Patronage as a Mechanism for Socialism?

It has become quite clear to me in my research that most expressive works (art, literature, music, film, science, etc) always have been, and probably always will be, funded by patronage. The key question, which has been answered differently according to the historical evolution of culture, technology, and the extent of the market, is who should be that patron? Wealthy elites, as in the Duke of Tuscany sponsoring Galileo or Pope Julius II sponsoring Michelangelo? The government, as in the National Endowment for the Arts or the National Science Fund politically allocating grants? Publishers, as in the Big Six movie studios or the Big Five record labels who buy copyrights from artists to distribute their work? The crowd, as in Kickstarter and Indiegogo who collectively chip in small donations?
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I only recently realized that there is an obvious parallel here between the temporal structure of patronage and the temporal structure of wages in production. In patronage, the patron pays the artist’s fixed costs up front, the artist takes time to produce, and then the work is finally sold and distributed (depending on the type of patronage above, either by the artist or patron). In exchange for covering the artist’s expenses, the patron contracts for some portion of the gains, either in royalties, merchandising rights, prestige, rewards (on crowdfunding sites), etc, until the fixed costs have at least been recouped by the patron. During the time of actual production (days, months, years), the artist sustains him or herself on the advance furnished by their patron.
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This might seem somewhat trivial to economists, as obviously the patron-client relationship is a form of entrepreneur-laborer relationship and is just a firm by another name. But I find it interesting that a lot of the crude arguments for socialism emerge from misunderstanding this critical market relationship (of employer-employee). When I say socialism, I do not mean a superior, comparable economic system to replace capitalism (such as what emerged from the socialist calculation debate), but that emotionally-charged pseudo-economic lamentation of the ills of capitalism we are all viscerally familiar with. Our hearts may sympathize, yet those trained in economics know to trace out incentives and consequences and recoil from the fallacies of such undisciplined thinking.

Socialists, particularly of the Marxian variety, argue in this fashion that (1) workers are the ones who make all of the goods, and (2) do not even receive enough wages to buy back the product, hence (3) capitalists are exploiting them by appropriating “surplus value” generated beyond what laborers are paid.
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These claims, of course, misunderstand the time structure of production: {Econ 101 lecture} Laborers, just like other owners of the factors of production (landowners, and capitalists), demand to be paid wages before the product is ultimately sold in the market. Imagine a world where nobody is paid until products were finally finished and sold on the market, years later — nobody would work because nobody could pay the bills. Thus, laborers are paid wages regularly, landowners are paid rent regularly, and capitalists (anyone who lends money) are paid interest regularly for their time services. There is little risk that these factors will not receive their payment (assuming the business at least breaks even). All of these are treated as costs to the entrepreneur (which is functionally, if not personally, different from the capitalist) who manages the enterprise and bears all of the risk. After all of these costs are paid, if (and that’s a big if, as the overwhelming majority of businesses have costs exceeding revenues) there is any revenue left over, they are earned as profits for the entrepreneur. That is, the entrepreneur (aside from their own laboring wages) only earns a return if the product is successful and society values the product more than its inputs. As for buying back the product, laborers marginal productivity contributes only a fraction of the total market value, combined with the shares going to the marginal productivity of landowners, capitalists, and entrepreneurial stewardship. Further, the incomes of workers allow them to purchase other products, as one is required to produce something (at minimum, rent out one’s labor services) in order to exchange with others to acquire the goods they desire. {\Econ 101 lecture}.

It is also a common trope that artists do not like capitalism because it is exploitative. Blake gave us the bleak view of “those dark satanic mills,” Dickens caricatures greedy capitalists like Scrooge in stark contrast to the wretched underclass of industrial England, and Sinclair churned our stomachs at the “Jungle” of working at a meat processing plant.

In more modern times, we have everything from the modern hippy/hipster subculture to Rage Against the Machine to Picasso. If we were feeling charitable, we could extend the definition of “artist” to Chomsky, Derrida, and all those philosophers of the varying branches of postmodernism that deconstruct modern capitalist society from all angles. Perhaps everyone has different experiences, but to think of the average “artist,” the mind’s eye tends to conjure up some combination of a bohemian “misunderstood” young 20-something, weighing invectives against the corporate media, industrial exploitation, or environmental degradation by unregulated free markets running amok.
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Might the patronage relationship be a mechanism by which artists and other bohemians, who are popularly known to identify with the political left, discover or craft their ideologies and identities against capitalism/the system/the man? Artists are, from their perspective, actually the ones doing all the work and producing the final product (be it a painting, a novel, a song, their part in a film, etc), and yet serve their bosses (patrons, studio executives) who dictate the direction of their work, sitting high and mighty on a paycheck probably much larger than their own (for apparently doing nothing of value in view of the artists). Would not this relationship color how they view value, production, and markets?
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I am not saying that all artists are political leftists, or even if they were that it is wrong, or that all artists misunderstand how economies operate. I don’t know, or think, that artists historically hated their patrons, that Da Vinci hated the de Medici. It’s perhaps more plausible today where artists become managed by faceless megastudios with political leverage, who start to look more and more like “the man.” But this seems to me to be a plausible mechanism for how art and artists tend in the aggregate, to take leftist views on culture and economics.
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Is it plausible? Or am I being just as apophenic and myopic as I am claiming some artists are?

