A Paradox of Gluttony

September 7, 2012

Even the cursorily familiar with economics will have heard of the Paradox of Thrift; when people, worried about the future of the economy, save rather than spend, and in doing so ensure that the economy takes a downturn.

The current shale gas boom in the US is an example of a different kind of paradox: a paradox of gluttony, of excessive greed leading to failure. Shale gas has been held up as the saviour of our economy; a new resource we can exploit in order to deliver cheaper energy and hence growth. However, unlike normal booms, no-one whose core business is extracting shale gas is actually making any money.

The reasons for this are pretty clear:

Henry Hub Natural Gas Spot Price Chart

Henry Hub Natural Gas Spot Price data by YCharts

Following the economic crisis, gas prices collapsed due to falling demand. The advent of shale gas has served to keep prices low, to the point where profitability of the sector is collapsing.

Why is this the case? Markets should respond to a price signal like this by decreasing production. Instead, gas production in the US has actually risen over the period.

The reason behind is an astonishing case of induced greed; an example of talking one’s book on an epic scale. The initial flood of investment into shale gas came from several ‘pioneer’ companies such as Chesapeake massively overleveraging themselves in order to snap up shale plays cheaply before the rest of the market caught on to the potential of fracking. Of course, once they’d done so, they had to ensure that the market, in fact, caught on. And so, they engaged in an enormous publicity campaign about the potential of fracking, placing articles in the media, engaging the investment community and generally putting themselves around quite a bit*.

It had an impact. Money flooded into shale exploitation, in the main by buying plays at extortionate rates from ‘pioneer’ companies, who proceeded to make a great deal of money. These plays have now been written down in large part. Nonetheless, the gas continues to flow, as the once greedy  and now worried investors lose money on their assets and demand production continues to extract any possible value, assuming that at some point other people will blink and the price will rise. Of course, if everyone does this, then the price will continue to stay too low for anyone to make any money. This is a paradox of gluttony.

It is difficult to say how long this particular ‘boom’ will last, estimates ranging from six months to several years. Nonetheless, it will eventually end in a squabble of recrimination, litigation and spiking gas prices. The environmentalists will blame the greed of the frackers, the libertarians will blame a quirk of SEC regulations that allowed the likes of Chesapeake to claim that a play is profitable without factoring in the actual cost of drilling, and the Austrians will blame the cheap credit that allowed the initial land grabs in the first place. In the interim before we decide who we’re going to blame, it’d probably be best if people stopped assuming shale gas will be a silver bullet.

*It is interesting to note that Cuadrilla, the company looking to exploit the UK’s Bowland Shale, has recruited Nick Grearly to go round the country extolling the potential of shale gas.

Supply-Side Shock and Awe

September 3, 2012

There are at least three levels of rhetoric which one can use to justify a policy: the historical, the ideological, and the pragmatic. When it comes to markets versus central planning, the first is eminently preferable: as Timmy is fond of telling us, the 20th century can be viewed as a great experiment about the relative merits of both systems in terms of delivering growth, with markets defeating central planning under the Nazis and the Soviets in turn. It is clear that, if one wishes to deliver growth, markets are on average the tool for the job.

However, from an ideological perspective, this argument doesn’t wash. If I am a great believer in economic freedoms, then whether those freedoms deliver growth is a moot point: I want them regardless, and making them contingent upon delivering growth is to devalue them. Freedom has value in and of itself, and while the historical context may have value when trying to sway non-believers, it should not form the justification for that belief.

On pragmatic grounds, neither of the arguments above work. Economics is fundamentally about trade-offs: a particular form of freedom may impose costs upon others, and the adjudication of which costs are heavier may come in the form of market forces or of public policy. Let us say that we forbade employers from requiring a notice period from their employees, while still requiring that an employer provided a notice period before letting someone go. Employees are free to change jobs at will, assuming someone else will take them on, while employers still find it difficult to get rid of a difficult employee quickly. This increases the economic freedom of employees in our present context, in which almost all desirable jobs require a notice period before departure, while decreasing that of employers.  While we can argue about the particulars, simply demanding increased economic freedom on ideological or historical grounds does not necessarily lead to a particular set of policies. Pragmatically speaking, we have to weigh up which and whose freedoms are more important.

