Why economists should feel conflicted about the Grokster ruling

by  Tyler Cowen in

…it is difficult to judge how a given level of illegal downloads will affect economic efficiency. First, the quantity of music sold in a given year is not a very accurate indicator of how much value consumers receive from music. Fans commonly experiment by buying a number of CDs, only a few of which pay off and become favorites. Many or most of the products bought are quickly regarded as disappointments and discarded; in this regard the market for CDs differs from the market for refrigerators. Whether consumers like what they bought is at least as important as the absolute size of the industry.

The Internet already helps music companies track fan demands. When fans sample on-line music, usually they can figure out whether or not they would like the entire CD. Many of these fans still buy the CD, to get better sound, to have the music in more convenient form, to receive the packaging, and so on, as discussed above. These fans usually will be happy with their purchases. As a result, it will be harder for the music companies to issue low quality CDs. Of course this tighter monitoring of quality may cause the number of new issues to decline. In nominal terms the industry will shrink, but at the same time it may produce more real value for consumers. For this reason, a shrinking music industry, as measured in terms of either dollars or new releases, can be desirable from an economic point of view.

Evaluating the efficiency consequences of illegal downloads is difficult for a more fundamental reason. Most generally, we do not understand the demand for music very well. We do not understand what most fans want from their music. Just as book buyers are not always readers, the music market is not always about the tunes. Sometimes it is about symbolic values.

It is a mystery why fans spend almost all of their music money on product of very recent vintage. Until we untangle this puzzle, and we have not yet, we will not understand how Internet music is likely to affect consumer welfare.

Most consumers are not interested in buying much music from 1950, regardless of its objective quality in the eyes of the critic. Music from 1650 is even less popular. Few people search the history of music for “the best recordings” and focus their buying on those. Rather, in any given year the most recent recordings dominate the charts. At a typical moment, all of the Billboard Top 40 singles, or albums, come from the last two years of recorded output. Every now and then there is a Beatles revival, but such events are the exception rather than the rule. Consumers evince an overwhelming preference for music produced in the very recent past.

Most likely the music market is about more than simply buying “good music,” as a critic might understand that term. People buy music to signal their hipness, to participate in current trends, or to distinguish themselves from previous generations. Buyers use music to signal their social standing, whether this consists of going to the opera or listening to heavy metal. Others value partaking in novelty per se. They find newness exciting, a way of following the course of fashion, and the music market offers one handy arena for this pursuit. For some people music is an excuse to go out and mix with others, a coordination point for dancing, staying up late, drinking, or a singles scene. Along these lines, many fans seem to enjoy musical promotions, hype, and advertising as ends in themselves, and not merely as means to hearing music. They like being part of the “next big thing.” The accompanying music cannot be so bad to their ears as to offend them, but the deftness of the harmonic triads is not their primary concern.

In other words, the features of the market that matter to the critic may not be very special to consumers at all. Most of all, consumers seem to care about some feature of newness and trendiness, more than they care about music per se. So how much does it matter, from a consumer’s point of view, if weaker copyright protection reshapes the world of music?

Under one hypothesis, the specific musics of our day are easily replaced, or in economic terminology, highly substitutable. All other things equal, people will buy the new, but they could get along with alternatives almost as well. For instance perhaps “ravers” could use Gregorian chants to define their cultural status. Indeed one chant CD (“Chant”) had a very long and successful chart run. Young rave and techno fans were among the largest buyers of this recording.

Or perhaps half the supply of music could do almost as good a job of supplying symbolic goods, especially if music companies can track fan demand with greater facility. Alternatively, individuals could rely more heavily on alternative means, such as fashion, to signal their social standing and participate in trends. These points are all speculations, but they show the difficult of pinning down what music fans really care about.

