Showing posts with label economics. Show all posts
Showing posts with label economics. Show all posts

A case for legalizing bribery?

Sunday, April 3, 2011


Indian economist Kaushik Basu argued that in order to deter corruption, legal immunity should be given to bribe-giver (but not bribe-taker). That is, when an act of bribery is committed and both of the doers are caught, the bribe giver should be set free and allowed to collect their money, but the bribe taker should be punished.

This is indeed an interesting method for deterring corruption by managing its supply-side. It provides incentives for suppliers (bribe-giver) to report and turn over the bribe-taker to the police. He provides caveats however, that bribe giver may have an interest to manage his or her reputation in the underworld (I can imagine that someone like Ayin will have to be ‘credible’ enough in order to earn trust from the bureaucrat – that is to say, to have some sort of an underworld moral code). He also warn the possibilities that false charges of bribery on behalf of the public officials may rise, but this can be managed by increasing penalties for false charges – somewhat dilemmatic for a lawyer.


Anyway, download the paper here.


H.T. Marginal Revolution

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The Economist and the human right to water

Saturday, May 22, 2010

H.T to Bo.
The economist recently released an excellent report on water. But there are some parts of the report that disturbs me a little:

Industrial use takes about 60% of water in rich countries and 10% in the rest. The difference in domestic use is much smaller, 11% and 8% respectively. Some of the variation is explained by capacious baths, power showers and flush lavatories in the rich world. All humans, however, need a basic minimum of two litres of water in food or drink each day, and for this there is no substitute. No one survived in the ruins of Port-au-Prince for more than a few days after January’s earthquake unless they had access to some water-based food or drink. That is why many people in poor and arid countries—usually women or children—set off early each morning to trudge to the nearest well and return five or six hours later burdened with precious supplies. That is why many people believe water to be a human right, a necessity more basic than bread or a roof over the head.

From this much follows. One consequence is a widespread belief that no one should have to pay for water. The Byzantine emperor Justinian declared in the sixth century that “by natural law” air, running water, the sea and seashore were “common to all”. Many Indians agree, seeing groundwater in particular as a “democratic resource”. In Africa it is said that “even the jackal deserves to drink”.
A second consequence is that water often has a sacred or mystical quality that is invested in deities like Gong Gong and Osiris and rivers like the Jordan and the Ganges. Throughout history, man’s dependence on water has made him live near it or organise access to it. Water is in his body—it makes up about 60%—and in his soul. It has provided not just life and food but a means of transport, a way of keeping clean, a mechanism for removing sewage, a home for fish and other animals, a medium with which to cook, in which to swim, on which to skate and sail, a thing of beauty to provide inspiration, to gaze upon and to enjoy. No wonder a commodity with so many qualities, uses and associations has proved so difficult to organise.

If you read these sentences carefully, you will find:

  • The reason why there is the right to water
  • The first consequence of the right to water
  • The second consequence of the right to water

What are they? Let’s return to the paragraphs:


Industrial use takes about 60% of water in rich countries and 10% in the rest. The difference in domestic use is much smaller, 11% and 8% respectively. Some of the variation is explained by capacious baths, power showers and flush lavatories in the rich world. All humans, however, need a basic minimum of two litres of water in food or drink each day, and for this there is no substitute. No one survived in the ruins of Port-au-Prince for more than a few days after January’s earthquake unless they had access to some water-based food or drink. That is why many people in poor and arid countries—usually women or children—set off early each morning to trudge to the nearest well and return five or six hours later burdened with precious supplies.  That is why [Reason] many people believe water to be a human right, a necessity more basic than bread or a roof over the head.
From this much follows. One consequence is a widespread belief that no one should have to pay for water. [First Consequence] The Byzantine emperor Justinian declared in the sixth century that “by natural law” air, running water, the sea and seashore were “common to all”. Many Indians agree, seeing groundwater in particular as a “democratic resource”. In Africa it is said that “even the jackal deserves to drink”. [ Example of first Consequence?]
A second consequence is that water often has a sacred or mystical quality that is invested in deities like Gong Gong and Osiris and rivers like the Jordan and the Ganges.
[Second consequence] Throughout history, man’s dependence on water has made him live near it or organise access to it. Water is in his body—it makes up about 60%—and in his soul. It has provided not just life and food but a means of transport, a way of keeping clean, a mechanism for removing sewage, a home for fish and other animals, a medium with which to cook, in which to swim, on which to skate and sail, a thing of beauty to provide inspiration, to gaze upon and to enjoy. No wonder a commodity with so many qualities, uses and associations has proved so difficult to organise.

