'Intellectual Bulwark' Of Austerity Economics Collapses Because Of Three Major Errors

Amongst economists and those who draw on their thinking, the names Reinhart and Rogoff are well known for work published under the title "Growth in a Time of Debt," which sought to establish the relationship between public debt and GDP growth. The key result, that median growth rates for countries with public debt over 90% of GDP are about one percent lower than otherwise, and that the mean growth rate is much lower still, has been cited many times, and invoked frequently to justify austerity economics -- the idea being that if the public debt is not reduce, growth is likely to suffer badly. 

On Techdirt.

The Real Legacy of the Hargreaves Report?

Now that the dust has settled a little on the Hargreaves report, I thought it might be worth revisiting it, but looking at it from a slightly different angle. Before, I noted its sensible thoughts on software patents; there's also much good stuff on orphan works, one of the areas crying out for a way to unlock the riches currently unavailable. But I want to step back and look at the bigger picture, and how in addition to offering their specific recommendations, Professor Hargreaves and his team have done something rather clever.

On Open Enterprise blog.

Why Microsoft Costs the World $500 Billion a Year

Here's another of those entertaining IDC reports commissioned by Microsoft:

Today, global research firm IDC issued a new white paper which estimates that members of the worldwide Microsoft ecosystem generated local revenues for themselves of $580 billion in 2010, up from $537 billion in 2009 and $475 billion in 2007.

On Open Enterprise blog.

The Economic Consequences of Piracy

I've noted elsewhere that there is a major piece of FUD being put about by content producers: that piracy causes massive damage to a country's economy. But as that post explained with regard to the BSA's claims about the harm of software piracy, here's the reality:

Reducing software piracy will not magically conjure up those hundreds of billions of dollars of economic growth that the BSA invokes, or create huge numbers of new jobs: it will simply move the money around - in fact, it will send more of it outside local economies to the US, and reduce the local employment.

The basic idea is really pretty simple to understand. When people make unauthorised copies of content or software, they save money. But that doesn't mean they put it in a bank: human nature being what it is, that money is generally spent elsewhere in the local economy.

And yet despite the simplicity of this crucial idea, report after report seems to have difficulty grasping it. Here's another [.pdf], this time on film piracy, put together by UK Ipsos MediaCT and Oxford Economics for AFACT (the Australian Federation Against Copyright Theft). The top-line "results":

6,100 Full Time Equivalent (FTE) jobs were forgone across the entire economy (equivalent to more than six times the number of job cuts announced by Telstra in October 2010) including nearly 2,300 forgone directly by the movie industry and retailers. These impacts of piracy on employment persist as long as piracy persists.

Allowing for effects on other industries, some A$1,370m in Gross Output (Sales) was lost across the entire Australian economy.

This was equivalent to a loss of GDP of A$551m across the Australian economy – reducing national economic growth and Australia’s ability to invest in its future.

Tax losses are A$193m, representing money that government could employ for other social uses in areas such as education and healthcare.

What's sad is that the report does try to make reasonable assumptions about piracy:

We do not assume that every pirate version equates to a lost sale.

We do allow for ‘sampling’ - those who see an authorised version subsequent to the pirate version are not treated as contributing to lost revenue. In fact, we make the very cautious assumption that no lost revenue results from piracy if any authorised version is seen subsequently.

We do allow for ‘over-claim’ – we apply a ‘downweight’ to those claiming they would have paid for an authorised version (had the pirate version not been available).

But this laudable attempt at rigour is completely undermined by the fact that nowhere in the report is there any recognition that all this "lost" money does *not* disappear, but is simply channelled elsewhere in the Australian economy, where it might actually create more jobs than it would if spent on films (because of revenue outflows to the US, and the fact that local money would be spent on more labour-intensive industries like retailing or catering.) Similarly, it *does* produce tax revenue for the Australian government, just from different sources.

It would be far more conducive to producing an honest debate about the *real* effects of unauthorised copies on national economies if these key facts were included for a change; by continuing to ignore them, these misleading and one-sided reports amount to little more than industry propaganda.