I bring up the above because of a regrettable tendency among the Right to reach for supply-side reforms as an answer to our current economic problems seemingly as a result of an ideological position, and only then going into pragmatic reasons why such reforms are appropriate. Handily, today David Davis has provided an example par excellence of this kind of thinking, which I shall analyse.

His speech meshes the historical, the ideological and the pragmatic into a melange of recommendations. Consider the following selected passages:

“Let us take Switzerland as an example. Its economic dependence on banking was a third greater than ours, and its exports are predominantly to its Euro zone neighbours. Yet, while our economy struggles, Switzerland’s is back up and running. So Britain’s problem cannot simply be attributed to bad banks at home and collapsing export markets abroad.”

“[We] must liberate individuals and companies from the impediments that are undermining their confidence and limiting their freedom of action.”

“The virtue of small businesses is they create jobs and wealth. […] Jump starting the economy will above all else involve liberating this sector to do what it does best, create jobs and wealth.”

“Our Business Secretary congratulates himself that we have one of the most lightly regulated labour markets in the developed world. Perhaps, from the point of view of a large company we do, but not according to the real job creators – small and medium sized businesses.”

“When the German government launched its growth strategy in 2003, the labour market
was the centre of the reform program. Special exemptions from employment law for small companies, easing of laws governing dismissals and redundancies, protection of companies from vexatious employee lawsuits, were combined with reform of the welfare system to improve incentives to work. And it worked.”

On historical grounds, because Switzerland shows our current economic difficulties are not related to our banking sector or exports, we should liberalise our employment market. On ideological grounds, because small business have virtues that must be freed to flourish, we should liberalise our employment market. On pragmatic grounds, because it worked for Germany and Switzerland, we should liberalise our employment market. This would seem to be a coherent argument.

Unfortunately, if you mash differing lines of thought together to create an argument, you leave it open to being picked apart. For example, our employment protections were amongst the lowest in the OECD (below Germany and Switzerland) going into the economic crisis, and I’m fairly sure they haven’t suddenly gone up since then. Germany’s reforms to their labour market were put in place because they were in relative decline compared to their competitor nations with more liberalised employment policies (e.g. the UK); right now, the UK is actually doing worse than countries with more rigorous employment protection (e.g. France). One is left with the ideological argument, which does have merit, but is devalued by all the other arguments around it being incorrect.

There are genuine pragmatic arguments for supply-side reform, and indeed Mr Davis makes one – it should be easier to set up banks, and banks should be more exposed to competition. It’s fairly clear that our banking sector suffered during the economic crisis, and a good dose of marketisation should help it return to health. Unfortunately, the fact that Mr Davis makes it after claiming that woes with our banks aren’t the cause of our current woes again devalues it – but Mr Davis needs to make that claim to justify all his other supply-side recommendations.

If you start from a position of ideology and then reach for arguments of pragmatism and historicity, you devalue your own position. If you’re in favour of freedom, then argue for freedom. If you’re in favour of growth regardless of how it’s achieved, then argue for that. But mashing the two together results in ridiculous situations like Mr Davis objecting to support for green energy, when it’s one of the few examples of the UK actually generating wealth in the current climate, if you’ll pardon the pun.

And it’s the job of this man:

In all the debate about what the Tories might offer the Lib Dems to get their precious boundary changes, there’s a fundamental truth that seems to be being avoided. While both Lords Reform and changes to constituency boundaries are ostensibly constitutional issues, they don’t lie at the heart of the reason the Coalition was formed. The real electoral dividends are to be reaped from a strong performance on the economy, and this is why Osborne needs to go.

The deficit reduction strategy formed a key part of the Coalition Agreement, and relied on growth picking up in short order. This has not happened. The ostensibly independent Office for Budgetary Responsibility, which Osborne set up, has managed to get every single one of its growth predictions incorrect. If it were managing a fund based on its predictions, it’d already be out of business. We are now back in recession, and Osborne’s response to this is to attempt to restrain one of the few remaining growth sectors we have in order to take an economy-wide punt on gas prices going down – right when the market expects them to rise. Take a look at the price of gas in Winter 2014-15 on the futures market for an indication of the kind of stories we can expect to see at the beginning of the next General Election campaign.