With all the respect to the economist, I think it is contestable that the human right to water causes either (1) the widespread belief that water is free or (2) that water is sacred and mystical.

Let’s discuss the first consequence. The economist is already quite prudent in not directly pointing out that human right to water means that water should be for free. Instead, it points out that human right to water makes people think that water should be free (a widespread belief). But is it true. Is it true that the human right to water makes people think that water should be free? It would require an empirical research to survey people’s opinion, not only about the human right to water, but also the term human rights in general. Is it true, that when something is labeled as “human rights”, then it should be free? This would make an interesting research in itself because it will have implications to human rights based access movements. My understanding is of course, that things which are labeled human rights, does not necessarily means that they are ‘free’. The right to education and the right to health are not free, although they are human rights. The right to vote is not free, because someone will have to provide and construct the ballots. Indeed, elections costs a lot.  

The examples of the first consequence is not really clear to me.  The second sentence (Justinian’s decree) does not really reinforce the assertion used on the main idea (human right to water causes the widespread belief that water should be free). But the sentence does provide an understanding that in the past people once regard water as ‘common to all’. This is correct. What is not correct is when they are tied to the main assertion. There is no relation between the human right to water and Justinian’s decree that water is a res communis. The two are different things. To put it in different way: Justinian does not say that running water is common to all, because it is a human right.

Now let’s move on to the second consequence: the right to water makes sacred or mystical qualities attached into it. I am almost certain that this is not the case. The Ganges were there, and was considered sacred, long before the term “Human Rights” were invented.

Anyway, probably it is me the one who misunderstood the Economist’s paragraphs above. Do you have a better suggestion?

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What is the best indicator for a regulatory transparency?

Wednesday, March 31, 2010

Gutierrez (2003, paper here) tried to come up with an operational elements of regulatory governance.  He considered that autonomy and independence should be reflected in financial and budgetary independence and no free removal of commissioners; accountability is reflected through clear mechanisms for solving disputes, while clarity of roles and objective is manifested through the regulatory authority’s ability to impose fines and set tariffs. Finally, he opined that "..transparency and participation are operationalized by the existence of hearings for the setting of tariffs and other issues" (see pages 18, 19 and 24). 

However the argument that public hearing is the best proxy in determining regulatory transparency was disputed by Stern and Cubin (2003, paper here), who argued that it is too american-centric. Stern and Cubin argued instead that the requirement for regulator to publish their decision is the better proxy.  

Now the hard task for lawyers is in translating this into a legal concept.  First we need to choose which one is the best proxy. Should we obligate public hearing, or instead, it is adequate for the legal framework to require regulator to explain and justify their decisions? The devil will of course be found in the detail. Public hearing without adequate information disclosure is a non-sense. The legal requirement to explain and justify decision is also not clear in itself unless it is detailed further on how this should be performed.  

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Calls for premarket registration of nanotech product

Sunday, October 11, 2009

EEB calls for premarket registration, stakeholders consultation and adequate legislative framework before a deeper entrance in nanotech market is made. In its brochure, it deems voluntary regulation as unsuccessful. I have yet to see where the failures are, but the EEB claims for lack of participation on the enactments of these codes.

It appears to me that the EEB stance are 'precautionary' in essence and relies more on command-and-control approach in nanotech regulation. The argument may have some merit provided that there are huge uncertainties surrounding nanotech products.

More regulatory framework of precautionary nature may reduce the risk of future market failure. But over-precautions will have implications on the growing market for nanotech.

Read more here.

