Tag Archives: Economics

Matching and a static environment

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In my remarks the other day about this year’s Roth/Shapley Nobel, I said that I thought the work was important and useful because it led to the implementation of better institutions in situations in which prices are unlikely to emerge organically. A post from Andrew Coulson at Cato at Liberty fleshes out some reasons why his enthusiasm is limited. In his post he describes some of Roth’s work in school-pupil matching, and he observes that

The problem is that this approach to “school choice” correctly assumes that the better public schools have a fixed number of places and cannot expand to meet increased demand. So it’s about finding the least-awful allocation of students to a static set of schools—a process that does nothing to improve school quality.

Meanwhile, there is something called a “market” which not only allows consumers and producers to connect, it creates the freedoms and incentives necessary for the best providers to grow in response to rising demand and crowd-out the inferior ones. It also provides incentives for innovation and efficiency. But instead of advocating the use of market freedoms and incentives to improve education, some of our top economists are spending their skill and energy tinkering with theincreasingly inefficient, pedagogically stagnant status quo.

That’s a good point to remember when thinking about matching algorithms and institutional design — if you have a problem, like kidney matching, that is fairly static in its overall nature (although probabilistic in its actual incidence), then yes, matching algorithms are likely to yield higher total benefits/welfare/surplus. But Andrew’s right; when there’s a possibility of increasing the supply of schools or teachers, or to change the quality of them, that’s not a problem where applying a matching algorithm is going to yield as many potential benefits as a market … if you can overcome the political barriers to school competition and choice. Markets yield better outcomes in general in dynamic situations.

In that case, it’s a transaction that’s politically repugnant.

Roth/Shapley Nobel

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Lynne Kiesling

I have little to add to today’s congratulations to Al Roth and Lloyd Shapley for this year’s Nobel; Peter Klein has a useful roundup of links to good commentary, with a namecheck to us, in his link to his discussion of market design back in 2007 (thanks!). Mike’s frequent posts on price gouging and ticket scalping as “repugnant” transactions are an interest shared with Roth, who is himself a prolific economics blogger.

This year’s prize rewards their work in what’s called market design or market engineering, and those names are sufficiently vague to be confusing. As Peter notes in his post and Alex Tabarrok illustrates helpfully, the Shapley-Gale deferred choice algorithm provides a rule by which parties can be matched that yields stable, mutually preferable outcomes. The Wikipedia entry for it also provides a piece of code for implementing the algorithm in a computer simulation. It’s an elegant piece of formal cooperative game theory, which Al Roth applied to situations requiring coordination but lacking prices (i.e., lacking organic markets). His work doing so has yielded substantial improvements in the processes of matching medical residents and medical schools, kidney donors and recipients, and other situations in which coordination means matching. In fact, his kidney swap design has meant many successful kidney transplants, and makes programs like the kidney swap program at Northwestern’s Feinberg School of Medicine possible. While I would argue in favor of kidney markets as a preferable way to coordinate and match (and it’s not clear from any of Roth’s writings that he shares that position), if you are in a situation where better matching can increase total welfare, then designs-rules-institutions such as these are an improvement on worse rules or institutions, such as random assignment or using a lottery.

And that’s an important context in which to think about, and expand upon, the work being rewarded with this prize. This sort of institutional design (because make no mistake, that’s what this is, because it’s designing a set of rules) pertains to situations in which, for whatever reason, organic markets and price signals have not emerged or have not been allowed to emerge. In some cases, such as kidneys, some of us decry the absence of markets while others classify such transactions as repugnant. In other cases, such as medical residency positions, strong social norms and perceptions of fair play preclude the use of cash transactions and prices to coordinate the match; it’s also not necessarily clear that a cash market for such positions would yield a superior match on compatibility grounds. So yes, it’s top-down institutional design that’s meant to address a deliberate set of matching problems. This is a good opportunity for comparative institutional analysis — compare the designed institution that’s been created and implemented top-down with a more decentralized, generalized set of market rules, and/or an actual market with prices.

Methodologically, Roth tests his institutional designs using experiments, a methodology that both Mike and I find quite congenial, and that is well-suited to comparative institutional analysis, although in experiments you do in some ways lose the organic and emergent nature of the bottom-up market process with prices.

