Patently Wrong, Mathematically Proved

Well, after yesterday's post about a paper drawing fascinating parallels between today's patent trolls and yesteryear's patent sharks, here's another zinger from academia, one of whose authors has just won this year's Nobel-ish prize for Economics. And look what it says:

the software industry in the United States was subjected to a revealing natural experiment in the 1980’s. Through a sequence of court decisions, patent protection for computer programs was significantly strengthened. We will show that, far from unleashing a flurry of new innovative activity, these stronger property rights ushered in a period of stagnant, if not declining, R&D among those industries and firms that patented most.

We maintain, furthermore, that there was nothing paradoxical about this outcome. For industries like software or computers, there is actually good reason to believe that imitation promotes innovation and that strong patents (long patents of broad scope) inhibit it. Society might be well served if such industries had only limited intellectual property protection. Moreover, many firms might genuinely welcome competition and the prospect of being imitated.

What's interesting about this - aside from the fact that a respected economist is arguing against patents for industries like software, and using maths to prove it - is that the whole idea of welcoming competition so that everyone can build on the communal advances is incredibly close to the underlying dynamic of open source, which gets better much faster because it can always draw on the work of others.

So essentially the result of the paper is that industries like software work better (a) without patents and (b) when they operate according to the open source development model. Imagine. (Via Slashdot.)

Signs of the (Virtual) Times

The virtual world of EVE Online now has an official economist, Eyjólfur Guðmundsson:

Some of you may have read in various articles and interviews recently that CCP was bringing an economist on board to act as a sort of Alan Greenspan for the virtual world of EVE Online. That economist is me. So here comes a short intro and a bit about what I plan to do as a part of the EVE dev team.

...

In the real world, economic information is the cornerstone for our daily business; everyone takes note when news on inflation, production and interest rates are announced and traders try to predict beforehand what the news will be. There is a constant game between the market and authorities on predicting each other’s move and for that everyone needs information. Though EVE is a virtual world, the basic needs are the same. Players, designers and the company leaders at CCP will all benefit from having a central figure to monitor inflation and trends and provide a focused insight into what is happening within that virtual world so that everyone can make better decisions.

As the lead economist for EVE, my duties will include publishing economic information to the EVE-Online community. My duties will also be to coordinate research cooperation with academic institutions as the academic world has expressed quite an interest in doing research on this phenomenon (which shows how important MMOGs might become in future research into economic and human behavior).

(Via Virtual Economy Research Network.)

Ecological Economics and the Commons

Heavy but important stuff here:

some resources should be part of the commons because their physical attributes mean that common ownership and democratic allocation will be more sustainable, just and efficient than private ownership and market allocation. Information, which will play a critical role in solving the serious ecological problems we currently face, is one of those resources. So too are most ecosystem services. The fact is that conventional markets based on private property rights do not work to solve the macro-allocation problem, which in recent decades has become far more important than the micro-allocation problem. Solving this problem instead requires a system based on common property rights and democratic decision making concerning the desirable provision of ecosystem services.

The Economics of Free

One of the central themes of this blog is that Internet has changed many things by allowing the distribution of digital objects for virtually no cost. This has enormous knock-on consequences: the software industry is where that is most evident, but content is being hugely affected too.

I tend to write analogically, drawing on my knowledge of free software (which goes back about 13 years now) to try to understand what is happening - and will happen - in other fields. An alternative approach is to look at this from the viewpoint of economic theory.

This is something that I am hugely unqualified to do, but fortunately Techdirt's Mike Marsnick has being doing an excellent job in this respect with a series of posts examining the economics of goods when scarcity is removed. He has now posted a summary to this series, together with consolidated links to the previous posts.

It's well worth reading, as are the comments on the above post - if only to see a fine display of people's misunderstanding of what's going on here. I was also pleased to see that the main example he uses - that of the recording industry, and how it can give away music and still make money from things like concerts, merchanise etc. - is precisely the one that I have been pointing to.

I hope that Mike turns all this into a book one day, since I, for one, would welcome and even more in-depth analysis of this important and fascinating area.

Open Source Motivation

Well, strictly speaking, it's about the motivation of those in open source:

Open source software has enabled large system integrators to increase their profits through cost savings and reach more customers due to flexible pricing. This has upset existing ecosystems and shuffled structural relationships, resulting in the emergence of firms providing consulting services to open source projects. This new breed of service firm in turn lives or dies by its ability to recruit and retain appropriate talent.

For such talent, in particular for software developers, life has become more difficult and exciting at once. Developers face new career prospects and paths, since their formal position in an open source project, in addition to their experience and capabilities, determines their value to an employer. Economically rational developers strive to become committers to high-profile open source projects to further their careers, which in turn generates more recognition, independence, and job security.

Nothing startlingly new, but some nice graphs. (Via Slashdot.)

Openness, Surveillance and Privacy

Previous posts have noted that there is an inherent tension between openness and privacy. That tension is even more acute in the case of surveillance, which goes beyond consensual openness. Despite this, there is relatively little public debate around these issues; instead, as has been remarked, the UK is effectively sleepwalking into a surveillance society.

