Catallaxy Files

polymathic pontification, bleeding heart economic rationalism and liberal secularist contrarianism

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    Saturday, February 14, 2004
    In love with food

    Kath and Kim's scriptwriters must enjoy the Valentine's Day Herald-Sun and its 20 pages of Valentine's Day messages (Age readers are a bit shy; they can't even fill one page). Here we have the suburban masses speaking in their own voices and without any sense of embarrassment.

    Kel's not the only one with a 'foxy lady', of course, but what struck me about the messages this year wasn't ascribing animal characteristics to humans (though there was plenty of that), but instead giving them food characteristics.

    Leading the list, by a long margin, was pumpkin. On a skim read, seven Herald-Sun readers have lovers that remind them of pumpkins. Two readers have fallen for a potato. Others think that their Valentine resembles a sweet pea, a banana, a chicken pie, a gooseberry, and a kit kat. One Age reader is in love with a noodle cup cake. There was also one case of regurgitated food, a pukey.

    Unlike with the animals, it's difficult to discern metaphoric content in most of these designations, or if we can (eg pukey) the metaphoric meaning is probably not intended. They seem more like sweet nothings, like the message from 'Smoosh Moosh' to 'Mooshie', and all evidence that love turns the brain to mush.

    Friday, February 13, 2004
    Ideas from a cave

    Richard Eckersley, author of Well and Good: How we feel and why it matters, is an odd mix of hippy and scientist. The first part of his book, which gives an overview of his research on happiness, quality of life, and the environment reflects his scientific training. We know where he is coming from, that long tradition of social critics who believe that the pursuit of material wealth and individual freedom is a moral, cultural and environmental disaster, but he is up-front about the available evidence being less than conclusive.

    The key passage from the later part of the book is on p.218, and reveals the hippy Eckersley. In the 1970s (of course!), he tells us, he spent some time living in a cave in a remote part of Crete. Watching the full moon one night (they say it affects people) he had his 'most intense spiritual experience'. He felt as if 'some force or power had penetrated to the core of my being, a part of me that seemed to go back in time forever, and to be connected with everything else. I was filled with awe and reverence.'

    I think relating this experience helps us understand Eckersley's underlying philosophy. It is based in the religious rejection of the material world. The more scientific material in the first part of the book is part of his search for evidence in favour of his spiritual assumptions, rather than the major reason he takes the view he does. His alternatives, too, seem based in faith more than anything else. He admits he is very short on detail. Instead of plausible policies we get this:

    My sense is that if we removed growth - becoming ever richer, regardless of where and how - as the centrepiece of our worldview, things would fall into place, the tensions would be resolved, a sense of coherence and balance would be restored.

    Which, of course, is nonsense. Though rarely deliberately, many countries (including Australia in the early 1990s) have experimented with a no growth or negative growth strategy and the consequences have always been precisely the reverse of Eckersley's prediction. These experiences are the relevant comparators with growth-oriented capitalist economies, not some vague, idealised alternative.

    The last few chapters have a 'repent or be damned' tone. I'll take my chances, thanks.

    Thursday, February 12, 2004
    Happy Darwin Day to all our readers! (link courtesy of fellow celebrant site Arts and Letters Daily)
    The politics of the GST

    Viewers of Nine's Sunday program last weekend might have been amused by Peter Costello conceding that Labor's strength in state polls was partly due to all the GST revenue coming their way. It confirms my view that the only people who knew what they were doing in the GST debate were the Democrats who backed it. It was bad for the Coalition, causing total taxation to rise, its key business constituency to be buried in paperwork, and now it is bankrolling Labor election victories in the states. Yet they supported it. It was a good idea for Labor, who needed higher taxes to finance its welfare and social service policies. Yet they opposed it. Only the big-spending, more-Labor-than-Liberal Democrats voted consistently with their long-term policy stance.

    In today's Australian John Roskam has a proposal to return personal income tax power to the states. From a political perspective, this certainly has some merit, provided it was accompanied by a re-allocation of funding responsibilities so that the states were clearly responsible for certain services, and unable to blame the Commonwealth for funding shortfalls. It would also, as Roskam suggests, give the Liberals greater relevance at the state level. I don't think the electorate has necessarily made the wrong choices in recent state elections. The Liberal Oppositions were unable to make a credible case that they would do a better job than the Labor incumbents. Yet their absolutely crushing defeats, as seen in Victoria and Queensland, creating governments with little fear of defeat, cannot be good for the political system. Roskam's switch would, then, improve accountability in two ways. It is an idea that has been floated many times before, but perhaps now is the time to develop it further.