Some of my Austrian economics friends are not impressed with this body of work, but I don’t share that opinion. Roth and Shapley are in the mechanism design strand of game theory, which means they take as given the decentralized nature of preferences and information. They are not Austrian, and their approach is certainly prone to Hayek’s (and Vernon Smith’s) “pretence of knowledge” critique that they are constructivist. That said, the Shapley-Gale algorithm and the way Roth has applied it to medical residency and other problems are explicit in recognizing that economic problems are problems of coordination in the presence of diffuse private knowledge. And if we’re being honest we have to recognize that in reality, most institutions/rules systems involve both organic evolution and conscious design.

Antitrust and Google search bias

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Lynne Kiesling

For the past year and a half the Federal Trade Commission has been investigating the potential anti-competitive effects of Google’s search-based business model. The European Union has also been pursuing antitrust complaints against Google. The main accusation is Google search bias — Google’s algorithm prioritizes links both to paid advertisers (which are shaded and labeled to indicate the payment) and to affiliated content sites. Google’s competitors complained to the FTC … but they do the same thing! For example, if you do a stock ticker search for, say AAPL (yes, I’m being cheeky), on Google, Bing, and Yahoo, each one will prioritize its own affiliated finance site, before then listing the sites of their competitors, Wall Street Journal, and so on.

We had a panel discussion on this issue at the Northwestern University-Searle Center annual conference on antitrust economics and competition policy last Friday afternoon, with panelists including Stanford’s Susan Athey (who has done some work with Microsoft) and Google’s Hal Varian and Preston McAfee. The discussion was as informed, informative, and lively as you’d expect.

There’s also a panel debate going on right now in DC in on the issue, hosted by Tech Freedom and including friend-of-Knowledge-Problem Geoff Manne, who has written extensive criticisms of the FTC investigation. I think Geoff has an important point when he asks for evidence of consumer harm in comparison to what a likely antitrust remedy would be. If, for example, the FTC required Google to modify its search algorithm to randomize the top results rather than prioritizing their affiliated content sites, then wouldn’t Microsoft and Yahoo have to implement that randomization as well? And if that’s the remedy, does that make consumers better off or worse off?

I think Bob Hahn and Peter Passell get it right when they say, as they did in a post yesterday at their blog regulation 2point0,

Indeed, anybody who’s been paying attention ought to have figured out by now that information technology is simply moving too fast to allow even the most nimble companies to grab the market goodies and lock the door behind them. …

In a hypercompetitive environment like this, where the product mix sometimes changes faster than Lady Gaga’s wardrobe, antitrust regulators would do well to pick and choose their interventions carefully. And to help get them there, academics really need to provide a more careful accounting of the state of competition in IT.

Hear, hear.

What do you think? Do you think you are “locked in” when you perform a search on a specific platform? Do you just click on the top link? Or when presented with search results do you look for specific sources that have a particular reputation or credibility to you?

Just how “wasteful” are data centers?

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Lynne Kiesling

You may have seen the article in Sunday’s New York Times on how “wasteful” data centers are — they use large amounts of electricity to enable the level of redundancy required to achieve the degree of reliability and uptime that consumers expect from their Internet activities. I put the word “waste” in quotes because I think Don Boudreaux has a point, in his letter to the editor in response to the article: where’s the line between “waste” and “use”? The NYT article presents data center power use as wasteful, implying that the author thinks that they should either figure out ways to deliver the same reliability with less electricity, or that we consumers should change our preferences so we don’t place as much value on reliability. I’ll argue later that data center operators have high-powered incentives to do the former, and as for the latter, I invite the NYT author to imagine how he thinks NYT readers would respond to a slowdown or lack of server availability that made it hard for them to access NYT articles.

Of course the undercurrent here is the argument that the price of our Internet activity does not include the environmental cost associated with power use, and consequently we should use public policy to impose a price on data centers, or on Internet use, to reflect that cost. The article isn’t explicit about carbon policy, but that’s the implication.