Ancient methods for modern times: Team suspensions in cycling

Looking back on history we find many examples of group punishment whereby an entire community could be held responsible for an infraction by one of its members. Though this seems patently unjust to modern tastes, there was a logic behind it: if the keepers of the peace are limited in their capacity to detect and/or punish crimes, group punishment incentivizes the other members of a potential offender’s community to deter breaches of the peace before they happen. After all, they are close to the potential offender and have much more influence on his behavior than a distant peacekeeping entity. I am not suggesting, of course, that this is always a good policy. Punishing a community for one member’s rebellion against a tyrant is unjust all around. But inter-community murders and another genuine crimes had to be prevented somehow, and with limited law enforcement resources group punishment was often the most efficient method. Thanks to the growth of technology and civilization it is no longer common practice, and I am glad for it, but I don’t condemn the tool for all the ways in which it was used.
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There are instances in which it may still make sense, and one of these was announced today by the Union Cycliste International, the global governing body of competitive cycling. Even people who are not fans of the sport are aware that cycling had, and possibly continues to have, a serious doping problem. (Note: this is not unique to cycling, but it was certainly a more serious problem in cycling than in most sports as far as we know, with former riders from the 1990s claiming that 60-70% of the peloton was doping in major races.)
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I should say first that even though at first I refused to believe Lance Armstrong was doping, eventually the scales fell from my eyes and I have a much more realistic view of the subject now. I recognize that it is still an issue, although I think the UCI has made great strides in reversing the decay of its product. As evidence we no longer have large, musclebound riders with time trial physiques like—to use a completely random example, alleging nothing, I assure you—Miguel Indurain absolutely crushing riders whose body types are better suited to climbs on major climbs. The record on Mont Ventoux, a legendary climb in the Tour de France, was set in the suspicious year of 2004 and has not even been approached since.

Now with the obligatory defensive stuff out of the way I can get to the meat of the post. The UCI announced many changes to its doping procedures, but the one that caught my eye the most was this:

Team Suspension

The UCI has adopted new measures relating to teams and their responsibilities:

Team Suspension
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If two riders within a team have an ADRV [= anti-doping rule violation – RFM3], the team shall be suspended from participation in any international event for a period determined by the UCI Disciplinary Commission. The suspension will be between 15 days and 45 days.

If there is a third ADRV, the team shall be suspended for between 15 days and 12 months.

Fine for UCI WorldTeams and Pro Continental Teams

In addition to the suspension above, UCI WorldTeams and Pro Continental Teams shall pay a fine if two of their riders have ADRVs within a twelve-month period. The fine will be 5% of the annual Team budget.

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For much of the golden age of doping the process was a team effort. Occasionally individual riders would dope on the sly, but to use the most famous example Lance Armstrong’s US Postal team was said to have an organized team doping effort involving not only the riders themselves but the management and support staff as well, and the overall pattern of violations and confessions confirms that they were not alone.

The standard procedure when a rider flew too close to the sun and got burned in doping controls was for the rest of the team to deny they had any knowledge of it and to say it was the rider’s own poor individual decision. As we have learned, this was usually a bold-faced lie. But the value of group punishment holds even if it had normally been the truth. The fact is that doping can be very hard to detect. The reason it became so widespread was that the doping technology was several years ahead of the testing technology. Even today smarter dopers can minimize their risk with well-known methods.
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The UCI has been slowly ramping up the punishments for doping but so far they have all applied only to the riders themselves, although certainly teams do not like the negative publicity they get when the media and fans rightly assume that the incident is probably not isolated. It has had some success (as evidenced by the above link to Mont Ventoux times) but it is not quite enough. There were several cases in the 2014 season that did further damage to the image of the sport.
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Given that it was rare after the early or mid-1990s for doping to be an isolated event on a team, and that teams were all to often incentivized not only to shield their riders but to actively promote doping, as they suffered no severe penalties as an organization for doing so and often won great accolades and bigger sponsorships, this should have been implemented many years ago. Teams are in a much better position to deter doping than the limited amount of doping controls the various agencies that govern the sport nationally and internationally are able to perform. To use this capacity for a result that the consumers of the product prefer is a wise move. It is much more efficient for teams that are already constantly in contact with riders to monitor them at almost no extra cost than for the UCI to do so with far less success and at much greater cost. Sure, it was fun to see record after record broken twenty and fifteen and ten years ago, but the consumers (i.e. fans) of cycling have generally come to a consensus about the product they demand, and it does not include doping.