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BSA's Piracy Numbers: Less than They Seem

You can argue all you want with words, which are vague and fuzzy, but numbers have hard edges: numbers are facts. Except, of course, they aren't. Numbers that relate to the real world have to be produced, somehow, and although the end-result may be an inarguable number, the assumptions that lead to that number are just as arguable as any wordy persiflage.

But people often forget this, and take numbers at face value. A case in point is the Digital Economy Act, where alleged numbers about the “scale” of piracy were regular quoted by supporters of the bill. Those numbers came from a number of sources, but the ones most used were contained in a report called “Building a Digital Economy” from the International Chamber of Commerce (ICC). I spent some time going through the details of that report, and concluded:

So the net result of this 68-page report, with all of its tables and detailed methodology, is that four out of the top five markets used for calculating the overall piracy loss in Europe draw on figures supplied by the recording industry itself. Those apparently terrifying new figures detailing the supposed loss of money and jobs due to piracy in Europe turn out to be little more than a *re-statement* of the industry's previous claims in a slightly different form.

So my scepticism was naturally high when I read the following:

In 2009, more than four out of 10 software programs installed on personal computers around the world were stolen, with a commercial value of more than $51 billion. Unauthorized software can manifest in otherwise legal businesses that buy too few software licenses, or overt criminal enterprises that sell counterfeit copies of software programs at cut-rate prices, online or offline.

However, the impact of software piracy goes beyond revenues lost to the software industry, starving local software distributors and service providers of spending that creates jobs and generates much-needed tax revenues for governments around the world.

Curbing piracy has the reverse effect, sending ripples of stimulus through the whole information technology (IT) economy. And lowering piracy faster compounds the benefits. “The Economic Benefits of Reducing Software Piracy” documents these gains in 42 countries, which represent 93 percent of the global market for PC software. Below are the key findings:

Reducing the piracy rate for PC software by 10 percentage points — 2.5 points per year for four years — would create $142 billion in new economic activity while adding nearly 500,000 new high-tech jobs and generating roughly $32 billion in new tax revenues by 2013.

On average, more than 80 percent of the benefits of reducing PC software piracy accrue to local economies — and in some cases it is more than 90 percent.

Front-loading the gain by lowering piracy 10 points in the first two years of a four-year period would compound the economic benefits by 36 percent, producing $193 billion in new economic activity by 2013 and generating $43 billion in new tax revenues.

Software has a ripple effect on the broader IT industry because selling, servicing and supporting software creates downstream economic activity. In the 42 countries covered in the study, the commercial value of unlicensed PC software put into the market amounted to $45 billion in 2009, resulting in total losses of revenue, employment and taxes from related sectors in excess of $110 billion.

Clearly, concerted action to ensure strong protection for intellectual property (IP) and to reduce software piracy should be a priority for governments — sooner rather than later.

Clearly...or maybe not. First, we need to examine where all these big numbers come from, and then pick apart the assumptions that lie behind them. This turns out to be the usual rabbit-hole stuff, as one report leads to another.

The main “Piracy Impact Study: The Economic Benefits of Reducing Software Piracy” [.pdf] turns out to be just a summary. Tucked away at the end is the following:

For more information about “The Economic Benefits of Reducing Software Piracy” and a full description of the methodology,see the full report at www.bsa.org/piracyimpact.

Following that link brings us to a slightly longer re-statement [.pdf]] of the first study, with a little bit of methodology tacked on at the end in compressed form, and the following statement:

A detailed explanation of that methodology is available at www.bsa.org/globalstudy.

Proceeding once more to that further study [.pdf], we find yet more words, and finally, towards the end, some details of the methodology.

The basic method for coming up with rates and commercial value of unlicensed software in a country is as follows:

1.Determine how much PC software was deployed in 2009.

2.Determine how much PC software was paid for/legally acquired in 2009.

3.Subtract one from the other to get the amount of unlicensed software.

A couple of points. To its credit, the main research, carried out by IDC, *does* take account of free software in its calculations. Indeed, it puts it at a rather impressive 12-22% of the market. Note, too, that it refers to “unlicensed software”: this is the correct term, not the “stolen” used by the BSA in their trumpeting of the results. It's the old copyright infringement versus theft argument that BSA still doesn't seem to understand, but IDC does.