My initial reaction to the article was that it was biased and somewhat inaccurate, and that it overlooked a wide array of innovations that chip manufacturers, data center operators, and architects have created over the past few years to reduce power use per calculation as well as overall power use. Fortunately, Katie Fehrenbacher (who is more knowledgeable than I in these matters) had a similar reaction, and wrote up her assessment:

As my headline suggests they sound like the author, who spent over a year reporting out the series, jumped into a time machine and did his reporting a couple years ago. One of the reasons is that both articles so far start with anecdotes from 2006 about Microsoft and Facebook. The data centers that Facebook recently built in Forest City, North Carolina and Prineville, Oregon, are industry pioneers in terms of energy efficiency and openness. Microsoft, too, has more recently pledged to get rid of its diesel generators for its facilities, and has been using less air conditioning in its new data centers.

The data center operators at the largest Internet companies like Google, Facebook, Apple, Microsoft, Yahoo and eBay are so focused on energy efficiency of their newest data centers that new designs are starting to be widely adopted with technologies like open air cooling (getting rid of the huge air conditioning units in these things). New types of low power chips and servers are being developed by startups like SeaMicro, which was recently bought by AMD. The articles so far don’t mention these innovations.

She does, though, think that there’s value in the NYT series because it will shine some light on data center operators who aren’t thinking about energy efficiency and power use. She wrote a 4-part series on data center power use, which I recommend and to which she links in her article.

From a policy perspective, is there an “externality” here to be addressed? Data centers are expensive and take up a lot of space, and if you are incurring the cost of a data center, electricity is your top expense item. Thus firms have strong incentives to minimize those costs while still delivering the services and degree of reliability that they have promised to their customers. That’s a high-powered incentive to pursue energy efficiency innovations with a policy intervention, and that incentive has been inducing those innovations over the past 5 years, as Fehrenbacher notes in her article and her data center series. Companies like Google, Amazon, Apple, Microsoft, and Facebook have been driving those innovations, are in aggregate the largest data center operators, and thus are driving the majority of data center server traffic in a more energy-efficient direction. As is typical with innovation and new technology adoption, others will follow as the innovations are refined and made easier to implement.

Another important innovation that has implications for energy efficiency, but has the Bastiat-esque problem of being unseen, is the dramatic move toward server virtualization in data centers. With server virtualization, data center operators can essentially run several virtual servers off of one physical server. Obviously this increases the computing and storage capacity of the data center without increasing the physical assets, and on balance this means an increase in computing and storage capacity without an appreciable change in power use — more computing per watt of power consumed. In the absence of virtualization, to achieve that same capacity would have required a dramatic increase in physical server capacity, and in electricity use to power those servers. Neither the NYT article nor Fehrenbacher’s series address the role that virtualization has played in enabling capacity optimization and high reliability at lower power use levels. Here’s a concise Green Grid white paper on the subject.

Yes, there is some energy wasted in data center operations, just as there is in every single way that we use energy — we won’t be repealing the laws of thermodynamics any time soon. But data center operators have economic incentives to pursue energy efficiency, and a wide array of inventors, architects, and other entrepreneurs see opportunities in those incentives. We are seeing this process play out before our eyes.

Dolan on the WPTC and energy policy

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Lynne Kiesling

Economist Ed Dolan makes a thorough argument for using the upcoming expiration of the wind production tax credit as an opportunity to rethink energy policy seriously. In particular, his combined focus on energy policy and tax policy, and whether such tax credits are good examples of either (guess what? No), makes for an informative discussion. He also argues that such policy falls short because it fails to focus on the policy objective, which he defines as reducing negative externalities. For that reason, he makes the Pigouvian tax argument.

While he is more confident than I am that we can devise such a tax effectively, identify the magnitudes of such external effects as are Pareto-relevant, and implement them in a politics-and-lobbying-light way, I think it’s worth considering the extent to which such a proposal would be an improvement on the subsidies for commercialization that are the current renewables policy, which are an abomination of rent-seeking and inefficiency.

Enron and crony corporatism

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Lynne Kiesling

Rob Bradley has an Econlib essay on Enron, and it’s a good one. He focuses on Enron’s particular form of crony corporatism, its ability to take advantage of regulatory complexity, and the lessons that we should carry forward from the experience:

Enron was essentially a political company, not a free-market one. Ken Lay’s creation would be unknown to history were it not for the distorted incentives from the government side of the mixed economy.

For classical liberals, Enron is a case study in support of the separation of government and business. There is egregious rent-seeking, whereby the company worked to shape political intervention for economic advantage. There is bootleggers and Baptist politicking, whereby Enron teamed with nonprofit groups to win support for what was in the company’s narrow self-interest.