This Month in IP Insanity

Partially because it’s too difficult to keep up with complete and snarky commentary every time there is a development or anecdote of intellectual property’s use and abuse, and partially because it seems more asinine and important when these anecdotes are collected together, I will start a monthly (maybe weekly in the future) list of IP developments. In this past month:nike air jordan 16

  1. Keurig automatic coffee machines copyrighted their coffee packets and implemented DRM software to ensure that no non-Keurig-licensed coffee packets can be used. In response, copyright hacktivists uploaded a video detailing a simple fix to trick the machine into accepting generic coffee, to some appropriate music.
  2. As part of an obvious ploy for protectionism, the Spanish government passed a new law requiring Google to pay domestic content producers to include their content (local news). Google announced it would cancel its Spanish news service. The rest of Europe, struggling to keep up with U.S. tech firm dominance, is paying close attention to the results. Speaking of which…
  3. This is from November, but important for its sheer ridiculousness: Taking a photo of the iconic Eiffel Tower in Paris at night is a criminal violation of copyright. During the day, you’re good. Good thing international copyright law is becoming increasingly based off of the French conceptions of copyright…
  4. NASA recently emailed a wrench to the International Space Station. “Emailing,” means emailing the design for the wrench, which was fed into and printed from a 3D printer in the ISS. How long until consumers have 3D printers, and the copyrights and copyfights over the “blueprints” become the next legal arena?
  5. In the aftermath of the Sony hack attack, we find out that the company itself violates copyright while producing movies, and would face the same punishment as a pimply teenager downloading a few songs. The system works!
  6. Apple has recently patented a “pen-like device” indicating they may try to get into the note-taking business.
  7. We find out that Miley Cyrus’ famous “Party in the USA” was actually written by Jessie J, who was able to pay her bills for 3 years with the rights to those transcendent lyrics.
  8. The big kahuna, the galactic haven for filesharers, the Pirate Bay has been taken down after a raid by Swedish police. The actual domain remains online, with a pirate flag waving defiantly along with a clock counting the days since the raid. Of course when you take down one head of the Hydra, two more appear, though it’s anyone’s guess which ones are good and not malware-plagued. TPB themselves finally made a statement saying their future is uncertain, but their original task was accomplished, hopefully a new and better system can take its place. They opened up the source and made it freely available to all, so that millions of people can make their own “Open bay.”
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  10. And, what else is new, Game of Thrones is the most pirated show of 2014.
  11. If you’re a more legal minded court-follower, here’s a list of the top 10 major IP cases of 2014 from someone more qualified than me.

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Hidden Assumptions of Public Goods and Information

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This is another post on public goods inspired in part by Santiago’s previous post on the under provision of entrepreneurship as a public good argument. I admit that this post does not fully respond to the precise argument, as that would require a more fundamental critique of equilibrium analysis (hence, a potential future third post on this), but it’s still necessary to flesh out a more robust view of public goods.
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Here, I want to focus on another aspect of public goods theory, as applied to a particular type of “good” – information. This is equally applicable to things that would today be patented (inventions) or copyrighted (creative expressions) under intellectual property laws, my research area, but also to information itself, as is disseminated via the price system.

In many ways, information is the purest (only?) public good. If we apply Samuelson’s (1954) typical public goods analysis, we find that once information is produced, it is instantaneously available for everyone to use simultaneously (non rivalry) and it’s damn near impossible to contain the spread of information to prevent others from using it (non excludability).
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Now, to be complete, both the inputs to producing information (the research and development expenditure, the erection of a specific complementary capital structure), and oftentimes, the products that result from produced information (physical products born of invention, CDs, DVDs) are excludable, if not also rivalrous. There are complications, but it’s largely the information itself that is the “messy” part of the economic analysis. Thus, following traditional public goods/welfare economics theory, the market will under-provide information (and inventions and creative expressions, etc).
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Naturally, any of us at this blog and many of our colleagues, friends, and readers would turn to public choice (sure government could try to correct this under-provision, but is the benefit not outweighed by the cost and risk of the system being abused/captured/used for rent-seeking?) or market process analyses (how such interventions would distort the price system’s ability to disseminate distributed knowledge by affecting entrepreneurship). For the first, you could look at Boldrin & Levine’s masterwork, for the second, might I humbly suggest my forthcoming article.
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However, I want to see if we might address the common argument with a neoclassical framework before resorting to these other (valid and complementary) perspectives. As I argued previously, the traditional theory is exogenous, where the conclusion of under provision logically follows from the way we define goods as inherently possessing particular qualities. Likewise, in this case, producing information supposedly exhibits a free rider problem because the non rivalry and non-excludability prevents the producer (discoverer/inventor/artist) from capturing the full social value of their information, as it is largely dissipated away amongst the rest of society (including rival producers).

