Hayek in the Machine

Medium: Nanoeconomics is about human-machine exchange, and machine-machine exchange. It is the economics of distributed ledgers and artificial intelligence, of object-capability programming and cybersecurity, of ‘central planning’ in the machine, and of ‘markets’ in the machine.

As we’ve come to understand blockchains and other distributed ledger technologies as an institutional technology, we’ve also learned that not only can blockchains coordinate and govern decentralised human economies (as governments, firms and markets do) but they can coordinate and govern decentralised machine economies (or human-machine economies).

This extends what Hayek called catallaxy — the spontaneous order of the market — from the market coordination of human action to the coordination of human-to-machine and machine-to-machine economies.

Nanoeconomics is not a new idea. In their Agoric papers published in 1988, Mark Miller and K. Eric Drexler developed the idea of a computational system as a space for economic exchange. The development of object-oriented programming has created software agents, which vie for scarce resources in the machine. But right now, these agents are governed through planning, not markets. Miller and Drexler suggested an alternative: a market-based computation system. In this system:

“machine resources — storage space, processor time, and so forth — have owners, and the owners charge other objects for use of these resources. Objects, in turn, pass these costs on to the objects they serve, or to an object representing the external user; they may add royalty charges, and thus earn a profit.”

With global computers like the smart-contract platform Ethereum we now have the bones of such a market-based computational architecture.

Interesting post from Chris Berg, Sinclair Davidson and Jason Potts of RMIT Blockchain Innovation Hub in Australia and Bill Tulloh from Agoric.

The Amazon War and the Evolution of Private Law

It’s well known that to boost their sales, sellers sometimes post fake 5-star reviews on Amazon. Amazon tries to police such actions by searching out and banning sites with fake reviews. An unintended consequence is that some sellers now post fake 5-star reviews on their competitor’s site.

The Verge: As Amazon has escalated its war on fake reviews, sellers have realized that the most effective tactic is not buying them for yourself, but buying them for your competitors — the more obviously fraudulent the better. A handful of glowing testimonials, preferably in broken English about unrelated products and written by a known review purveyor on Fiverr, can not only take out a competitor and allow you to move up a slot in Amazon’s search results, it can land your rival in the bewildering morass of Amazon’s suspension system.

…There are more subtle methods of sabotage as well. Sellers will sometimes buy Google ads for their competitors for unrelated products — say, a dog food ad linking to a shampoo listing — so that Amazon’s algorithm sees the rate of clicks converting to sales drop and automatically demotes their product.

What does a seller do when they are banned from Amazon? Appeal to the Amazon legal system and for that you need an Amazon lawyer.

The appeals process is so confounding that it’s given rise to an entire industry of consultants like Stine. Chris McCabe, a former Amazon employee, set up shop in 2014. CJ Rosenbaum, an attorney in Long Beach, New York, now bills himself as the “Amazon sellers lawyer,” with an “Amazon Law Library” featuring Amazon Law, vol. 1 ($95 on Amazon). Stine’s company deals with about 100 suspensions a month and charges $2,500 per appeal ($5,000 if you want an expedited one), which is in line with industry norms. It’s a price many are willing to pay. “It can be life or death for people,” McCabe says. “If they don’t get their Amazon account back, they might be insolvent, laying off 10, 12, 14 people, maybe more. I’ve had people begging me for help. I’ve had people at their wits’ end. I’ve had people crying.”

Amazon is a marketplace that is now having to create a legal system to govern issues of fraud, trademark, and sabotage and also what is in effect new types of intellectual property such as Amazon brand registry. Marketplaces have always been places of private law and governance but there has never before been a marketplace with Amazon’s scale and market power. It’s an open question how well private law will develop in this regime.

Athletes Don’t Own Their Tattoos

NYTimes: Any creative illustration “fixed in a tangible medium” is eligible for copyright, and, according to the United States Copyright Office, that includes the ink displayed on someone’s skin. What many people don’t realize, legal experts said, is that the copyright is inherently owned by the tattoo artist, not the person with the tattoos.