There is the peril of half-slave, half-free. Partially deregulated markets (such as with electricity in California) created a devil’s sand box for profit-making that otherwise would have been absent in a free-market order.

A proposal for Fisk power plant: museum of history and industry

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Lynne Kiesling

After a long and contentious series of battles over the past three decades, two of the original coal-fired steam turbine power plants in Chicago powered down at the end of August. The Fisk plant and the Crawford plant were the last two coal-fired power plants in operation within a major U.S. city, and they closed due to a combination of the economics of natural gas relative to coal and the potency of neighborhood opposition to having large power plants situated in Pilsen (Fisk) and Little Village (Crawford), which are densely-populated neighborhoods in Chicago.

These two power plants are important landmarks in our economic history, industrial history, regional history, and entrepreneurship. Fisk, in particular, opened in 1903, and was a bold, innovative, and controversial investment decision on the part of Samuel Insull:

The day the Fisk plant began operating — Oct. 2, 1903, only a decade after electricity debuted at Chicago’s World’s Fair — some feared it might explode, including its financier, Samuel Insull, according to a “A Spirit Capable,” a history of Commonwealth Edison Co.

“If it blows up, I will blow up with it,” Insull reportedly said, apparently figuring that if the plant’s massive boiler blew up, his career was finished anyway. Insull was the forefather of what would become Commonwealth Edison.

Fisk, in what became the Pilsen neighborhood, was a significant step forward because it marked the first time electricity became available on a large scale in Chicago. Until then dynamos supplied electricity to Chicago’s Loop and a few wealthy neighborhoods, but most homes were still lighted by gas.

Within three years, what would later become Commonwealth Edison, was supplying 50,000 customers with electricity and double that number by 1909. Four years later that number again doubled. The Crawford plant, built only five miles from Fisk, came online in 1924. Between 1919 and 1929 the utility grew to supply nearly 1 million customers.

Fisk was considered so advanced that during a January 1921 trip to America, Queen Mary and King George V of England popped in to see it and signed their names in a huge visitors’ book. In 1912 visitor Thomas Edison had signed the same book, listing his profession as “inventor.” Fisk and Crawford’s turbines have since been replaced and upgraded many times over.

Rob Bradley also discusses Insull’s decision-making process regarding Fisk in his Edison to Enron, which I reviewed here recently. As the Smithsonian Institution notes, Insull had to work very hard to persuade General Electric to manufacture the 5-megawatt steam turbine for Fisk in 1902, when GE’s standard turbine size was 3MW. This is the Smithsonian’s picture of Fisk’s turbine in 1907:

Consider the economic impact of that bold investment — lighting and other electric services for residential customers who had heretofore relied on gas lighting, more reliable electricity at a larger scale for more industrial and commercial customers to run machines and shops, and the ability to serve more and more customers at increasingly lower average cost due to the dramatic economies of scale that the technology created. The Fisk station pioneered changes that truly transformed the daily lives and the economic well-being of Chicagoans, and then millions of people around the world. Electricity made Chicago prosper.

As Mayor Emanuel and others consider proposals for brownfield renovation of these areas and adjacent ones, think about how the power, the ingeneuity, the drive, the entrepreneurship of which the Fisk Street Station was emblematic have changed the world — mostly for the (dramatically) better, but also with the unintended by-products of pollution. Think about the history of industry and commerce in Chicago, and the role that Fisk Street Station played in making it possible. Think about places like the Tate Modern in London, situated in a decommissioned architecturally significant power plant on the Thames.

The Fisk Street Station could be a museum of history and industry. Perhaps a joint venture between the Museum of Science and Industry and the Chicago History Museum. The Galvin Center for Electricity Innovation at the Illinois Institute of Technology could provide exhibits on electricity technology innovation and sustainability. The Clean Energy Trust could showcase clean energy innovations. The museum could be a focal point for the local electricity, energy, and environmental community to develop and share new knowledge. And we could explore all of this innovation in the context of the very real and very important history of electricity in Chicago.

Even if the original 1903 structure can’t be salvaged or if the original 5MW turbine no longer exists, this site is an opportunity to celebrate and explore the benefits and tradeoffs of our industrial history, warts and all. Having such a museum in Pilsen would increase visitor activity, contributing to the neighborhood economy and our broader education with respect to electricity and our economic history.