Against this depresseing background, the new report from the Royal Academy of Engineering, entitled Dilemmas of Privacy and Surveillance Challenges of Technological Change, is particularly welcome.

This is not least because it offers a depth of knowledge about the technological issues involved that is rarely encountered (these are engineers, remember). But it is also notable for its even-handedness and sensible suggestions. For example:

In this scenario, disconnection technologies are widely used in a co-ordinated manner: personal data is routinely encrypted and managed in a secure fashion, so co-ordinated connectivity does not threaten it and even substantial processing resources are not a day-to-day threat. This leads to Little Sisters who, by themselves, watch over only a fragment of a person's identity, but when co-ordinated can reveal all.

It would be possible to devise a store loyalty card which incorporated a computer chip that could perform the same functions as an ID card, but without giving away the real name of its owner. Someone might choose a loyalty card in the name of their favourite celebrity, even with the celebrity's picture on the front. If they were to use that card to logon to Internet sites, the fact that they are not really the film star whose name they have used would be irrelevant for most applications, and the privacy of the consumer would be maintained. However, if they did something they should not, such as posting abusive messages in a chat room, law enforcement agencies might then ask Little Sister (ie, the company that runs the loyalty card scheme, in this case) who the person really is, and Little Sister will tell them. In this
scenario, government departments are just more Little Sisters, sharing parts of the picture without immediate access to the whole.

This approach exploits both mathematics and economics. If it is technically possible to find out who has done what - for example when a crime has been committed - but cryptography makes it economically prohibitive to monitor people continuously on a large scale, then a reasonable privacy settlement can be achieved.

This approach suggests a interesting way of balancing the opposing requirements for privacy and accountability.

Recommended reading. (Via the Open Rights Group.)

Give The RIAA Enough Network Cabling...

...and it will hang itself.

One of the under-appreciated benefits of a medium like Web publishing that has practically no barriers to entry is that anybody can post anything - and does. These might be veritable gems - or utter, own-foot-shooting howlers that in some respect are even more precious than said jewels.

For example:

Between 1983 and 1996, the average price of a CD fell by more than 40%. Over this same period of time, consumer prices (measured by the Consumer Price Index, or CPI) rose nearly 60%. If CD prices had risen at the same rate as consumer prices over this period, the average retail price of a CD in 1996 would have been $33.86 instead of $12.75.

Only the RIAA.

Zeroing in on Abundance

A characteristically deep post from Techdirt about the intertwinings of copyright, economics and abundance.

Five Stars for the Stern Report

WorldChanging has a splendid review of the Stern Report, giving it an unequivocable thumbs-up. It also pulls out a subtle but important facet: the report's ethics.

Actually, it's important to underscore that the ethics in this report are mostly not arcane -- even though those arcane aspects reflect, I think, a tectonic shift in economics that the Stern Review is helping to solidify. Climate change is forcing economists to think differently. In fact, I think climate change will one day be credited with having knocked some sense into the discipline of economics.

As I've noted many times on this blog, this kind of change is needed in order to understand and appreciate justly all the commons, not just that of the world's atmostphere.

Upgrading the Economic Operating System

How can you not love a book whose author introduces it thus:

My latest book, Capitalism 3.0, is out this week. It’s about how to upgrade our economic operating system so that it protects the planet, shares income more equitably, and makes us happier, while preserving the strengths of capitalism as we know it. The key to my proposed upgrade is to rebuild the commons, that dwindling set of natural and social assets that benefit everyone.

In the spirit of enlivening the cultural commons, the book’s publisher, Berrett-Koehler, has agreed to an experiment. They are selling the book in the usual places — in bookstores and on-line — but they’re also allowing readers to download the book from this web site for free.

I've not read it yet, but will do: I'm sure it'll be worthwhile. Until then, I suggest everyone spread the word to reward the author and his enlightened publishers, and to fulfil the former's hopes - and help with that upgrade:

As the author, here’s what I hope will happen. I hope many of you will download and skim the book. If you’re intrigued, you’ll read the preface and first chapter either on the screen, or by printing just those pages. You’ll then decide you want to read the whole book, give a copy to a friend, or keep it on your bookshelf or coffee table. So you’ll go to your local bookstore, or to an on-line vendor, and buy the handy, long-lasting version, printed on acid-free paper.

Economics as Enemy of the Commons

A nicely provocative post from OnTheCommons.org, which points out the destructive effect of money on the commons:

What is called "economics" today is the world as seen through the myopic and tendentious lens of money and price. If something is transacted through money it has reality; if not it does not exist. It makes no difference that trees provide shade and neighbors provide comfort; it makes no difference that they serve real needs. They are not sold for money and therefore they do not count. Therefore, the more "the economy" destroys these things – the more it displaces that which is free for commodities that we have to buy for money – the more the economy is growing and the better life is getting, or so we are told.

Eyeballs as Micropayments

Here's a post that wraps up a lot of ideas.

I've often wondered why micropayments have never taken off. Personally, I'd be fine with the idea, and I can't believe I'm the only one. But they haven't, even though various technologies have been around for over a decade.