Consider two further examples. First, in the former Soviet Union, dissident rock and roll bands performed many popular culture functions and commanded a fervent following. These bands fell short of the objective critical quality of their Western counterparts. Still they provided consumers with many useful services, including a means to signal rebellion against the Soviet state. Second, in 1941, the major radio stations refused to carry the catalog of the music publisher ASCAP, in a dispute over fees. At that time ASCAP, the leading music publisher and clearinghouse in the United States, dominated the music market. The stations instead played BMI music, which was more oriented towards rhythm and blues and offered less Tin Pan Alley, crooning, and big band. Radio listeners seemed to take the sudden change in stride; there is little evidence of a serious problem. Music fans continued pretty much as before, except for the change in styles and associated music publishers.

For whatever reason, most consumers find it harder to reorient their attention towards older musics. Perhaps only new music allows for effective signaling and sorting. When music is new, individuals can show that they are connected to current modes of thinking and feeling. Not everyone can know “what is in,” because “what is in” is changing so frequently. That very fact makes it worthwhile for consumers to put effort into following the new. The music market might therefore churn product to help people communicate their identities to others, and to help people play an ongoing dynamic game of clues and cues. Furthermore previous generations already have claimed older musics, making them less well suited for social differentiation. Perhaps musical taste is a game of secession and repudiation more than anything else.

So the music of Chuck Berry “no longer fits” the world of 2005, and cannot be made to fit it. Critics still love the music, and some niche consumers will be drawn to its merits, but it can never hold the current place of Britney Spears. That is why hit reissues are rare. It is not because consumers still remember the older musics. Rather most consumers do not care about them very much. It thus appears that the value of popular music, to most consumers, consists of some temporally specific tracking quality. This may involve an ability to follow, correspond to, or perhaps even shape the spirit of the times. Rejection of the previous Zeitgeist may be part of this same process. For consumers, this tracking quality is a significant part of the value of music. The music industry is delivering the goods when its product performs this tracking function, and otherwise not. The Internet helps music perform tracking functions of this kind.

The bottom line: The welfare economics of music do not resemble those of bread or buttons.  Right now we do not even know whether music is being oversupplied or undersupplied, relative to an optimum.  Beware of any analysis of this case which does not consider these deeper underlying issues.

Supreme Court rules Grokster can be sued

by  Tyler Cowen in

Here is a tiny squiggle of information.  Here is more information, the case is now headed back to a lower court.  This seems to be the bottom line:

…in Monday’s ruling, Souter said lower courts could find the file-sharing services responsible by examining factors such as how companies marketed the product or whether they took easily available steps to reduce infringing uses.  "There is substantial evidence in MGM’s favor on all elements of inducement," Souter wrote.

This legal analysis suggests the Court in fact upheld the Sony doctrine.  Matt Yglesias makes some good points, see David Post as well.  Here is a good argument that the ruling places a big tax on the marketing departments of technology companies.

Is Paul Krugman now a mercantilist?

by  Tyler Cowen in

Fifteen years ago, when Japanese companies were busily buying up chunks of corporate America, I was one of those urging Americans not to panic. You might therefore expect me to offer similar soothing words now that the Chinese are doing the same thing. But the Chinese challenge – highlighted by the bids for Maytag and Unocal – looks a lot more serious than the Japanese challenge ever did…

The more important difference from Japan’s investment is that China, unlike Japan, really does seem to be emerging as America’s strategic rival and a competitor for scarce resources – which makes last week’s other big Chinese offer more than just a business proposition…

Unocal sounds, in other words, like exactly the kind of company the Chinese government might want to control if it envisions a sort of "great game" in which major economic powers scramble for access to far-flung oil and natural gas reserves. (Buying a company is a lot cheaper, in lives and money, than invading an oil-producing country.) So the Unocal story gains extra resonance from the latest surge in oil prices.

If it were up to me, I’d block the Chinese bid for Unocal.

I suppose at this point I must vote "yes, he is a mercantilist," but decide for yourself, here is the full piece.  Here is my earlier post on whether Chinese raw material demands hurt the U.S., an application of the theory of comparative advantage.  Here is one of Krugman’s earlier essays on free trade. 

Addendum: Here is Don Boudreaux with some excellent points and a great link to Sebastian Mallaby.