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Behavioral Monkeynomics

Tuesday, September 8, 2009

First of all, a hat tip to my Canadian friend who referred me to this article at Science Daily: "Monkeys Follow Economic Rules Of Supply And Demand".

C├ęcile Fruteau placed food containers with highly-desired pieces of apple in two groups of South African vervet monkeys. For the monkeys there was just one problem: only one in each group could open the food container. This monkey had a low position in the rank order and was therefore scarcely groomed. However, as soon as she acquired the power to hand out apples she was valued more and was groomed a lot by the rest of the group. Yet she could only enjoy that privilege briefly; the researchers placed a second food container that could be opened by another low-ranking female. From that moment onwards the market value of the first monkey was halved, and she was therefore groomed half as often.

Lessons for mankind:
  1. Its not how you look, but whether you have apples or not
  2. Male (monkeys) are materialistic. No gender question here
  3. Beware of your competitors!

This one is most surprising:

A change in price - grooming for less long if there is another monkey that supplies apples - is only possible if a negotiation process takes place. Many economists assume that such negotiations can only take place if they are concluded with a contract. However, the vervet monkeys do not have the possibility to conclude such binding contracts and yet they still succeed in agreeing to a change in price for a service.

We, humans, should be ashamed of this fact. Monkey market can be very efficient even without a contract. Look at how their 'informal institution' can streamline transaction cost. No need for complicated regulations, monkeys can agree to reach amicable settlement that would bring welfare to their kind. If this were human, they would have to conclude a contract which will take sleepless nights no negotiate, pay a lot of money to the lawyers, file a claim to the court, bribe the judges, and in the end of the day, no one gets the apple.


Why is a speed limit rule effective?

Sunday, August 23, 2009

I had a discussion with my Canadian friend a few days ago. I told him, that I grew skepticial about the role of law in society. I explained, that it is very difficult to establish causation (or strong correlation) between a particular law and behavioral changes intended by the law. Put it simply, it is hard to argue that a particular law has any meaning at all in practice.

After discussing for several minutes, my Canadian friend then uttered that Canada has recently changed its speed limit rule. After the speed limit rule was altered, he said everyone in Canada complied to the rule despite the fact that the effort to socialize the rule is very minimum. Nevertheless, the news spread rapidly and everyone complies.

My friend then went on to explain that in Canada, a driver's license means a person's life. Without a car, it is difficult to travel from one place to another, and in order to be able to drive a car, one will need a driver's license. So when your driver's license is revoked, you'll be paralyzed.

Ah, so now I understand that for Canadians, a driver's license is everything. No wonder they quickly complied to the new speed limit rule. But... what if Canada has a more developed network of train systems? What if people had more choices of transport other than private cars? What if Canada is not as big as it is today, but shrinked and compressed to the size of Madura Island? Would the people there complies to the speed limit rule the way they do today?

I think economics might give a little enlightment. If there is no other alternative of supply (no substitute) and the good is a necessity of life, then the demand is inelastic. In this case, the police can act as a monopolist, it can charge a very "high price" such as imposing rigorous and expensive test for acquiring a driver's license and lowering speed limits. Drivers would have no other option but to "buy" the goods, that is, to comply with it. Of course, at some point if the pricing gets too high, for example if the police lowers the speed limit unreasonably in highways, drivers will think twice using cars and compel themselves to innovate in other means of transports.

In Indonesia, the case is different. People here have a variety of options for transportation in addition to private cars. Public transport is abundant and cheap. So the demand may not really be that strong for a driver's license. I guess the implication would be that people's compliance to traffic rules will be less than in Canada.

Of course, the explanation above still does not take into account that there are 'illegal' supplies of driver's license. If the black market is strong, then the police's monopoly power will decrease because the goods is easily obtainable at cheaper prices. Hence, there will be less incentive to comply.

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What will happen if the world's population go down?

Sunday, July 26, 2009

Lower land prices, higher labor prices, said Pete Alcorn. Surely, it will bring tremendous changes to social system: land reform, democratization and the rise of middle class. Alcorn suggest us to move beyond malthusian economy and pay attention to the tendency of population decrease.

