Convergences

Review of Paul Seabright's The Company of Strangers

Paul Seabright's book The Company of Strangers: A Natural History of Economic Life is one of the most interesting and thoughtful works I have read in decades, and I highly recommend it to anyone interested in public policy and economics, especially those working in international development, environmental studies, finance, or international relations.

Seabright begins by asking some fundamental questions about human economic life. One of the most puzzling of these is, given that it is almost unheard of for animals, including our own prehistoric ancestors, to cooperate with anyone outside of their own family, how are modern societies based on trust, in which one routinely deals with total strangers and non-relatives, possible? He goes on to explore the history of prehistoric and modern developments which make cooperation with non-relatives possible. In the course of this exploration he explores money, markets, property, military defense, agriculture, cities, language, writing, the banking system, and other vital institutions.

On the way, he develops the theme of human "tunnel vision," the tendency of individuals to act according to their own individual preferences, without regard for the consequences of this for the group as a whole. Sometimes these consequences are good, including, with the spread of trade and markets, rising standards of living even for the poor--and sometimes bad, like pollution. (Other economists, like James Buchanan and Viktor Vanberg, have developed similar themes in their paper on "action interest" versus "constitution interest," in which the individual's narrow self-interest is contrasted with the interest of the group as a whole. Adam Smith's "invisible hand," John Locke's concept of the "common good," and the concept of the "general welfare" referenced in the U.S. Constitution are working the same territory). 

As I proceeded through the chapters in this book, I became very curious to see where the author was going with all this. In wrapping up, he presents several main points. One of these is that globalization is the natural outcome of thousands of years of the evolution of the human mind and human institutions. The second is that although globalization has many benefits, it will also give rise to serious problems in some quarters--and human evolution does not naturally equip us to resolve these problems easily. Some new practices and institutions might be needed (he does not try to specify what these might look like). He also warns about the dangers of the current trends in the balance of power. With the United States so easily able to dominate the rest of the world in conventional military might, trust will be very hard to build and maintain. Thus in a nutshell, he cautiously defends globalization, and warns against overuse of military power. This is all very much worth thinking about and worthwhile.

Reading the book today, however, some years after it was written, I must say that the ideas he develops in the first part of the book about trust and human institutions, now lend themselves to speculation about political crises other than concern with globalization. One example is the trouble with balancing national budgets which has come to the fore in the past year or so. There is good bit of tunnel vision underlying this; everyone seeks to take from the federal coffers, as if they were bottomless--but the money must come from somewhere, and such a system is not sustainable in the long run. And, perhaps related to this, as if everyone were half expecting to be called on to pay this very large piper, there is a general crisis of trust.

One of the subjects that Seabright explores is the question and how problems that arise--crises in trust, pollution, unemployment--are resolved. Markets, though fragile, can be self-correcting at the micro level, though this can be painful. Sometimes, though, new institutions and rules evolve, and sometimes can be designed through an intellectual and political process. But the design process itself is a human one, beset with problems of tunnel vision.

I hope that next, therefore, Seabright will tackle the question of whether the systems and forces he identifies have natural limits--whether there are some problems that will systematically fail of being corrected at any level. That is, it it would be comforting to think of the evolutionary process he describes (in which problems develop, followed by solutions at one level or another, followed by the next set of problems and solutions arising in turn) goes on forever, with the problems humanity must confront being of a progressively higher order. But it seems more likely, since the process of improvement is an accidental one, resulting from the fortunate confluence of a lot of factors, that at some point, at some level of complexity, at some scale, or at some scope, that human institutions like democracy and markets will reach the limits of their effectiveness, and we will be stuck with systemic problems that require a whole new order of solution to resolve.

Just how hard it is for human beings to escape their own situation of individual patterns and preferences, and the institutions that had adapted to cope with these patterns, I explored for myself in the weeks following my reading of this book, as a sort of thought experiment. As I went about my business during the day, I tried to be conscious of the larger consequences of my actions for others, particularly when my actions imposed costs on others without my directly being aware of them. The effect of this kind of consciousness can be, I found, at times quite paralyzing. Throwing away garbage, in particular, becomes a depressing act, but still unavoidable, as it certainly cannot stay in the house. Engagement in markets (aka shopping!)  was made more enjoyable; it is amusing to be more aware of the highly evolved levels of trust required for this seemingly simple act, and how it would go against the grain for other primates. 

On the whole, an excellent book, though for every insight it offers one finds a new cause of frustration. Understanding the origins of problems is only one small step towards fixing them. It sometimes seems as if humanity is more likely to happen upon effective rules and institutions mainly be accident, in an endless and brutal process of trial and error, than by deliberate design.

Are confusing and conflicting patents the same as NO patents?

Nanotechnology

I recently read “Patenting Nanotechnology” by law prof Mark Lemley. Excitement about (and fear of) nanotechnology seems to be waning rather than waxing. The article nonetheless includes a curiously paradoxical line of argument about intellectual property that I think is worth setting out in detail.

Presently there is some concern that there are already too many overlapping nanotechnology patents, and/or too many nanotechnology patents that cover basic research concepts as opposed to actual useful products. A number of observers have warned that these patents could interfere with ongoing nanotechnology research. This is a familiar theme over the past couple decades of patent scholarship.

Of course, patents (with all their warts) were around during the nineteenth and twentieth centuries, too, when a lot of important advances were made in technology. All kinds of things from sewing machines to radios were developed, and it all worked out okay in spite of much patent nonsense being involved.