Some tattoo artists have sold their rights to firms which are now suing video game producers who depict the tattoos on the players likenesses:

The company Solid Oak Sketches obtained the copyrights for five tattoos on three basketball players — including the portrait and area code on Mr. James — before suing in 2016 because they were used in the NBA 2K series.

…Before filing its lawsuit, Solid Oak sought $819,500 for past infringement and proposed a $1.14 million deal for future use of the tattoos.

To avoid this shakedown, players are now being told to get licenses from artists before getting tattooed.

Why Doesn’t the FBI Videotape Interviews?

Michael Rappaport at Law and Liberty:

…if the FBI believes that an interviewee has lied during the interview, he or she can be prosecuted for false statements to the government. The penalty for this is quite serious. Under 18 U.S.C. 1001, making a false statement to the federal government in any matter within its jurisdiction is subject to a penalty of 5 years imprisonment. That is a long time.

How does the FBI prove the false statement? One might think that they would make a videotape of the interview, which would provide the best evidence of whether the interviewee made a false statement. But if one thought this, one would be wrong, very wrong.

The FBI does not make videotapes of interviews. Apparently, there are FBI guidelines that prohibit recordings of interviews. Instead, the FBI has a second agent listen to the interview and take notes on it. Then, the agent files a form—a 302 form—with his or her notes from the interview.

What is going on here? Why would the FBI prohibit videotaping the interviews and instead rely on summaries? The most obvious explanations do not cast a favorable light on the Bureau. If they don’t tape the interview, then the FBI agents can provide their own interpretation of what was said to argue that the interviewee made a false statement. Since the FBI agent is likely to be believed more than the defendant (assuming he even testifies), this provides an advantage to the FBI. By contrast, if there is a videotape, the judge and jury can decide for themselves.

…One might even argue this is unconstitutional under existing law. Under the Mathews v. Eldridge interpretation of the Due Process Clause, a procedure is unconstitutional if another procedure would yield more accurate decisions and is worth the added costs. Given the low costs of videotaping, it seems obvious that the benefits of such videotaping for accuracy outweigh the costs.

See also this excellent piece by Harvey Silverglate.

The Top Ten Marginal Revolution Posts of 2018

As measured by page views the most popular MR post this year was my post on how there is one law for the police and another for the rest of us, Get Out of Jail Free Cards.

Second was Tyler Cowen’s 12 Rules for Life. Number seven on Tyler’s list, “Learn how to learn from those who offend you,” caught my eye today but there’s much wisdom throughout.

The third most popular post was by neither Tyler, myself, nor a guest blogger but rather by a MR commentator, One smart guy’s frank take on working in some of the major tech companies.

One of my favorite posts was fourth, Lessons from “The Profit”. The new season of The Profit has started and continues to be of interest. All IO economists should watch.

Number five was another one of my favorites Why Sexism and Racism Never Diminish–Even When Everyone Becomes Less Sexist and Racist.

Tyler’s excellent analysis of the North Korean deal shows why he is an important thinker in foreign policy, able to see beyond the headlines, The North Korean summit and deal.

A second MR commentator had another top post, Will truckers be automated? (from the comments).

Tyler doesn’t like to write the kind of post that came in at number 8 but these posts are always popular which is one reason Tyler doesn’t like to write them. The five most influential public intellectuals?

Number 9 was a useful post, Why are antiques now so cheap?

Coming in at number 10 was my video and Tyler’s post on Paul Romer’s Nobel Prize, Why Paul Romer Won the Nobel Prize in Economics.

Other notable posts from Tyler included:

Other notable posts from me included:

Overall, I’d say it was a notable year for MR commentators! Congratulations! What were your favorite, or least favorite, MR posts of 2018?

Police in Philadelphia Stealing Houses

The Supreme Court is considering whether the Constitution’s ban on excessive fines applies to the states as well as to the federal government. If the SC needs more motivation to curb the abusive process of civil asset forfeiture they need look no further than Philadelphia. In a field filled with outrageous stories of injustice, the situation in Philadelphia where houses have been forfeit stands out.

