James Fallows on surveillance’s effect on the commercial Internet

I’m pleased that someone picked up on my offhand mention of the likelihood that deep and broad NSA surveillance will have a negative effect on the value of the Internet as a commercial platform for value creation and posted the link on reddit. Thanks!

Since I didn’t intend to provide any in-depth analysis on that point, and some of the reddit commenters are taking me to task for not doing so, I encourage reading James Fallows of The Atlantic on this point: Why NSA Surveillance Will Be More Damaging Than You Think. For example:

The problem for the companies, it’s worth emphasizing, is not that they were so unduly eager to cooperate with U.S. government surveillance. Many seem to have done what they could to resist. The problem is what the U.S. government — first under Bush and Cheney, now under Obama and Biden — asked them to do. As long as they operate in U.S. territory and under U.S. laws, companies like Google or Facebook had no choice but to comply. But people around the world who have a choice about where to store their data, may understandably choose to avoid leaving it with companies subject to the way America now defines its security interests. …

What governments do eventually becomes known. Eventual disclosure is likely when a program involves even a handful of people. (Latest case in point: Seal Team Six.) It is certain when an effort stretches over many years, entails contracts worth billions of dollars, and requires the efforts of tens of thousands of people — any one of whom, as we’ve seen from Snowden, may at any point decide to tell what he knows.

In launching such an effort, a government must assume as a given that what it is doing will become known, and then calculate whether it will still seem “worthwhile” when it does. Based on what we’ve seen so far, Prism would have failed that test.

 

History of economic thought course video: John Stuart Mill

Lynne Kiesling

You may know John Stuart Mill the utilitarian philosopher, the JS Mill of On Liberty and of Utilitarianism. You may know him as the philosopher who can’t hold his shandy in the Monty Python philosopher’s song.

What you may not know is how important an economist Mill was. He made some original contributions that bridged from the classical economics of Smith and Ricardo (and others) to the subsequent marginal revolution of Jevons, Menger, and Walras.

You can read some of them yourself in Mill’s Principles of Political Economy (1848), available at the Library of Economics & Liberty.

Google Reader coda: will it become social media?

Lynne Kiesling

Apparently I’m not the only one musing on the relationship between social media and RSS readers. Since I wrote the previous post, this Ars Technica post has suggested that Google will fold Reader into Google+.

To which I respond: Meh. Too social. Too visual. Not mobile friendly because it uses too much screen space (disclosure: Eli Dourado said the same to me on Twitter, and I concur). Not easy to either scan or dig deep or put aside for later. Meh.

Regulation’s effects on innovation in energy technologies: the experimentation connection

Lynne Kiesling

Remember the first time you bought a mobile phone (which in my case was 1995). You may have been happy with your land line phone, but this new mobile phone thing looks like it would be really handy in an emergency, so you-in-1995 said sure, I’ll get a cell phone, but not really use it that much. Then, the technology improved, and more of your friends and family got phones, so you used it more. Then you saw others with cool flip phones, in colors, and you did some searching to see if other phones had features you might like. Then came text messaging, and you experimented with learning a new shorthand language (or, if you’re like me, you stayed a pedant about spelling even in text messages that you had to tap out on number pad keys). You adopted text messaging, or not. Then came the touch screen, largely via the disruptive iPhone, and the cluster of smartphone innovation was upon us.  Maybe you have a smartphone, maybe you don’t; maybe your smartphone is an iPhone, maybe it isn’t. But since 1995, your choice of communication technology, and the set from which you can choose, has changed dramatically.

This change didn’t happen overnight, and for most people was not a discrete move from old choice to new choice, A to B, without any other choices along the way. Similarly for technological change and the production of goods and services. For both consumers and producers, our choices in markets are the consequence of a process of experimentation, trial and error, and learning. Indeed, whether your perspective on dynamic competition is based on Schumpeter or Hayek or Kirzner (or all of the above), the fundamental essence of competition in market processes is that it’s a process of experimentation, trial and error, and learning, on the part of both producers and consumers. That’s how we get new products and services, that’s how we signal to producers whether their innovations are valuable to us as consumers, that’s how innovation creates economic growth and vibrancy, through the application of our creativity and our taste for creating and experiencing novelty.