    Tuesday, February 10, 2004
    Krugman vs Bush Inc
    In the latest New York Review of Books, Paul Krugman takes no hostages in his spray at the Bush dynasty:

    ...the Bush dynasty differs from other American families that have mixed wealth with political prominence. While the Kennedys and the Rockefellers may have a sense of entitlement, they also display a sense of noblesse oblige—what one might call an urge to repay, with charitable contributions and public service, their good fortune. The Bushes don't have that problem; there are no philanthropists or reformers in the clan. They seek public office but, if anything, they seem to feel that the public is there to serve them ...

    The Clinton administration refused to impose a steel tariff even during the 2000 campaign; had it betrayed its principles, West Virginia might have gone to Al Gore, who would now be in the White House. When the issue arose again in early 2002, Bush was still immensely popular. "If you can't do the right thing when you're at 85 percent approval, when can you do the right thing?" asked one official. But politics prevailed, and the tariff went through ...

    What emerges from Suskind's book is a picture of an entirely cynical administration—much more cynical than Nixon's, in which the corruption was localized, and large parts of the policy process continued to be run by serious, even idealistic people. (Old hands at the Environmental Protection Agency describe the Nixon administration as a golden age.) Under Bush, it seems, political rhetoric bears no relation to reality—what officials say has nothing in common with what they do, or what they think. And policy decisions are driven almost entirely by politics, by what the political arm thinks will play well with "the base."
    Free trade agreements as a commitment device
    As Stephen Kirchner points out, a lot of the recent negativity over the US Free Trade Agreement has come from the view of trade as a zero sum game. Let's note that unilateral lifting of trade barriers is almost always a good thing so the fact that the Australia has 'given up' on more trade barriers than the US is irrelevant. The fact that Australia under the FTA is now committed to the gradual phasing out of car and textile tariffs which hurt consumers is a good thing regardless of whether we get more access to the US market. Ah, but you might argue, couldn't we have achieved the same thing without an FTA? As Stephen points out, this is where a failure to appreciate domestic political economy considerations comes in:

    ... unilateral trade liberalisation is not going anywhere. Domestic protectionist interests have brought this process to a near halt in Australia as well as in the US. By negotiating an FTA, both Australia and the US gain leverage over these domestic interests. Governments have resorted to bilateral agreements precisely because unilateral and multilateral trade liberalisation processes have stalled. It is a way of making progress that would not otherwise be possible.

    More broadly speaking, as my employer Henry Ergas argued in a short paper written last year, this view of free trade agreements as a precommitment device to efficiency-enhancing regulatory reforms that would be less likely to be achievable absent special conditions has broader applications to competition policy and regulation:

    To achieve maximum benefit for the Australian economy, an important element in such a principles agreement should be the neutral, consistent, and universal application of competition policy. Of course, this does not mean that there cannot be
    exceptions in situations where public benefit concerns warrant. But it does mean that any exceptions should be rigorously and independently tested, and publicly so, on a regular and periodic basis.

    Disappointingly, this aspect of precommitment has not been milked to its full capacity. In particular, the FTA could have been used as an opportune instrument to force through fuller liberalisation of cross border investment flows between the two countries than what has been achieved. It will be interesting to see whether the promise of precommitment to broader competition law harmonisation and reform will bear fruition in that aspect of the FTA that foreshadows greater cooperation between the competition law enforcers of the US and Australia and the formation of a joint working group to examine competition laws and policies. It is also worth asking whether this harmonisation and regulatory review aspect of the FTA could have been realistically achieved through alternative fora.

    Of course a substantial negative of the FTA has been the copyright term extension forced on Australia. Opposition to this policy should be a no-brainer among most sensible economists and classical liberals. Whether this cost is a price worth paying for the 'precommitment' aspect of the FTA, in light of the short lifespan of most works relative to the absurdly lengthy copyright terms they enjoyed even under the status quo is a difficult question to answer.
    Intellectual property and the Free Trade Agreement

    For those interested in reading more about intellectual property, the current review of the Digital Agenda Act in Australia, and the US-Australian Free Trade Agreement, see Kim Weatherall's detailed and very relevant post.

