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About this site

Here we'll explore the various economic and financial principles that impact the business of technology, keeping up to date on the various ideas, theories, trends and numbers, dispelling the silly buzzwords, slogans and fads and generally trying to understand how recent developments affect this industry going forward and may help divine what's going on and where things may be headed. Among the topics we'll touch on: regulatory issues, intellectual property, network effects, the general economy, productivity and more.

About this editor


CORANTE

Arnold Kling has a Ph.D. in economics from MIT; founded homefair.com, one of the very first commercial websites, in 1994; separated from Homefair in January 2000 after it was sold to Homestore; is author of Under the Radar: Starting Your Internet Business without Venture Capital



and is an essayist. Please send any comments, as well as suggestions for what we might point to from this page, to us at econ@corante.com


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THE BOTTOM LINE: the economics of IT

By Arnold Kling


Posted Friday, January 31, 2003

Isn't it Ironic?

That Eric Raymond runs his blog using proprietary software, and the new version of my other blog runs on Movable Type?


. . . . . .

AOL Post-mortems

I think I did mine a while back, so here are some other folks':

David Geffen (at the bottom of this Peter Jennings thingy):

Convergence, Mr. Geffen opined, just might end up being the most expensive word in history.

Doc Searls (his whole post is worth reading):

What AOL understood was how to keep an online service alive for a few more years by leveraging the very platform that was sure to make the service obsolete.

And God bless AOL for doing that.   They and Microsoft could have suicide-bombed the Web in 1995, severely hampering its growth, although risking defection of their own customers.

In an essay on alternative histories of the Internet, I speculated on what might have happened had AOL chosen a different course.

Late in 1993, America Online faced a dilemma. People still considered it the Number 3 online service, behind Prodigy and CompuServe. Its membership was stuck at around one million. Some executives proposed to use the Internet as a competitive wedge. While all three services were open to Internet email, these executives advocated that AOL provide its users with access to Gopher, with access to the World Wide Web to follow in August of 1995.

Other AOL executives objected. They pointed out that Gopher and the Web had the potential to foster disintermediation that would undermine AOL’s ability to charge businesses for hosting their content on its proprietary service. As one executive put it, "If we let our customers view Gopher and Web sites, then instead of coming to us, corporations are going to put their content on the Internet. We would be handing businesses our customer base without our being able to charge them for it."

This argument was accepted, and AOL decided against offering Internet content to its customer base. Although AOL continued to compete successfully against its rivals by sending out free disks and promoting its popular chat rooms, these rivals, too, decided that it would be suicidal to provide Internet content to their customers. Thus, all three major online services remained proprietary. All were able to achieve profitability, but their membership growth was only about 10 percent per year.

Because of AOL’s decision, and those of its rivals, the demographics of the Internet remained poor from a commercial perspective. As one analyst put it, "What can you sell to a male college student, other than porn? If you have a mainstream product, you’re much better off setting up shop on one of the Big Three."

Lacking a mainstream consumer clientele, the commercial World Wide Web slowly evolved into a Red Light District, consisting of pornography, gambling, pirated software, and other fringe merchandise. Internet usage grew only a little faster than that of the online services, and the Internet’s growth was due mainly to business-to-business commerce applications.

...

Microsoft, AT&T, and other companies also offered proprietary services, further muddying the issue. By 1997, there were eleven national online services, none of which offered access to Internet content. For businesses, the fragmentation of the online market was frustrating for many years.

That is the path that AOL could have chosen.  Instead, they wound up exactly the way Doc describes them.


. . . . . .

I Do it Again

This time, with Economic Idiotarians.

The idiotarian approach to debating economic policy is to frame an issue as a conflict between Authority Ranking (bad) and Communal Sharing (good)...

The Internet has encouraged a great deal of idiotarian demagoguery. Net-heads complain about "Big Media" which supposedly controls "content," keeping it away from the "commons." Once again, transactions that are based on Market Pricing are re-interpreted as Authority Ranking that detracts from Communal Sharing.

The essay scored a Blogosphere "hat trick," with links from Glenn, Charles, and 'Jane Galt.'  On the latter site, there are hordes of angry idiotarians making comments, to which 'Jane' gives a spirited defense--better than I could have done myself.

When I was very young, my parents got a record by a humorist who would start to wind up his act by asking the audience, "All right.  Is there anybody I haven't offended yet?"   I think that line stuck with me.  (A free copy of my book to anyone who can identify the humorist)


. . . . . .

Make it Stop

I think that Kevin Marks' post should be the last word on the "Content is Crap" controversy.

Why can't you see?
Arnold Kling, Arnold Kling, Arnold Kling

Arnold Kling, Don't do it again

 


. . . . . .


Posted Thursday, January 30, 2003

The Alternative to a National ID Card

If the government is prevented from collecting data on individuals, the result is not going to be freedom and paradise.  Instead, we will see more of this.

"We were stunned. I never thought I'd see this in my own country: people grabbed on the street and taken away," said Stephen P. Cohen, head of the Brookings South Asia program for which Haider worked. "If he hadn't come into the building to show the agents some notes, it's not clear we would have known where he was."

The only thing worse than law enforcement with intelligence is law enforcement with stupidity.


. . . . . .


Posted Wednesday, January 29, 2003

Illegal to Connect the Dots

Congress complained that the U.S. intelligence agencies failed to "connect the dots" prior to 911.  So now that the Bush Administration wants to "connect the dots" going forward, Congressional reaction, as reported by Declan McCullagh, is to outlaw the concept.

Sen. Russ Feingold, D-Wis., has introduced a bill to regulate "data-mining technology" in use by the government that could, if enacted, apply to TTIC.

To me, it makes much more sense to audit and restrict the use of intelligence than to try to stop the intelligence agencies from connecting the dots.  But you sound so much more hip and cool if you label as fascism any attempt by government to be organized and competent at fighting terrorism.


. . . . . .

Satellite Radio?

Most investments in startup companies are mistakes.  Most start-ups fail, after all.  But this mistake is incredibly big

XM Satellite Radio Inc. (Nasdaq: XMSR) today closed on its $475 million funding package...XM (Nasdaq: XMSR) had more than 360,000 subscribers as of Jan. 8

The ratio of funding to subscribers is about $1300.  It reminds me of the silly ratios I used to track during the Internet Bubble, such as the proportion of Fortunate 500 companies that would have to have $10 million contracts with MicroStrategy in order to justify its market cap.