Cato Unbound’s “Empirics of Austrian Economics”

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Lynne Kiesling

The title of this month’s Cato Unbound, “The Empirics of Austrian Economics”, makes it sound more like inside baseball than it really is. The valuable discussion does have some elements of insider talk, but most of the exchange is externally focused, and as such is well worth reading if you are interested in economics but aren’t sure what all of these distinctions and differences are among various schools of thought. And if you’ve heard the label “Austrian economics” tossed around but aren’t sure you know what that means, this exchange is worth your while – not because you’ll emerge with a pat, concise answer to that question, but because you’ll have experienced a rich conversation about it.

At its core, this set of essays discusses what constitutes good economics, regardless of the labels one attaches to this group or that group. As in other schools of thought within economics and in other fields, different people hold different interpretations of the meaning of earlier works, place different evidentiary weights on different methods of persuasion, and bring different biases to those interpretations and weights. In addressing the specific question of whether or not Austrian economics is “sufficiently empirical”, these essays grapple with important questions of inquiry, method, evidence, and persuasion. In some ways the simple response is, it depends on what you mean when you use the word “empirical”.

Steve Horwitz’s lead essay sets up the issues, providing a primer that explains but does not rely on the unique terminology (such as “praxeology” and “catallactic”) that has alienated other economists in the past and unfortunately provided a means for isolating Austrian economists (please note here that I am not criticizing the concept of economics as the study of purposeful human action, but rather the effect of the rhetoric). When I think about empiricism and the Austrian perspective, the distinguishing aspect that I think is most important is subjectivism and its implications. Steve notes

Subjectivism also explains Austrian skepticism about statistical correlation being the privileged form of empirical evidence. It only provides correlation, and to provide causation requires a theoretical explanation. If such explanations must start with actors’ perceptions of the world, then forms of empirical evidence that capture such perceptions would be at least as useful. Austrians therefore frequently turn to primary source material and interview and survey work as well as quantitative data to tell a complete story of how a particular economic phenomenon came to be and functioned. How did actors perceive their options and constraints and what sorts of consequences emerged from their choices? That is the fundamental narrative framework for Austrian empirical work, with economic theory providing structure to the story.

This observation puts a very fine point on the complementarity of (a priori, deductive) theory and empirical analysis, while highlighting some limitations of statistical analysis, as described above. This is not a new problem, of course; we’ve been grappling with it at least since Paul Samuelson and Milton Friedman wrote about revealed preference and “as if” interpretations of abstract, “perfect rationality” assumptions in theoretical models. But what’s changed for the better in the past few years is the loosening of the methodological hegemony of econometric evidence as the only acceptable empirical evidence to test a hypothesis. As Bryan Caplan points out in his response to Steve, over the past 20 years behavioral economics has broadened the varieties of evidence used to test hypotheses (and in later comments Steve endorses that idea); I would add experimental economics to that list, which all of the authors do implicitly. I think this is one of the most salutary complementarities in economics today: the combination of (1) Austrian theory of “how markets and their institutions enable humans to coordinate and cooperate in a world of subjective and fragmented knowledge and structural uncertainty” (see also Pete Boettke’s excellent entry in the Concise Encyclopedia of Economics for a good summary), (2) behavioral economics testing of hypotheses about cognitive limitations to rationality that complement the knowledge focus in Austrian theory, (3) experimental economics and economic history exploration and testing of hypotheses about institutions that enable or stymie such coordination in the face of diffuse knowledge and other cognitive limitations, and (4) new insights from other fields, particularly other social sciences and neuroscience.

George Selgin’s response had many elements worth highlighting, but I’ll limit myself to one in the interest of space: there’s a lot of potential empirical work to do on economic puzzles in the vast gulf between the poles of “needs no empirical validation to be “true”/is only “true” if shown via multiple regression analysis:

But Mises’s belittlement of statistics, and econometrics especially, … overlooks the fact that there is something between merely checking to see whether an occurrence satisfies all of the “contingent claims” needed to apply a particular theory to it, and pretending that you can construct economic theories using regression coefficients. What’s in between is trying to arrive at an informed estimate of just how much of any observed phenomenon an applicable theory explains and, when there are several equally applicable theories, their relative worth.