Yet, as Richard Wagner (2012, 2013) argues, the free rider problem is not inherent in the provision of the good itself, but is an “artifact of particular institutional assumptions.” The true problem is that there is some inalienability of ownership over the good, which is often the result of some institutional failure, often in the public realm.

In the traditional view of information, there seem to be a number of implicit assumptions that are unwarranted and must be jettisoned. The usual story seems to assume two things (in addition to non-rivalry & non-excludability):

1. Once an idea is discovered, it is instantly and costlessly broadcasted anonymously to everyone

This statement has a lot of moving parts to it that need to be dissected. First, ideas are rarely broadcasted like a TV-show over the air out of NBC to all who have a (legal or illegal) receiver. Furthermore, those ideas that are broadcasted do not reach everyone. Take blogs for example, the paramount form of hailed modern citizen-journalism, open to all who have internet access (assuming it is not passworded or private). Most blogs will ultimately be accessed by a select group of people.
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This leads to the second point, that only some interested minority will receive any given idea. Tune into C-Span at any random time during the day. This is the Samuelsonian ideal type: a speaker is literally broadcasting ideas to everyone watching. But notice how many empty seats there are in Congress, not to mention the millions of Americans (I venture to say 99%) who chose not to watch C-Span, even if they were somehow all made aware of the schedule of speakers and topics.

Third, ideas are rarely anonymously spawned and disseminated. One can think of “memes” on the internet. Few people know who started the “Doge” meme (though Know Your Meme is doing the Lord’s work trying to find out). It obviously passed through a network of people commenting and sharing jokes on places like Reddit, which got out to 9Gag, and Facebook, and finally even U.S. Senators start using it (when you know it’s time to abandon ship). Though, in principle, anyone with internet access could potentially discover it, it is not until it flows through channels of social networks that it becomes “a thing” and is copied, remixed, and parodied.

Finally, ideas are not disseminated costlessly. Perhaps this is not a large effect, and there are plenty of cases where they could be diffused at negligible cost, say if J.K. Rowling stood on a soapbox in Trafalgar Square and shouted out the text of Harry Potter to passersby. But there still needs to be strong investments to generate hype and advertising. Imagine how much harder it would be for her, further, if she did this before anyone had heard of Harry Potter. The most obvious example of this effect for us is our capacity as educators. The failures of us economists to inform and teach the public about economics, despite our massive investments in teaching capital makes this plainly obvious. Any of us will tell you that getting our students interested and having them actually absorb and learn the information is not easy or costless.

We also have to worry about potential distortion from transmission. This is the classic “telephone game” dilemma we all played in elementary school: – in sending a complex message across many people, the message gets distorted, misremembered, ad libbed, or even (from the joksters) intentionally altered for comedic effect. Take a look at news reporting of major events and scandals. Often the news media (whether intentionally for ratings or genuine mistakes) focuses on some sound clip or particular aspect of a message and distorts it. The missteps of the news media and social media in identifying the 2013 Boston bombing suspect are instructive here. Even in the internet world of costless CTRL-C CTRL-V, there are problems.

2. Once aware of the idea, all people value it highly enough to costlessly consume it

I already mentioned that not all people are going to value the information highly enough to use it (let alone highly enough to find it profitable to use when its use comes with a significant cost). Even once information is spread to another person, it is not costless to consume and utilize it. Suppose Apple plans to produce a new i-Hologram which creates an internet-connected personalized avatar of yourself in 3-D space. It’s going to revolutionize the market and everyone will want one. That sounds like a nice profitable idea, let’s get in on that, you say. Well how would you go about doing that? Even if you got your hands on one legally before it hit the market, you would have to reverse engineer it. That’s not to say it can’t be done, even done easily, since this clearly happens in the real world. But it is not costless. 

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Once information is reverse-engineered and replicable, it still has to be produced, which requires high investments in a complementary structure of capital with specific uses directed at producing that new product. Again, these costs are not always prohibitive. If Merck reverse-engineers the formula for Phizer’s secret new diet pill, they probably have the machinery and the human capital to replicate it soon enough. But again, it is not costless. And Merck will still be the first-mover in the industry. While they will not be able to capture all of the potential profits of their new diet pill (because of Merck and generic knockoffs), they still may capture enough to make the pill profitable and worth producing for the public.

And to return to the Apple example for a moment. Even if your startup company is able to copy and produce the new hologram device and cut into Apple’s profits, many people will still want to buy Apple’s polished product with an established brand and reputation. Who the hell are you?

Lastly, one reason that discovering and using ideas is not costless is precisely because firms recognize the possibility of lost profits from reverse-engineering and have made contingency plans. To say nothing of patents or copyrights, firms use contracting devices such as non-compete clauses and non-disclosure agreements, and make other attempts to keep their discoveries from spilling out by keeping trade secrets.