Satellite Radio is a concept with a tiny market (my guess is that there will be fewer subscribers two years from now than there are today) and huge infrastructure costs.  It makes Pets.com look like a smart idea. 


. . . . . .

Digital Appliances?

I followed Donna Wentworth's link to this interview with Jonathan Zittrain.

You don't normally get to write your own software for your coffeemaker or for your refrigerator or your lamp or your television or your VCR. So as we go to an appliance model that gives people more stability and predictability and longevity, I think we're going to lose the anarchic quality currently associated with PCs and the Internet.

It is true that if you build a single-function gadget (say, a music player), you have more stability and less flexibility than with a personal computer. 

But Zittrain writes as if personal computers are about to be replaced by stand-alone appliances.  He suggests that a TiVo will become a data storage device.  But that's saying that a TiVo could be used as a hard disk.  We already have hard disks.  And hard disks are not stand-alone appliances.  I may be misinterpreting Zittrain.  But I think that the notion that we are headed toward a world of stand-alone devices is flat-out wrong.

On the other hand, you have Microsoft saying that formerly stand-alone appliances are going to start to have the flexibility that we associate with computers.  Hence, smart alarm clocks, smart watches, and so forth.  To me, that vision, which is almost the opposite of Zittrain's, is more plausible.

I think that Microsoft is also correct in thinking that as consumers we will want/need tools that enable us to reconfigure those smart appliances.  But I am not convinced that these tools will be personal computers running Microsoft's operating system.  Howard Rheingold sees the cell phone evolving into an all-purpose remote control, and I doubt that, also. 

I think that someone might do better by designing something from scratch as an all-purpose remote control.  The remote control somehow has to be able to communicate with any to-be-developed smart appliance, convey to me as a user what the appliance can do, and allow me to configure the appliance and interact with it.  In some ways, this remote control is as generic as a personal computer, but it does not seem to me to require all of the overhead of today's operating systems.


. . . . . .


Posted Monday, January 27, 2003

The Last Mile will be EV-DO?

I don't know EV-DO from DO-DO, but it might be another wireless contender in the last mile sweepstakes.  Alan Reiter says,

If Verizon and Sprint wanted to construct nationwide 1xEV-DO networks, the price probably would be in the billions of dollars.  This requires a major upgrade of network hardware and software, as well as requiring all new cellular phones and PC Card modems if you want the higher speeds.  Someone's got to pay for the system.

My impression is that in theory we could have a nationwide Wi-Fi network without a single company building lots of transmission towers.  That is, our communication devices could also be relay stations.  I do not know whether or not this is also true for EV-DO.  I'm so beyond my depth these days!!!  (see also previous post)


. . . . . .

Is SMS Spam Likely?

This post and this post say "yes."  But I think it takes more than just having a database of mobile phone numbers.

If spam is going to break out over the mobile phone system, you will need for it to be costless to send spam over mobile phones.  That is not the case today.  Also, email spammers need to be able to set up and use phony addresses in order to evade detection.  I am not sure that this is so do-able in the mobile phone world.  But I am not an SMS user, so I am prepared to be corrected...


. . . . . .


Posted Sunday, January 26, 2003

DRM:  Salvation or Suicide?

Zimran Ahmed thinks that Digital Rights Management is closer to suicide for music industry incumbents.

I think that as labels make some progress towards implementing DRM technology, they'll start to see the content equivalent of open source software start to become more popular. Ultimately, they'll be relegated to a small, uninteresting corner of the content market.

In a world where convenience is king, DRM is the road to serfdom for the companies that rely on it.


. . . . . .

Open Spectrum and Free Speech

Bob Frankston makes the connection. 

It's as if we were having a party and someone came into the room and told everyone to be quiet and gave out pieces of paper with a time and a place telling each person when and where they could talk. If there were a possibility young people would overhear you couldn't use certain words even if there were no other venues and even if you felt the language was appropriate for them.

Put that way it seems outrageous. Yet if we communicate using radio waves instead of sound waves that is precisely what the FCC is doing.

I keep waiting for someone to spell out how spread spectrum technology and legacy hardware can work together.

The standard is based on the most naive technology. It's no different from requiring that automobiles be designed so as not to interfere in anyway with horse traffic.

Actually, until automobiles became a dominant form of transportation, their impact on horses was a genuine and legitimate concern.


. . . . . .


Posted Thursday, January 23, 2003

When Will Wireless be Ready?

Not soon enough, according to Duane Freese.

It is in the offing - not here, and not overnight. Even, David Reed, a former chief scientist at Lotus Corp., and an optimistic promoter of "open spectrum" and a wireless Internet, says, "My gut feeling is that in 10 or 20 years this will be as big as the Internet."

Here is my timetable for the rollout of the wireless last mile:

Over 50 percent of the 500 largest colleges and universities will have wireless Internet access covering their premises by September of 2005.

Over 50 percent of Fortune 500 companies will have wireless Internet access covering their main corporate buildings by December of 2006.

Over 50 percent of hotels that cater to business traverers will have wireless Internet access by December of 2006.

The big question is when the home broadband market will start to tip toward "pure wireless," that is wireless access without DSL or cable.  Right now, the "pure wireless" penetration rate is essentially zero.  What will the rate be in 2005?  2010?


. . . . . .

Living in Minus

Knowing nothing at all about the topic of international finance or Israel's economy does not stop me from tossing out this opinion.

With a "tough love" approach, the United States might attach conditions to aid that would push Israel to take the politically difficult reform measures needed to create a dynamic economy. On the other hand, if aid were granted without conditions, the ability to live in minus likely would be used by the Israeli government to try to prop up its unsustainable structure of government subsidies and overly-aggressive trade unions.


. . . . . .

Another Smartmobs Moment

Using wireless connections at a conference.  I would expect to see a lot more of this.  I believe it would make a conference like the American Economic Association meetings much more productive.


. . . . . .


Posted Wednesday, January 22, 2003

Telephone "Competition"

My colleague Dana Blankenhorn disparages this piece by Peter Huber on the failures of the 1996 Telecom deregulation act.  Huber argues that during the Clinton Administration the FCC turned this act into a windfall for lawyers and regulatory arbitrageurs.

Take a company like Z-Tel, founded and run by lawyers, bankers, management consultants, and an antitrust litigator. Such companies have brought to telecom the same talents that Enron brought to electricity. They build networks out of paper, and whatever actual money they invest is poured into complex software and computer systems developed and optimized for playing the regulatory game.