The report does make a mistake when it says:

$ Commercial Value = #Unlicensed Software Units)/Average System Price

It obviously means these should be multiplied together, but I assume that is just a slip. Moreover, this looks reasonable enough:

The commercial value of unlicensed software, which BSA previously referred to as “losses”, is the value of the unlicensed software as if it had been sold in the market. This is calculated using the same blend of prices used to determine the average system price, including: retail, volume license, OEM, etc. In practice, because of the many methods of deploying software, the average system price is lower than retails prices one would find in stores.

So far, so good, then. The problem, I think, comes in the analysis of what would happen if piracy were reduced – in other words, if people stopped using unlicensed software, and paid for licences instead.

One obvious problem is that some might well choose to do without, or to use free software, rather than pay not inconsiderable sums for licences; but for the sake of argument, let's assume that's a small factor. Instead, I want to focus on the following section (from the last report linked to above):

Since 2002, IDC has conducted research with BSA on the economic benefits of lowering piracy – in terms of additional jobs, new local revenues and additional taxes generated. These studies have shown that the benefits to local governments are more significant than just replacing unlicensed software with licensed software.

One thing that is always omitted in these analyses is the fact that the money *not* paid for software licences does not disappear, but is almost certainly spent elsewhere in the economy (I doubt whether people are banking all these "savings" that they are not even aware of.) As a result, it too creates jobs, local revenues and taxes.

Put another way, if people had to pay for their unlicensed copies of software, they would need to find the money by reducing their expenditure in other sectors. So in looking at the possible benefit of moving people to licensed copies of software, it is also necessary to take into account the *losses* that would accrue by eliminating these other economic inputs.

One important factor is that proprietary software is mainly produced by US companies. So moving to licensed software will tend to move profits and jobs *out* of local, non-US economies. Taxes may be paid on that licensed software, but remember that Microsoft, for example, minimises its tax bill in most European countries by locating its EU headquarters in Ireland, which has a particularly low corporate tax rate:

In November 2005, The Wall Street Journal wrote that "a law firm's office on a quiet downtown street [in Dublin, Ireland ] houses an obscure subsidiary of Microsoft Corp. that helps the computer giant shave at least $500 million from its annual tax bill. The four-year-old subsidiary, Round Island One Ltd., has a thin roster of employees but controls more than $16 billion in Microsoft assets. Virtually unknown in Ireland, on paper it has quickly become one of the country's biggest companies, with gross profits of nearly $9 billion in 2004."

So in addition to causing money to be taken out of the country (and hence the local economy), licensed software would probably also bring in far less tax than money previously spent on local goods and services, which would generally pay the full local taxes.

Another factor that would tend to exacerbate these problems is that software has generally had a higher profit margin than most other kinds of goods: this means any switching from buying non-software goods locally to buying licensed copies of software would reduce the amount represented by costs (because the price is fixed and profits are now higher). So even if these were mostly incurred locally, switching from unlicensed to licensed copies would still represent a net loss for the local economy.

Similarly, it is probably the case that those working in the IT industry earn more than those in other sectors of the economy, and so switching a given amount of money from industries with lower pay to IT, with its higher wages, would again *reduce* the overall number of jobs, not increase them, as the report claims.

IDC also suggests two other reasons why unlicensed software costs more than licensed:

Business and consumers waste time and money working with faulty and unsupported software.

For users, using unlicensed software entails not just legal risks, but also security risks

Of course, the idea that "official" software from companies like Microsoft is exempt from such "faults" and "risks" is droll, to say the least: licensed proprietary software is probably plagued with malware and affected by downtime almost as much as unlicensed versions (just ask users...)

So although the IDC numbers turn out to be reasonable enough, the conclusions drawn from them are not. Reducing software piracy will not magically conjure up those hundreds of billions of dollars of economic growth that the BSA invokes, or create huge numbers of new jobs: it will simply move the money around – in fact, it will send more of it *outside* local economies to the US, and reduce the local employment. And it certainly won't do anything to ameliorate the quotidian problems of poorly-written software...