In the end, relaxing these assumptions and including a number of types of information and transaction costs can lead to a more robust understanding of public goods problems and information. These also give rise to a number of institutional forms which manage these issues to overcome the free rider problem. Ultimately, our view will not be complete until we address these institutions, as Wagner puts it best through example (2013, 13-14):

Suppose, for instance, that a mayor forms the idea of hosting an open-air music and arts festival under the presumption that residents of the city would value that festival sufficiently highly to make the event worthwhile. Institutionally, how might the mayor go about doing this? Within the spirit of anonymity and free riding, the mayor might install collection boxes in private places and ask residents to make donations. How much or how little a person donates would be known only to that person…

Yet no sensible mayor would operate in such a fashion. The mayor would enlist allies who were of a similar mind about the festival, and these people would in turn establish an architectural pattern of participation that would be far removed from anonymity. That architecture could entail cellular patterns of discussion and contribution where friends ask friends for contributions. It could also entail publicity regarding the identity of contributors, perhaps even ranking them by contribution. In these and numerous other possible ways free riding would be obviated. In any event, an entrepreneurial mayor would never elicit anonymous donations. Instead, sponsors might be solicited, with those sponsors given various forms of publicity. While the festival might be open to all, there could also be places where seating was reserved for patrons who made significant contributions to support the festival. We would also expect to find that those who made larger contributions were those who valued the festival and the associated activities more highly. Under an entrepreneurial institutional arrangement, organization of the festival is possible according to the benefit principle, and the free-riding problem is avoided. Whether the resulting pattern would correspond to some presumptions of postulated equilibrium is impossible to determine because those postulated conditions are just theoretical constructions that do not have existence independently of the relevant process of social organization.

Samuelson, Paul A. (1954). “The Pure Theory of Public Expenditure,” Review of Economics and Statistics, 36, 387–389.

Wagner, Richard E. (2012). “The Institutional Framework for Shared Consumption: Deemphasizing Taxation in the Theory of Public Finance,” Public Finance and Management, 12, 5–20.

_______. (2013). “Public Finance without Taxation: Free-Riding as Institutional Artifact,” George Mason University Department of Economics Working Papers, 13-05.

What is a Public Good, Anyway?

This will be the first of a two or three part series on public goods as inspired by Santiago’s recent post about the argument that entrepreneurship is a public good that is under provided by markets.
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I argue in “Public Goods” or “Good for the Public?” – Endogenizing Public Goods (currently under review) that our view of “public goods” as economists is fundamentally incomplete.
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Typically, we define public goods technologically, as any good that exhibits non-rivalry (my consumption does not prevent you from also consuming) and non-excludability (I cannot prevent you from consuming). Look in every economics textbook and this is what you will find, along with examples of parks, national defense, tornado sirens, etc. I call this the “exogenous” theory of public goods — we automatically know what goods are “public” by the very way we define them. Public goods theory and welfare economics argues that in the presence of goods with these features, markets under provide them and therefore the government must intervene somehow to increase provision because they are socially valuable.
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There are a number of problems with this view that many scholars have already found. I won’t spend much time on them, and simply catalogue them as follows (for references and elaboration, see the paper):

  1. Private markets and voluntary organizations do provide public goods
  2. Governments largely provide private goods, not public goods
  3. Many historical cases of government correcting market failures were just ex-post facto justifications for rent-seeking
  4. Impracticalities of mundane positive externality compensation
  5. Distortions of taxation and political allocation
  6. How do we know what is efficient/optimal?

One of the more fundamental issues is that somewhere along the way, economists in public finance and welfare economics conflated positive explanations of what government actually spends its money on with the theory of public goods–a normative theory of what government should do. (Perhaps here is where Santiago will argue this is precisely why we must jettison the normative theory entirely.)

What is a public good, much like the degree of the externality it poses, is often subjective. Suppose Bob is a fervent vegetarian, and does not believe anyone should be allowed to slaughter animals. Ann, on the other hand, is carnivorous and believes that everyone should be allowed to consume meat. To Bob, a law that prohibits slaughtering animals is a public good (under the exogenous definition): everyone can simultaneously enjoy living in a society where animals are treated ethically, and (assuming perfect enforcement) no one can prevent others from that enjoyment. Ann on the other hand, would view this law as a public bad, as it creates a negative externality (from her view) on everyone. Perhaps a law affirming meat-consumption, maybe even a subsidy to meat-producers, would constitute a public good for her.