Consider this story from today's Washington Post.  It concerns a baker whose phone service had technical problems, which were difficult to resolve.

The federal Telecommunications Act of 1996 ... created a slew of new phone companies such as ATX that simply re-sell local phone service at a discount. ATX doesn't even have a technician in the Washington area who could help Ottenberg and his 300 employees.

It sounds as though Huber has a point. Perhaps he should not disparage the motives of the Clinton FCC.  But his analysis reinforces my instinct that the "competition" created under the auspices of the 1996 Telecom Act is nothing but a Potemkin Village.

And while we're discussing motives, Dana, I am not writing this because I am in the pocket of a Baby Bell.  I have never been paid by a phone company, and I never plan to be paid by one of them.  I just have to call them the way I see them.  And my guess is that Huber is doing the same thing.


. . . . . .


Posted Tuesday, January 21, 2003

Shirky on Filtering the Sewer

Here is Clay Shirky's version of the "content is crap" thesis. 

A working collaborative filter would have to make three assumptions.

First, it would have to support the users' interests. Most new music is bad, and the users know it...

Second, life is too short to listen to stuff you hate...

Finally, the system would have to use lightweight rating methods...The Blogdex Top 50 links are sometimes pointed to by as few as half a dozen weblogs, and the measure of interest is entirely implicit in the choice to link. Despite the almost trivial nature of the input, these systems are remarkably effective, given the mass of mediocrity they are sorting through.

It is interesting that most of the filtering systems that Shirky points to fail to meet my threshold signal-to-noise ratio.  So I am not ready to go along with him on the virtues of "lightweight rating methods."  I continue to be an advocate for Bayesian filtering (perhaps on top of existing lightweight methods).  If Bayesian filtering is heavy on computation and data storage now, that only means that it stands to benefit from the next few turns of the Moore's Law wheel.


. . . . . .

Another Dip into the Sewer

AKMA writes in part,

Kling ...gets a number of things wrong. First, I think, water treament plants usually don't reroute sewage to homes as drinking water

Yes, I already have been corrected on that.  Mea culpa.

He goes on,

The Big Media model of copyright involves constructing and preserving an artificial scarcity of access to cultural work... All that artificial scarcity and security isn’t a market force—it’s a restriction on market forces and is designed to produce a particular outcome, in this case an outcome beneficial to Big Media.

There is no scarcity of access to cultural work--you can get all the amateur music, unpublished literature, and homemade movies you want.  What is scarce are intermediaries with proven filtering methods.  What is scarce are intermediaries who have the ability to charge for cultural work and therefore the ability to see that creators get paid. 

AKMA continues,

The Commons doesn’t presuppose anything about the quality of what is licensed; the Commons represents a commitment to making publicly available as much gold and as much dross as it can, and allowing readers, listeners, and even columnists to make use of it as they will.

And that is precisely why I cannot see the Commons making a difference in our lives.  Having a nice, big communal haystack does nothing for me if I'm looking for a needle.


. . . . . .


Posted Monday, January 20, 2003

Threat to the Music Industry

While the music industry focuses on fighting technology, someone is going to figure out how to use stuff like this.

A new credit card-sized hard disk that can hold up to 5GB...The cards should be out later this year, and are expected to retail for under $15.


. . . . . .

Fighting the Privacy Luddites

In this essay, I tried to argue that checks and balances are a better approach for balancing the risks and benefits of government databases than the Luddite approach of banning them altogether.

Heather MacDonald reports on the Total Information Awareness initiative.

Like criminal investigators, analysts using TIA would be given access to private data only if their case for seeking it met certain legal standards. The program would also contain audit mechanisms automatically tracing where data are sent and who has seen them. Oversight would be built into the system. Policymakers should of course provide for criminal penalties for any abuses.

It sounds as though the people behind the proposal have thought through the issue, unlike its opponents.


. . . . . .

Sub-texting

This story may be important.

Some MTV shows allow viewers to send in text messages that crawl across the screen during music videos -- what better way to send a note to a friend? -- and others allow texters to choose the next video to be played by casting a text vote for one of two options.

Keep in mind that when these kids grow up, they are going to expect to be able to send text messages that scroll across the bottom of your PowerPoint presentations.  Business meetings could start to get interesting...


. . . . . .

Pushing Open Spectrum

David Weinberger tries to deal with objections to open spectrum in this FAQ.  For example,

22) Does this require everyone to get new radios and TV sets?

No. Existing technologies will continue to work. They will be replaced by customers as they — we — realize the benefits of the new technology.

I wish he would spell this out a bit more.  My naive understanding is that old-fashioned radios and TV's are too dumb to sort out signals that would be sent over the same frequencies.  If my naive understanding is wrong, then we could overlay "open spectrum" on our existing spectrum allocation system, starting tomorrow.  If my naive understanding is right, then it's a tougher issue.


. . . . . .

Just Take the Oil

In this essay, I argue that

the worst refuge of scoundrels, in my opinion, is the line that "we need to reduce our dependence on foreign oil in order to fight terrorism." When I hear that, my baloney-sandwich detector really starts vibrating. I am ready to reject whatever is on offer, whether it be oil drilling in Alaska, regulations on SUV's, or some new synthetic fuels program.


. . . . . .


Posted Sunday, January 19, 2003

From the anti-spam conference

If, like me, you missed the conference, you can view the webcast.  An attractive idea from the first session on spam filtering was POPfile.  It looks pretty straightforward to set up, and my guess is that it works reasonably well.  But I wonder how scalable it is--you have to use them as a proxy service.  If enough people did it, they would run out of processing power, no?

It seems as though purely text-based spam is pretty easy to stop.  The challenge is when spammers start to use images, HTML, and JavaScript.  But even those can be defeated.


. . . . . .

Claude Shannon vs. Dr. Lucky

Here is a recent New York Times article on one of the latest spectrum technologies.

Gerard J. Foschini, a 40-year veteran of Bell Labs, came up with the theory behind Blast about a decade ago while working on a long-term project to find the limits of a wide variety of technologies. As part of that project, he reviewed the work of Claude Shannon, the Bell Labs mathematician who published a paper in 1948 that established the field of modern information theory. Dr. Shannon's work still provides the basis for much information theory, including the notion of system capacity limits.