In previous posts we have discussed a little about post-scarcity economics, which is a by-product of Molecular Manufacturing (MM). It may turn out that even without MMworld's population growth may decrease to negative within one century.

The reason for decreasing population may vary. In the past, it can happen because of wars. Now it seems unlikely. So plague -- such as virulent influenza viruses -- could be a scenario. Another scenario would be a relatively successful health and social programs which increases longevity but turned population growth into negative.

See Alcorn's talk here:

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Bringing patients to court may not be efficient

Friday, June 19, 2009

This is my recent op-ed piece in JP. I tried to argue that litigating is not always the best option, both for producer and consumer in cases where credence good is involved.

Unlike buying clothes in a department store, the quality of a particular health, legal and financial service is hard to ascertain. Even if consumers have experienced the service, the long-term effect of the service remains unknown. Is there any guarantee you will not be sued for following your lawyer's advice, or that you will not experience any side effects for taking medication? No.

Health, legal and financial services exploit the high degree of information asymmetry between seller and buyer. Put simply, the service is there because laypersons don't know what to do. Clients don't know the law and patients don't know their disease.

As such, consumers rely heavily on their service provider. Demands are created by the service provider and not by the consumer alone. So clients follow their lawyers on which transaction structure they should enter into and patients follow their doctors on which pills they should buy and swallow.

Hence, at the tip of the business is trust and reputation. Reputation may be worth more than the actual quality itself. As reputation is earned through sustainable efforts in performing high-quality, honest services and a good relationship with consumers, it is the Achilles' heel of this business.

Do courts resolve tarnished reputations through their verdicts? The news that a former patient has been victimized by a health service provider is more likely to be good news for the media than news that a hospital wins a lawsuit over its former patient.

People are naturally more interested in stories where they can be projected into the situation. Hospitals are impersonal institutions owned by corporations, therefore it is not in the interest of the layperson to hear a story of them winning a lawsuit.

Is criminal libel a good recourse to repair a damaged reputation? One thing about going to criminal proceedings is that external factors come into play in the process - namely the police and the prosecutors.

Once a case has been lodged with the police and transferred to the prosecutors, it is no longer in the full control of the "victim" or their lawyers. Unlike lawyers, the police and the prosecutors worked on behalf of the state in the pursuit of (bureaucratic) justice, not in the interests of both parties.

It is not within their consideration if the hospital is interested in maintaining reputation and the former patient just wants to go home. As such, criminal justice institutions may decide to proceed with imprisonment although it may not be in the best interests of any party.

Conventional wisdom suggests going to court in libel cases to get an injunction - that is, to get a court order for the defendant to stop defaming the client.

However, this is effective only in the age of the printing press, not in the Internet age. Court injunctions are meaningless, as the cost of distributing and multiplying information for every user is very low. Once an email is sent, there is no way to stop it from spreading.

Rather than go to court, I would argue for a market-based solution. From the plaintiff's point of view, going to court means they have to pay litigation costs and legal fees. If they win in civil court, they may not be able to recover the costs as the defendant may not have enough money to pay. If it is the insurance company they are suing, the insurance company may decide to appeal, which means more costs and more publicity for the plaintiffs. If at all they finally win the case, it will not bring the damaged reputation back, so they will still need to pay a public relations company to repair the damage.

From the defendant's point of view, the judicial process is lethargic, cold, cumbersome, costly and often does not reflect their sense of justice. From the taxpayers' point of view, legal proceedings mean a burden for their tax money. Taxpayers pay every penny for electricity, water and other utilities spent by the police, the prosecutors and judges. Yet, like laypersons, judicial professionals do not know about medicine.

That is why judges need doctors to stand as expert witness. If there are two expert witnesses with conflicting views, one from the plaintiff and one from the defendant, judges will just have to choose the most convincing one and take the opinion into their decision. The end result could be far from we call "the truth".

In a market-based solution, the parties stay out of court. If the health service provider does something wrong, they pay the patient and the patient can agree not to sue at a price. If providers don't do anything wrong, they ask the patient to issue a public apology and a sum of money to the extent that they can pay. The cost expended in this mechanism is much lower compared to going to court.