A forfeiture petition for one property lists one gram of marijuana, a half gram of cocaine and some over-the-counter pills as justification for taking. In one case recently settled in a $3 million class-action lawsuit, Norys Hernandez nearly lost the rowhouse she and her sister owned after police arrested her nephew on drug dealing charges and seized the house. Another family named in the suit fought to save their house from the grip of law enforcement after their son was arrested for selling $40 worth of drugs outside of it. Of the lawsuit’s four named plaintiffs, three had their houses targeted for seizure after police accused relatives dealing drugs on the property. None of the homeowners were themselves accused of committing a crime.

As families fought to keep homes targeted by the DA, the revenues from the forfeiture sales became a big moneymaker for local law enforcement – netting some $6 million annually in the best years. The proceeds turned into an unregulated budget split between the police and DA. The money made off of the seized homes went to buy wish list items ranging from new submachine guns to custom uniform embroidery.

As if that weren’t enough, sometimes police officers were the buyers of the foreclosed properties! How’s that for demand creates its own supply?

“I am genuinely distressed to learn that the DA’s office permitted police officers to acquire forfeited homes of Philadelphians at public auction,” said University of Pennsylvania Law School professor Lou Rulli. “This disturbing revelation underscores one of many serious flaws in civil forfeiture — law enforcement is able to directly benefit from the actions they take to seize private property, often from lawful homeowners who have done no wrong.”

This story takes the cake:

Biddle recalled an instance, in 2007, when he purchased a property on the 5700 block of Chester Avenue for $21,000. To his surprise, he found a buyer just a few days later who was willing to pay nearly double that amount. He inked the sale.

At the next forfeiture open house, an incensed DA staffer, who by now knew Biddle on sight from his repeat visits to forfeiture auctions, approached him.

“They said, ‘That guy we took the house from? You just sold that to the guy’s mom,’” Biddle recalled. “They were pissed, but they knew I couldn’t do anything about it.”

Records show that it took the District Attorney’s Office three years to seize the property back, through a second forfeiture action filed against the pair.

This is from an excellent investigative report by Ryan Briggs.

Addendum: See also my piece with Makowsky and Stratmann forthcoming in the JLS, To Serve and Collect: The Fiscal and Racial Determinants of Law Enforcement.

Stunning Figures on Energy Efficiency

Over the past 60 years, the energy efficiency of ever-less expensive logic engines has improved by over one billion fold. No other machine of any kind has come remotely close to matching that throughout history.

Consider the implications even from 1980, the Apple II era. A single iPhone at 1980 energy-efficiency would require as much power as a Manhattan office building. Similarly, a single data center at circa 1980 efficiency would require as much power as the entire U.S. grid. But because of efficiency gains, the world today has billions of smartphones and thousands of datacenters.

From Mark Mills at Real Clear Energy.

The Crypto Anarchist Manifesto

Tim May, physicist, libertarian-Randian, cypherpunk revolutionary, has died. Here is his Crypto-Anarchist Manifesto first published in 1992.

A specter is haunting the modern world, the specter of crypto anarchy.

Computer technology is on the verge of providing the ability for individuals and groups to communicate and interact with each other in a totally anonymous manner. Two persons may exchange messages, conduct business, and negotiate electronic contracts without ever knowing the True Name, or legal identity, of the other. Interactions over networks will be untraceable, via extensive re- routing of encrypted packets and tamper-proof boxes which implement cryptographic protocols with nearly perfect assurance against any tampering. Reputations will be of central importance, far more important in dealings than even the credit ratings of today. These developments will alter completely the nature of government regulation, the ability to tax and control economic interactions, the ability to keep information secret, and will even alter the nature of trust and reputation.