    Monday, February 09, 2004
    A reincarnated metaphor

    In his justly famous essay Politics and the English Language George Orwell warned against 'dying metaphors', metaphors that are merely used because they 'save people the trouble of inventing phrases for themselves'.

    One metaphor that has not just died but also come back as something else is the 'landslide' election victory. The Australian's report of Labor's Queensland victory, like many other media outlets, used the landslide terminology. Originally, the 'landslide' description evocatively created an image of a large, and probably sudden, movement of soil or rock, sweeping away whatever was in its path. As the numbers in the same story showed, this metaphor was far from appropriate for what happened in Queensland at the weekend. Labor, in fact, lost both votes and seats.

    The dictionaries have pretty much given up on this one, with the Macquarie saying that it means an (any, presumably) overwhelming election victory. But it would be good if journalists could find a word that evokes an image of what happened, rather than what did not happen.
    Progress on the US-Australia Free Trade Agreement

    On 8 February, Australian Trade Minister Mark Vaile concluded an agreed text for the Australia-United States Free Trade Agreement with United States Trade Representative Bob Zoellick. The press release is available on the DFAT website.

    Although there are a number of interesting issues arising out of the FTA, I'll just raise a couple that have been mentioned very little in the press, but are nonetheless important: intellectual property and competition law.

    Intellectual property

    The negotiators have agreed on three intellectual property issues so far. A more detailed list of the intellectual property commitments made to date is posted here.

    Australia’s IP laws will be substantially harmonised with the largest intellectual property market, and a global leader in innovation and creative products

    Little additional information is provided on this point, but presumably this means that the term of copyright under Australian law will be extended to conform with the United States. That means that copyright will last for life +70 years when individuals create copyright works, and 95 years from publication for corporate authors. There has been a great deal of debate on the Constitutionality of the Copyright Term Extension Act 1998 in the United States, including litigation that reached the Supreme Court (the Eldred case). One of the arguments forwarded by opponents to the Act is that intellectual property is meant to be protected for "limited times" (according to the US Constitution itself), and that the extension of copyright term by another 20 years is contrary to this aim.

    While the basis of Australian copyright law does not contain an explicit statement about its intended boundaries, there are certainly interests in Australia that would oppose the extension of the copyright term by another 20 years. This agreement with the US would bypass much of the debate that would otherwise be had on the issue, and effectively renders its consideration in the context of the Copyright Amendment (Digital Agenda) Act 2000 review currently underway irrelevant.

    Another issue to look out for in this context is liability of Internet Service Providers (ISPs). The Digital Agenda Act currently provides that carriers and carriage service providers (including ISPs) are not liable for authorising infringements that occur on their networks, including on web sites hosted on their servers but operated independently of the ISP, by reason only of the fact that the infringements occurred on the facilities provided by the carrier or carriage service provider
    (including ISPs). Under US copyright law, ISPs can be held legally liable for content carried via their services, unless they affirmatively act to remove or block access to the content upon receipt of a complaint from any person or company that claims the content violates their intellectual property rights.

    Australia's international reputation as one of the world's leading countries in protecting and enforcing intellectual property rights has been reinforced

    Given the current concerns about piracy on peer-to-peer networks on the Internet, changes to ISP liability would do much to strengthen copyright ownership by the media industries. The recent raid on the KaZaA offices in Sydney (see Heath's post), in addition to actions that have been taken against both individuals and universities in Australia, demonstrate that the media industry is taking the threat of piracy as seriously in Australia as it has been in the United States.

    Standards of intellectual property protection will be beyond those provided by multilateral agreements such as the WTO TRIPS agreement and WIPO Treaties

    Again, the meaning of this agreement is unclear. One possibility is that the negotiators were referring to the Digital Millennium Copyright Act 1998, in which the US legislature complied with international obligations on copyright law, but went further than they were required in the direction of copyright protection. The DMCA is arguably more draconian than the Digital Agenda Act, in which Australia complied with the same international obligations. The main differences in the laws is in their anti-circumvention provisions. To describe the differences would take much more time than I can spend right now. But suffice it to say that the DMCA provisions are more extensive than those in the Digital Agenda Act.

    Competition law

    The most significant aspect of the agreements on competition law agreed to date are that Australia and the United States will cooperate on competition law and policy, and that consumer protection agencies of the two countries will work together in combating illegal activity. This raises some issues about how much government agencies in the United States and Australia will be sharing information, which could be important in a number of contexts, including when companies file for competition approval of transactions in both countries and in enforcement and investigation situations. It will be interesting to see the details of how the agencies will work together.

