Tag Archives: Ostrom

New Dourado and Tabarrok Paper on Intellectual Property

I’m pleased to announce that Alex Tabarrok and I have a new working paper out from the Mercatus Center today, “Public Choice and Bloomington School Perspectives on Intellectual Property.” The paper will appear in Public Choice in 2014.

Here’s the abstract:

We mine two underexplored traditions for insights into intellectual property: the public choice or Virginia school, centered on James Buchanan and Gordon Tullock, and the Bloomington or Institutional Analysis and Development school, centered on Elinor Ostrom and Vincent Ostrom. We apply the perspectives of each school to issues of intellectual property and develop new insights, questions, and focuses of attention. We also explore tensions and synergies between the two schools on issues of intellectual property.

The gist of the paper is that the standard case for intellectual property—that a temporary monopoly is needed in order to recoup the sunk costs of innovation or creation—ignores issues raised by the two schools we investigate.

From a public choice perspective, a temporary monopoly provides enormous opportunities for rent seeking. Copyright and patent owners are constantly manipulating the political environment to expand either the duration of the monopoly or the scope of what can be monopolized. We document the evolution of intellectual property in the United States from its modest origins to its current strong and expansive state.

From a Bloomington perspective, the standard case for IP wrongly treats the commons as a kind of wasteland. In fact, numerous innovations and sprawling creative works occur without monopolization—just look at Wikipedia. Innovation occurs when the right institutional structures are in place, and intellectual property that is too severe can hamper the smooth operation of these institutions. Too much IP can harm as much as too little.

Read the whole thing, cite it copiously, etc.

The Myth of the Myth of the Market

Matt Yglesias argues that there is no such thing as a “market distribution” of wealth, because most wealth would not exist without the state. He lists “a few minor exceptions” to the maxim that market solutions are efficient:

— The air pollution impacts of modern electrical power generation, industrial activity, and transportation can’t be efficiently bargained away because the transaction costs are way too high.

— So-called “public goods” like basic scientific research or musical recordings will be underproduced absent some combination of state subsidy and state-created intellectual property monopolies.

— Basic infrastructure (roads, electrical lines, sewers) won’t be provided properly without some eminent domain and they won’t be priced correctly due to the monopolistic nature of the market.

— Absent deposit insurance and regulation, banks will be subject to runs and economically destructive panics.

— Without a central bank minding the store properly, the entire macroeconomy will fall into periodic recessions lasting months or years.

Since these five factors color all market activity, Matt says, there is no such thing as pure market activity, and therefore no distribution of wealth that would result if there were no government provision of pollution abatement, public goods, and so on.

In my view, Matt’s argument is not compelling. Take first his list of “minor exceptions” to the general rule that markets work best. Do we need state intervention to keep air pollution down to acceptable levels? There has never been a completely laissez-faire society that has had dirty air, so it is difficult to say. What we do know from the work of Elinor Ostrom is that we don’t need state intervention in all cases to solve problems associated with water usage or overfishing, which are structurally similar to that of air pollution (i.e., they have high transaction costs). It turns out that the threat of state-sanctioned violence is not the only solution to repeated prisoner’s dilemmas, even when transaction costs are high, either in theory or in practice.

What about other public goods? It is strange to me that Matt chose copyright protections for musical recordings as an example, because I might favor eliminating such protections even as a matter of marginal policy reform. If musicians could no longer make money from selling recordings, they would still produce recordings as advertisements for their live performances. Musicians would tour more, and the live music scene might become more vibrant. It’s not at all clear to me that it would be worse than the status quo. I don’t favor eliminating government funding for basic research, and indeed, at the margin, I would favor more such funding. But similarly, without government subsidies, research would still occur, philanthropists would still donate to universities, and so on. While the result may be some modest “underproduction” of basic research, it still seems unlikely that but for government funding of basic research, we would be living in caves.

I’ve never understood the argument about roads, since as best I can tell, roads have always existed, even in cases in which governments did not have transportation policy. The common law, which itself originated without the state, seems to have made adequate allowance for solving the anticommons problem via various kinds of easements and property rules. Matt also argues that private infrastructure would be monopolistically priced, but I think he fails to consider the possibility of customer-owned mutuals as an alternative to both government and for-profit firms.

Without deposit insurance, would banks face constant runs and panics? This is at best controversial among monetary historians. Modern economists tend to blame bank failures during the Great Depression more on restrictions on interstate banking and the concomitant lack of geographic diversification than on the lack of deposit insurance. New Zealand does not today have deposit insurance; it is not a financial hellscape. If deposit insurance were eliminated, banks would become more sober, prudent institutions than they are today, which may not be such a bad outcome. I favor the elimination of federal deposit insurance, and I don’t think I am very alone. Certainly, it is not one of my most out-of-the-mainstream policy views.

