Cafe Hayek - Latest Comments in Zero Sum Economics

Re: Zero Sum Economics

Russell Nelson — Tue, 26 Sep 2006 21:04:12 -0000

Fact: US governments at all levels interfere with markets. Fact: these governments are democratic. Fact: democracies respond to special interests. Derivation: politically powerful people are able to direct the market interference to their own ends.

Does anybody here think that wealthy people are not politically powerful? Does anybody here think that poor people are politically powerful? Clearly, a strong government is in the interests of wealthy people, and a weak distributed government is in the interests of the rest of us.

Thus, let the rich people vote for whomever we want and the rest of us should vote libertarian.

Re: Zero Sum Economics

Russell Nelson — Tue, 26 Sep 2006 20:57:12 -0000

Ed C: of course open source software forms a relatively small part of the market for software, because .... it's not scarce. People will only pay for things if they can't get them at zero cost.

You'd have trouble arguing that Firefox is a worse browser than IE6, or that PostGreSQL is worse than Oracle. I'm a board member of the Open Source Initiative, and we argue that indeed, Open Source Software produces higher quality software than the proprietary model.

Re: Zero Sum Economics

Adam Malone — Mon, 25 Sep 2006 11:27:55 -0000

Well put Mcwop.

And it should be noted that Copyright laws are drastically "under" enforced. Partly because historically copyright and IP laws were used to protect corporations and inventors from other powerful corporations and inventors. The combination of nearly ubiquitous hi-speed internet access, the low price of fairly powerful computers, and a high level of computer literacy has outstripped the capability of both corporate and government efforts to stave off the modern IP raider.

For example, many of my friends who take up residence in college dorms have spoken of the ease with which they can obtain pirated copies of nearly every piece of software on the market. MSFT has realized this problem and worked to resolve it with their Service Packs. Starting with SP2, only legitamate software users can download and run service packs.

While this seems like a fairly small issues new programs are written to ONLY work with current Service Packs installed.

MSFT is learning how to operate in a world without copyright protections. At least, they are learning to operate in a world where copyrights are not enforced.

Re: Zero Sum Economics

Mcwop — Mon, 25 Sep 2006 10:58:29 -0000

Adam, while your point is valid, it still supports the argument that a company could become incredibly successful (and wildly rich) in an environment without Copyright laws. Companies would simply need to offer their products so that the marginal benefit exceeds the marginal cost over any "free" version (there is no free lunch and free software, for example, has costs such as support etc…). I belive that this is the exact mechanic that has helped Miscrosoft achieve its wealth, and stave off free options such as Linux.

Again, I believe one could get rid of copyright laws, and Microsoft might still have become the tech behemoth that it is. To attribute all of MSFT's wealth to copyright is very naive in my opinion - and has not been substantiated.

(Disclaimer - While I "defend" MSFT here, I am a die hard Mac user.)

Re: Zero Sum Economics

Adam Malone — Mon, 25 Sep 2006 05:59:07 -0000

About 2/3 up this page the comment was made that iTunes has worked even though there are free alternatives to the system. What this, and many other posts, ignores is Marginal Benefit vs. Marginal Cost.

iTunes has been so successful, not because it circumvents property rights but rather it makes the marginal cost of submitting to those copyrights so low that consumers believe that it is valuable for them to follow them. To put it economic terms the marginal benefit of using iTunes is greater than the marginal cost of its use (which entails adhering to copyright laws).

To say that iTunes directly competes with free (illegal) downloads ignores that they actually offer two different goods that are in fact imperfect substitutes for each other. When one purchases music from iTunes the musical fidelity and file integrity is guaranteed, essentially forever. When one illegaly downloards the "same" music, there is no guarantee attached. Viruses, poor musical quality, and mislabeled songs abound in the illegal download sector.

To say that iTunes is an example of how companies "could become worth billions regardless of copyright laws" is to ignore the fact the iTunes is successful BECAUSE it embraced copyright laws. None of the illegal sites offer any such guarantees of their "goods". iTunes is an example of how companies can use innovation to lower the price of government compliance to level which consumers feel is low enough to warrant the extra cost of said compliance.

Re: Zero Sum Economics

JohnDewey — Sun, 24 Sep 2006 18:53:39 -0000

Joan: "Pointing them out as examples does not prove that many, probably the majority "didn't take it from others"."

How did you arrive at this implied conclusion? that the majority of the nation's billionaires took their wealth from others? The reference you supplied was a study on high income earners, not on the nation's billionaires. Most of the truly wealthy own profitable businesses, and reinvest their profits rather than take huge incomes.