Perhaps that example is silly and hyperbolic. But it can be applied to nearly any partisan wedge issue today and be perfectly accurate. Take gay marriage: opponents of gay marriage argue that a law permitting it would be a public bad and harm the very moral fabric of society, while proponents argue that having such a law would be a public good because everyone would live in a tolerant society (not to mention the concentrated benefits upon gay couples). Both of these arguments fit perfectly well within the exogenous framework of public goods (nonrival, non-excludable benefits/harms), but they reach contradictory conclusions (perhaps because they are arguing over different goods).
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For a more robust (and positive) view, I argue that we need an “endogenous” theory of government activity, that incorporates the fact that what goods are provided by the state is a complex product of political entrepreneurship and the very heterogeneous preferences I just described:

In laying out a theory of public goods, it might be useful to start with an analogy to the theory of private goods which may seem tedious at first: Oil in the ground is mere black goo. Were geologists or physicists to discover it first, they may derive technical and conceptual definitions for oil based on its chemical content, fluid dynamics, or other objectively verifiable characteristics. It takes a subjective act of entrepreneurship, however, to make that black goo into something of value for society (beyond mere scientific study). An enterprising individual must recognize, and personally bear the risk to bring about, in hopes of personal profit, the potential benefits of extracting, refining, processing, and selling oil and oil by-products to consumers and other firms as a fuel source to be used to power automobiles, factories, and the modern world. It requires integration with the current capital structure of complementary goods all calibrated to serve the demands of consumers through time. Entrepreneurship is what creates value from land.
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I propose that there is a similar analogy for those types of goods we colloquially call public goods. Welfare economists have formally conceptualized a type of good that exhibits certain technological features (jointness in consumption, high costs of exclusion), and defined it as a “public good.” Operationally, however, there is an implicit understanding that those goods that government provides are public goods, with the technical definition is not necessarily overlapping. Instead, it requires the acts of choice by individuals, that will affect others externally, to consider a good to be worth producing politically or privately. It takes an entrepreneur, often in the political realm, to recognize and bear an opportunity for personal gain, to convince members of the public (as voters, bureaucrats, legislators, firms) that a good must be provided by the government to meet the needs of society. As the realm of politics is largely one of language, it requires considerable rhetorical investment in the scientific language of public goods (the exogenous definition) in order to convince a sufficient number of people that they are “good for the public.” Thus, just as oil in the ground is only given value by private entrepreneurship, I argue that goods only take on “publicness” attributes by public entrepreneurship.
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T-Swift and Spotify are Never Ever Ever Getting Back Together (?)

This comes as a little late, but since I am the occasional fan of T-Swift (much to the chagrin of my girlfriend; haters gonna hate…) and an enormous fan of Spotify, I feel the need to comment. Recently, Taylor Swift has pulled all of her music off of Spotify. She has also taken what appears to be the moral high ground, claiming in a prior op-ed, as so many others have, that music should not be free, and that streaming services like Spotify, Pandora, Grooveshark, and the like are contributing to the music industry’s decline.
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Some have argued that Swift’s move is a shrewd monetary calculation. Billy Bragg argued that she is merely a part of a corporate stunt to exclusively join Google’s new streaming service, though the facts don’t seem to line up. Others say this benefits Apple, who is supposedly about to launch its own streaming service to rival Spotify. In any case, let’s take T-Swift at her word.
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In response, Spotify has published a website detailing how its royalty payments work, and how it contributes to the music industry by monetizing would-be pirates. Spotify has already paid about $2 billion in royalties to rights-holders.
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Roughly, Spotify pays artists a royalty of between $0.006 and $0.0084 per instance played. (In truth, it’s not a flat rate, but is adjusted for certain factors like popularity and country of origin.) Let’s do a few back-of-the-envelope calculations: Take the conservative estimate of Spotify paying artists 0.6 cents per play. Let’s further make the best-case assumption for the artist by saying that if you were to buy that same song on iTunes for $1.99, the artist gets that entire $1.99. Assuming people actually like the song and will replay it on Spotify, it would take about 332 plays to equal that revenue from one person. The upside for Spotify, however, is potentially limitless – assuming someone will play that song many many times over their lifetime, as opposed to the one-time fee for iTunes.
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When we relax the assumption that the artist gets all iTunes revenue, and bring it down to a realistic 10%, that one-time purchase gives the artist about $0.20 per person. This would only require about 33 plays to match. Granted this is a highly simplistic analysis which would obviously differ with bands and their popularity.
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Is this enough for the artist? Probably not. A lot of people have complained about Spotify’s paltry revenue to artists. I don’t know what the “optimal” price for a song is, much less how much is “fair.” But it is clear that Spotify’s model clearly adds value to the industry, and probably even to artists.
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What Spotify is actually hinting at, is that artists are not being hurt as much by streaming services or even by pirates, as they are by their own studios. Artists taking only 10% of the revenues of digital sales is a pretty raw deal. As I mentioned before, perhaps studios serve a legitimate economic function of lowering transactions costs of tapping into economies of scale for distribution. The problem is by concentrating all the money and power into a small handful of firms that control all of the distribution rights in our crazy copyright system is that they end up having the influence to negotiate their massive cut of the rents (and use the political system to do so when the market won’t oblige). This is precisely why Spotify (and iTunes for that matter) can only pay artists such a low royalty. Spotify pays 70% of its revenues to rights-holders, who are are often the studios, with artists getting whatever is left. Despite the value that Spotify seems to be bringing, the company allegedly has yet to make a profit because of these immensely high costs, and some say their model could be inherently unprofitable no matter how many subscribers they win.
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Which brings us back to Taylor Swift’s stand. Time correctly argues that even if Swift’s strategy works, it will not have a wider impact on the music industry. Only someone with who is already successful and has the level of clout equal to Swift’s could hope to make a living solely on digital sales. Streaming helps bands get discovered, and tap into the real money which comes from touring and merchandise. More fundamentally, however, is that streaming services like Spotify are actually incentivizing people to switch from openly pirating music. Forcing people to return to paying for downloads will encourage them to return to piracy, whereas the “freemium” option to stream music for no monetary cost (but suffer through ads) encourages legal discovery and consumption. The sheer convenience might even convince many consumers (as it did for me) to pay for the premium subscription, where Spotify actually earns revenues to pay to artists. Hell, even Pink Floyd, Led Zeppelin, Metallica (!) are now on Spotify.