This mechanism requires the government to reduce information asymmetry in the market as parties can only negotiate when the evidence is available.

In practice, this means medical records should be made available to the patient. Criminal, administrative and civil sanctions should be introduced for those who tamper with medical records or retain them from patients.

This setting will provide incentives for honest behavior. It will make information discovery cheaper for patients and insurance companies, and also prevent burdening taxpayers through complicated judicial proceedings.

The writer is the founder of the Center for Law Information.

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The need for clarification on HP-3 rights

Thursday, May 14, 2009

I published an article in today's Jakarta Post:

Law 27/2007 enables private ownership of coastal zones through a system called HP-3 (which governs the right to commercialize coastal waters). The idea behind this system is to allow the exploitation of the currently neglected, but potentially profitable, 81,000 thousand kilometers of Indonesian coastline and its 12 mile wide territorial sea.

A HP-3 grants ownership to water columns (above the seabed to the water surface) in Indonesian territorial zones. In most cases, the Law stipulates that HP-3s will be granted by local governments. The Law says that the first period of ownership is granted for a period of 20 years but can be extended. As the law does not impose any limitation for extension, it is presumable that HP-3s could be owned perpetually. It is also worth noting that a HP-3 certificate can be used as collateral to secure a loan.

We know from theory that in order to be functional, property rights must fulfill the "3Ds" rule: definability, defensibility and defeasibility. Property rights can only be efficient within these three aspects, and only if transaction costs are low.

With respect to definability, the Law stipulates that a HP-3 covers a three dimensional space from the seabed up to the surface. This would mean that the seabed falls under another system of regulation. There is however, some interface between the seabed and the water column, and this becomes an issue in sea mining operations. If there is an overlap of ownership between the two (the seabed is granted to an oil company and the HP-3 on the surface is granted to an aquaculture company, for example).

A way of preventing this problem is by coordinating the awarding of property rights between the two areas. That is to say, the awarding of any marine mineral resources exploitation license by the central government must be coordinated with local government.

In another scenario, if both a seabed exploitation licenses and a HP-3 for the adjacent surface are owned by the same entity, disputes could occur from one area to another, which could dilute the value of the property of the neighboring HP-3 owner. One way to anticipate this is for the local government to stipulate which area is used for what. Zoning mechanisms must be very solid in order to prevent property rights disputes.

The law also does not define exact rights within a water column. A water column may be an area passed-though by highly migratory species protected under international law, which therefore cannot be harvested, even by HP-3 owners. A way to address this issue is by clarifying the dos and don'ts for HP-3 owners when implementing regulations.

Another significant problem is that marine boundaries constantly change because of natural phenomenon. HP-3 limits could be confused if the baseline used to measure a sea boundary also changes because the sea level rises. I am not certain as to what mechanism could be used to adapt to this problem.

As for defensibility; defending a property rights in the ocean is relatively more difficult than on land. On land, one can install fences in order to defend and mark their property. This is not possible in the sea. Nets can be used, but if used too extensively they could capture protected species. The surface structure could be used, but that should not hinder navigation for vessels passing through the area. And in any case, it is difficult to exclude traditional fishermen from fishing in HP-3 zones, as they may not be equipped with GPS.

HP-3s are interestingly defeasible enough. Defeasible basically means that the property rights can be transferred. In theory, a property right must be defeasible in order to enable exchange, so that a market can develop. The Law does stipulate that HP-3s can be transferred or encumbered with a mortgage. It is not yet clear which government department would be responsible for the registration of the mortgage. As long as the government has not clarified any institution responsible for the mortgage registration, the idea of mortgaging the sea will not be enforceable. Mortgage is an important part of the whole scheme, as it allows banks and other investor to enter and finance the project.

As we can see from the above explanations that property rights in the sea could be very costly in terms of its definability, defensibility and defeasibility. A huge amount of information would be required to define the property rights. Sonar imaging, GIS interpretation or anthropological studies on the existence of traditional fishing rights would expend a huge of amount of cost.