If we have been part of a Government that has failed to deliver growth and plunged hundreds of thousands of people into fuel poverty, we can expect to be decimated by the electorate, even without changes to constituency boundaries. Therefore, Osborne has to go, to be replaced by one of our own. Hell, even William Hague would be better.

The Virtuous Citizen

August 1, 2012

Today, returning to blogging after a brief interval while I settle into my new job, I’d like to be a bit naughty and compare Chris’s two most recent posts, on Corporate Crime and the Rightness of Romney. The first concerns the role of incentives in law-breaking amongst our corporate friends, making the clear point that for any given legal enforcement framework there is a level of law-breaking for which the returns are greater than the costs (i.e. fines/imprisonment). We should therefore expect that level of law-breaking to obtain. Furthermore, this lesson applies to the whole of society too: criminals, like everyone else, take a rational approach to their law-breaking based on the costs and benefits of doing so. The Daily Mail assumption that criminals are simply evil is not particularly useful in understanding actual criminal behaviour.

The second covers the relationship between culture and economics, and briefly reviews a number of studies and arguments which link social virtues and cultural differences to economic growth. Certain norms, such as trust, individualism and wealth being seen as a good in itself appear to have a positive effect on long-term economic development. Culture is not simply the domain of politics, but flows from a variety of sources, including religion. This presents an interesting challenge to policy-makers, because as Chris says:

“On the one hand there are the (dwindling) number of economists who think that long-run growth is a matter of technocratic fixes, of establishing the right policies and institutions. On the other hand, there are politicians who think that culture can be changed by talk and wishful thinking. The truth is more interesting than either group realizes.”

Policy by itself has only limited impacts on culture, with other actors – and history itself – having a much stronger influence. This is interesting, because the implications of the findings mentioned above is that there is likely an ideal set or family of virtues that are conducive to economic growth if they are held as social norms; certainly, Chris refers to the claim that bourgeois values are conducive to growth.

For policy-makers or other actors looking to magnify growth, therefore, the promotion of this set of virtues would be helpful. Now, the constant advocacy of supply-side solutions to our current economic difficulties by a certain section of the debate – including those currently giving succour to Naomi Klein-esque conspiracy theories – would point to the peculiar bundle of virtues bound up with Ayn Rand-style libertarianism as being conducive to growth. In a world with little regulation beyond contracts between individuals, virtues which demand that one be proud of one’s own efforts and not engage in force or fraud to secure those of anyone else are most useful under such an understanding of economics; if markets are always the best way of delivering growth* then virtues most likely to lead to totally unfettered markets will help.

In contrast, virtues that include caring for others when one judges them to be incapable for caring for themselves will encourage the public advocacy of regulation on certain economic matters, as well as the setting aside of a portion of the wealth of individuals to non-productive uses, including, say, looking after the elderly. This will be less conducive to growth on this economic model.

However, what’s left out of this picture – and the reason I draw the contrast between Chris’s two posts – is that economic circumstances influence culture in turn. For example, for certain demographics file-sharing and piracy could be considered to be a norm. This is, effectively, the incorporation of crime into cultural mores because the benefits (free consumer goods) are much less than the cost (risk of being caught stealing). And so, you have a section of society actively agitating for their cultural norm to become legally recognised too.

Under Rand-style libertarianism, the ordinary worker is supposed to be content to be allowed to purchase goods and services from those with a greater capacity for production, to be content with a lowly lot in life and to be entirely dependent on their capacity to produce. In a hypothetical society in which everyone signed up to those norms, it is difficult to see how long those norms would last in the face of the overwhelmingly disadvantaged in that society agitating for a greater share of the wealth. Such agitation, even if illegal, would be rational: the benefits that may accrue would be far higher than the cost. Any libertarian society – or libertarian culture – would be fundamentally unstable as a result. Given the shift in attitudes towards the rich over the relatively small economic differences caused by the recession, it is difficult to see how anyone could claim otherwise.

