like a production line, with high quality computer and economic experts. The industry has also learned that its biggest vulnerability is the charge that it was indifferent to using the Internet as a distribution channel, so:

After Tenenbaum left the stand in the early afternoon, plaintiffs called Ron Wilcox, an attorney and long-time digital music executive now at Warner Music Group, who guided the jurors through the industry’s efforts to sell music on the Internet, from the early days of MusicNet and Pressplay, through iTunes, and to what he sees as an all-digital future.

“Our total focus and attention is on” digital distribution, said Wilcox, who was called to counter the defense’s suggestion that Tenenbaum’s use of peer-to-peer was justified by the labels’ alleged failure to provide legal alternatives.

The defense has no economic expert at all, and seems to be relying on the idea that it is not fair to hold one P2P downloader, out of a multitude, liable. Tenenbaum could have settled early for about $5K, and his rejection of that deal is not, at the moment, looking too good.  

To really overdose on the case, go to Law Pundit, as well.

Property Rights -- Real & Otherwise

The confirmation hearings on Sonia Sotomayer produced more senatorial questions about property rights -- real estate division -- than any comparable session in living memory. They also produced Professor Ilya Somin of George Mason to talk about property rights specifically, and Sotomayer's decisions thereon.

Somin is a strong critic of the Second Circuit's unsigned and unpublished decision in Didden v. Village of Port Chester, in which Sotomayer joined, summarizing it as "upholding the government's condemnation of property after the owners refused to pay extortion money to a politically influential private developer."  (The Institute for Justice posted some of the briefs in the case, including the Petition for Certiorari, which attaches the decisions of both the District and Circuit Courts.)

This is a good news/bad news situation. There is no area of current political/economic controversy that is not in some way intertwined with the institution of property rights. Telecom and broadband, with all their component issues of construction, net neutality, unbundling, special access, and filtering; pharmaceutical innovation and health care generally; financial bailouts and regulation; autos; energy; environment; the decline of the news business.

So the good news is that the public is pressuring its elected officials to pay attention to property rights. The bad, of course, is that the courts do not seem to be on board, having relegated property rights not just to second-tier but to no-tier status, and it is not clear that the elected representatives have any goal in mind except to get the public to shut up. Any signs of actual understanding of or devotion to the institution of property rights are well hidden.

Prof. Richard Epstein observed re Didden:

[T]he sorry saga of Port Chester shows that when it comes to real estate, we have a government not of laws but of politicians. In matters that they really care about, like race and free speech, judges are quite capable of seeing through airy abstractions to harsh realities. Why can't they do the same for property rights?

A sound observation, with far broader applicability than real estate.

Biosimilars, Data Exclusivity & Innovation

Tied up in the big health care debate are many small duels, some of which will have profound impacts. One of these is "data exclusivity" for biosimilars.

Developing biological drugs, which is the frontier of pharma research, costs bales of money. To make the investments, developers need exclusivity for long enough to recoup the costs. Generic companies, of course, want shorter periods so they can free ride on the investment in research sooner. (You can guess which side I am on -- see Saving the Goose: Intellectual Property and Follow-On Biologics (FOB).)

The pro-developer side won a round in the Senate this week when the HELP committee voted for a period of 12 years rather than the 7 demanded by the generics and their allies, such as the FTC and the AARP. (That is one reason I do not belong to the AARP -- it focuses on price reductions for existing biosimilars without regard for the health of the overall ecosystem that creates such drugs. As a senior, I regard that as a definition of the old adage "penny wise, pound foolish." My interests are aligned with the venture capitalists, who must have a longer period or they will look for opportunities elsewhere.)

For an excellent analysis and many links, see Newsfeed Researcher's wrap-up.

Free Association about Chrome OS

Last week, Google announced its new netbook Web-focused operating system -- Chrome OS, to match its browser. The OS will be open source, a variation on Linux, so Google will be able to tap into the strength of that community from the get-go, and of course free ride on the  work supported by IBM, HP, and the other tech companies who fund Linux.

There is a lot of cross-talk in the press and web about how this is or is not a deadly or minor threat to Microsoft's core Windows business, done with or without deliberate malice by Google, and how it is a disruptive or minor innovation that can be extended up the value chain (unless it is not), and how Microsoft must be very worried or perhaps highly amused.

The day before, I was at Google's DC office to hear Chris Anderson talk about his new book Free: The Future of a Radical Price. One point he made is that there is a big psychological distance between "free" and even a trivial cost and that the business models of the future must cater to this. This does indeed seem to be a pre-occupation of the tech world, which thus assumes that Google's free OS should sweep the board, except of course for the power of those Microsoft people who seem to cheat by charging for their products.

China & Land Reform

Property rights may be taking a beating in the U.S. lately, but they are prospering in China. The Li & Fung Research Centre reports on the recent rural land reforms:

On 12 October, the 3rd Plenary Session of the 17th Central Committee of the Chinese Communist Party was concluded. A long-term goal of doubling farmers’ income by 2020 from the 2008 level was set. A “rural land reform” plan was announced, which is viewed as one of the most important and ambitious government policies in recent years.

According to the “rural land reform” plan:

1. Farmers are allowed to transfer, sub-contract, lease, exchange, or to offer/transfer through a shareholding system the use rights of their farmland
2. Government will establish markets for the lease of contracted farmland and the transfer of farmland-use rights.

Before the reform, farmers can only lease farmland for long-term use, typically 30 years. While individual farmer only leases small plots of farmland, the agricultural production in China is mostly in small scale. After the reform, farmers can choose how to exercise their farmland-use rights and hence, economic efficiency can be boosted.

The reform is expected to encourage farmland consolidation. With larger farmland, farmers will have more incentive to make investments and raise the mechanization level of the agricultural production. Meanwhile, the process of urbanization would be accelerated as farmers can be compensated for leaving rural areas and moving into cities.

The “rural land reform” is one of the major policies to develop both rural and urban economies, and is consistent with the government strategy to stimulate domestic demand – which has become particularly important amidst the global economic slowdown. We expect more capital will be attracted to the countryside for developing a modern agricultural industry. Besides, rural residents’ wealth will increase, as they are entitled to the income from their land-use rights. In addition, it is expected that a lot of rural residents will leave the rural areas and migrate to cities. This will greatly stimulate the demand for housing (and related products and services) in the urban areas.

The bf sentence is important. One of the major corruptions in China is that local Party officials have been able to cream off the value of changes in land use. By making the farmers the de facto owners, the government is not only increasing economic efficiency and removing a major cause of rural unrest, it is removing a source of income from the local officials and increasing the control of the central government over the Party itself.

For the present circumstances of China, this is a good thing.