But these things are essential because, without a clear definition of property rights, future disputes may occur. Defending property rights is also difficult and the costs will be borne by the owners. If the cost of defending the property rights is more than the benefit of exploiting it, then it will not be a worthy investment. As for defeasibility, there is a high cost for institutional set-up. An institution will need to be established in order to maintain marine cadastre and administer HP-3 titles and their encumbrances.

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Where is the "wealth of nations"? Answer: Rule of Law

Saturday, October 6, 2007

An interesting story from Reason Magazine:

A Mexican migrant to the U.S. is five times more productive than one who stays home. Why is that? The answer is not the obvious one: This country has more machinery or tools or natural resources. Instead, according to some remarkable but largely ignored research—by the World Bank, of all places—it is because the average American has access to over $418,000 in intangible wealth, while the stay-at-home Mexican's intangible wealth is just $34,000.

But what is intangible wealth, and how on earth is it measured?

...the World Bank finds, "Human capital and the value of institutions (as measured by rule of law) constitute the largest share of wealth in virtually all countries." According to their regression analyses, for example, the rule of law explains 57 percent of countries' intangible capital. Education accounts for 36 percent.

Average per capita wealth in OECD countries is $440,000, consisting of $10,000 in natural capital, $76,000 in produced capital, and a whopping $354,000 in intangible capital. (Switzerland has the highest per capita wealth, at $648,000. The U.S. is fourth at $513,000.)

By comparison, total wealth for the low income countries averages $7,216 per person consisting of $2,075 in natural capital, $1,150 in produced capital and $3,991 in intangible capital. The countries with the lowest per capita wealth are Ethiopia ($1,965), Nigeria ($2,748), and Burundi ($2,859). In fact, some countries are so badly run, that they actually have negative intangible capital. Through rampant corruption and failing school systems, Nigeria and the Democratic Republic of the Congo are destroying their intangible capital and ensuring that their people will be poorer in the future.

It's really about the people, not the nature.


Nano divide: some comments on Post MNT Economics

Sunday, July 29, 2007

An interesting post on CRN's blog:
" imagine a third world country somewhere in the year 2035, most home industries wiped into oblivion by nanotech minifacs, traditional agriculture wiped into oblivion by cheap biogenetics and superefficient nanotech based agriculture - those people would be without any product in demand, locked away from resources and raw materials, largely incapable of coping because of traditionalist lifestyles..."
Makes me wonder. How long will it take since the first day nanofac is invented to ubiquitous mass production? Will it be enough to buy time. If a moratorium is allowed, international trade can continue for a while to fill the gap on the transitionary phase.

But even with the moratorium, I would expect a rush, capital and financial market fells followed by lay offs triggered by manufacturing companies spreading to other industries. This disruption may cause extreme economic crisis. But I am not an economist. Any ideas on how to prevent it?

ps: blog hiatus until August 11th. I am on vacation.


Privacy is dead?

Wednesday, July 18, 2007

Have a look at Mike Treder's post titled "Is Privacy Overrated?" here:

We agreed with author, scholar, and transparency advocate David Brin, who asserts that we are not required to choose between freedom and security; that, in fact, history shows us that the most open or "transparent" societies -- those with the least emphasis on secrecy and control -- also are the safest.
I have the impression that law and economics scholars tends to restrict privacy uses for economical purposes, hence, privacy is protected insofar as the total outcome of its protection outweighed its costs of protections. Secondly, privacy shall not be protected if it hinders people to commence beneficial economic transactions. Posner said in his blog:
The particular concern I have with defenders of privacy arises when they argue for legal rights to blanket concealment not of communications, and not of embarrassing facts, but of facts that would be material to the willingness of other persons to transact with the concealer on terms favorable to him.
Posner seemed to defend organizational value of privacy (in terms of trade secret, for example) compared to its individual value. (I must put a note here, that I doubted that protecting privacy in organizations is all good, if they are too much protected, then it can also hamper developments.)

From the human rights approach, privacy is also troublesome. Is privacy a sub-right or a fundamental human rights? I think privacy could be an interrelation between the two. Not all concepts under privacy rights are negative rights.