    The benefits to Australia of these and other measures on competition issues are said by DFAT to include greater ease in pursuing US-based companies, cooperation in combating breaches of consumer protection laws, and consultations and a joint working group to examine competition laws and policies.
    The con in econometrics
    From The Economist via PrestoPundit:

    Two economists, Deirdre McCloskey of the University of Illinois, and Stephen Ziliak of Roosevelt University, think their colleagues do a lousy job of making sense of figures, often falling prey to elementary errors. But their biggest gripe is that, blinded by statistical wizardry, many economists fail to think about the way in which the world really works ...

    In a past paper* Professors McCloskey and Ziliak attacked other economists' over-reliance on statistical rather than economic reasoning ...

    McCloskey and Mr Ziliak found that 70% of the papers published during the 1980s in the American Economic Review (AER), one of the most respected journals of the dismal science, failed to distinguish between “economic” and “statistical” significance. They relied too much on numbers, and too little on economic reasoning ...

    In their latest work**, Ms McCloskey and Mr Ziliak looked at all the AER articles in the 1990s, and found that more than four-fifths of them are guilty of the same sin. Indeed, so pervasive is the cult of statistical significance, say the authors, that ever more economists dispense altogether with the awkward question of whether the patterns they uncover have anything meaningful to say about the real world.

    Sunday, February 08, 2004
    Music Copyright – The Battle Heats Up

    The music industry campaign against file sharing escalated on Friday, when MIPI (Music Industry Piracy Investigations) launched raids on Sharman Networks, four ISPs and a number of universities – in pursuit of evidence against Sharman.

    (For those who came in late – Sharman Networks is the software company that owns and distributes KaZaa, the most well known and popular file sharing program following the demise of Napster.)

    The music industry across the globe has been looking for some way to stifle music swapping. Shutting down Napster had little effect, with imitators like KaZaa quickly stepping up to fill the place of Napster. In the US, the RIAA (Recording Industry Association of America) decided that it was going to start taking action against individual users as a means of stemming the sharing of copyrighted files. This turned out to be something of a PR disaster, when one of the 261 individuals targeted turned out to be a 12 year old girl. (Article 1, Article 2)

    MIPI has at least learned something about public relations. Michael Speck, from MIPI has indicated in the media that:

    “Civil action which begins on Tuesday would not include individual Kazaa users, Mr Speck said.”

    My speculation is that MIPI is banking on inflicting such a financial loss on Sharman Networks and it’s owners, that other firms are deterred from producing similar file sharing software or allowing P2P software to be distributed via their web sites.

    However I suspect this won’t do a lot to stem music sharing for a couple of reasons. Firstly – whilst the MIPI action may reduce the amount of new P2P software produced, there is already a lot of P2P software in users hands. Secondly, this kind of action might be effective when software is produced by corporations – but will probably be less effective against collectives of open-source software programmers.

    Discouraging illegal music sharing is going to require more than just targeting the companies that produce P2P software. It’s going to require successfully targeting those involved in the large scale distribution (uploading) of copyrighted music – i.e. more activities like the recent court action against three university students from Sydney. More fundamentally – it is going to require a shift in the attitudes of Internet users, who have become accustomed to the ‘free everything’ culture and convenience of the ‘net and digital music.

    However this shift in attitude probably isn’t going to happen until the music industry provides alternatives to illegal sharing that are affordable, convenient, and still allow digital music to be moved around between consumer devices with the flexibility of today’s .mp3 format.

    Finally, it’s worth noting the closing paragraph of the SMH article where

    “Music industry analyst Phil Tripp said the case was "certainly the most dynamic, and they better hope they get it right . . . If they've gotten it wrong at all, Kazaa and the individuals that have been affected by this can sue for huge damages for a long time."
    Future imperfect
    David Friedman, libertarian anarchist son of Milton, has made available on the web the working draft of his next book, to be called Future Imperfect, which seems to be a foray into futurology with law and economics-based insights.
    The economics of open source software
    Tech blogger Shanness links to a few items on how Linux is taking off in a big way. Linux is the best known of open source software programs. Open source software raises lots of interesting issues for economists because of two distinguishing characteristics:
    (1) it is freely written and distributed without expectation of a royalty payment (however to say that open source software is created for 'love' and not for money is to oversimplify matters - some profit oriented companies are emerging from the open source movement that make a business out of servicing and training);
    (2) all modifications to the software by users is subject to a licence condition (e.g. like Linux's GPL) which states that the modification is also to be made freely available (i.e. cannot be copyrighted but must also be released as open source software).