Cultural norms both influence and are influenced by economic circumstances, and politics is influenced by and influences both. All three are deeply intertwined, and any useful understanding of society must consider them all.

*Tim does not claim this, but some of his fellow travellers certainly do.

We need a price for carbon. Preventing climate change requires that we find a way of minimising our emissions of carbon dioxide and its equivalents, and by far the best way is by assigning a price to those emissions, providing an incentive to people to innovate their way round the difficult process of decarbonising our economy. However, I’ve always been slightly ambivalent about how we do this. There are, broadly speaking, two options:

  • A market for emissions permits, making the right to pollute a tradeable good. This is exemplified by the EU’s Emissions Trading System. This has the advantage of – if the number of permits are set correctly – setting a price for carbon that genuinely reflects the cost of displacing emissions, as markets are excellent at price discovery.
  • A tax on emissions, providing a flat cost (rising under some models) per tonne of CO2 produced. This has the advantage of being set at an appropriate social cost of carbon, reflecting it as an externality rather than the technical difficulties associated with no longer emitting it.

I have always found it difficult to decide which mechanism I prefer. The first allows us a clear way of reducing emissions to zero, while the second appeals to the classical liberal in me. However, the news today that Poland has been claiming emissions permits for coal plant that doesn’t exist has decided me.

An ETS provides an incentive to ‘invent’ sources of emissions that can accrue free permits if free permits are permitted as a result of political pressure to not over-burden sections of the economy. Conversely, a carbon tax provides an incentive to conceal sources of emissions. However, concealing sources of emissions is difficult for one very clear reason: they continually release big clouds of smoke.

Monbiot’s Mistake

July 3, 2012

George Monbiot has today announced his discovery of economics. Well, that’s perhaps not precisely what he meant, but it’s certainly what this means:

“The constraints on oil supply over the past 10 years appear to have had more to do with money than geology. The low prices before 2003 had discouraged investors from developing difficult fields. The high prices of the past few years have changed that.”

You see, there’s no such thing as supply-and-demand as discrete quantities. What there is is ‘demand-at-a-price’ and ‘supply-at-a-price’. Until oil passed the $70/barrel price – and looked to remain there for the long term – there was no additional supply, because there was no demand for oil at $70/barrel. Now the market price is reaching over $100/barrel, there certainly is.

Monbiot is interpreting this to mean that peak oil, which he seems to conceive of as actually running out of the stuff, is not going to happen. However, this isn’t what peak oil actually is. Rather, ‘peak oil’ is a price of oil so high that other commodities fulfilling a similar role become cheaper by comparison. This includes, for example, renewable sources of electricity, hydrogen or electric cars, and non-oil based plastics and lubricants. In economics, these are known as ‘substitute goods’.

The increasing supply of oil from non-traditional sources spurred on by the high oil price is beginning to foster a market in substitute goods. For example, the US firm Metabolix has been in the business of producing plant-based plastics for several years now, and is the brainchild of ex-oil and pharmaceutical types. This stands outwith any Government subsidy programme, although I’m sure significant amounts of subsidy for corn in the US helped. We can expect this to continue as the price of oil rises.

As a result of this, there will not be one ‘peak’ for oil – there will be multiple plateaus and transitions in the price, as one substitute good replaces demand for oil from a particular sector. Eventually, our economy will no longer be dependent on it, as the price rises so high that we substitute it entirely. This will be long before it actually runs out; as has been said, the stone age did not end because we ran out of stones.

The above is not an argument against environmental activism, or leaving everything to the market – far from it. ‘Peak Oil’ will not come soon enough to prevent dangerous climate change, and so activism, both for subsidies for cleantech which bring forward the date at which they’re cheap enough to be a substitute good and against oil production fromthe likes of the tar sands, which increases the cost of gaining permits and so on, makes a difference. This fundamentally economic difference made by environmental activists may yet be the difference between dangerous climate change and climate change we can just about adapt to.