The technology for this revolution–and it surely will be both a social and economic revolution–has existed in theory for the past decade. The methods are based upon public-key encryption, zero-knowledge interactive proof systems, and various software protocols for interaction, authentication, and verification. The focus has until now been on academic conferences in Europe and the U.S., conferences monitored closely by the National Security Agency. But only recently have computer networks and personal computers attained sufficient speed to make the ideas practically realizable. And the next ten years will bring enough additional speed to make the ideas economically feasible and essentially unstoppable. High-speed networks, ISDN, tamper-proof boxes, smart cards, satellites, Ku-band transmitters, multi-MIPS personal computers, and encryption chips now under development will be some of the enabling technologies.

The State will of course try to slow or halt the spread of this technology, citing national security concerns, use of the technology by drug dealers and tax evaders, and fears of societal disintegration. Many of these concerns will be valid; crypto anarchy will allow national secrets to be trade freely and will allow illicit and stolen materials to be traded. An anonymous computerized market will even make possible abhorrent markets for assassinations and extortion. Various criminal and foreign elements will be active users of CryptoNet. But this will not halt the spread of crypto anarchy.

Just as the technology of printing altered and reduced the power of medieval guilds and the social power structure, so too will cryptologic methods fundamentally alter the nature of corporations and of government interference in economic transactions. Combined with emerging information markets, crypto anarchy will create a liquid market for any and all material which can be put into words and pictures. And just as a seemingly minor invention like barbed wire made possible the fencing-off of vast ranches and farms, thus altering forever the concepts of land and property rights in the frontier West, so too will the seemingly minor discovery out of an arcane branch of mathematics come to be the wire clippers which dismantle the barbed wire around intellectual property.

Arise, you have nothing to lose but your barbed wire fences!

Addendum: Inspiring! But see my post The Demise of Crypto Anarchy from 15 years ago.

Fewer, Bigger Entrepreneurs Explains Rising Inequality

Why has wealth inequality increased in the United States? A lot of semi-plausible but vague theories have been offered–changes in the tax code, the diminished role of unions and so forth–but there are surprisingly few fully-specified models. In an important paper, Mohsen Mohaghegh (on the job market) has a new answer.

Wealth inequality has risen considerably in the US since 1975. For instance, the wealth share of households in the top 1 percent of the distribution rose from 25 percent in 1975 to more than 37 percent in 2007. This paper builds on theories of entrepreneurship and wealth inequality to address changes in inequality in the US between 1975 and 2007.

In the data, there are two trends in entrepreneurship since 1975: the average debt-to-asset ratio among entrepreneurs has increased, and the number of entrepreneurs (the entrepreneurship rate) has fallen. I study how the distribution of wealth changes over time, when these two trends are accounted for in a model.

…[two] channels accounts for both the fall in the entrepreneurship rate and the rise in the entrepreneurs’ leverage: an increase in banks’ willingness to fund risky entrepreneurial projects and a rise in the costs of starting a business. When changes in entrepreneurship are accounted for, my model explains more than 90 percent of the rise in the share of wealth held by the top 1 percent of households, and just under half of the rise in the share of the top 0.01 percent of households in the data.

A lower rate of entrepreneurship implies that a smaller number of households can take advantage of their productive ideas. Active entrepreneurs, however, have access to more capital which allows highly productive entrepreneurs to expand their businesses. Both of these changes contribute to a rise in inequality over time.

Below are two figures from the paper showing the declining entrepreneurship rate and increasing leverage. Mohaghegh doesn’t explain these facts but he connects three literatures, declining entrepreneurship, increasing financialization and rising inequality and he shows that the first two of these well-known features of the US economy can explain a large share of the third, the rise in inequality.

The Cryptoeconomics Lab at Ivey

Ivey Business School at Western University (London Ontario, Canada) is looking for a Post doctoral Research Fellow to join our newly established CryptoEconomics Lab: http://cryptoeconomics-lab.com

The focus of the position is on conducting foundational research in the emerging discipline of cryptoeconomics, which examines the protocols and incentives that govern the production, distribution, and consumption of digital goods and services within decentralized online platforms.

The CryptoEconomics Lab at Ivey Business School is a cutting-edge initiative that is just getting started, and builds upon the school’s Scotiabank Digital Banking Lab and its interdisciplinary team of faculty members and graduate students.

