Friday, December 19, 2008

Digital rights management sucks

Cartoon by Rayma, originally in reference to Venezuelan politics.

The free market works when participants in the market are rewarded in proportion to the amount of good they contribute. With DRM this proposition is reversed. Society gains less benefit from a protected work, but the owner of the work gets more reward. (Or so they hope.) On top of that, copy protection mechanisms invariably provide a less useful product even to the paying customers. This helps explains why DRM is so universally reviled.

The crux of the problem is that traditional economics states that the price of goods in a competitive free market should approach the marginal cost to produce them. This works nicely for manufactured goods like cars, where the cost of capital, like factory equipment, can be amortized over large numbers of the manufactured product. For digital goods, the marginal cost approaches zero and the traditional economic model stops working.

Consider, also, the difference between rival and nonrival goods. To understand rival goods, imagine you want to build a house on a piece of empty land. Someone else wants to turn that land into a farm. Only one of those two uses can be accommodated. Either you or the farmer will have to outbid each the other for the use of the land. The theory goes that this competition will tend toward the most efficient use of scarce resources. But nonrival goods, for example information, can be put to an unlimited number of uses. Copying information is usually very easy compared to the effort of deriving the information in the first place, whether we're talking about a scientific theory or a piece of music. This creates a situation in which the most benefit is had by copying the information as widely as possible, yet it's very hard for the original creator to capture much of the wealth he has created. This is a very real dilemma, but the solution favored by intellectual property rights advocates - that of creating scarcity where no natural scarcity exists - sacrifices some fraction of the utility that would otherwise be gained in order to increase the portion that property holders can capture.

The publishing industry has set itself up as a middleman between the real content providers and consumers. They seek to use legislation to preserve this privileged position. A truly free-market approach would be to allow the middlemen to be made obsolete. This is what will happen eventually, the efforts of our toadying crony capitalist government notwithstanding.

We need to find market mechanisms that more closely align reward with contribution for the real content providers, the creative people. This is a tricky problem with no obvious solutions. For now, we'll have to put up with a lot of stupidity because so few people even clearly understand the problem.

Saturday, December 6, 2008

Time to buy that first house?

The NYT has a peice out called Maybe It’s Time to Buy That First House. The author tries to shade the article towards encouraging people to buy. He links to a report from the Center for Economic and Policy Research that basically says, don't look for gains in home equity any time soon. All the talk about bailing out over-indebted home "owners" pisses me off. I'm glad somebody is saying this: "If you’re hoping for a recovery in the housing market, you ought to be cheering on the first-time home buyers."

Tuesday, November 18, 2008

Play-by-play of the collapse of capitalism

During the last for months of financial disaster, I've gotten totally hooked on Yahoo's Tech Ticker. The financial news these days reminds me of when I was a kid and I used to take old TVs and radios apart. Except, it's the global financial system that has its pieces strewn all over the floor. Ripping something apart is a great way to start figuring out how it works.

Reregulation of the financial sector?

Bloomberg has a peice out called, Rubin Failure on Swaps Dims Odds Obama Will Rein In Wall Street that speculates about incoming President Obama's possible response to the ongoing financial crisis. Obama's association with Clinton administration veterans and deregulation advocates like Larry Summers and Robert Rubin along with large donations from the financial section may signal a less sweeping reform of financial regulation than is justified by the situation.

As the president-elect faces a once-in-a-century opportunity to remake the regulatory apparatus governing Wall Street, some of Obama’s fellow Democrats and investor groups are urging him to bring sweeping changes to banks, hedge funds and executive pay. His closest economic advisers, men like Robert Rubin, Lawrence Summers and Paul Volcker, may recommend otherwise: go slow. If Obama takes their counsel, the 44th president, who succeeds Bush on Jan. 20, may not clamp down all that hard on a financial industry whose excesses have pushed the nation -- and much of the world -- into a recession.