I know I’ve been blathering on about the Adam Smith Institute quite a lot lately (my reasons for doing so aren’t unique, though), but this is particularly egregious:

“Do we need an inquiry on the Libor scandal? No. The boom phase of every boom-bust cycle breeds this sort of excess and dishonesty. It is to be expected. All another banking investigation will conclude is that we need more curbs on the banks. That might cure the symptoms – quite probably by killing the patient – but it will not prevent the disease from coming back.

Instead, we would be much better investigating and curbing the excess and dishonesty of the politicians who created the artificial, unsustainable boom in the first place, and thereby encouraged the banks – and we borrowers too – to make some pretty massive mistakes and do some pretty colourable things.”

Dr Butler, Director of the Institute, is asking us all to ignore the actions taken by bankers over the period during which Barclays, amongst others, were purposely manipulating the LIBOR rate in order to gain pecuniary advantage. Instead, we should blame the politicians who were responsible for the cheap credit that inflated an unsustainable boom. Apparently, bankers are incapable of controlling themselves in the presence of large amounts of money, and so should be left well alone:

“And sure, in the process, a lot of people did a lot of stupid things, and a lot of bad things. It’s pointless, though, for the people who actually hosted the party now to wring their hands, blame the people who got drunk on their easy credit, and say that we need new investigations over what went on, and new restrictions to stop them doing it again. What went on is perfectly obvious. And it was encouraged by government-created disincentives and excess.”

What Dr Butler is saying is that if you host a party and provide alcohol, you’re to blame if people get drunk and vomit all over the upholstery. This provides an interesting, but I’m sure inadvertent, insight into Dr Butler’s social life: at parties hosted by the Adam Smith Institute, the host always pays to clean up when people get too tipsy for their own good.

I regret to say, at my parties people who act like twats get kicked out (although in one notable instance, they did try to kick down the door afterwards). Perhaps I’m insufficiently libertine for the ASI, but I think the problem lies in an interesting inversion of standard left-wing tropes about the poor.

During the London riots, the instinctive response of many Guardian-reading types was to point to the social conditions of the rioters as an explanation for their actions. They were always very careful to say that these conditions did not excuse the riots, but they were something we should bear in mind when considering our policy response. This is in much the same vein as Dr Butler’s plea that the venality of the bankers involved in manipulating LIBOR should be understood in the political context of the times.

Both parties are making the claim that the structure of incentives surrounding the actions of their preferred social group at a given point go at least part-way to, if not justifying, then explaining their actions, and demanding that Government action bear this explanation in mind. Both parties are making the fundamentally patronising and dehumanising claim that their preferred group is incapable of making moral judgements because of a nice big fat pile of cash or a lovely pair of trainers. Both parties are guilty of spouting bollocks.

No-one can claim that someone else is incapable of making moral judgements, because no-one gets exclusive access to morality. Making such a claim is tantamount to saying that only your moral vision is true and pure, and that the vision of other people is in some way fogged by returns on interest-rate derivatives or a flat-screen telly.

In this case, Dr Butler is doing precisely that. Moreover, he is doing so in a way which ignores the facts of the case, and the sheer spivvery of the people involved. The role of Government and the Bank of England in setting LIBOR is tangential – the short-term interest rates which are in the BoE’s gift do have an impact upon on it, but the strongest influence rests with the group of banks whose estimates for the rates other banks will charge them for money go into deriving it. Blaming Government for this is rather like blaming the party host for the people who make ‘cocktails’ using every available kind of alcohol, and are surprised when they’re violently ill. The best way of dealing with such people, of course, is to not invite them back to the party.

Timmy doesn’t like wind turbines, or, indeed, anything of the other solutions to climate change which are subsidised. This is fair enough; it’s entirely coherent for any classical liberal to dislike any prospect of rent-seeking that appears to impose costs on the rest of society. In a post on Forbes yesterday, he endorsed a letter from an engineering professor to the Telegraph which criticises ‘premature’ technology deployment – i.e. the deployment of technology before it reaches a level at which it can compete successfully with established tech.