"He found the ultimate limits," Dr. Foschini said. "But he was basically dealing with one transmitter and one receiver. It was obvious to us that we could deal with many transmitting antennas and many receiving antennas for the same transmission."

...

Assuming that problems do not develop there, however, Dr. Lucky said, the system could completely alter all systems that depend on radio waves. "I had this idea that spectrum was all used up,'' he said. "Now, with new technologies like Blast, maybe spectrum is infinite."

I do not understand the engineering and physics of spectrum well enough to have a helpful first-hand opinion on the issue of whether or not spectrum is a scarce resource.    I report, you decide.


. . . . . .


Posted Friday, January 17, 2003

The anti-spam conference I missed

The anti-spam conference I missed (which should still be going on for another hour or so) is reported on here.

More recently, spam-fighters have been looking at statistical analysis to help determine whether a message is spam or not. Programmers can use large archives of known junk e-mail to search for patterns and properties, then use those results to test incoming mail.

Those filtering methods can help combat one problem in spam-fighting: false positives, which lead legitimate e-mail to get mislabeled as spam. And the methods may also be more difficult for spammers to fight than traditional defenses.

Incidentally, at about 3 PM I got an email from Expedia travel warning me about a change to my itinerary and saying I should call them.  I figured that this was regarding the plane that I had gone to the airport 9 hours earlier to catch (one hour before scheduled departure), only to find that it had been canceled.  Not the timeliest notification process, but whatever.

I called Expedia, and they offered to help me get to Boston.  I pointed out that since it was no longer possible for me to get to Boston in time for the conference, I had to decline.  Then, Expedia was able to do something that none of us had been able to do all morning:  get Air Tran to commit to giving me a refund.  So Air Tran's strategy of making me pay for their canceled flight didn't work (it never was going to, but they sure gave it their best shot).


. . . . . .

A Commons Challenge

Doc Searls wrote a balanced piece on my critique of Creative Commons.  He concludes,

Yes, there has been much snot flung in the general direction of the old content companies, whose responses to the presence of the Internet in their lives has generally ranged from hostile to clueless. But Creative Commons isn't about snot-flinging. Its purposes are constructive. If it succeeds, it will enlarge the content business by including a public domain that's well-stocked with useful stuff made even more useful by uncomplicated licensing. What's wrong with that?

I say let's give it every chance we can.

I have no quarrel with that.  I'm not out to stifle CC.  I am just predicting that it will not have much impact.

For example, take the National Bureau of Economic Research, which is a content intermediary for economists.  I would like to read NBER working papers, maybe 5 to 10 of them a month.  But the bleeping NBER charges $5 to read just one working paper.  I can afford to pay that, but the charge (and the time I have to spend going through the ordering process) offends me.   It does not offend the typical university economist though, because most universities pay for subscriptions, so that reading the papers is free for the typical academic economist.

Most of the time, I can read the paper for free by Googling the author and going to his or her web site, which often has a copy on line.  The authors evidently do not mind my reading their papers for free.

In general, a lot of academic research is held back from the public domain by expensive journals and intermediaries like the NBER.  Clearly this is wrong.  And in the case of the journals, the people who add the filtering value--the referees--are grossly underpaid.  Clearly this is wrong.

My challenge to Doc Searls and other Commonists is this:  can you use CC to bring more academic research into the public domain?

I keep getting hung up on the fact that right now the journals and the NBER have leverage not because of copyright but because they have prestige.  No economist can afford to blow off those intermediaries as outlets for his or her research.  Doing so would be suicidal.  So if you gave researchers a tool to label their work with a CC license that is contrary to the terms and conditions of the incumbent intermediaries, it would not be in their interest to use it. 

I just do not see how the ability to use a CC license changes the balance of economic power in any way.  So I just cannot see how it will lead to significant increases in the supply of public-domain work.


. . . . . .

Amazing Rheingold

Howard Rheingold's new book, Smart Mobs, is more intellectually meaty than I had expected.  In fact, some of the problems that he bites off are too big for him to chew (or for any one person).  But what is positively stunning to watch is the way that events are playing out along the lines that his book predicts (how unlike my own book, where as each month went by between the date I finished writing and the publication date I felt the timeliness of the book eroding).

Reading this article by Steven Johnson was a typical "Ahhh...more smartmobs stuff" experience.  Naturally, when I went to the Smart Mobs blog, the article was already cited there.  One of the comments on the post is from Peter Davidson :

Who will deal with the info glut? Have you ever seen how message boards run amok when the topic is broad. How will thousands of geo-specific notes be processed?

Once again, this raises the issue that Content is Crap. Rheingold's book focuses on a class of solutions known as reputation systems, which appear to be part of the design of some of the concepts discussed in Johnson's article.

Meanwhile, here is Mitch Ratcliffe's criticism of the crap thesis.


. . . . . .

More on Local Telephone "Competition"

I suggest that when the Baby Bells are forced to lease their lines to other entrants in the local phone service market, prices go down because of price controls, not because of competition.  I argue that no new real supply is going to come into local telephony, and the same price reductions could be accomplished by regulating the Baby Bells' retail prices.

Justin C. Michael emails to disagree:

Price can come down because of reduced expenses on the part of the provider.  If a provider uses/purchases cabling but chooses a different switch technology, the new providers costs may be less than the incumbant, resulting in price reductions for consumers.

Theoretically possible, I suppose, but my instinct is that this is not what is going on. 

There is another commodity which is provided when a new company enters the local telecommunications market.  That is the supply of customer support, responsiveness, specialty services or technical ability.

Again, this is only a theoretical possibility.  My impression is that the consumer satisfaction rate with phone service is very high. Moreover, when I used a competing provider for DSL at my office, the customer service issues were a nightmare.  When the DSL went down, invariably the first half hour of the customer service call was devoted to figuring out whether the problem was with the router at my ISP or with the DSL at Bell Atlantic (now Verizon).  Ultimately, the ISP's customer service could be no better than the Baby Bell's, and in fact it added another layer of bureaucracy to deal with.

Another correspondent writes:

The wireline competition you dismiss is vital to a vibrant wireless competition in the future. Further, wireless services are quite dependent on wireline -- what is Wi-Fi connected to now? 

A long-distance company could build out Wi-Fi.  That seems to be what Cometa Networks, which includes AT&T, is up to.  A more far-out alternative would be a mesh network consisting of devices that relay signals for one another.  See Clay Shirky's famous Zapmail analogy.