See my previous discussion on this issue here.

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"Scarcity" and "Cost" in the economy of abundance

Saturday, October 28, 2006

In corellation with our previous discussion on the economics of abundance, there is a review on the topic at Harvard Business School's blog. One of the commentator said:
This is easily observed from the prices of any number of e-books on the web. The most popular carry higher prices than the less popular, even though they all cost virtually nothing to reproduce. This emphasizes the point that prices are set by demand, not the constraints of supply. Of course, the price floor created by direct physical materials doesn't exist any more. But production costs never determined price: Demand always did.

The scarcity effect, therefore, has nothing to do with physical constraints. If there is a popular Stephen King novel that exists only in digital form, the price charged for it would be determined by how much the individual reader wants the book. It might cost one-hundredth of a cent to reproduce, but still cost $4.99 to download.

I think it can be true assuming the consumers does not share the book it has purchased through P2P softwares. Prices at the initial sales are determined by consumer demand. But once an information good is released to the market, it's becoming a public good. Any attempts to limit its movement would be artificial (through DRM and IPR), and not natural. So, will there be an adjusted "price"?

Scarcities and Costs

Another commentator said:
The cost of creation is increasing in every creative area such as games, Internet websites, and digital contents. It was possible to make a website with one or two developers five years ago, but it is impossible now if they want to make it attractive to consumers.
Besides creation, one element of cost that I can figure out is time-cost and opportunity cost. The time you spent searching for cheap products at e-bay could be more valuable if it is used in analyzing the ups and downs of the stock market. So, another form of business model could be in making search faster and more filtered. That's what user-review sites such as Digg is doing.

Of course we still need to diffrentiate between purchasing movies at netflix and buying a laptop from e-bay. Movies can be directly downloaded, there is a time cost there. But a laptop needs to be packaged and sent. Thus, there is a distribution costs plus time cost there. This triggers the improvement of two business models: (1) Delivery and (2) Direct Marketing. And where do the tax goes as the transaction is made on the internet? Good question. Then we might need to regulate the internet, but I rather hate the idea of regulating the net.

Walmart could be threatened and so as CBS. So, will market monopoly finally comes to an end? Not really. Where do you search the goods before ending up in netflix or you tube? Google. That's right. What kind of monopoly will the future have? Our next topic is "Competition in the economics of abundance".

Do leave me comments...

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Economy of Abundance

Friday, October 27, 2006

A wonderful power point presentation from Anderson's Long Tail, titled "Economy of Abundance" is now available on line. There is a good summary from David Hornik in his blog:
The same businesses that are the poster children for the Long Tail, are the poster children for the Economy of Abundance. And the same businesses that are the victims of the Long Tail are the poster children for the Economy of Scarcity. With bandwidth and storage approaching free, iTunes can offer three million songs (P2P offers nine million). In contrast, with limited shelf space, Tower Records can only offer fifty- or sixty-thousand tracks. The end result, consumer choose abundance over scarcity (something for everyone) -- Tower Records gets liquidated while iTunes grows dramatically. Television is undergoing a similar transformation, from scarcity to abundance. TV initially consisted of only the major networks. Consumers were limited to 3 choices in any given time slot. With cable the number of channels was dramatically increased and a broader range of content became available (Food Channel, Discovery Channel, ESPN, CNN, etc.). To many, 250 channels may constitute sufficient abundance as to approach infinite choice in their minds. But the true television of abundance is YouTube. With unlimited bandwidth and unlimited storage, television is subject to microprogramming -- millions of shows, viewable on demand at any time. Now not only should NBC be worried, so too should be Comcast.
Anderson did not take into account molecular manufacturing in his presentation. I have the feeling that full scale abundancy will-- for the time being-- be only availabe to non-physical goods. The cost for sharing files in P2P is of course, almost zero (there is of course the time costs and therefore opportunity costs being incurred). E-books, songs, videos, you can sell it this way. But that is not the case when you sell vegetables through the internet. There are still costs thay you will have to pay, you need to grow it first, then maybe sell it at e-bay. Consider other commodities such as water. Do you really think there is going to be a long tail for water companies? Nope, water market is always monopolistic.