The wild west era of blockchain is ending and the scams and flimflams are being revealed but the fundamental of the technology will be used to build socially useful mechanisms.

By the way, the CryptoEconomics Lab has a good bitcoin crash course ( I believe that should be read, bitcoin crash-course!).

Increases in Inequality Have Been Overestimated

Stephen Rose of the Urban Institute (not exactly a right-wing or libertarian think tank) compares recent studies measuring changes in inequality and finds that although inequality has increased the Piketty and Saez (2003) results, which generated a tremendous amount of discussion and research, are very likely over-stated.

The results from at least four studies were compared for three measures of income change: change in median incomes, share of growth captured by the top 10 percent, and the changing income share of  the top 1 percent. In all cases, Piketty and Saez (2003) were the outlier, showing the most increased inequality. And in all three measures of income change , Piketty, Saez, and Zucman (2018) found much less growth in income inequality than Piketty and Saez (2003).

This brief does a meta-analysis of different findings to estimate a “consensus” level of change…I find that instead of stagnating, real median incomes grew by just over 40 percent (1 percent a year) from  1979 to 2014;  the top 10 percent of the income ladder captured 45 percent of income growth from 1979 to  2014; and the share of the top 1 percent grew 3.5 percentage points.

All studies find that income inequality rose after 1979, but common perceptions that all income gain went to the top 10 percent and middle class incomes stagnated (or even declined) are wrong.

Russ Roberts also has several good videos showing how the numbers can be cut in various ways.

The Cost of Occupational Licensing

In an NBER paper, Blair and Chung find that occupational licensing reduces labor supply significantly. I had expected that occupational licensing would be worse for blacks than for whites because it imposes an additional locus of discrimination but that effect seems to be opposed by a certification effect (the license helps black workers to overcome statistical discrimination) so the net effect is not as bad for blacks as for whites:

We exploit state variation in licensing laws to study the effect of licensing on occupational choice using a boundary discontinuity design. We find that licensing reduces equilibrium labor supply by an average of 17%-27%. The negative labor supply effects of licensing appear to be strongest for white workers and comparatively weaker for black workers.

An Institute for Justice report by Morris M. Kleiner, the dean of occupational licensing studies, and Evgeny S. Vorotnikov attemps to calculate the net loss to the US economy from occupational licensing and concludes that when all costs are considered it is on the order of $200 billion annually.

In preventing people from working in the occupations for which they are best suited, licensing misallocates people’s human capital. In forcing people to fulfill burdensome licensing requirements that do not raise quality, licensing misallocates people’s human capital, money and time. And with its promise of economic returns over and above what can be had absent licensing, licensing encourages occupational practitioners and their occupational associations to invest resources in rent-seeking instead of more productive activity. Taking these misallocated resources into account, we find potential costs to the economy that far exceed those from deadweight losses and that likely provide a more complete picture of the extent to which licensing reduces economic activity.

…we find licensing costs the American economy $197.3 billion in misallocated resources.

Tariff Man

Some good economics in Tariff Man, sung to the tune of Piano Man (with apologies to Billy Joel) by Art Carden:

Now Paul is a real estate contractor
He’d like to buy things for his wife
But he canceled a deal because structural steel’s
More expensive—it’s doubled in price!
And the firms are all practicing politics
As their businessmen fly to DC!
Yes, they’re spreading a problem called poverty,
And calling it prosperity!

Jack up that tax, you’re a Tariff Man!
Let’s make Americans pay
For the right to buy stuff from those foreigners–
We should make it here, anyway!
These policies concentrate benefits
And they spread costs to you and to me
These costs are concealed, but see, they are still real—
They are there, though they’re harder to see.
Some goods are expensive that shouldn’t be
Because tariffs have made them cost more!
And we’d have more for bars, and put bread in their jars
But we’re stopping goods at our shores!

La la la, di da da
La la, di da da da dum

Jack up that tax, you’re a Tariff Man!