Solar panels, he points out, are frequently described by their advocates as likely to be cost-competitive with coal plant in at most ten years’ time. If this is the case, he argues, then why do we need to spend money subsidising their production? Surely we could just wait ten years and reap all the benefits of clean energy without having to shell out millions of pounds of bill-payers’ money? In fact:

“Another way of making the same point is that instead of deploying subsidy requiring energy production systems now we should be, assuming we are going to do anything about climate change, be putting those resources into the R&D of renewable systems so as to get them to economic efficiency that much the faster.”

On the same day as this post went up, Timmy put the following up on a post about the NHS:

“For there’s something we learned in the short 20 th century, that period betweem 1917 and 1991. Market based systems improve total factor productivity better than centrally planned systems.”

Put simply, markets are the best tool we have for procuring something that we want more cheaply. If we want good quality healthcare that’s free at the point of use, then the cheapest way of ensuring that is by permitting competition within the NHS. If we want cheaper wind turbines and solar panels, we need a market. We need a bunch of people who want to buy these things, and people who compete to sell them to them.

I feel confident enough in this to make the following prediction: solar panels will be cheaper in ten years’ time if we fund a market in them than if we spend the same money throwing boffins at the problem. This is because the market will pay people to spend money on boffins too, boffins with stronger incentives to make the solar panels better.

Now, you can argue whether the current market we have in green energy is the correct shape to properly incentivise  increasing productivity. What you can’t do is say that we should have a thing and then say that the best way to get that thing is to fund experts to think really hard about the problem, and then say the exact opposite about another thing. I’m quite frankly shocked that Timmy has decided to eschew his own economic knowledge for that of engineer on this point.

I had meant to follow up my earlier post in this series with an analysis of the praxeological approach taken by the Austrian school, but have yet to have the time to properly read Mises. While On Human Action is on my bookshelf awaiting attention, it seems unfair to criticise praxeology without full familiarity with it.

However, Crooked Timber ran a series of posts on David Graeber’s Debt yesterday, and there is much there to consider – and much to leave to one side, such as Graeber’s bizarre insistence the entire international monetary system only exists thanks to the backing of state force. What I’d like to pick up on is, again, his illustration of different models of economic interaction and how they relate to contemporary debate.

Graeber distinguishes between diffuse reciprocity (or as he calls it, ‘communism’), hierarchy, and market exchange. The latter we know and love to a greater or lesser extent, the middle is simply being told what to do with your resources, and the latter is a ‘fuzzier’ version of exchange, in which you don’t exchange anything with anyone for a particular value, but rather distribute your resources to society in expectation that you may, at some point, have your needs looked after in a manner which does not necessarily equate to the value you gave up.

At this point Graeber normally points to primitive tribes to illustrate this model, but I’d like to use an example of something much closer to home with which most people will be familiar. On Wednesday, I brought a box of chocolates into the office for my colleagues, because it had been my birthday two days before. It’s a tradition in the office that the person whose birthday it is supplies the chocolate or cake, which works in reverse to the standard tradition of presents for the birthday-haver.

Now,  my action would be seen as irrational from a market-exchange point of view. I do not receive anything directly in exchange for my submission of chocolates to the office society, nor do I guarantee that the chocolates that others purchase for their birthdays will be of the same quantity or quality as the chocolates I buy. I do not even guarantee that others will buy chocolates; I do not have access to information about my colleagues’ birthdays, and so do not know who is shirking their chocolate-buying responsibilities. However, I am content to enter into this fuzzy exchange, which is not with any one of my colleagues, but rather with all of them. On the Austrian view, this is irrational.

You could go down the Polanyi route and say this is because I’m embedded in social networks, but this is tantamount to saying that social networks make one into a non-rational exchanger. You could talk about game theory, but that rather presumes that there’s a hell of a lot of processing going on inside my head that I don’t have access to, which is something you’d have to prove. Instead, I want to outline why this is a problem for the Austrians, one based on the understanding that Man is rational, and that so is a person, but a human is not.