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Exploring Entitlement Economics

Bradley M. Kuhn has a thought-provoking post with the title "Proprietary Software Licensing Produces No New Value In Society". Here's a key section:

I've often been paid for programming, but I've been paid directly for the hours I spent programming. I never even considered it reasonable to be paid again for programming I did in the past. How is that fair, just, or quite frankly, even necessary? If I get a job building a house, I can't get paid every day someone uses that house. Indeed, even if I built the house, I shouldn't get a royalty paid every time the house is resold to a new owner. Why should software work any differently? Indeed, there's even an argument that software, since it's so much more trivial to copy than a house, should be available gratis to everyone once it's written the first time.

He then goes on to point out:

Thus, this line of reasoning gives me yet another reason to oppose proprietary software: proprietary licensing is simply a valueless transaction. It creates a burden on society and gives no benefit, other than a financial one to those granted the monopoly over that particular software program. Unfortunately, there nevertheless remain many who want that level of control, because one fact cannot be denied: the profits are larger.

For example, Mårten Mikos recently argued in favor of these sorts of large profits. He claims that to "benefit massively from Open Source" (i.e., to get really rich), business models like “Open Core” are necessary. Mårten's argument, and indeed most pro-Open-Core arguments, rely on this following fundamental assumption: for FLOSS to be legitimate, it must allow for the same level of profits as proprietary software. This assumption, in my view, is faulty. It's always true that you can make bigger profits by ignoring morality. Factories can easily make more money by completely ignoring environmental issues; strip mining is always very profitable, after all. However, as a society, we've decided that the environment is worth protecting, so we have rules that do limit profit maximization because a more important goal is served.

This analysis is cognate with my recent post about the absence of billion-dollar turnover open source companies: the fact is, as a pure-play free software outfit, you just can't make so much money as you can with proprietary software, because you generally have to sell scarce things like people's time, and that doesn't scale.

But the implications of this point are much wider, I think.

As Kuhn emphasies:

I'll just never be fully comfortable with the idea that workers should get money for work they already did. Work is only valuable if it produces something new that didn't exist in the world before the work started, or solves a problem that had yet to be solved. Proprietary licensing and financial bets on market derivatives have something troubling in common: they can make a profit for someone without requiring that someone to do any new work. Any time a business moves away from actually producing something new of value for a real human being, I'll always question whether the business remains legitimate.

This idea of getting money for work already done is precisely how copyright is regarded these days. It's not enough for a creator to be paid once for his or her work: they want to be paid every time it is performed or copies made of performances.

So ingrained is this idea that anyone suggesting the contrary - like that doughty young Eleanor - is regarded as some kind of alien from another planet, and is mocked by those whose livelihoods depend upon this kind of entitlement economics.

But just as open source has cut down the fat profits of proprietary software companies, so eventually will the exorbitant profits of the media industry be cut back to reasonable levels based on how much work people do - because, as Kuhn notes, there really is no justification for anything more.

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The Economics of Copyright

One of the problems with the debate around copyright is that it is often fuelled more by feelings than facts. What is sorely lacking is a hard-nosed look at key areas like the economics of copyright. Enter "The Economics of Copyright and Digitisation: A Report on the Literature and the Need for Further Research” [.pdf].

On Open Enterprise blog.

Uncommonly Good Post on the Commons

Wow: this is the best single post I have ever read on the commons (and I've read a few):

The commons as a common paradigm for social movements and beyond (version 1.0)

We can only promote the commons as a new narrative for the 21st century if they are identified as a common denominator by different social movements and schools of thought. In my point of view, enforcing the commons would be not only possible, but strategically intelligent. Here are 15 reasons why...

I'm tempted to quote the whole thing, but it's long and doing so is unnecessary, since you can simply follow the link above. But it really touches on just about every reason why the commons as an idea is important. However, I can't resist give an indication of its riches by quoting two sections that should strike a chord with people in the world of free software:

The commons strengthens an important core belief about human beings and behaviour. We are not only, not even mainly the „homo oeconomicus“ they made us believe we are. We are much more than selfish creatures looking for our own interest. We need and enjoy being embedded into a social web. “The commons are the web of life”, says Vandana Shiva. We enjoy to contribute, care and share. The commons strengthens the confidence in the creative potential of people and in the idea of inter-relationality, which means: “I need the others and the others need me.” They honour our freedom to contribute and share. This is a different kind of freedom than the market is based on. The more we contribute, more things we have access to. But note: it is not simply „access to everything for free“.