This kind of dynamism is common in our world, and is increasingly an aspect of our lives that creates value for us; mobile telephony is the most obvious example, but even in products as mundane as milk, the fundamental aspect of the market process is this experimentation, trial and error, and learning. How else would Organic Valley have started coming out with a line of milk that is entirely from pasture-raised cows? (I am happily consuming this milk; pasture-raised cows make milk with more essential fatty acids and conjugated linoleic acid, very important for health)

But this kind of dynamism, while common, is not pervasive. Institutions matter, and in particular, various forms of government regulation can influence the extent to which such technological dynamism occurs in a market. The example I have in mind as a counterpoint, the example I want to explain and understand, is consumer-facing electricity technologies, like thermostats and home energy management systems. For the past several years there has been considerable innovation in this space, due to the application and extension of digital communication technology innovations. But despite the frequent claims over the past few years that this year will be the year of the consumer energy technology, it keeps not happening.

Tomorrow in New Orleans, at the Southern Economic Association meetings, I’ll be presenting a paper that grapples with this question. My argument is that traditional economic regulation of the electricity industry slows or stifles innovation because regulation undercuts the experimentation, trial and error, and learning of both producers and consumers. As I state in the abstract:

Persistent regulation in potentially competitive markets can undermine consumer benefits when technological change both makes those markets competitive and creates new opportunities for market experimentation. This paper applies the Bell Doctrine precedent of “quarantine the monopoly” to the electricity industry, and extends the Bell Doctrine by analyzing the role of market experimentation in generating the benefits of competition. The general failure to quarantine the monopoly wires segment and its regulated monopolist from the potentially competitive downstream retail market contributes to the slow pace and lackluster performance of retail electricity markets for residential customers. The form of this failure to quarantine the monopoly is the persistence of an incumbent default service contract that was intended to be a transition mechanism to full retail competition, coupled with the regulatory definition of product characteristics and market boundaries that is necessary to define the default product and evaluate the regulated monopolist’s performance in providing it. The consequence of the incumbent’s incomplete exit from the retail market suggests that as regulated monopolists and regulators evaluate customer-facing smart grid investments, regulators and other policymakers should consider the potential anti-competitive effects of the failure to quarantine the monopoly with respect to the default service contract and in-home energy management technology.

In August 2011 I wrote about the Bell Doctrine, Baxter’s precedent from the U.S. v. AT&T divestiture case, and how we have failed to quarantine the monopoly in electricity. This paper is an extension of that argument, and I welcome comments!

If you’ll be at the SEA meetings, I hope to see you there; I am headed to NOLA tonight, and look forward to a fun weekend full of good economic brain candy.

Newspaper report implicates politicians, industry insiders in attempt to manipulate renewable credits market

Michael Giberson

Consumers remain wary of attempts to manipulate energy markets, but it can be hard for consumers to tell when markets are being manipulated. For example, JP Morgan has been accused of manipulating the California ISO power market, but the company denies the accusation. The markets are complicated, the regulatory filings in the complaint are less than transparent to non-specialists and not always public, and the disputes can go without final resolution for years.

So much easier for consumers when public officials get involved in market manipulation, because they can be counted on to brag about the manipulation and word gets out. For example, in New Jersey, as the Star-Ledger reports, Gov. Christie held a news conference to publicize his energy market manipulation efforts:

Yesterday, Gov. Chris Christie signed a law to revive the [state’s solar power] industry, which ranks only behind California’s in terms of total solar-energy projects.

The market works because electric companies must buy solar credits, called SRECs, from panel owners on a state-planned market, or produce their own.

But the subsidy plus a federal incentive led to a huge buildup of projects in the state and a glut of SRECs. That drove prices down sharply, leading to fears of solar layoffs.

So legislators and the governor stepped in to dramatically increase the number of solar credits that New Jersey’s electric utilities must buy, a move meant to increase prices.

See also the Renewable+Law blog, “Bill to stabilize New Jersey Solar Market Signed into Law.”

It is clear from these descriptions that politicians, working with industry insiders, are working the rules in order to push market prices up. Smells like manipulation to me.