My correspondent goes on

Furtherly, why do you buy the Bells argument that they are selling below cost

I do not buy that argument.  I am not a cost accountant.  All I can say is that they are leasing their lines at a government-set rate, which is below the rate at which they would voluntarily choose to lease those lines.

Look, my goal in life is not to support the Baby Bells.  I've had experiences with Verizon that were more infuriating than my experience with Air Tran described  below (although Verizon customer service agents didn't lie--they were just incompetent).  But when I view the issue dispassionately, I come down on the side of a policy of sitting back and letting the local phone companies die a slow, natural death.  On the other hand, if you want them to die sooner, then I think that regulating their retail prices is a more efficient way to do that than regulating their prices at the wholesale level and bringing in another layer of retail "competition" on top of the same physical capacity.


. . . . . .

Trained Liars

I don't hold grudges against airlines.  As bad as an experience can be, usually the employees try their best and there is at least one who is willing to be reasonable.  So I have never gotten so angry as to say, "I will never fly ____ again."

Until today.

I forgive Air Tran airlines for canceling my flight.  I forgive them for failing to notify me ahead of time.  I forgive them for trying to rebook me on a much later flight that would have had me miss 80 percent of the one-day conference for which I was flying.  I forgive them for making no effort to get me an appropriate flight on a competing airline.  I forgive them for trying to offer me a credit instead of a refund.

But I cannot forgive them for training their employees not to tell the truth. 

A very experienced and well-versed customer service representative said that I was not entitled to a refund.  My reaction was to ask to speak to a supervisor.  She told me to go sit down on a distant bench and wait, and I said I would wait at the counter. 

Moments later, another passenger in the same situation came to the counter, and she gave him the same line about not giving a refund.  For a moment, he looked as though he was going to accept the credit and go away, but then like the 70's TV detective Columbo he very calmly and politely took a brochure from the counter and read to the woman the part that says that if a flight is canceled a customer is entitled to a refund.

At this point, I was handed off to another agent, who spoke on the phone and then told me that I could only get my refund through my travel agent (Expedia).  I figured I had no choice but to come back home and try this.

Before contacting Expedia, I tried calling Airtran.  The customer service person on the phone gave me the exact same sequence as the one at the airport:  you've been re-booked; I can give you a credit; We do not give refunds; putting me on hold when I insisted on a refund (the equivalent of "go sit on a bench"), and then disconnecting me.

These people are well trained.  Well-trained liars. 

UPDATE:  I called Expedia, and--no surprise--they could not do anything.  They called Air Tran, and Air Tran did not give them permission to give a refund.  I don't think this is Expedia's fault.


. . . . . .


Posted Thursday, January 16, 2003

Spot On

My first reaction to Microsoft SPOT was "Hunh?"  I didn't get the point.  I think that Leslie Walker has got a helpful analysis.

But in the area of portability and longer battery life, SPOT gadgets seem to have the edge. National Semiconductor reports that the first watch models will require a recharge every three to five days, giving them a longer life between charges than most cell phones. That time will quickly lengthen, National Semiconductor says, as its engineers continue shrinking the components.

Well, battery life is an important consideration in the mobile world.  But the SPOT devices still strike me as being too static and uninteresting.  I think I want something that can communicate interactively, and that can be given new instructions on the fly, without having to run back to my personal computer. 


. . . . . .

Beauty and the Beholder

A thoughtful email from Christopher Penrose:

Consider a web designer, a writer, a film maker, or a potter.  When they create a configuration of information and make it available for others through some medium, they are not declaring their work as waste.

I think an essential element of my view of content is that the content creator cannot unilaterally declare that the content is valuable.  Instead, I start from a model in which "beauty is in the eye of the beholder."  The beholder could be an end-user, but more likely will be an intermediary who starts the filtering process.  What I can't get past in my "eye of the beholder" model is my perception that the front-end declarations that the content creator makes have very little significance. 

Penrose continues

If information being evaluated by a Bayesian algorithm diverges from the given field of preferences, Bayesian logic will become a considerably lossy preference filter...significant use of such techniques would hide many of life's surprises.

I disagree.  For example, even if my hypothetical email filter would not have known to put a high weight on Penrose's email based on its content, it might have passed along the email based on the quality of his writing.  The content could still surprise me. 


. . . . . .


Posted Wednesday, January 15, 2003

One More Down the Sewer

This is being touted as profound.

...Umm, which "economic problem"? It seems to me that Creative Commons is about proving that the optimal setting for creativity is not infinite copyright. That's a social problem, not an economic one.

I don't think Lawrence Lessig would try to deny that copyright is an economic issue.  Otherwise, why did he get help from these economists in his  unsuccessful attempt to overturn the Bono act?

You certainly don't need Creative Commons to prove that infinite copyright is non-optimal.  Infinite copyright is unconstitutional.  To an economist, that makes the Bono act unconstitutional, because to a first approximation, 75 years is infinite if you discount at a reasonable rate of interest.  Unfortunately, I suspect the Justices found that argument too cute for their purposes, although it makes perfect sense to me.


. . . . . .

Further Down the Sewer

Among the critics of "content is crap" we have (via email):

James Thiele, who tells me that in fact it is extremely rare for sewage to be purified to the point where it can be used as drinking water.

Dang!  It was such a good metaphor the way I described it.  I still like the metaphor for making my point about content, but I certainly feel badly about spreading misinformation about the actual water treatment system.  Thanks, James for fact-checking my you-know-what.  Ouch!

Dave Owen writes, "While I agree that most of it is worthless, I respectfully suggest that creative reuse can make even apparently useless content into useful content"

Robert Davidson writes, "things like Creative Commons allow lots of different filters to be applied"

Abe Burmeister writes, "I'm in total agreement with you that filtering is one of the key content issues of present and future. And its certainly a very overlooked service provided by the media corporations. I'm at complete loss as to what it has to do with the Creative Commons though. Its very much an argument of apples and oranges.

These are all along the lines of "filters are good, but Creative Commons is good, too."  In principle, I could agree.  In practice, I am eager to use filters.  I have to really strain to come up with a scenario in which Creative Commons enables a transaction to take place that otherwise would not happen.

Donal McMullen writes, "The infomediaries missing from Mr Kling's somewhat dystopian vista could have been the internet radio stations, if the RIAA hadn't sent them to sleep with the fishes."