Free Markets Don’t Provide Enough Entrepreneurship

Dear Reader,
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Please consider the following argument in abbreviated form (original here).
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“Information is a public good because its consumption is nonrivalrous and it is very hard to exclude nonpayers from acquiring it once it has been generated. Thus in equilibrium the market will tend to provide too little information. When an initial entrepreneur discovers a new profitable product (the smart phone or the personal computer for example) he generates information on the profitability of this new product. If there is free entry, other potential entrepreneurs will use this information and will enter the market as producers of this new product. Because the information generated by the initial entrepreneur on the profitability of the new product is non rivalrous and it is very difficult to exclude others, the information generated by entrepreneurship will be under provided. In other words, in a free market, in equilibrium, entrepreneurship will be underprovided. Hence government must subsidize entrepreneurs.”
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What can be said in terms of Public Choice? What can be said in terms of pure theory? Please be social and answer in the comments!

Uber Uber Alles, Or Why We Can’t Rely Solely on Uber to Improve Transportation

The best of all monopoly profits is a quiet life. – Sir John Hicks

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A lot of people who are fans of free markets and technological innovation praise Uber as the poster child of market competition and ending crony monopolies like taxis. The ridesharing service promotes greater resource utilization and echoing the work of Hernando de Soto, brings a lot of dead capital to life, enabling low-income groups to become entrepreneurs in a world where regulation keeps them out. Even the Republican Party is trying to exploit the disruptive dynamism of Uber to claim themselves as “the party of Uber” (even if Uber has been saying things contrary to the GOP’s ideals). Contrast this to a lot of progressives who have made Uber their rallying call against unregulated markets. And yet, even economists widely agree (an unfortunate rarity), that on net, Uber is an improvement in people’s lives, for the obvious reasons.
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I have used Uber about a dozen or so times, and have never had anything short of a wonderful experience. The drivers were always courteous, and many times we have had conversations about Uber, the taxi-monopoly, and the state of technological improvement. It might be where I currently live, but these drivers were ethnically diverse, often second-generation immigrants from North Africa and the Middle East, and some commented about how Uber was substantially improving their even friends and family’s lives back in their home countries. I have even thought, on multiple occasions, of driving for Uber.
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Yet, even as the taxi monopoly is obviously trying to bring Uber down, in a some ways, Uber itself is bringing itself down. Or, at least, it is smearing the ideal that we really want it to be. It’s CEO has been saying a lot of shady things, prompting the media to say Uber has an “a-hole problem.” Uber has been dealing with a lot of criticism over the way it has been engaging with its rivals such as Lyft and Sidecar. It seems Uber allegedly uses a lot of shady tactics to make it more expensive for Lyft. Maybe these claims are overblown or even misrepresented, in hopes to benefit Uber’s rivals.
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None of this is to mention the cries of “price gouging” when Uber multiplies its rates during peak hours, and media attention given to horror stories of short trips with high bills. A friend of mine took an Uber on Halloween night about 10 miles for $250. While as a consumer in that situation I too might be irate, the greater principle of peak-load pricing is perfectly fine by me, it’s even socially beneficial. High prices signal information about relative scarcity, and induce new drivers to start offering their services. While you might save money by taking a cab in those situations, the “cost” you incur will instead be the hours waiting for that cab (if you can get one at all). And then there is the kicker, you can always chose not to take the Uber.
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But the most troubling developments about Uber is that it is starting to play the Taxi monopoly’s own game against its rival ride-sharing companies:

In September, though, the company hired former Barack Obama adviser David Plouffe specifically to work with local governments. “Uber should be regulated,” says Plouffe, who hails the legislation he hammered out in Washington, D.C. as “groundbreaking legislation [that] provides a model going forward.”
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That model is one that gives clear advantages to Uber, which has more market share and political clout than its rivals such as Lyft and Sidecar. What the legislation does is establish “burdensome new ridesharing regulations” dictating minimum ages of drivers and other requirements that will make it more difficult for competitors to catch up to Uber or enter new markets in the first place. (Time

In the end, we must remember that Uber is a business, and the goal of every business is to become a monopoly. The reason Uber has been such a force for good is that it opened up the stagnant monopoly of the taxi cabs to one of convenience and innovation precisely because it stood as a rival competitor. The taxis were able to crush competitors because of the favorable regulation that they were able to co-opt from regulators.