Maybe eyeballs are the solution. That is, the attention economy creates a de facto micropayment system without the need for a complicated infrastructure:

Money is a very important and useful medium of exchange for high-value, tangible products. For small-value, intangible products, the costs tend to exceed the value of the transactions—especially when you add in the overhead associated with making payments at a distance. Fortunately, human beings are clever. We’ve begun to find a variety of substitutes for money that work better in cyberspace. This isn’t the repeal of market economics, but rather an extension of them to deal with changed circumstances.

(Via Luis Villa's Blog.)

The Economics of Security

In his lastest Wired column, Bruce S. is writing about a subject particularly dear to my heart: the economics of security. He was lucky enough to go up to the fifth Workshop on the Economics of Information Security at Cambridge: I had hoped to go, but a sudden influx of work prevented me.

My own interest in this area was sparked by a talk that Ross Anderson, now a professor at Cambridge, gave down in London. I vaguely knew Ross at university, when both of us had rather more hair than we do now. Since this was 30 years ago, it's not suprising that he didn't remember me when I introduced myself at the London talk, pointing out that the last time I had seen him was in Whewell's Court: he stared at me as if I was completely bonkers. Ah well.

Schneier gives a good summary of what this whole area is about, and why it is so important:

We generally think of computer security as a problem of technology, but often systems fail because of misplaced economic incentives: The people who could protect a system are not the ones who suffer the costs of failure.

When you start looking, economic considerations are everywhere in computer security. Hospitals' medical-records systems provide comprehensive billing-management features for the administrators who specify them, but are not so good at protecting patients' privacy. Automated teller machines suffered from fraud in countries like the United Kingdom and the Netherlands, where poor regulation left banks without sufficient incentive to secure their systems, and allowed them to pass the cost of fraud along to their customers. And one reason the internet is insecure is that liability for attacks is so diffuse.

Read the whole column, and then, if you are feeling strong, try Ross's seminal essay on the subject: "Why Information Security Is Hard -- An Economic Perspective".

Open Access Books Are Like Buses...

...you wait for ages, and then three turn up at once.

Well, two at least: I wrote recently about Willinsky's The Access Principle, and now here, hard on its heels, comes Yochai Benkler's The Wealth of Networks.

If the name Benkler is unfamiliar, you might want to glance at the suggestively-titled Coase's Penguin (yes, that penguin), which is effectively a sketch of the present book. Both, then, are about how the network changes everything, and how all the opens and the various kinds of commons that are central concerns of this blog lie at the heart of one of the most profound economic, social and political transformations seen in recent years.

But don't take my word for it, listen to what Larry Lessig has to say, with typical generosity:

This is — by far — the most important and powerful book written in the fields that matter most to me in the last ten years.

Then buy/download the thing (CC licence, of course) and read it. I know I will. The fact that I haven't yet finished its 500+ pages is not just another reason not to listen to me: it's also a further hint of why eventually all books will be freely available as digital downloads online. Basically, reading on a screen and reading text placed on a physical object are two quite different experiences, and warrant two quite different business models.

The Economics of Open Access Books

I've written before about open access books; but such is my sad state of excitement when I come across good examples, I feel obliged to pass on another one. The home page for the book Introductory Economic Analysis by R. Preston McAfee declares itself to be "the open source introduction to microeconomics" no less, and the online blurb explains why, and also offers some interesting thoughts on the economics of academic book publishing:

Why open source? Academics do an enormous amount of work editing journals and writing articles and now publishers have broken an implicit contract with academics, in which we gave our time and they weren't too greedy. Sometimes articles cost $20 to download, and principles books regularly sell for over $100. They issue new editions frequently to kill off the used book market, and the rapidity of new editions contributes to errors and bloat. Moreover, textbooks have gotten dumb and dumber as publishers seek to satisfy the student who prefers to learn nothing. Many have gotten so dumb ("simplified") so as to be simply incorrect. And they want $100 for this schlock? Where is the attempt to show the students what economics is actually about, and how it actually works? Why aren't we trying to teach the students more, rather than less?

(This closely mirrors Linus' own feelings about the high cost and low quality of proprietary software.)

As a consequence of this unholy alliance of greed and shoddiness, McAfee suggests:

The publishers are vulnerable to an open source project: rather than criticize the text, we will be better off picking and choosing from a free set of materials. Many of us write our own notes for the course anyway and just assign a book to give the students an alternate approach. How much nicer if in addition that "for further reading" book is free.

Introductory Economic Analysis is truly open access, as the author explains: "You are free to use any subset of this work provided you don't charge for it, and you make any additions or improvements to it available under the same terms." To be precise, it is published under the Creative Commons Attribution-NonCommercial-ShareAlike 2.0 licence. Although I've only just started working through the text, I can heartily recommend it for its pervasive clarity and gentle wit - not qualities that you normally associate with economics textbooks.

As well as for the generous gift of the book itself, I'm also grateful to McAfee for the link he gives to a site that's new to me, called The Assayer, which describes itself as "the web's largest catalog of free books." It turns out the vast majority of these are in the fields of science, maths and computing. It's not a huge collection, but since it includes titles as fine as McAfee's, things are clearly looking up in the world of open access books.