I absolutely agree that internet radio has tremendous potential as a filter.  And if I were a music industry executive, I would be designing systems to feed my product to internet radio, instead of sending my lawyers out to kill it.  (insert politically insensitive analogy comparing record industry lawyers to Palestinian terrorists here) 

My issue with the Commonists is that their syllogism seems to be: 

  • the entertainment industry abuses (or takes advantage of) copyright law
  • Creative Commons provides an alternative copyright license
  • therefore, Creative Commons is a tool to defeat the entertainment industry

My whole point is that the conclusion does not follow from the premisses.  The entertainment industry performs an economic function, and replacing that economic function is what will overthrow it.  On the other hand, Creative Commons gives you the same right you've always had--to stay out of the industry and forego whatever benefits it might provide in terms of exposure and revenue.


. . . . . .

Is this Telephone Competition?

My TCS colleagues, like James Glassman, are probably crowing about this announcement that AT&T is going to compete in the local phone service market.  But I am going to argue that this is not really competition.

The 1996 telephone deregulation act was written at a time when it was reasonable to believe that we needed more telephone capacity in the United States.  The Internet was on the steep part of the growth curve, more people needed to get connected, and the thinking was that the telephone industry could use more players building out local telephone infrastructure.  To jump-start the process, the telecom act gave new entrants the ability to use the phone lines of the Baby Bells until the upstarts could accumulate sufficient customers and capital to build their own phone systems.

Today, however, the need for more capacity in land-line telephone service seems to be receding.  We've probably seen the peak in land-line phones, with most people gradually (or not so gradually) converting to mobile phones.  There is no social reason to build additional land line phone capacity. 

The "competition" that is taking place under the 1996 Telecom act consists of state regulators dictating low wholesale rates for the Baby Bells to charge "competitors," who then re-sell phone service at lower retail rates.  Price does not come down because of additional supply, but because of regulatory fiat.

What the consumer benefits from here are price controls.  Competition has nothing to do with it.

The same thing could be accomplished more straightforwardly by giving state regulators the authority to set the rates for retail phone service.  They could skip the charade of "competition" (and save on overhead) by just using their regulatory fiat at the retail level rather than the wholesale level. 

Competition that does not increase supply is not competition.  But it would be crazy for someone to increase the supply of landline phone infrastructure.  The meaningful competition for local phone service will come from mobile phones or voice-over-IP, with the latter using either cable or the wireless last mile as the Internet connection.


. . . . . .

Copyright Extension Wins in Court

Just because it is not unconstitutional does not mean it is a good law.   But just because it is a bad law does not mean that the world is coming to an end.  Am I the only person who thinks business and technology innovation ultimately will prove to be more important in the entertainment industry than whether Mickey Mouse stays protected for another umpteen years?


. . . . . .


Posted Tuesday, January 14, 2003

Substance vs. Motives

This week's lesson is that it is better to focus on substance than to impugn another party's motives.  Brad DeLong has a post about the way that Nobelist Joseph Stiglitz distracted attention from his substantive arguments about capital mobility with an improbable ad hominem attack on Stanley Fischer, one of the economics profession's great gentlemen.

In his column today, Paul Krugman makes some important, valid points about the distortions that are likely to result from the Bush Administration's dividend tax cut proposal.  But then he concludes by saying,

But maybe the mess is deliberate. Is this just another clever step on the way to a system in which only the little people pay taxes?

This changes the tone from a discussion of substance to a cheap assault on motives, and undermines the entire piece.

Finally, there is my own example.  In my Content is Crap essay, I distracted attention away from the substance by claiming that the advocates of Creative Commons were motivated by a naive retro-60's ideology.  I should have left that claim out, or at least limited it to some specific illustrations without impugning everyone's motives.


. . . . . .

Throwing content down the sewer, con't

Both Dan Gillmor and Siva Vaidhayanatha took strong exception to my characterization of the Creative Commons folks as being 60's anti-corporate types.  I am prepared to concede that I was over the top there, but I remain strongly skeptical of Creative Commons.  Siva writes in part,

In practice, Creative Commons could allow for important works to be used in more creative ways. The default position of copyright now is "all rights reserved." This limits the growth of culture and the field of play.

I don't think that current copyright law is an important factor limiting the growth of culture.  The point of my raw sewage metaphor is that the value of content is not constrained by its terms of use, but by the fact that most of it is worthless.  My point is that alternative copyright rules do nothing to fix this problem. 

The challenge in media today is not how to enable the average author's work to be used in more flexible or creative ways.  The challenge is in filtering the average author's work so that it is exposed to interested consumers without wasting everyone else's time.

Frank Field writes in part,

Why do publishers get to be the arbiters of the public taste? Because they own/control the traditional instruments of copying and distribution (a barrier to entry that has now fallen due to the onward march of technology).

This viewpoint exemplifies what I meant by the retro-60's ideology.

A lot of people (myself included) lament the state of popular music.  Nonetheless, I would prefer to listen to popular music than to the vast majority of music being created today. 

What is wrong with the music industry is that the music publishers are still the best filtering system out there.  This is in spite of the fact that (a) their filtering produces results that seem mediocre at best and (b) their distribution system is antiquated and anti-consumer. 

To change the music industry, you need to come up with a better system for filtering music while providing compensation to musicians.  My prediction is that alternative copyright systems will play little or no role in such a revolution.

Thanks to Donna for the pointers.

UPDATE:

Ed Felten writes, in part,

Arnold Kling, over at the free website TechCentralStation, offers an odd little op-ed arguing that free content is crap...

Kling seems to be attacking Dan Gillmor for Gillmor's supposed opposition to selling content through established publishers. Never mind that Gillmor sells his content through an established publisher.

Nice irony.  But I am not saying that free content is crap.  I am saying that unfiltered content is crap.  TechCentralStation filters content.  I am still open to the charge that my essay reflects its title, but at least one editor must have thought otherwise.

And I think it's perfectly ok for Gillmor to sell through an established publisher while believing that there ought to be something better.  Even if you want to change the system, you still have to work with it.


. . . . . .


Posted Monday, January 13, 2003

The Sewer and the Commons

Fans of Lawrence Lessig may think that my latest essay, Content is Crap, is reflexively titled.

Individual software writers, authors, and musicians produce something close to raw sewage. The computer programs, books, and music that people buy are closer to drinkable water.

What Creative Commons lets you do as an author is label your stuff before you flush it down the toilet. If you don't want the sewage treatment plant to filter your stuff and sell the water on its usual terms, Creative Commons lets you have your way. If you think that publishers are stealing your crap, you can stop them.