Similarly, I had general agreement with Antony Davies’ response that Austrian theory, mathematical modeling of theory, and statistical testing of theory can be complementary, although I think he overstates the benefits of mathematical modeling relative to analytical narrative with respect to vagueness of logic.

So how do we do good economics? I think Steve’s framework from his response to George points to an approach that embraces inquiry grounded in economic theory, and pluralism with respect to what constitutes empirical evidence (with a name-check of Schumpeter that made my heart go pitter-pat):

The Austrian tradition from Menger to Mises to Hayek to Kirzner shares a broad pre-analytical vision (to use Schumpeter’s helpful term) about the nature of economies and importance of subjectivism, knowledge, and spontaneous ordering processes. From that vision comes a series of more specific substantive propositions about how this vision manifests itself in economic analysis (see Boettke’s list, which I noted earlier). If we want to make use of those propositions to understand real-world phenomena, it should be those propositions that guide us as to what sorts of empirical observations and evidence are needed to demonstrate the usefulness of Austrian economics in rendering the world intelligible.

More precisely: the world is full of puzzles that we do not understand. Austrians think those analytical propositions are necessary (though not sufficient) for good explanations of those puzzles. What sorts of arguments and evidence are needed to offer persuasive accounts of those puzzles in ways that render them no longer puzzling? Different puzzles will require different propositions, which will require different methods and empirical evidence to render them intelligible.

All in all, a very thought-provoking exchange.

Economic Freedom of the World: We’re #18!

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Lynne Kiesling

This year’s Economic Freedom of the World report is released today, and the US has dropped to #18, its lowest ranking ever. From the press release:

The United States, long considered a champion of economic freedom among large industrial nations, dropped to its lowest position ever in to the Fraser Institute’s annual Economic Freedom of the World report. This year, the U.S. plunged to 18th, a sharp decline from the second overall position it held in 2000. Much of this decline is a result of high spending on the part of the U.S. government.

Hong Kong again topped the rankings, followed by Singapore, New Zealand, and
Switzerland. Australia and Canada tied for fifth overall among the144 countries and
territories in the Economic Freedom of the World: 2012 Annual Report. “The United States, like many nations, embraced heavy-handed regulation and extensive over-spending in response to the global recession and debt crises. Consequently, its level of economic freedom has dropped,” said Fred McMahon, Fraser Institute vice-president of international policy research.

The report’s authors, James Gwartney, Robert Lawson, and Joshua Hall, have a column in today’s Philadelphia Enquirer summarizing the results of their research, and why economic freedom is such an essential input for prosperity:

Economic freedom means people are free to choose, trade, compete, invest, and have the fruits of their labor protected against aggressors within a legal framework of equal treatment and minimal interference from government. The link between economic freedom and long-term prosperity is overwhelming: freer economies invest more, grow more rapidly, and achieve higher income levels than those that are less free.

The United States, long considered a bastion of economic freedom, has become less free during the past decade. This decline is across the board. Increases in government spending, record deficits, violation of property rights, more onerous regulation of business, and wars on terrorism and drugs have all contributed to the erosion of economic freedom in America.

Sobering, right? But where’s their data?

During the past decade, the U.S. rating fell nearly a full point on our 0-to-10 point scale, from 8.65 in 2000 to 7.70 in 2010. While it is difficult to pinpoint all the reasons for this decline, the increased use of eminent domain, the ramifications of the wars on terrorism and drugs, and the violation of the property rights of bondholders in the bailout of automobile companies have all clearly weakened private property and the rule of law tradition of the United States.

Our empirical work indicates that a one-point change in a country’s EFW rating is associated with a 1.0 to 1.5 percentage point change in the long-term annual growth rate, all else equal. It is worth noting that U.S. growth averaged 2.3 percent in the 1980s and 2.2 percent during the 1990s, but it fell to an annual rate of only 0.7 percent during 2000-2010. Without a reversal of undermining economic freedom, the future economic growth of the United States will be weak for many years to come.

Which suggests that in an election year, our political candidates will focus on the connection between economic freedom and the conditions for prosperity? OK, maybe not.

During this election season, the two major political parties will attempt to convince voters that their policies are dramatically different. But the EFW data indicate that the U.S. decline in economic freedom began during the presidency of George W. Bush and has continued under President Obama. Subsidies, grants, and other forms of political favoritism directed toward well-organized interests providing large political contributions have become the primary business of both parties, undermining economic freedom and retarding economic growth.

