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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.

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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 Sunday, August 31, 2003

Back to Plain Text for Multi-recipient Email?

I think that one solution to spam would be to revert to plain text as the standard email format.  No HTML, no attachments.  Spam filters would be much harder to fool in such a world, and of course plain text email will not have viruses and worms in it.

People who want to send pictures, or fancy-looking documents, or spreadsheets would have to use a different protocol.  But that protocol would not have a "cc" function.  To get a picture or a spreadsheet to a large list, you would have to direct them to a web page.

So, my spam solution is this:  reconfigure email servers so that a sender can either send email that includes attachments or send email to multiple recipients, but not both.  If you want to send email to multiple recipients, you must use only plain text, with no attachments.  If you want to send email to just one recipient, then use HTML and attachments to your heart's content.  If you want to send HTML and attachments to a lot of people, set up a web page, and use the email to point to the web page.  Or use some other protocol.

Would that work?  See Frankston.  See also Gillmor.  See also Mayfield.


. . . . . .

The John Locke Bandwagon

I said that he was the real Internet candidate.  Now Eugene Miller explains why.  He divides philosophers into four quadrants, depending on whether they emphasize the benefits or harms of technology and on whether or not they view controls as beneficial.

Views that Emphasize Benefits but Oppose Controls (lower left quadrant). This option has been preferred by writers in the classical liberal tradition, because it best fits their conviction, first, that personal well being and economic growth depend on technological progress and, second, that the very conditions of that progress -- individual freedom, private initiative, entrepreneurial activity -- are greatly endangered by governmental encroachment.

 

Classical liberalism's philosophical foundations were articulated chiefly by John Locke, Montesquieu, and Scottish Enlightenment thinkers such as David Hume and Adam Smith. In Locke's writings, particularly his Second Treatise (Of Civil Government), we find an emphasis on the benefits of productive labor and private property, on ways that enterprise and exchange develop spontaneously under conditions of freedom, and on the rule of law as a barrier to arbitrary government.

This quadrant, which emphasizes benefits and opposes controls, describes the attitude that many of us have toward the Internet, and for me it extends to the economy and to technology in general (I mean, there are some state controls that I favor, but I'm for less control than most people). 

 

Not to belabor the point, but many of Howard Dean's supporters are in the opposite quadrant.  The environmental radicals emphasize the harms of technology and advocate strong controls.  Their economic policies also are highly statist.  Thus, in my view, he is not the Internet candidate. 


. . . . . .


Posted Friday, August 29, 2003

Software Patents?

My view is that the success of business processes--including software--depends on subtle issue of execution, rather than on the concepts that you can explicitly patent.  So I think I'm sympathetic to Paul David, et al, who argue against a proposal for the EU that would encourage software patents.

Bessen and  Hunt found that the correlation between R&D and patenting in the U.S. over time has been significantly negative. In other words, as software patenting rates have risen, R&D investment in sectors using information technologies has declined. Whether there is an underlying causal relationship remains unestablished, but the U.S. experience warrants scepticism regarding claims that software patenting would contribute to the goal of raising the software R&D investment rate in the European Research Area.


. . . . . .

Real World Telecom Regulation

An illustration of the fact that in the real world it's hard to tell "the people" from the "special interests" is telecom regulation.  Here is a story from today's Washington Post.

Verizon and the other companies want the court to force the FCC to make it more difficult for state regulators to order local telephone companies to give rivals discounts.

If Verizon is on one side, then you might assume that "the people" are on the other side.  Instead,

AT&T Corp. and WorldCom Inc. rely on the rules to provide millions of customers a package of telephone services that include local and long distance for about $50 a month.

So on one side you have Verizon, and on the other side you have WorldCom.  You won't find "the people" represented anywhere. 

What is under discussion are rules that force local phone companies to allow competitors to provide services using the local phone wires.  State regulators set the prices that local phone companies charge competitors.  In some cases, those prices are arbitrarily low, and competitors are subsidized.  Nobody knows the "right" wholesale price for telephony.  The only sure winners from the regulations are lawyers and consultants.


. . . . . .


Posted Thursday, August 28, 2003

Academia and Ideology

How did Krugman wind up on the left while I wound up on the right?  I speculate that is because I spent more time taking Real World 101.