    For a nice and (mostly) accessible overview of the economics of open source, see this long literature review by Aaron Schiff (PDF file). Schiff's piece focuses on the incentives of programmers to participate in open source projects and the business models that may emerge from the movement and their likely effects on 'closed source' software companies like Microsoft. By far the most interesting bit of Schiff's literature review is where he looks at the non-pecuniary benefits of participation that indirectly lead to pecuniary benefits, in particular the 'signalling effect':

    Lerner and Tirole ... emphasise the existence of delayed payoffs from open source projects. They separate delayed payoffs into two different incentives: the career concern incentive, which relates to future job offers or future access to the venture capital market, and the ego gratification incentive, which stems from a desire for peer recognition. Lerner and Tirole group these two incentives together under the heading of the signalling incentive... Lerner and Tirole identify three
    factors that will increase the signalling incentive: (i) the more visible the performance to the relevant audience, (ii) the higher the impact of effort on performance, and (iii) the more informative the performance about talent.

    Lerner and Tirole identify several reasons why the signalling incentive may be greater in open source projects compared to closed source ones. First, performance measurement is better under open source. This is because only the functionality and usage of a closed source program can be observed by outsiders, while under open source the contribution of each individual and the quality of his or her code can be directly inferred. Second, an open source programmer takes full responsibility for his or her project or subproject whereas in a traditional firm environment, an individual?s performance depends on that of others. Finally, open source programmers are less likely to have firm-specific human capital, thus making the labour market more fluid.

    Another issue raised by open source software is whether goverment procurement policy should be biased in favour of open source software. This issue is tackled in a book produced by the AEI-Brookings Joint Centre for Regulatory Studies which is available online for free here. The book consists of five papers, 4 of which conclude 'no' and one (by Larry Lessig) which concludes 'yes'. However it appears to me that Lessig's argument that governments procurement should prefer open source because an open platform would benefit its operations doesn't really negate the consensus of the economist contributors that procurement decisions should be 'business as usual' (that is, government should pick the package on its merits rather than as industry policy)n because there is no evidence of market failure in competition between open source and closed source.

    Indeed, I found the most interesting of the papers in the anthology to be the one by Bessen (PDF file) who argues that open source software is a privately evolved response to a previous market failure associated with incomplete contracts and asymmetric information problems of purchasing proprietary software that does not sufficiently allow users to customise their code:

    Standardized software packages are, at best, a compromise. Attempting to meet as large a set of individual consumer?s needs as possible, standardized packages cram in as many features as is feasible. This is why successful products so often suffer from feature bloat. ... Thus developers of standardized products face a trade-off between feature richness and product quality and reliability...Hence, packaged software represents only a minority of software investment.

    Custom software and contract programming provide an alternative proprietary means for meeting the needs of individual consumers. But customization will not, in general, meet the needs of all consumers for two well-understood reasons. First, as anyone who has negotiated a custom programming contract knows, it is very difficult to specify the contract. This is because the only complete specification of all the software features and its behavior under all circumstances is the software code itself... Any software contract is thus what economists call an incomplete contract.

    Second, negotiations over custom contracts also suffer from asymmetric information. That is, the developer does not know how much value the consumer places on the product and therefore does not know what to charge. With standardized commodities, market demand is revealed through many transactions. But with a custom product, developers cannot obtain this information without a costly bilateral bargaining process. As a result, a developer may not offer a custom contract, even though a contract on terms that are profitable would be accepted. Alternatively, the developer may overreach and ask for too much, leading the consumer to reject the offer.

    Incomplete contracts and asymmetric information result in some degree of market failure. That is, some consumers are not served even though their needs could be met with profitable contracts. Note, however, that such market imperfections cannot be corrected by direct government intervention?the government is in no better position to design or negotiate contracts than private software developers.

    But open source development may finesse these problems by allowing consumers to customize products themselves. Open source means, roughly, that consumers are provided with 99 percent of their desired product in a form that allows some of them to tailor the remaining 1 percent to their own needs.




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