And:

The commons is an alternative mode of production. The problems we are confronted with are not problems of resource-availability. They are problems that arise from the current mode of production. Fortunately, in some areas, we are witnessing a shift from the capitalist mode of production (based on property, command, value exchange via money, resources and labour exploitation, dependent on growth and striving for profit) into a commons mode of production (based on possession, contribution, sharing, self interest and initiative, where the GDP is a negligible indicator and the aim is a „good life“ < bem viver). Many “Common Based Peer Production” projects are developing successfully. This is especially true for the production of knowledge (Wikipedia, Free Software, Open Design). But there is a thrilling discussion going on about how principles of commons based peer production can be transferred to the production of what we eat, wear and move with, at least to a certain extent. I believe that this is possible. Firstly because knowledge makes up the lion’s share of each kind of production. All goods are latent knowledge products. There is no car production or eggproduction without a concept and a design behind (which make the lion’s share of its „market value“). Secondly because there are many kinds of commons sectors (care economy, solidarity economy) which have not been commodified yet and where commons values and rules are deeply rooted. Those sectors are evidence that every day many of the things we need to live are produced outside the market.

Do read the whole thing if you can: it's really worth it.

Follow me @glynmoody on Twitter or identi.ca.

SABIP Finally Enters 21st Century

It looks like at least one government department, the Strategic Advisory Board for Intellectual Property Policy (SABIP), is starting to get a clue about the digital economy, and the fact that constantly harping on about *online* file-sharing misses the bigger picture:

Today sees the publication of the first comprehensive review of currently available national and international research into consumers’ attitudes and behaviours to obtaining and sharing digital content offline. Much of this activity infringes current copyright law in the UK.

Because what do they find?

# Estimates indicate that between 7-16% of the UK population buy discs (DVDs, CDs, & video games) which infringe copyright. Very little is known about other forms of physical peer-to-peer file sharing (e.g. hard drive swapping) and the few estimates that exist vary greatly.

# Demographics for consumers who acquire offline/hard copies which infringe copyright appear to be different from those that engage in online copyright infringement: they are often older, with dependent(s), and are more likely to belong to lower socio-economic groups - ie. they are more ‘ordinary’ than the predominantly younger, well educated, technologically-savvy group who infringe copyright online.

# The evidence is mixed as to whether consuming content through infringement substitutes or complements legal consumption. For example, while the music industry points to falling sales, some evidence suggests that consuming music illegally does not substitute legal consumption but that both types of consumption may sit alongside each other.

# Initial evidence indicates that online downloading and file sharing is substituting offline counterfeit sales. Anecdotally some suppliers suggest that the market for counterfeit content is declining - this is corroborated by falling seizures of counterfeit discs.

They suggest:

* The sharing of digital content offline needs to be looked at through a new lens. It has been predominantly studied using criminology or social psychology. But these perspectives tend to carry value judgements about what is considered right or wrong which implicitly shape the research. This means that other factors, eg, economic criteria, have rarely been considered. Industry and government surveys suggest that these additional factors are very important to any consideration of copyright infringement.

* There is little research that looks at the effect of ignorance of IP law. Copyright law is complex, and difficult for the average consumer to fully understand (where consumers are aware it exists at all). The default position in previous criminology-based research is that people know that they are breaking the law and make a choice to do so, but this is not empirically proven.

Who would have thought that economic criteria might have played a role in people's decisions to share copyright materials offline? Similarly, who would have thought that the fact that in recent decades copyright has been framed solely for the benefit of content owners, and not content users, means that it is user-hostile to the point of opacity, and that "ordinary" people make no attempt to navigate its thickets?

Let's hope this report is the first in many that shows some realism on the part of not just SABIP, but the UK government.

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The Economics of Ecosystems

The general area of the economics of ecosystems is something that I have been banging on about for while. Now we have a Web site and even a glorious PDF report on the subject:

The Economics of Ecosystems and Biodiversity (TEEB) study is a major international initiative to draw attention to the global economic benefits of biodiversity, to highlight the growing costs of biodiversity loss and ecosystem degradation, and to draw together expertise from the fields of science, economics and policy to enable practical actions moving forward.