I confess to chortling a little at Matt’s line about central banks. Months or years of recession?! Unimaginable. With central banks in charge, the US is experiencing a years-long slump, Japan is experiencing a decades-long stagnation, and Europe is…fucked. Central banks were also at the helm during the Great Depression. My monetary policy views are conventional, but the central banking track record is not something I would try to draw attention to were I taking Matt’s side of this argument.

None of this is to say that we would all be immensely wealthy in a world without government intervention. The way Matt structures his argument, I don’t have to make that claim. All I need to show is that but for government intervention, we would not be dramatically worse off than we are now, which I think I have done. It seems worth mentioning, in addition, that government sometimes makes us worse off as well as better off. For example, government regulation of pollutants can and often does exceed anything resembling the welfare-maximizing amount. Governments produce public bads as well as goods, such as war, genocide, the new Jim Crow (to say nothing of the original), and immigration restrictions. Transport policy is often counterproductive, and infrastructure resources such as spectrum and airspace are often misallocated or otherwise mismanaged, relative to a common law approach. Financial regulation seems to do more to enrich Wall Street than protect the public. And as I said above, government policy caused the Great Depression and the Euro crisis, as well as innumerable other financial disasters. These costs are significant. Immigration restrictions alone cut global output in half. On top of all this is the deadweight loss of taxation, which is substantial.

What is most unfortunate about Matt’s list is how widely accepted it is. He says you can find it in “a really banal mainstream neoclassical economics textbook,” and he is right. Textbook economics presents a simple model of the world and draws conclusions from that model that are frequently at odds with reality. Most textbooks try to convince the reader of the benefits of economic analysis, not to educate the reader about the limits of the models they present. Real world institutional analysis is much more complicated, messy, and context-dependent than Matt’s textbook allows. We can and should use the tools in the textbook to illuminate our work, but applying them as Matt does to create a universal theory of the (non)existence of a market distribution of wealth seems misguided.

The Post-Westphalian Order and the Age of the Network

In my work on WCITLeaks and on my latest working paper on cybersecurity (paper, blog post, podcast), I’ve had the occasion to think a lot about governance structures. In particular, what happens when there is a mismatch between a governance structure and the problem that people need to be solved? Do, and how do, governance structures evolve?

I came across a great quotation yesterday from Toomas Hendrik Ilves, the president of Estonia. In remarks that he made in June at a conference on “cyber conflict,” Ilves said:

We must choose between two paths – either we can change the nature of the internet by placing a Westphalian regulatory structure on internet governance, or we can change the world.

To my mind, this is an intriguing way to frame the issue of Internet governance, and it is impressive that it comes from the president of a nation-state. I’m not especially familiar with the issues under discussion at the particular conference at which Ilves made this statement, but I can tell you how it relates to WCIT and cybersecurity. To a large extent, the Internet developed without top-down control. As a result, non-Westphalian Internet-native governance institutions emerged to solve the problems that netizens had. For example, on both the issue of accounting for data transfer costs and that of maintaining security, a system of zero-priced at-will peering emerged between networks at the core of the Internet.

Now that the Internet has become so important, the Westphalian order wants to remake the Internet in its own image. We’ll take it from here, it says. But my daydreams are now filled with the idea of an Internet that replies, “No, no. We‘ll take it from here.”

This might be crazy, but is it so crazy? The Peace of Westphalia was concluded in 1648. Westphalian sovereignty has had an impressive run, but why assume that it will be around forever? At some point, the Westphalian system will end, and something new will come after it. That something new will depend on a lot of real variables, not on legal fictions, just as the Peace was a ratification of the distribution of power, not a creator of that distribution.

In my new paper, I link the spontaneous provision of Internet security to the work of Elinor Ostrom, but I’ve realized that in a crucial way, my work contradicts Ostrom. She argues that the governance of large common pool resources needs to be accomplished through a nested system, a federal structure. Essentially, she solves the problem of bigness with a vertical cascade of punishment. This is a form of hierarchy. But Internet security is a large common pool resource, and as I show in the paper, it is provided non-hierarchically. Instead of a vertical cascade of punishment, there is a network cascade of punishment.

This is a big deal. One aspect of it that is especially intriguing to me is that it provides evidence for David Friedman’s critique (ungated) of Tyler Cowen’s argument (ungated) on anarchy. It also can give us a way to anticipate the real variables that may define the post-Westphalian order.

In particular, is the world becoming more network-like? I think so. Globalization means trade networks. War increasingly means non-state actors: “terrorism” networks. The plummeting cost of communication means thicker meatspace networks, not just more computer networks. Think about the rise of hacktivism and Anonymous, a loose network of online prankster-vigilantes.

We may be entering the Age of the Network, but a remaining question is to what extent networks are becoming more prominent only because they have the consent of the Westphalian order. As much as nation-states want to regulate the Internet, they don’t exactly want to shut it down. They want to ensure it remains domesticated, too weak to represent a serious alternative to their power. At some point, we may witness a genuine conflict between “sovereign” institutions and network institutions. If and when the network institutions start to win, I will interpret that as the beginning of the end for the sovereign nation-state.