Those aspects, Anderson did not consider. But, those scarcities may not last long. Thus, there could be a long tail too for water or plants, not the real water or plants, but programs containing molecular structure of water or plants. This is what we call, the nanotech's economy of abundance.

I am taking this opportunity to point out that futurist and nanotech expert had actually come up with the idea of abundance, but seen from the nano perspective and not from the economical and marketing perspective.

Abundant economy will revolutionarize the Law. Creative Commons and EFF movements is a reflection of this, but it is not likely that the developments are limited into those areas. The trend of the future law will follow the long tail trends: decentralized, personalized, fast, consumer-dictated, open, shared, highly networked. In Burgess words:
In a system based on scarcity, those holding the levers of production will not easily give them up. In domestic and international markets based on scarcity, the function and responsibility of directors and officers is to maximize shareholder value—at nearly any cost that does not fall afoul of laws, or at least not so far afoul that the penalties exceed the financial gain resulting from illegal actions.

So, what kind of culture do we want? In a system of plenty, will we continue to keep score by maintaining the preponderance of benefits inside corporate walls and coffers? Will we continue to stifle the spread of benefits through secrecy and protectionism? Unless something changes, history suggests that laws, regulations, and protections will continue to be designed for the exact purpose of directing all profits and virtually all of the benefits to shareholders.
Will corporation remained existed? I have a feeling that the trends toward "limited liability" will be reduced. Limited liability has been quite abusive in that it escapes real liability and hide it behind corporate walls. There is of course a doctrine of lifting the corporate veil, but it doesnt really work if you can hire good lawyers. So I think there is going to be a shift from limited liability to common but differentiated liability. Next question, will multi-national corporations (MNC) ceased to exist? Their number of employees will shrink of course, but it isn't likely that they ceased to exist. They will evolve, maybe as a completely new entity. I must remind you to Google. That, is the prototype of future MNC. And what does google have in mind? Stakeholder, not shareholder. Participation, not centralization. Opennes. Boldness in buying You Tube with the risk for violating multiple copyright laws. The world is changing and the future law must accomodate this.

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Barriers to "Star Trek" economy

Monday, March 27, 2006

An interesting post from the Adam Smith Blog:
In an article in the current Business newspaper I examine how people increasingly expect goods to be free. From matches given away in restaurants and bars, we have been through free downloads and even free DVD movies given away with daily and Sunday newspapers. Skype has given us free telephone calls around the world. Many people, especially young people, prefer to read newspapers and magazines free over the internet. It leads to a new type of economy. It does lead to a rethink. If people are receiving the goods free, the price element of competition diminishes, and those of quality and convenience probably increase. It isn't quite a Star Trek economy where food and appliances come free from the replicator, but it's on the way to somewhere we haven't been.
Over at wise-nano, you will find an essay written by Giulio Prisco, titled “Globalization and Open Source Nano Economy”, in which he argued:
"Basic goods should be free, or priced within the means of everyone. In other words, Coca Cola can be expensive, but water must be free. Armani suits can be expensive, but basic clothing must be free. Who will develop royalty-free MDL descriptions of basic goods that everyone on the planet can use? The answer, I think (or at least I hope), is that they will be developed with an Open Source development model by armies of MDL programmers."
Hear hear! And Nanotech can make that happen. But for the near-term, we must get rid of bad laws that prevent open-source. In India, copyright relinquishment must undergo tight process like giving written notice to copyright registraar. In many other states, you cannot just append "Attribution, Non Commercial, Share alike"* to your writing as an indication of license as in their laws, "copyright license" must be written and signed by both parties.
These laws won't work after MNT is discovered. Even today, ther already become serious impediment to the economy. They will have to be rewritten. Immidiately.
Mohamad Mova Al 'Afghani
* In Creative Commons, that means a work can be copied freely given that the copier sufficiently attribute the work to original author, in a manner prescribed by him. Noncommercial means that people may not use the work for commercial purposes. Share Alike means any alteration of the work can be distributed under an identical license.