Will the Middle East run out of water?

by  Tyler Cowen in

Farmers, who account for 70 percent of the world’s water consumption, are often hugely uneconomical about it.  For example, in growing water-intensive crops they derive a less-than-optimal nutrition content from a given quantity of water.  Agriculture, in fact, is one of the real villains in the global water drama…Half the water used by the world’s farmers generates no food…A 10 percent improvement in the distribution of water to agriculture would double the world’s potable water supply.

Middle Eastern countries could solve many of their water problems with free trade, economic diversification, and better agricultural incentives, and yes that means don’t grow bananas in the desert.  Yemen needs to stop growing qat; this addictive drug accounts for over seventy percent of their water use.

Ideally the relatively water-rich Syria, Lebanon, and Turkey could be selling water to the rest of the region but for political reasons don’t expect much of that anytime soon.  Sometimes the easiest way to trade water is inside a tomato.

As for desalination, the costs have fallen dramatically over the last decade, and may continue to fall.  The real problem is not producing the water but rather transporting it uphill.  Desalination won’t solve your problems if you live in the mountains.

The above passage is from Fredrik Segerfeldt’s excellent Water for Sale: How Business and the Market Can Resolve the World’s Water Crisis, published by Cato, and thanks to Alex for the pointer.

Will the Chinese keep on propping up the dollar?

by  Tyler Cowen in

Niall Ferguson says probably yes:

Even the gloomiest pessimists accept that a steep dollar depreciation would inflict more suffering on China and other Asian economies than on the United States. John Snow’s predecessor in the Nixon administration once told his European counterparts that “the dollar is our currency, but your problem.” Snow could say the same to Asians today. If the dollar fell by a third against the renminbi, according to Nouriel Roubini, an economist at New York University, the People’s Bank of China could suffer a capital loss equivalent to 10 percent of China’s gross domestic product. For that reason alone, the PBOC has every reason to carry on printing renminbi in order to buy dollars.

Although neither side wants to admit it, today’s Sino-American economic relationship has an imperial character. Empires, remember, traditionally collect “tributes” from subject peoples. That is how their costs–in terms of blood and treasure–can best be justified to the populace back in the imperial capital. Today’s “tribute” is effectively paid to the American empire by China and other East Asian economies in the form of underpriced exports and low-interest, high-risk loans.

Read the whole thing.  For the pointer I thank the now-once-again-as- good-as-ever (we need him — the guy has no right to actually finish his dissertation, does he?) www.politicaltheory.info.

Voltaire: Game Theorist

by  Alex Tabarrok in

Voltaire didn’t just champion markets he used them to his advantage.  In one scheme he successfully cornered the market on a poorly-designed government lottery buying all the tickets to score a sure profit.  Jerry Muller writing in his excellent The Mind and the Market: Capitalism in Western Thought speculates that Voltaire’s legendary hypochondria also had an economic basis.

Voltaire loaned large sums of money to members of the royalty, in return for a lifelong annual payment…He lived for eight-four years, and throughout the last four decades of his life, he spoke of illness and his imminent demise.  Since his debtors had to make the full annual payments only as long as the original lender was alive, those to whom Voltaire loaned funds were more likely to agree to a higher annual rate if they had reason to think that his life would be short.

Intelligence predicts health and longevity

by  Tyler Cowen in

Large epidemiological studies of almost an entire population in Scotland have found that intelligence (as measured by an IQ-type test) in childhood predicts substantial differences in adult morbidity and mortality, including deaths from cancers and cardiovascular diseases.  These differences remain significant after controlling for socioeconomic variables.

Here is the full article, courtesy of Randall Parker.  It suggests another perspective on why health care appears not to contribute to health.  Gross health care expenditures — an input — are not always the best way to measure real health care outputs.  (Similarly, gross educational expenditures do not much predict learning, once we adjust for other factors.)  High IQ is correlated with compliance with doctors’ instructions, good choice of doctor, adequate medical attention, and so on.  High IQ thus appears to be doing some of the work that should be credited to health care, as properly defined and measured.

Policy implications: Targeting gross expenditures on health is not the best approach to making people healthy.  But this does not mean that health is neutral with respect to health care policies.  A smart policy can make people much better off, just as smart patients live longer.