A lot of the blame for the financial crisis lies with deregulation that started under Reagan and continued unabated through the Clinton and Bush years. Glass-Steagall Act was repealed by Gramm-Leach-Bliley under Clinton. Let's hope that one of the results of this crisis is a more secure firewall between risky financial experiments and the day-to-day banking that the whole economy depends on.

This blog SUCKS!

I have a blog called "Political Economy" and I let the most historic election in my lifetime and the collapse of Western capitalism go by without a comment? I've been busy?? All I can say is, "Sorry, but this blog sucks."

Friday, April 25, 2008

Decline of Dollar, Decline of Empire

Here's a summary of some videos on YouTube of "Decline of Dollar, Decline of Empire" a discussion at York University in Toronto (on January 18, 2008) about the subprime crisis and the decline of the dollar from a Marxist perspective. (see Law of value and capital accumulation)

The 600 billion in losses due to sub-prime crisis (as of that time) damaged the dollar's status as the primary reserve currency and further weakened the "Washington Consensus", which, in some views, is a polite name for American hegemony. (see Democracy and The Washington Consensus - J. Williamson)

Several developments give the current crisis the potential to threaten American imperialism. Credit markets have become complex and opaque. US capital is no longer willing to pay for an empire - federal revenue as a proportion of GDP has declined sharply with Reagan and has continued to decline. The dollar's status as the global reserver currency is in decline.

Dollar convertibility to gold ended in 1971. The Dollar's reserve status has been sustained by demand for US assets. This gave the US state the right of global seigniorage - the ability to print money accepted worldwide. This right is eroding. International reserves are moving away from the dollar. In 1999 the Euro was introduced. A regime of more than one center of world money is taking shape.

During the same periode, the working class in the US and europe maintained its standard of living not by wage increases but by credit - a process whose end may be signaled by the crisis.

(see also Ron Paul's End of Dollar Hegemony)

A gas tax holiday is a terrible idea

McCain used to have a respectable record of fiscal conservatism. That's why I'm disappointed in his recent "Gas Tax Holiday" proposal.

A gas tax holiday is a terrible idea. America needs to consume less oil and, as any student of the free market knows, the price signal is the means that will make this happen. The economic externalities involved in petroleum consumption, if anything, justify higher gas taxes. Expensive gas reduces the effective demand for oil and stimulates growth in badly needed alternative energy sources. Revenue from gas taxes could help reduce the federal budget deficit, which congress has so miserably failed to control.

We might also question the assumption that cutting the gas tax would really yield lower prices. Reducing a tax on a transaction benefits both parties in the transaction, but supply and demand determine how much benefit goes to which party. I'll leave it to smarter people than me to analyze the elasticity in demand of gas versus the ability to produce greater supply. But I will point out that the prospect of new refineries and oilfields being opened up to accommodate one summer's worth of gas-guzzling RVs seems unlikely.

The age of oil is coming to a close. If America wants to be a leader in the coming century, we will need to be a leader in alternative energy. Going deeper into debt to help people cling to a dying technology is a lose-lose proposal. The McCain campaign is capable of better.

Monday, April 21, 2008

Weingast on Violence, Power and a Theory of Nearly Everything

“Economists assume away the problem of violence.”

Barry Weingast was a guest on EconTalk in August of 2007. He describes a categorization of societies based on the means of dealing with violence.

  • Primitive order: hunter-gatherer societies of 20-100 people
  • Limited access order: System of privileges in which distribution of rents reflects distribution of power (access to violence). Monarchies and most developing countries fall into this category. Per capita income ranges between $400 and $8000.
  • Open access orders: modern free-market democracies. Per capita income above $20k. Open access to organizations of all types - political, economic, social, religious. Equality before the law.

If you wanted to criticize, you might point out that they've taken hunter-gatherer at one extreme and western democracies at the other and lumped everything else into the limited access category. But, I'm not sure the categories are the point. Too often economics ignores the social and political context. All other things are seldom equal.

A political economy

A recent piece in the Economist ( A new anthology of essays reconsiders Thomas Piketty’s “Capital” , May 20, 2107) ends with these words: &q...