A good way to cure the adolescent fantasy is to spend time in government. Up close, it is hard to tell the people from the special interests. The crusaders for more low-income housing turn out to be construction companies. The campaign for energy independence and clean-burning fuel turns out to be a plea for a subsidy to benefit a large ethanol producer.


. . . . . .

Flat-rate Pricing

Ed Felten makes the case for it succinctly.  Talking about music, he says,

We will go to a model where people pay a flat fee for unlimited access, because it costs the same to provide ubiquitous access to all material as it does having restricted access to some stuff.


. . . . . .

Why Microsoft has Security Holes

Because people like new brother Boyd value stuff like this.

In this sort of presence-threaded environment, every object, every document, every folder, every comment, every appointment is associated with an implicit buddy list. Every context offers immediate access to the community of those people who are somehow associated with it.

This introduces a whole new realm of integration into Microsoft software, which my instinct tells me leads to a whole new realm of security holes.


. . . . . .

Government and Incumbents

Do you need to be protected from voice-over-IP-telephony?  Your friendly regulators think so, as Jeff Pulver found.

State Public Utilities Commission started an inquiry on how telecommunications providers are using VoIP in Ohio to provide telecommunication services to Ohio consumers. This proceeding will look into how "telecommunications services with an Internet Protocol and/or voice over the Internet component" are being delivered in Ohio.

The State PUC is looking for comments on whether or not a company that is providing VoIP services is "transmitting telephonic messages" as defined by Ohio law. It turns out that under Ohio law, companies that are in fact "transmitting telephonic messages" are a common carrier subject to the State PUC's laws.

Take this easy pop quiz.  Government regulation serves to protect:

(a) the public; or

(b) incumbents?

You are well along the path to wisdom if you understand that the correct answer is (b) much more often than (a).   


. . . . . .


Posted Wednesday, August 27, 2003

How Regulations Evolve

Brother Shirky writes,

Process is an embedded reaction to prior stupidity. When I was CTO of a web design firm, I noticed in staff meetings that we only ever talked about process when we were avoiding talking about people. "We need a process to ensure that the client does not get half-finished design sketches" is code for "Greg fucked up." The problem, of course, is that much of this process nevertheless gets put in place, meaning that an organization slowly forms around avoiding the dumbest behaviors of its mediocre employees, resulting in layers of gunk

This is an excellent example of what I call Real World 101--the insights into organizational behavior that one gains from actually working for a corporation or government, as opposed to hiding behind the Ivy walls.  Organizations create rules, and legislatures enact laws, in response to past failures.  Occasionally, the rules and laws actually fix a systemic problem.  However, most of the time, they create meaningless overhead.  All too often, they induce new pathologies that are even worse than the ones that they are intended to correct.

 


. . . . . .


Posted Monday, August 25, 2003

It's Not 1995

AOL does blogs.

America Online, Inc., the world's leading interactive services company, today announced the launch of AOL(r) Journals, a new feature that makes it simple and easy to share thoughts, photos and much more online with friends, family and others on the Internet.

I see this as a non-event.  My guess is that all the AOL users who are anxious to have blogs already have them.  The marginal inducement to blog will be small.

In 1995 with the Web, it was the opposite.  AOL users were demanding that AOL offer access to the Web.  And there was no easy alternative (unless you count Prodigy, which offered Web access about 6 months before AOL did).  Without AOL, you had to install a TCP/IP stack on your computer--something even I had trouble with (the President of my ISP came over in a driving rain one night to help me.  That was back in the day.) 

When AOL finally offered Web access in August of 1995, the Web changed overnight from a college playground to a mainstream medium.  Don't look for the same thing to happen to blogs eight years later.


. . . . . .


Posted Sunday, August 24, 2003

Computer Viruses and Binary Trust

Bob Frankston says that on the Net if we expect to treat trust as a simple binary operation we will suffer from bad computer security.

Fundamental to the problem is a tragically naive model of trust -- one that says you either trust people (and software) or you don't and if you trust them you give them full and unfettered access to all of your computer and information and data...

the viruses are an automated version of the old cons but most people don't have the computer equivalent of "street smarts".

 


. . . . . .


Posted Saturday, August 23, 2003

Satellite TV

Apparently, a lot of people use it

The Satellite Broadcasting and Communications Association announced today that 20.36 million U.S. households – or one in five television households – now receive their television programming through direct broadcast satellite


. . . . . .