Now, here is where Mark comes up with a twist on the familiar arguments. To help make his paper about nanotechnology more interesting, he seems to want to build up the case that nanotechnology is different from earlier technologies, so that the patent system might cause problems for nano that they did not cause for earlier technologies. So he goes through each earlier technology in some detail, and argues that in each case, in effect, for each of these key earlier technologies, patent protection was in effect non-existent. In the case of sewing machines, for example, the patents were tied up in litigation; in the case of radio, WWI intervened and the patents were taken over by the government.

Therefore, he argues, nanotechnology will be the first important technology that is in effect actually protected by patents. He goes on to conclude that there is no reason to worry about this yet. This conclusion seems sensible enough. So… what?

With his argument that previous key technologies were in effect devoid of patent protection as a practical measure, even though they were patented, well, he’s created a mythical monster, the worm who eats his own tail. I don’t think he fully realizes this, so I will play with the idea a little bit.

The argument is, in effect, that when a technology is tied up in patents to such an extent that no one has a clearly enforceable right to it… well, in effect, this is just the same as the technology’s having no patent protection at all. It’s a free-for-all. 

If this is right, well, no need to worry about the anti-commons then, is there, not for nanotechnology nor for anything else. If the muddle with patents gets bad enough, well, everyone just ignores them, or stakes his own claim, or the whole business gets swept aside with compulsory licensing. On the other hand, if all these key technologies developed in a free-for-all, why bother with a patent system at all?

To which I say, hold on a minute! First, just because patents end up getting into a legal muddle after a technology is developed, does not mean that the incentive system that patents creates was not important to their initial creation. Investors are looking to the future, and if things don’t turn out as well as they expect, they’ll have to make the best of it. But that doesn’t mean that our ground rules can treat future expectations as irrelevant to investment.

Second, even if patents get tied up in litigation, well, is this the same thing as having no patent protection at all? In the case of sewing machines, yes, there was a lot of litigation. But there were a limited number of parties to that litigation, and ultimately it was all sorted out (Adam Mossoff’s paper on this offers details).

What I end up taking away from Mark’s paper is this:

--The problem of too many patents (or patents on the wrong sort of idea) is unlikely to emerge as a practical barrier to scientific or technological development for a wide variety of reasons.

--The problem of too many patents (or patents on the wrong sort of idea) is nonetheless worth thinking about, because systemic problems might affect whether investors are likely to see returns on their investment. Mind you, the effect is likely to be small, compared to other factors like entrepreneurial skill in producing and marketing a new idea.

--Too many patents might create a situation similar to the situation one would see with no patents at all, but the details matter. But accepting this idea without looking closely at the context could do quite a lot of mischief.

Mark, being tolerant, will forgive my wrenching his argument out of its context.

-SS

Marginal Cost & the Content Industries

[The following was posted on the AEI's Enterprise Blog yesterday.]

Margin of Error: Against a Persistent and Pernicious Fallacy

By James DeLong

January 29, 2010, 5:24 pm

In a pair of recent posts (here and here), Matt Yglesias embraces one of the most pernicious and destructive fallacies of economic thought: the proposition that prices “should” equal marginal cost. As my colleague Solveig Singleton explained in “Is Cheaper Always Better? Misusing the Concept of Marginal Cost in Policy Discussions,” the idea that “efficiency” is reached by the P = MC equation is true only in an abstract world of unrealistic and static assumptions, but the persistence of the myth continues to cause great damage.

Does the concept of static efficiency or marginal cost have *any* appropriate uses? Rarely. . . .

Models of perfect competition and the concept of marginal cost have some power to explain some of the forces at work in real markets, but they are not a sound normative measure of what the real world ought to look like.

For more discussion, see “Marginalized,” and for a real coup de grace see the eminent economist William Baumol’s 2006 monograph for AEI, How Regulators Can Be Misled By Simplistic Theory, which warns:

Only this year I heard a conference presentation dealing with the economic and legal principles of copyright suggest that the innovating Schumpeterian entrepreneurs are automatically to be deemed proper subjects for antitrust attentions because in the period before imitators enter the market, they can charge prices that exceed the marginal-cost levels of perfect competition. Never mind that this is a prescription for undermining intertemporal efficiency. Never mind that marginal-cost pricing would generally preclude recoupment of the research and development (R&D) costs of the innovations at issue, costs that will have to be incurred many times again if innovation is to continue.

Baumol is too kind in limiting his indictment to “some economists” who are “not as careful as they should be,” because the fallacy and its consequences are woven into a great deal of professional analysis and policy recommendations, not to mention most of antitrust.

Six years ago, the Competitive Enterprise Institute (CEI) did an excellent workshop on Declining Marginal Cost Industries, featuring talks by giants Ronald Coase and Lester Telser. (Disclosure: I helped Fred Smith put it together.) The descriptive blurb notes:

The declining marginal cost problem remains the key challenge to a range of industries. As Ronald Coase long ago noted, a declining cost industry must find some way to finance itself: either via creative multipart pricing (facilitated by bundling or contracts) or via some form of government subsidy. The markets solution has traditionally relied on distinct marketing strategies in different geographic regions and to different segments of the markets, with market segmentation facilitated by the high costs to consumers of transport and/or the difficulty of acquiring information about the prices paid by others. The government subsidy approach inevitably entails government regulatory and /or price controls (there are no “free” subsidies). Clearly, we prefer the market solution.

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.