Is There a Cybersecurity Market Failure?

That is the title of my Mercatus working paper (PDF), released yesterday. Basically, it aims to be a short course in public economics for tech policy analysts. Almost all policy wonks have taken Econ 101, perhaps even a graduate version, in which they learn that externalities can cause markets to get prices wrong, and that this can result in market failure. What my paper stresses is that this link, from externality to market failure, is not automatic.

The paper is heavy on “what Coase really meant” (lots of smart people get this wrong), on non-property institutions and norms à la Ostrom, and on the often-ignored inframarginal externality as discussed by Buchanan and Stubblebine. By applying these ideas to cybersecurity policy, I try to show that it is not at all as obvious as many analysts think that there is significant scope for welfare-enhancing regulatory intervention. The point is not that there is literally zero market failure, but that proponents of cybersecurity regulation have not done the work they need to to show that market failure exists, if it exists. Indeed, many policy analysts may not even realize they are missing something. I hope that this paper will correct that and lead to a more humble and cautious approach to market failure among its readers.

I have plans for more work on tech policy in the future. Internet security and governance is a great research topic for young, tech-savvy economists interested in polycentric governance and institutions. If you’re interested in doing research in this area, let me know, I may be able to help.

Is the Blogosphere a Common-Pool Resource?

Pete Boettke asks for essays addressing this question; I’ll give him a blog post instead.

From the content of Pete’s post, it’s clear that he’s not asking if the blogosphere is a common-pool resource; rather, he’s asking about the comments that appear on blog posts. Furthermore, I don’t think he’s suggesting that by reading (i.e., consuming) comments anyone is inhibiting others’ ability also to read comments. So I’ll refine the question: Does some people’s use of the comments section at the margin inhibit its use by others?

In some cases, the answer is clearly yes. Attention is the scarce resource. Some comments consume attention without contributing anything (or something sufficiently!) positive.

To understand where this problem occurs and how to solve it effectively, one first needs to understand that this is what is known as a first world problem. This is true in two senses. First, in the literal “people are dying of wars and poverty and famine and we are worried about blog comments?” sense. Second, and more importantly for our purposes, we ought to recognize that most bloggers do not sit around and worry about all the comments they are receiving. The median blog post gets zero comments. Most bloggers are concerned with trying to encourage, rather than inhibit, commenting.

The commenting dynamic is very different on small blogs than it is on popular blogs. On small blogs, people typically comment when they have something to contribute or ask that is relevant to the post. These are frequently of high quality (relatively speaking; recall Sturgeon’s Law: 90 percent of everything is crap). On more popular blogs, this positive commenting dynamic is confounded by the presence of eyeballs. Every post is read by many thousands of people. For the self-involved who could never attract such a large audience on their own, this is an irresistible forum for expounding pet hypotheses, axe-grinding, and generally shouting at or expressing meaningless agreement with the celebrity post-authors.

The first step, therefore, to higher quality comments is “be more niche.” Discourage your marginal readers with technical language, obscure references, and lengthy posts. Your marginal readers are not of high value anyway, and driving them away is an excellent way to improve the average comment of your inframarginal readers.

If you cannot bring yourself to do this, or you have delusions about being the next mainstream blog, then you must adopt some sort of rules to govern commenting. Because the incentives for commenting on blogs vary with the popularity and other characteristics of the blog, different blogs should use different rules to govern commenting (straightforward application of Ostrom 1990). Most smaller blogs probably do not need any sort of rules at all. My own blog, unpopular as it is, gets consistently high-quality comments with virtually no rules or policing. The comments section at the blogs of major media outlets (such as the New York Times), however, are a sewer. Again, there are too many eyeballs.

The kinds of rules that might be adopted are not particularly interesting in and of themselves. Many forums require registration to prevent fully anonymous comments. Pete mentions banning both anonymous and pseudonymous comments. Requiring users to log in with Twitter or Facebook accounts accomplishes basically the same thing. Users can rate comments and the better ones can float to the top. Commenters can compete for reputation or “karma.” I’ve opted not to do these things on my blog because I’d still prefer more comments, not fewer.

The structure of the comments themselves can aggravate the problem. For example, many sites are now using threaded comments, in which users can reply directly to another comment and the comments can be grouped together. While this may be fine for small sites, it is death to the comments section on bigger sites because it rewards the self-involved commenter with comments on his comments. It increases the payoff for piggybacking on the blog’s popularity.

As a final observation, I will note that banning comments is pretty nearly weakly dominated by unmoderated commenting. The reason is simple: if the comments are a sewer, then readers won’t wade in the sewer. The amount of time wasted reading bad comments is small relative to the value of the good comments, even if there are few good comments, because people ignore the comments sections on blogs with bad comments sections. I myself never read the comments on a post if there are more than 30 comments already, and rarely if there are even 20. This is a useful heuristic: if there are many comments, they probably aren’t any good. Banning comments doesn’t typically help and could possibly cause harm.

Comments are open.