Posted Thursday, August 21, 2003

My Manifesto

I don't know what came over me.  My view is that everyone on the Internet writes manifestos that nobody else wants to read.  And then I went ahead and wrote one, anyway.

My impression is that many college-educated Americans -- perhaps even the majority -- view those of us who support free markets as cold-hearted and uncouth. Where I see the moral dignity of free choice, they see only "selfish individualism." Where I see decentralized markets as having a genius for self-regulation and information processing, they see a need for planning and oversight.

 

In my view, markets are a force for moral good as well as economic progress. The power of government to take away those blessings, and the alacrity with which many leaders propose to do so, requires much more vigilance than the neocons are willing to give to it.


. . . . . .


Posted Wednesday, August 20, 2003

Eliminate Mass Email?

Brother Mayfield may be on to something.

Unfortunately, the unintendend consequence of CC is occupational spam, unavoidable by opt-in and opt-out. If only we could disable this field and shift mass distribution to publishing mediums where subscription is optional.

So email is a many-to-many medium, but that doesn't mean it should be.

Let's think about this.  Suppose you created a new email protocol which somehow forced every mail server to be configured not to send more than n copies of any email.  Maybe n=1 is the only number that will work. Ideally, though, you would set n large enough to minimize inconvenience to non-spammers but low enough to make spam prohibitively expensive to send.

Non-spammers who want to reach more than n people at a time would have to use something other than email.  Perhaps some new protocol, or something hacked using some other protocol (a web service?). 

Suppose that I read some publications that now come as email lists.  These would migrate to something else.  As a reader, I might use a web interface to set up this "something else."  I set up permissions that control the publications that I read--locking spammers out.  I set up rules for how I want to be notified of new information in my "publication box"--maybe I get an email once a day telling me what has arrived, or maybe there are some publications where I want to be notified instantly by email or instant message.

Sounds like an interesting idea.  I'd be curious what others think.

Meanwhile, I really like the fact that the head of the FTC had the nerve (euphemism) to tell Congress that their anti-spam legislation won't work.  I'm sure he'll take a lot of grief (euphemism) for speaking truth to power.

UPDATE:  more from Brother Mayfield--email is dead


. . . . . .

Outsourcing and Ignorance

Concern with outsourcing is bipartisan.  There are ignoramuses on the left and on the right

Conversely, there are economists on the left and the right.  I tried to explain outsourcing to a conservative audience here.  Now, Brad DeLong tries to explain it to liberals.

First of all, the number of jobs in the United States is not set by what happens on the sea lanes--on what exports and imports the container ships carry from port to port. The number of jobs is set in the Eccles Building, by the Federal Reserve...

the principal determinants of our prosperity and our productivity come from within: get public investment in infrastructure right, private savings and investment high, and investment in education high as well.

 


. . . . . .


Posted Tuesday, August 19, 2003

Patented Failure

Hylton forwarded me this post about a payment system for information goods.

Eat it first, and then decide what you want to pay for it...how much or how little. That, in essence is the concept of "post pricing", an idea which has recently been patented by Thomas Murcko, CEO of a financial technology/advisory company called WebFinance.

I guarantee that this guy will fail.  It's not that his idea is such a long shot (although I think it is).  But I am a firm believer in Edison's rule that invention is 1 percent inspiration, 99 percent perspiration. 

When you go out and patent an idea like this, then announce to the world that you've won the patent, you are telling me that you have Edison's rule reversed in your head.  You think that having gotten the inspiration and patented it, you are 99 percent of the way there.  That is so wrong.

Thomas Murcko, you are wearing a big sign around your neck that says, "I don't know squat about what is involved in executing a business.  I do not have the first clue about what it will take to bring my idea to market.  You would have to be a total idiot to invest with me."


. . . . . .


Posted Monday, August 18, 2003

Direct Tax Vs. Copyright Tax

Jay Currie says that Canada has been successful allowing music to be copied and using a tax on storage media.

The Copyright Board of Canada administers the Copyright Act and sets the amount of the levies on blank recording media and determines which media will have levies imposed. Five years ago this seemed like a pretty good deal for the music industry: $0.77 CDN for a blank CD and .29 a blank tape, whether used for recording music or not. Found money for the music moguls who had been pretty disturbed that some of their product was being burned onto CDs. To date over 70 million dollars has been collected through the levy and there is a good possibility the levy will be raised and extended to MP3 players, flash memory cards and recordable DVDs sometime in 2003.