Basically, we'd be mad - not just for environmental reasons, but economic ones too - not to look after our global commons. After all, it's the only one we've got....

Biophysical Economics: A Different View

One of the things that I have felt for a while is that mainstream economics isn't really the best way to look at free software, or any of the other intellectual commons or - even more importantly - the environmental commons, since economics is really about consumption. And now, it seems, some academics are beginning to call into question basic assumptions about that consumerist, consumptive viewpoint:

The financial crisis and subsequent global recession have led to much soul-searching among economists, the vast majority of whom never saw it coming. But were their assumptions and models wrong only because of minor errors or because today's dominant economic thinking violates the laws of physics?

A small but growing group of academics believe the latter is true, and they are out to prove it. These thinkers say that the neoclassical mantra of constant economic growth is ignoring the world's diminishing supply of energy at humanity's peril, failing to take account of the principle of net energy return on investment. They hope that a set of theories they call "biophysical economics" will improve upon neoclassical theory, or even replace it altogether.

Here's the heart of the problem:

Central to their argument is an understanding that the survival of all living creatures is limited by the concept of energy return on investment (EROI): that any living thing or living societies can survive only so long as they are capable of getting more net energy from any activity than they expend during the performance of that activity.

Great to see some new thinking in this area; I'm sure in time it will have knock-on consequences for the way we look at the commons, too.

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Ecology, Economics, Sharing

One of the things that interests me at the moment is the way open source ideas are proving hugely useful when considering areas like economics and environmentalism. If you want an encapsulation of this important but complex area, you could do worse than this brilliant essay, "From a Failed Growth Economy to a Steady-State Economy." Here's the key logic:

if we can’t grow our way out of all problems, then maybe we should reconsider the logic and virtues of non-growth, the steady-state economy. Why this refusal by neoclassical economists both to face common sense, and to reconsider the ideas of the early Classical Economists?

I think the answer is distressingly simple. Without growth the only way to cure poverty is by sharing. But redistribution is anathema. Without growth to push the hoped for demographic transition, the only way to cure overpopulation is by population control. A second anathema. Without growth the only way to increase funds to invest in environmental repair is by reducing current consumption. Anathema number three. Three anathemas and you are damned—go to hell!

Or, put another way, on a finite earth, only steady-state economics is sustainable; and economics without growth implies sharing.

Ecology => Economics => Sharing.

(Via Michael Tiemann.)

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On the Wikinomics Paradox

In the long run, what drives the wealth and success of an economy is productivity and efficiency. In my opinion, many of the principles of wikinomics continue to hold the promise of an extraordinary amount of efficiency and productivity to be unleashed, which should/ could have amazing long-term benefits. But in the short to medium term, I see the potential for a very difficult paradox - what makes the economy more efficient and productive as a whole causing a major dislocation of workers, who as we all know are also the consumers, and as they have less to spend the economy potentially shrivels up in a way similar to the paradox of thrift.

Well, yes, but economics doesn't really enter into it (except as a by-product): what we're talking about here is mathematics. Things that can be done in a distributed fashion online, will get done (subject to a raft-load of caveats) because on the Internet - the Great Greaser - there's no friction to stop it. Whether people suffer dislocation doesn't enter into it - however regrettable it may be.

Haque on Hacking Economics

And yes, it's all about openness, collaboration and respect:

companies who can build authentic, honest, open, collaborative relationships with consumers are significantly more profitable (and sustainably profitable) than companies who treat consumers deceptively, antagonistically, and manipulatively.

The Economic Impact of Software Patents

The UK's Patent Office – which now goes by the awful name of UK Intellectual Property Office, which means it's really the UK Intellectual Monopolies Office – is a curious beast. On the one hand, as its name suggests, it's tied into one of the biggest confidence tricks around, dressing up conceptual mutton as intellectual lamb. On the other, there are odd outbreaks of sanity that suggest someone in there understands some of the deeper issues concerning software patents....

On Open Enterprise blog.