I see Creative Commons as a form of 1960's protest theater, not as something that solves a real economic problem.


. . . . . .

Steve Case Departs AOL

A few remarks in post-mortem:

1.  A few years ago, I decided to bring my father into the Internet age.  I bought him a computer, and set it up.  I had to decide what kind of Internet service to get, and I needed something easy to use.  I considered AOL, but I decided in the end that DSL would be better, because it would allow him to get on the Net with just one click, keep his phone free, and not cost much more. 

The point is that in a broadband world, AOL does not have a value proposition.  And I don't think that there is anything they can do about that.

2.  How much better off would AOL be if they had never made a single acquisition?  MapQuest cost them $1 billion, Netscape cost them $4 billion, and Time-Warner cost AOL its soul.

3.  Case had less ego and less need to portray himself as a brilliant visionary than any of his peers at, say, Sun or Netscape or Microsoft.  AOL was driven by its customer research, not by a top-down mentality.  My guess is that is changing, and AOL is the worse for it.


. . . . . .


Posted Sunday, January 12, 2003

Can Microsoft win in this League?

This article points out that Microsoft is playing in a different league now that it is trying to get into mobile computing and communications.

winning against self-destructive competitors such as Apple and Netscape was easy; the tough test is emerging victor over the likes of Sony and Nokia.

This point is well worth pondering.  I'm also in the camp that believes Apple's and Netscape's mistakes did much more to retard their businesses than any of Microsoft's marketing tactics.  I once compared Netscape's business operation to the Swarthmore College football team.  (Both enterprises subsequently folded, but AOL chose to buy out Netscape.  They might have been better off buying the Swarthmore football team).

Going forward, Microsoft will be hampered by the fact that the screen-and-keyboard interface is not likely to be the heart of mobile computing.  And the competition may be a bit tougher than Swarthmore football.


. . . . . .

Information Highway Robbery

Back in the days of the "information superhighway" metaphor, an "e-rate" was established to try to funnel money from the telecom industry to wiring schools.  It turns out that these good intentions paved an information superhighway to hell.

The program is ‘‘honeycombed with fraud and financial shenanigans,’’ said the report from the Center for Public Integrity in Washington.

Bob Frankston comments,

Though both the telephone and the Internet seem to fall under the general category of "telecommunications" there is no special reason (other than to avoid the "T" word) to associate the use of one with the other and that is one source of the problem.

In other words, the specific tax-and-subsidy approach of "e-rate" was inferior to using general tax revenues to fund generic education programs.  That's economics 101.


. . . . . .

The Big Media Non-takeover

All of the myths of Big Media debunked in one place.  For example,

A merger of Time Inc. with Warner Communications and then with America Online dominates headlines, but the incremental growth of smaller companies from the bottom does not. Breakups and divestitures do not generally receive front-page treatment, nor do the arrival and rapid growth of new players or the shrinkage of once influential players.

Thanks to Zimran for the pointer.


. . . . . .

A Wireless Manifesto?

Here it is.

We have formed the Wireless Commons because a global wireless network is within our grasp. We will work to define and achieve a wireless commons built using open spectrum, and able to connect people everywhere.

Personally, I have no use for manifestos (manifesti?).  Actions speak louder than words.  The key to building the wireless last mile is to demonstrate a viable system in one area that can be replicated everywhere.


. . . . . .

Movielink and the incumbent disease

Incumbent firms and radical innovation tend to go together like oil and water.  Thus, we have Stewart Alsop's review of MovieLink.

It's clear that the studios' motivation in designing MovieLink is fear of piracy. But they forgot to make the service usable, appealing, or compelling. So MovieLink will fail, people will argue that you can't sell digital content on the Internet--and the studios will have proved nothing.


. . . . . .

AOL and Sex

In 1993, I first started to go online.  I tried Delphi, CompuServe, and AOL.  I soon signed off AOL, commenting "I'm too old and too married for this service."

Michael Wolff says that things have not really changed for AOL, and they should just go with what works.

The big attraction of AOL through all of its growth years has been not just ease but easy prurience. Its real selling point was that you could buy something perfectly respectable and get something very dirty -- it was the ultimate brown paper bag. In fact, the more respectable it got -- building up a critical mass of American families (women too!) -- the dirtier, and more compelling, it became.

 


. . . . . .

Sentient Shopping Carts

One of the memes in Howard Rheingold's Smartmobs is what he calls "the era of sentient things."  We can watch this trend unfold, for example in this new Safeway shopping cart.

Shoppers are greeted by the "Magellan" -- a shopping cart with a book-sized computer on the front handle. A side slot lets shoppers swipe their Safeway "club" cards -- the identification most major grocers now require for discounts on certain items.

Eventually, I would expect the store clerk to go away.  The items will have radio-frequency ID's (rfID's), which can communicate with the computer in the shopping cart.  The consumer can bag his groceries as he goes through the store, and he when he takes his cart outside, his credit card is automatically charged.  If he wants, the computer will give him a receipt.


. . . . . .


Posted Friday, January 10, 2003

Open Source without the Prince

The conclusion to this article is right, in a sense.

By further engaging typical users into the development process OSS projects can create a networked development community that can do for usability what it has already done for functionality and reliability.

But open source software in which the developers have to respond to non-technical users is Hamlet without the Prince.  Non-technical users have nothing to contribute to the gift-exchange model of software development.  All we bring to the table is our money.  Once you start down the road of selling improvements for money, you tend to leave the OSS framework behind.


. . . . . .


Posted Thursday, January 9, 2003

Nice Try, Bill

Bill Gates is trying to catch the next wave in computing.

The watches will connect to PCs to calibrate themselves, download software and connect wirelessly to streaming data beamed over FM radio signals to grab the latest sports scores or stock prices.

...

He also noted that the forthcoming watches have faster processors and four times as much memory as the first IBM PCs.

What is happening is that computers are getting small and inexpensive enough to embed in devices that do not fit the PC form factor.  The problem that this poses is this:  how can the consumer take advantage of the flexibility and features of something as small as a watch, which does not have a screen and a keyboard to work with? 

If you've ever tried to set one of those infernal watches where you choose the "mode" by pressing one tiny button with your fingernail and choose the setting by pressing another tiny button, while reading the miniature-origami users' manual, it gets scary to think of what it could be like to program one of these newer watches.