Uber broke this very stable equilibrium because it was able to exploit technological progress in software to come up with a clever way to offer a more convenient service to consumers, and an equally clever way around the pro-taxi regulations: it’s not a taxi service, it’s just a software app that connects people who want to share rides that happens to be in exchange for money, and you cannot hail one from the street.
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But now that Uber has taken prominence over its own competitors, we should not at all be surprised that it would seek to use regulation to favor itself and make its rivals less competitive. Given favorable (but highly unlikely) circumstances, they would become the new taxi monopoly and we would be stuck back at square one. The only way to ensure consumer satisfaction and innovation is by the threat of rivalrous competition. 
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Thus, as economists and advocates of free markets, we must remember to be vigilant of the abuses of individual businesses — we are pro-market, not pro-business. Only through open competition can we enable the wealth-creation that allows us to live the good life. Even the most innovative company will use free-market rhetoric just long enough to allow them to capture enough market share to start turning to the political process to switch from earning profits by creating value for consumers to collecting rents and deterring entrants.
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This is in no way a call to smear or boycott or prohibit Uber or ridesharing. We just have to realize that without reforming the capturable regulation itself, we risk our heroes becoming the villains once they are strong enough.

Equilibrium, Disequilibrium, Non-equilibrium

Equilibrium and non-equilibrium systems have been a recurring theme at many panels in this year’s SEA conference leading me to muse on the differences between them. Please note that non-equilibrium is not the same things as disequilibrium. The difference being that disequilibrium is a property of some systems that have (stable or unstable) equilibria, usually used to characterize the dynamics of the system when outside of equilibrium. On the other hand non-equilibrium systems are systems that do not posses equilibria.
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One common, avoidable, and completely unnecessary confusion is that the way one can tell the difference between disequilibrium and non-equilibrium is through stability analysis, of the type that can only be carried out with mathematical models. We must not confuse physics envy for analytic sophistication. This view entails confusing non-equilibrium for systems with unstable equilibria (typically by analyzing the properties of fixed points in dynamic systems, Strogatz has posted all his lectures online, Yey!). But non-equilibrium is a category that applies to systems, not a property of those systems that have equilibra, a category mistake.
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Consider the definition of economic equilibrium: the vector of prices and the vector of quantities such that all possible gains from trade have been exploited. Two things that have been extensively pointed out by others are immediately apparent, equilibrium can never describe any real economic system unless all change is considered to be exogenous to the system. It then follows that if we assume that all change is exogenous, entrepreneurship is a disequilibrium path that characterizes the response of the system after it gets jolted out of equilibrium. In an equilibrium universe entrepreneurship is the name we give to disequilibrium, which is then by definition always equilibrating. This is as formal a definition of a closed ended economics I can give imagine. An open ended economics can then be defined simply as a non-equilibrium economics, and while it may seem difficult all it entails is to recognize that economic models are not representations of reality in the same sense that physics models are. Entrepreneurship is driving the dynamics (but what of coordination? more on that to come) of the non-equilibrium system, while in equilibrium/close-ended economics, entrepreneurship is merely the name we give to disequilibrium adjustment of the system.
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Is there a pendulum of low-skilled workplace satisfaction?

One of the reasons given for why we see minimum wage increases leading to smaller drops in the quantity of labor demanded than we’d expect from a simple supply-and-demand graph is that employers don’t like to fire people. It’s easy to imagine that this argument has some merit. How would you feel breaking the news to somebody that he doesn’t have a job anymore, especially a low-skilled worker who was performing acceptably before the increase, especially knowing that you’ll be the one blamed for it? I think this effect is probably weak—the people who would be long-run managers would end up being the kinds of people who accept having to do their unpleasant duties—but it could have some non-negligible effects at the margin.
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A complementary argument is that employers adjust to MW increases by working employees harder to get more value out of them once they have to pay them more. (I also think this is an important puzzle piece.) Putting together the first and the second arguments, it seems like there’d be an important consequence of MW increases in low-skilled environments: more workplace tension. This is hard to measure, of course, but not impossible. Perhaps some workplaces already do this. If this idea holds water, periodic employee surveys, including managers, over a long enough timeline could show periods of increasing dissatisfaction and returns to stable levels of satisfaction. This would help fill in some of the details about labor force adjustments that many researchers are currently grasping at. Again, I don’t expect to see large changes, but they might be big enough to observe.
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Readers, I’m not wedded to this idea but I think it’s interesting to consider. What do you think?where to buy oakley sunglasses