While hardware vendors whine about the levy, consumers seem fairly indifferent. Why? Arguably because the levy is fairly invisible - just another tax in an overtaxed country. And because it makes copying music legal in Canada.

My guess is that this storage media tax is much more efficient than the copyright taxes that the RIAA wants to use in the U.S.--lawsuits, DRM, and the like.  I really wish somebody in the U.S. would propose this.


. . . . . .


Posted Sunday, August 17, 2003

Information Superhighway

Great one-liner from naval, talking about video on demand vs. Netflix.

Never underestimate the bandwidth of a truck full of DVDs speeding down the highway.


. . . . . .

The Politics of Technological Change

Ron Bailey writes,

it is no surprise that opponents of technological progress often want decisions about new technologies to be made in political arenas. Opponents of a given new technology believe that they will have more luck by lobbying their local congressperson or member of parliament to vote to prohibit its development.

The essay is based on economist Joel Mokyr's excellent history of the Industrial Revolution and its relationship to the rise of the Enlightenment and the scientific method.  I recommend reading the whole essay--and the book, too, for that matter.


. . . . . .


Posted Saturday, August 16, 2003

The Internet Candidate

What political figure really gets the Internet?

Hint:  It's not Howard Dean.


. . . . . .

Social Software Category

I think that this is a valid category for social software, although I suspect we are a long way from really revolutionary products.

the first comprehensive two-way classroom communication and management application for wireless-enabled handheld Pocket PCs over 802.11b wireless networks


. . . . . .


Posted Friday, August 8, 2003

Come Back August 17

Yep, I'm going on vacation again.  Meanwhile, in addition to the usual suspects like Tomalak, SmartmobsGizmodo, and Many-to-Many, check out a couple of blogs that are more recent discoveries:  Future Pundit and The Speculist (the latter sounds like an Ob-Gyn). 

I was particularly interested in this interview with Aubrey De Grey, who I remember as a middling sort of Othello player back in the day.  He's now a leader in anti-aging research, but his heart is still with the board game.

Can you say a few words about what your own plans would be for a life that spans several centuries?

Well, first of all I have a lot of catching up to do — all the films I haven't seen, books I haven't read, etc.— while I've been spending every spare minute in the fight against aging. But in addition, there are masses of things that I enjoy doing and will always enjoy — spending time with my wife and friends, taking a punt out on the river Cam, playing a game of Othello, etc  

And, of course, check TCS for new essays of mine.  Like this one, where I argue that the economy is weaker than the conventional wisdom says it is.

If you did not know that productivity was growing at 4 percent per year, then a growth rate of real GDP of 2 to 2.5 percent would be considered satisfactory. However, taking into account high productivity growth, 2.5 percent GDP growth is terrible...The NBER, which still looks at GDP growth without taking into account productivity, has been fooled.


. . . . . .

The Real Cause of Spam

It's the jerks who respond to it.

some 6,000 people responded to e-mail ads and placed orders for the company's Pinacle herbal supplement. Most customers ordered two bottles of the pills at a price of $50 per bottle...

Among the people who responded in July to Amazing's spam, which bore the subject line, "Make your penis HUGE," was the manager of a $6 billion mutual fund, who ordered two bottles of Pinacle to be shipped to his Park Avenue office in New York City. A restaurateur in Boulder, Colorado, requested four bottles.

If you think it should be a crime to send spam, then it also should be a crime to buy from spammers.  Think about it. 


. . . . . .


Posted Thursday, August 7, 2003

Information Wants to be Middle-Class?

Interesting observations by James Miller on the possible distributional effects of information goods.

As easily copied informational goods become more important to the U.S. economy, the differences in consumption between the rich and middle class will continue to diminish.


. . . . . .

Trashing Fannie Mae

Gosh, I never thought I would be defending Fannie Mae, the mortgage giant.  But this article is just too skewed.

At the end of last year, the models showed that Fannie Mae's portfolio would have lost $7.5 billion in value if interest rates rose immediately by 1.5 percentage points, internal company documents provided to The New York Times indicated. At that time, the market value of all the assets on Fannie Mae's books, minus all the company's debts, was about $15 billion. So it would have lost roughly half its market value from such a sharp increase in interest rates, according to the models.