Bill's solution is for consumers to do the programming from a PC.  The PC would connect wirelessly to the smaller device.  For Microsoft, that has the advantage of extending the usefulness of Windows(TM).  And I'll admit that as a user it appeals to me more than the fingernail interface.

But I don't think it will work.  A lot of these devices are going to be mobile, and people do not want to have to go back to home base to reconfigure them. 

My prediction is that to serve the purpose of interacting with small electronic devices, a new type of configuration device will emerge as a standard.  This will be a single portable device that I can use to configure or interact with any of the new little computerized gizmos--watches, intelligent street signs, refrigerator magnets, etc.

It could be that, as Howard Rheingold suggests in Smartmobs, that the cell phone will emerge as the generic remote-control device for mobile electronics.  Personally, I hope that the device turns out to have more screen space and more useful controls than a cell phone--probably a Gameboy comes closer to what I have in mind.  Or maybe this is something that Palm-thingies would be good at. 

In any case, the configuration device or remote control does not need all the overhead of a PC.  It can run a much more stripped-down operating system.  In which case, Bill is going to have to compete from the same starting position as everybody else.


. . . . . .


Posted Wednesday, January 8, 2003

Go Wireless Young Man, Con't

Bob Frankston writes,

Rather than wondering whether Voice over IP is viable, we should be asking whether traditional telephony is viable.

I have to say that looking at the site for Vonage, one of the first products, I am not motivated to use it.  Our house has three floors, and we have one cordless phone on each floor.  That setup appears difficult to replicate using Vonage. 

But my guess is that by the end of the year we will be experimenting with a VOIP phone.


. . . . . .

Go Wireless, Young Man

Clay Shirky explains why the telephone industry is headed for contraction.

WiFi is the new fax machine, a huge value for consumers that generates little new revenue for the phone companies. And, like the fax network, the WiFi extension to the internet will cost hundreds of millions of dollars, but it will not be built by a few companies with deep pockets. It will be built by millions of individual customers, a hundred bucks at a time.

...WiFi hubs and VoIP adapters allow the users to build out the edges of the network without needing to ask the phone companies for either help or permission. Thanks to the move from analog to digital networks, the telephone companies' most significant competition is now their customers, because...the customer can buy a simple device that makes wireless connectivity or IP phone calls possible

If he is right, then we need more competitors in the retail phone business the way we need more competitors in the horse-and-buggy business.


. . . . . .


Posted Tuesday, January 7, 2003

Powell-bashing

My TCS friends are furious at Michael Powell over a proposal to allow the Baby Bells to set higher prices for leasing their lines to competitors.  Duane D. Freese writes,

The requirement that the Bells provide wholesale leasing of their network platform to competitors - so-called UNE-P - is the only reasonable way for most competitors to enter local phone markets now. It is the only way they can generate the capital to ultimately build out a competing network they can fully control themselves. 

James K. Glassman chimes in,

The conservatives object strongly to the FCC trampling on the rights of states, whose encouragement of competition has served to contrast - and embarrass - the federal regulators. The state commissioners have required the Bells to live up to the Telecom Act by leasing their lines at reasonable rates. 

Glassman and Freese are correct, in that subsidized competition helps to spur entry and reduce prices.  The question is whether this is good for the economy.  At some point, my guess is that the land line phone business is going to die off as cell phones and wireless voice-over-IP take over.  The last thing we need is to pour more capital into building what George Gilder calls "copper cages."  My advice to anyone who wants to go after the Baby Bells' telephony business would be to "Go wireless, young man."

My guess is that Powell sees it the same way. 


. . . . . .


Posted Sunday, January 5, 2003

Living in Minus

During our vacation in Israel, I accumulated the following economy-related anecdotes.

1.  I learned an expression "living in minus," which means using the overdraft facility in your checking account.  This mechanism, rather than credit card debt, is the primary form of personal debt in Israel.  I think that a lot of businesses, too, are living in minus.  In fact, it could be that Israel is a bit like Japan, with a lot of capital tied up in enterprises that should be re-organized or shut down. 

The Palestinians also must be living in minus.  Their tourism has collapsed even worse than Israel's, and it is all but impossible for them to work in Israel, so there are few sources of earned income.  But they look much healthier, better dressed, and modern than they did twenty years ago, which was when we were last in Israel.

2.  In spite of high unemployment, Israelis have replaced the Arabs that no longer are hired to work in construction with guest workers from Asia.  This use of guest workers when there is domestic unemployment suggests a labor market that, like Europe's, is distorted by unionism and a generous welfare state.

3.  Two of our taxi drivers in Jerusalem were 5th-generation Jerusalemites.  To realize how striking this is, consider how unlikely it would be to encounter a New York taxi-driver who is a 5th-generation New Yorker.  In discussions of income inequality in the U.S., I find the metaphor of an escalator helpful.  That is, a lot of the dispersion in income is due to the fact that you are taking a snapshot of people on an escalator, with young families and immigrants standing near the bottom.  In thirty years, most of the those at the bottom will have arrived at the top third of the escalator, which is why you don't see many native cab drivers in New York.  But in Israel, the escalator may not be working quite so well.

4.  Israel's potential use of the Internet is hampered by the Hebrew language.  Search engines, for example, are optimized for English.  Like the French, the Israelis are loathe to sacrifice the cultural autonomy represented by their separate language.  But from a purely economic point of view, they would be better off if, as in India, the English language played a larger role, particularly in education.

5.  The basic infrastructure of the country is much better than it was twenty years ago.  Automobiles and appliances are more up-to-date.  Our cell phone calls to America were clearer than phone calls within the U.S.  You no longer have to wait years for a phone, an apartment, or a permit to start a business.

Overall, I came away thinking that Israel has shed many of the vestiges of a Third World country that still plagued it twenty years ago.  But relative to the U.S., it has some serious weaknesses, which of course have been exacerbated by the ongoing war with the Palestinians.


. . . . . .

Non-convergence

While I was away, TCS published my essay called Betting Against Convergence.

For the past decade, pundits have been predicting media convergence... the convergence hypothesis goes, we do not need devices that specialize in one type of media. Instead, we will have "converged," multipurpose devices.

I continue to bet against this vision of convergence. My thinking is that while technology certainly might evolve in that direction, people cannot.


. . . . . .









Copyright 2002-2003 Arnold Kling. All rights reserved. Terms of use


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