My next question: Do veterinarians extend the lives of the animals they care for?

How much did Judas earn?

by  Tyler Cowen in

$12,254, according to one source.  The calculation is "seat of the pants," at the very least, but it makes for an amusing exercise:

The answer (with some help from ebible’s weights and measurements section).

  • 1 Roman denarius is equal to one’s day wage for an agricultural worker. As most people in the ancient world were farmers, we can make some basic judgement about the standard of living a denarius could provide.
  • 1 denarius = 1/4 Hebrew shekel. Thus, 1/4 Hebrew shekel was probably the going rate for your basic Jewish [?] in Roman times (give or take).
  • Judas was given 30 silver shekels to betray Jesus (Matt 26:15)
  • 30 x 1/4 = 120. Thus, Judas was paid 120 days of an annual laborer’s wage.
  • 120 days is approximately 1/3 of a year
  • The average annual income for the American worker is $36,764 (according to a 2002 report by the U.S. Bureau of Labor Statistics)
  • 36764 * 0.333 (i.e. one third of 36764) = 12254.66.
  • Therefore, Judas betrayed Jesus in exchange for what is approximately $12,254 in today’s currency.

A purchasing power parity calculation should be much lower; one-third of an annual income back then simply didn’t buy much.  Or for a classroom exercise, imagine a strangely long-lived forward market in ancient shekels and dollars.  Thanks to Claudio Shikida for the pointer.

Is RSS Google’s main competitor?

by  Tyler Cowen in

If RSS is getting face-time at the expense of search, Google has something to worry about. And it makes sense. From personal experience, I know my daily routine to keep up with the information overload doesn’t really involve searching anymore, but subscribing. Thanks to services like del.icio.us, Technorati and Digg.com, people are spending a lot less time actively searching and more time passively reading what’s being updated in their readers.

I think what they’re [Google] afraid of is the rise of applications that seem to be tracking importance and trends better than search. In the race to find what deserves face-time, services like del.icio.us, Technorati and Digg.com in combination with the rapid adoption of web apps like bloglines, newsgator, feedster and kinja are making Google’s search seem very, very slow. And it’s all being accomplished with RSS technology.

Here is the longer and very interesting discussion.  I have long resisted RSS feeds.  I like the visual feel of a well-designed blog, I like to see how one post follows another, and I also track new blogs by seeing when people add to their blogrolls.  By doing things "by hand," I feel I am in closer touch with the blogosphere, and obtain what Michael Polanyi called greater tacit knowledge.  I will let you know when I switch to RSS, but I predict it won’t be soon.

Thanks to the ever-useful Chris F. Masse for the pointer.

Do pheromones influence consumer behavior?

by  Tyler Cowen in

The best place to sell magazines could be in the gym locker room, according to a study which found that pheromones in male sweat makes men opt for a manly read.

Men under the influence of androstenol – a pheromone found in men’s underarm sweat – find men’s lifestyle magazines to be more attractive and are more likely to purchase them than those not exposed to the pheromone, suggests the research.

Here is the full story.

Glenn Hubbard on the global savings glut

by  Tyler Cowen in

To what extent is weak financial intermediation in Asia part of the problem?

The Japanese case illustrates a general point absent from a discussion of a savings glut. The Keynesian reasoning assumes a simple black box between desired saving and investment–the financial system at home and abroad costlessly transforms lenders’ funds between savers and borrowers. A weak financial system–reflecting an underperforming banking system, poor investor protection and corporate governance, or fragile securities markets–yields a high cost of financial intermediation. For any given return on an investment project, savers’ net return is lowered by the high costs of intermediating funds. More broadly, regulatory restrictions in goods markets and labor markets reduce returns on domestic investment.

In a closed economy, high costs of financial intermediation increase the relative attractiveness of liquid, safe government obligations. (Again, household purchases of JGBs in Japan come to mind.) In an open economy, the international capital market offers the possibility of investing domestically generated savings in countries with a low cost of financial intermediation and/or a safe nominal anchor in government bonds–the U.S., for example.

Here is the full argument.