It is irrational for me to buy chocolates for my colleagues, but it is not irrational for a species to share resources; in doing so it avoids substantial risk. However, describing a species as rational seems odd. Or does it? Is there some process whereby individuals can be selected for the contribution they make to the survival of the species, rather than just the propagation of their own particular genes? We could perhaps call this process ‘evolution’. Such a process would need to include some way to ensure that any one individual was not being short-changed by this sharing of burdens, which we could call a sense of unfairness. You could certainly apply game theory to it, which would perhaps allow us to describe it as ‘rational’ for a very narrow definition of the word.

Therefore, our genes and their expressions in emotion and instinct can be seen as rational if one assumes their goals are the continuation of the species, rather than a particular individual, although one should of course be careful to avoid teleology when talking about such things. However, this presents a problem: the goals of our genes which relate to the survival of the broader species may not relate to our particular goals as an individual. They are expressed to our consciousness as emotion and instinct, and our rational pursuit of our individual goals may come into conflict with the evolutionary goals to which they point. So while we can be rational about our own goals, and our genes as expressed in instincts like reciprocity could be construed as rational from the perspective of the species or society, the package that is our mind and our emotions together – i.e. our entire self – is not.

This is a problem for Austrians, because they assume that man as a rational being will always have a single prioritised goal. But we are not simply individuals, but expressions of a species too, meaning that we are incapable of having that single goal. This is not a conflict of instinct and reason, but of competing rationalities, bound together in a single form. And so, I buy chocolates on my birthday, having been assured by my instincts and similar instincts in my colleagues that this is a good thing to do.

Athena Shrugged

January 19, 2012

Yesterday’s strike by the modern world’s gatekeepers of knowledge was fascinating, both from a professional campaigner’s perspective and for those of us with an interest in how intellectual property rights play out in the modern world. Whether it achieves its aim has yet to be seen, but the language used to describe it by its opponents is indicative. Phrases like ‘an abuse of power’ and ‘cyber-bullies’ are strongly reminiscent of the language used by opponents of trade unions to condemn withdrawal of labour. Indeed, it’s fairly clear that Wikipedia at least was able to leverage its position as a primary source of knowledge for political purposes, in much the same way as the public sector strikes used the withdrawal of public services as a political weapon.

Of course, there is absolutely nothing wrong with this – politics is part of the competition for limited resources, and condemning Wikipedia for using the levers at their disposal is comparable to condemning the film industry for buying access to lawmakers via their trade association, the MPAA. Attempting to define your opponents’ actions in the political sphere as immoral is often a way of attempting to limit their success. The condemnation of campaigning undertaken by tech companies and web services is in many respects a recognition of the failure of the likes of the MPAA to properly engage the public over the changing definition of intellectual property. This failure is hardly surprising, given that the MPAA’s position is unsustainable.

In order to understand why, it’s important to consider why intellectual property rights are valuable in the first place. In enabling people to profit from their inventions, they directly encourage innovation and are arguably a prime driver of economic development. While they are a constraint upon freedom inasmuch as they prevent people from making whatever they want, they are a reward for something so valuable that they are worthwhile constraint.

However, in the digital age, the cost of production of content can be so low that a financial reward is unnecessary to facilitate innovation. The serried ranks of Wikipedia’s editors carry out their work on an unpaid basis for little greater reward than internet glory. Running costs can be covered by donations from those who want to see that service continued, in much the same way as charities function. This model can even apply to more labour-intensive digital products – consider this paean by the New York Times to the video game Dwarf Fortress, whose developer is funded entirely by donations. You cannot recoup costs from donations if you are not the original distributor of a product. No-one is going to donate money to someone who simply copies Wikipedia onto their own website. This new business model makes profiting from IP theft incredibly unlikely. Only the innovator will see a return. It is those innovators who went out on strike yesterday, in response to an attempt to make this new model impossible.

The MPAA’s preferred business model, if enshrined in statute, would put a halt to a wholly new model of rewarding innovation. The net cost to society for doing so may be significant. If the MPAA’s members believe their products are strong enough that people would seek to support their continued production, then I would urge them to let the market decide, and not hide behind regulation.