This analysis does not count the offsetting reduction in the value of the debt used to fund those mortgages.  The net change in market value is small, and it could be a gain.  The Times' spin on this fact:

The company said in its most recent annual report that if rates rose 1 percent on Dec. 31, it would actually have made $600 million. But that figure included gains that were not directly related to the value of its mortgages.

What I gather from this story is that if you mark to market Fannie Mae's entire balance sheet, the affect of an increase in interest rates is small and perhaps favorable.  However, if you only mark to market one side of the balance sheet--the mortgage assets--you get a big decline in value.  The story implies the latter approach is more accurate.  This is 180 degrees incorrect.

And finally, the Times gets this wrong:

Fannie Mae once mainly insured mortgages held by other financial institutions against default, a steady but unglamorous business. But in the last decade, it has steadily increased the quantity of mortgages it holds instead of selling to other investors.

That sentence would accurately describe Freddie Mac.  Not Fannie Mae, which has always held most of its mortgages in portfolio.


. . . . . .


Posted Tuesday, August 5, 2003

Data Mining and Terrorism

In an essay that tries to exploit an analogy between terrorism and submarine warfare, I write,

Even if we suffer no further attacks, it is an outrage to use data mining technology for any purpose other than fighting terrorism. Although I have supported data mining for a narrow purpose, I vigorously oppose any attempt to extend its use to fight other crimes or perceived threats.


. . . . . .

Who Needs Academic Journals?

Today's Washington Post talks about somebody trying to come up with an alternative to expensive academic publications.

Now, with a $9 million grant from the Gordon and Betty Moore Foundation, the PLoS hopes to lift open-access publishing into the scientific stratosphere, in part through the personal gravitas of its founders and friends.

We already have open-access publishing.  It's called putting your papers on your faculty web site.  All we need to do to unseat the journals is to replace the function of reviewing papers to decide what's worthy.

If somebody gave me a $9 million grant, I would hire 3,000 bloggers at $3,000 a year to cull through papers in their specialty and make recommendations about the importance of them.  Cut out all the other nonsense.


. . . . . .

Ban Government Data Mining?

Randall Parker comments on a bill introduced by Oregon Senator Ron Wyden to ban data mining by the U.S. government.

Federal investigative agencies are of course allowed to look for signs of a terrorist attack by using large numbers of agents to go out into the field to collect information by talking to and observing people. The agents can talk among themselves to compare and share with each other what they find. But in the view of Senator Wyden automated analysis of information collected for other purposes is considered too dangerous and ripe for abuse to allow the federal government to do it. So this bill seeks to deny federal agents many of the efficiencies in data collection and analysis that computers make possible.

It must be great to be a member of the Senate, where you can berate the intelligence agencies for failing to connect the dots and then turn around and outlaw dot-connecting.


. . . . . .


Posted Friday, August 1, 2003

Libertarians Need Not Apply

Congratulations to Dr. Weinberger on becoming Senior Internet Adviser to Howard Dean.  I gather that it is a position for which libertarians need not apply.

I think that at some deep level it is impossible for someone as conventionally leftist as Dean to "get" the Internet.  As I wrote here, it amazes me that people can champion a decentralized Internet and be in favor of statist economic policies. 


. . . . . .

Media Concentration

One approach to the issue of concentration in the media industry is to use innuendo and hints of conspiracy.  The Atlantic Monthly (not yet on line) offers a James Fallows cover story on Rupert Murdoch, the evil demon.

Another approach is to look at facts.  Eli Noam tries to do that.

We can also look at the presence of the top four mass media companies in the entire mass media sector. Their revenues tripled from $26bn in 1984, in today's money, to $78bn last year. But the share of these companies in the overall mass media sector has doubled from about 11 per cent in 1984 to 21 per cent in 2001/2. This is a considerable increase - but the level would be considered low in most sectors. The low percentages, defying conventional wisdom, are explainable by the sheer size and diversity of the mass media market and the diversity of its segments: about $400bn, if one adds up the revenues of print, music, broadcasting, cable, and film.

What we have in media is an industry that is distinguished from other industries by its lack of concentration.  

Michael Powell has been vilified on this issue, and 400 House members voted to overturn his modest deregulation proposal.  But the facts happen to be on his side.


. . . . . .









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


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