Taxing Intellectual Monopolies

Here's an interesting thought:

He also reported research that demonstrates patent renewal fees can be used to improve the innovation incentives generated by patent rights. Professor Schankerman set out an analysis of renewal fees as a tax on the property right conferred by a patent, and proposed that the effective tax rate be adjusted to provide socially optimal incentives. His analysis suggests that existing renewal fees impose a highly regressive tax on patents, and suggested that renewal fees should be very substantially increased, especially in later years, to make the effective taxation rate progressive.

Imposing high renewal fees would be a disincentive to file frivolous patents. It would also usefully shift discussion of intellectual monopolies to a more objective, economics-based analyses. That's good, because the evidence that such monopolies are not economically justifiable is overwhelming (as the Gowers Review noted in the context of increasing the term of copyright for music performance.)

Not Economically Viable

Speaking as a mathematician, I have never understood why economics ignores its environmental effects, since this fundamental error in the model almost guarantees things like climate change, deforestation, overfishing and the rest. It seems I'm not the only one:

the mathematical theories used by mainstream economists are predicated on the following unscientific assumptions:

* The market system is a closed circular flow between production and consumption, with no inlets or outlets.
* Natural resources exist in a domain that is separate and distinct from a closed market system, and the economic value of these resources can be determined only by the dynamics that operate within this system.
* The costs of damage to the external natural environment by economic activities must be treated as costs that lie outside the closed market system or as costs that cannot be included in the pricing mechanisms that operate within the system.
* The external resources of nature are largely inexhaustible, and those that are not can be replaced by other resources or by technologies that minimize the use of the exhaustible resources or that rely on other resources.
* There are no biophysical limits to the growth of market systems.

If the environmental crisis did not exist, the fact that neoclassical economic theory provides a coherent basis for managing economic activities in market systems could be viewed as sufficient justification for its widespread applications. But because the crisis does exist, this theory can no longer be regarded as useful even in pragmatic or utilitarian terms because it fails to meet what must now be viewed as a fundamental requirement of any economic theory—the extent to which this theory allows economic activities to be coordinated in environmentally responsible ways on a worldwide scale. Because neoclassical economics does not even acknowledge the costs of environmental problems and the limits to economic growth, it constitutes one of the greatest barriers to combating climate change and other threats to the planet. It is imperative that economists devise new theories that will take all the realities of our global system into account.

Amen to that.

Paying the Price for Google

An interesting analogy here between Google and markets - with a nasty ecological payoff that we will all pay for people gaming the system (just as spam games the email system, and threatens to destroy it):

As every web content producer adjusts to Google, its results become necessarily less and less compelling. The joy of Google past was to think hard about the search query and get a first screen result full of relevant but quirky, even obscure material. A Google result today is much less sensitive to the driver, because every content maker is trying to "buy" space that it can't pay for in genuine links. SEO [Search Engine Optimisation] will ossify Google and a better solution will wipe it out with the speed of an epidemic. The web has become over-fitted to Google like a strain of wheat becomes over-designed to a specific ecology. The web is covered in content strategies over-designed to Google, and new mechanism will find a source of meaningful, un-manipulated information---just as the hyper-link was before PageRank made it a gameable commodity.

Internalising Externalities

One of the problems with most everyday economics is that pollution tends to be regarded as an externality:

An externality occurs when a decision causes costs or benefits to third party stakeholders, often, although not necessarily, from the use of a public good. In other words, the participants in an economic transaction do not necessarily bear all of the costs or reap all of the benefits of the transaction. For example, manufacturing that causes air pollution imposes costs on others when making use of public air.

But externalities have a habit of coming home to roost:

China's rising energy demand isn't just leaving its mark on the country's heritage. Every 30 seconds, an infant with birth defects is born in China, according to Jiang Fan, deputy head of the country's National Population and Family Planning Commission. The rate of birth defects nationwide has soared 40 percent in the past five years, from 105 defects per 10,000 births in 2001 to nearly 146 in 2006. The problem now affects nearly 1 in 10 Chinese families, the Commission stated in a recent report .

Birth defect rates are highest in the northern province of Shanxi, an area that is also home to some of China's richest coal resources. "The incidence of birth defects is related to environmental pollution," An Huanxiao, director of Shanxi's provincial family planning agency, told Xinhua News. "The survey's statistics show that birth defects in Shanxi's eight large coal-mining regions are far above the national average."

Ouch!

That has got to hurt. (Via Salon.)