Unless American voters and the politicians they elect reverse course, our future will be one of stagnation, dependency, broken promises, and increased political corruption.

The LIFX lightbulb: Bringing the Internet of things to electricity

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Lynne Kiesling

The LIFX lightbulb is one of the most exciting things I’ve seen in a while, even in a period of substantial innovation affecting many areas of our lives. It’s a Kickstarter project, not coming from an established company like GE or Philips, not coming from within the electricity industry. Go watch the intro video, and then come back … you back? So how cool is that? Wifi enabled for automation and remote control from your smartphone. Automation of electricity consumption at the bulb level. You can set your nightstand bulb to dim and brighten according to your sleep cycle. It’s an LED bulb, so it can change colors, any combination in the Pantone scale, from your phone, anywhere. And, as an LED bulb, you get all of these automation and aesthetic features in a low-energy, low-carbon package.

This discussion of their project provides insight into the entrepreneurial future of consumer-facing energy technology — it’s not about the hardware, it’s about the software:

The LIFX app is one of our favorite aspects of the entire project, and we’ve spent countless hours thinking about how you can interact with your lights. We have mapped out a very smooth configuration UX from the app to the LIFX master bulb. In essence you place your LIFX smartbulb into a light socket, turn the switch on and then launch the app. You will be guided through a process of choosing your home network from a list and then entering your password. The LIFX master bulb will then auto configure itself to your router and all the slave bulbs will auto connect to the master. If you add more slave bulbs down the track  these will also auto connect.

Regarding security: LIFX will be as secure as your WiFi network. eg. without the WiFi network password you can’t control the smartbulbs.

We’re aware that while the hardware is the most visible and interesting part of this project our software is the soul.

This. This is the right thing to do, from my perspective, from both economic and environmental perspectives. And while I think Kevin Tofel at Greentech is right that there’s a network architecture issue here (separate control systems vs. a single server capturing and implementing your automation decisions throughout the house), a system like LIFX’s seems to me to be flexible enough to be incorporated into a whole-house energy management setup. And, given how enthusiastically consumers have adopted wireless mobile technologies, that seems to be a good place to start to get consumers comfortable with this degree of automation and functionality. Transactive capabilities and dynamic pricing are next! Unless our electricity network is transactive it’s not smart, and intelligent end-use devices (and the connectivity to network them for automation) create value for consumers from that intelligence.

Note also the implications of software like LIFX’s for having electricity enter the Internet of Things. As sensors and the connectivity among them become ubiquitous, we can automate our consumption decisions much more deeply, at a much more granular level (down to the bulb, here), in ways that do not inconvenience us. We can use the technology to make ourselves better off by automating our choices in response to variables we care about, which eventually will include variables like the retail price of electricity and the carbon content of the fuel used to generate it. The Internet of Things reflects Alfred North Whitehead’s observation that “civilization advances by extending the number of important operations which we can perform without thinking of them.”

The Internet of Things enables mass customization and the ability of each individual to choose a bundle, a set of features, a price contract that they expect to bring them the most net benefits. This is a dramatic technological and cultural break from the century-long custom and regulatory practice of uniform products, uniform quality, uniform pricing as a matter of social policy. The public interest ethic of uniformity ties us to mediocrity, to the extent that it constrains what features and pricing people can bundle and consume with technologies like these.

Another Internet of Things implication here is that, with each bulb having a unique sensor and identifier, we will generate very detailed, granular data about how the connected, sensing devices operate. Such “big data” can help us use less energy, save money, do more with less, and lots of other things I can’t imagine but some other entrepreneur will, and will bring to market, if regulation doesn’t stifle it, and with clear stipulations of consumer privacy and property rights in their data.

You can also tell that this is an interesting topic when I am not the first economist to write about it! I love seeing my colleagues interested in electricity-related technologies. Mark Perry shares my enthusiasm about the application of human creativity to generate such a product. Josh Gans shares my enthusiasm for the networking, the interoperability, and the open architecture. And Felix Salmon offers a worthy note of caution about the ability of LIFX to deliver on its promised features and timeline, given the time delays experienced in other Kickstarter projects.