Joan, have you looked at the list of the nation's wealthiest people? At the top of the list, in addition to the Microsoft founders, are:

- the founder of the company ranked first in global computer sales;

- the heirs of the world's largest retailer;

- a casino developer;

- the owners of a private oil and chemicals company;

- the Ebay founder;

- the family that produces the nation's most popular candies.

You could go through the list of America's billionaires - as I have done - and discover that the primary road to great fortune is providing goods and services that consumers want. Through their vision, talent, and hard work, these wealthy people made the world that you and I enjoy. They didn't take from others, but simply exchanged their goods and services for money we willing gave up.

Re: Zero Sum Economics

Dean Baker — Sun, 24 Sep 2006 12:55:54 -0000

TGGP,

I give a strong endorsement to the Triumph of Conservatism -- great book. btw, I propose my system in competition with the copyright system. we'd get to do a market test of the two.

Re: Zero Sum Economics

TGGP — Sun, 24 Sep 2006 06:05:18 -0000

Dean, my prediction is that any system the government attempts to create to spur innovation will be worse than the patent system.

Your book sounds interesting and I plan on reading it eventually, but it also sounds a lot like "The Triumph of Conservativism", which as a classic I've heard a lot of praise for I have to place higher up in my queue of books to read.

Re: Zero Sum Economics

Dean Baker — Sun, 24 Sep 2006 04:37:36 -0000

Matthew and Randy,

I'll throw out a few quick comments:

1) on trade in manufactured goods, I consider it a done deal that we have reasonably free trade in these goods, so manufcaturing workers already face international competition. I want out doctors, lawyers, accountants and economists to enjoy the same competition. I don't think it is plausible to close the doors that have already been opened.

2) On software development -- my proposal is that people be paid, I'm not counting on people to act out of the goodness of their heart. Re-read the section. I have two proposals. One for more highend systems type work where you would have private contractors competiting for grants from the government (think of military or public works contracts). I know of the inefficiencies of this system, but the base of comparison is an extremely inefficient copyright system. The other mechanism, for games and applications is an individual voucher system, where people get a fixed sum as a refundable tax credit (e.g. $20) that they can give to the developer or intermediary of their choice. Eeverything developed udner both systems is placed in the public domain so that anyone can freely work from it. So, there is no assumption that anyone will work for free (although there are people that enjoy this and will).

3) on the over-valuations of the stock market in the late nineties -- my point was that this was partly in response to the false security created by the Greenspan bailout in 1987. I would say that the Fed should have taken action in any case (as it should have on the housing bubble), but the case was made stronger by the fact that it had helped to create the stock bubble with its actions.

Re: Zero Sum Economics

joan — Sun, 24 Sep 2006 02:03:08 -0000

I think there are people on the list that got their wealth by creating it and adding to the gdp of the nation. Pointing them out as examples does not prove that many, probably the majority "didn't take it from others". A new study by Steven Kaplan

http://faculty.chicagogsb.e...

looks at how the high income earners get their income. Wall street is heavily represented. You should look at it as well as all 400 the billionairs list and see it you can come up with an serious argument that most are being paid their marginal product.

Re: Zero Sum Economics

Matthew — Sun, 24 Sep 2006 01:14:34 -0000

Dean Baker,

I've read through much of your book and it is very interesting. In the half of the time you discuss the upper tiers of society, you make very libertarian arguments, but in the half you discuss the lower tiers of society, you hit on the regular leftist zero-sum talking points.

For example, you expound on how trades such as lawyers and doctors should open up to foreign competition and free trade, citing its benefits for the society as a whole. However, you then use zero-sum arguements for how manufacturing workers should use these exact same type of mechanisms for their own benefit. Well, which it it? Personally, I would love to see the things you mentioned for the high-income trades also come true, especially where it would depress the wages of doctors. But I also think that free trade aggreements have likewise brought a lot of wealth and productivity growth for all classes in this country, as most of the people who shop at Wal-Mart can attest.

As for copyrights and patents, I found your arguments pretty weak. First, as many here have pointed out, you assumed that such things as Windows exist and then look at how money we would save. Well, would Windows exist without the huge windfall they looked to receive? Microsoft did go through a very long and dark process of developing Windows before a workable version(3.1) finally came out on the market.

Your alternative to the patent system, an increase in government research funding and keeping all software in the open domain, greatly underwhelms me. You say that "the process of software development would almost certainly be more efficient if all software was placed in the public domain where anyone was free to work on it." Do you really think people will program to the level of user-friendliness we have today out of the goodness of their hearts? Do you think people will magically produce good outcomes without monetary incentives?

There was a system founded upon these assumptions, socialism, and throughout the world it has shown to be a complete failure in raising the average person's living standards.

Re: Zero Sum Economics

Randy — Sat, 23 Sep 2006 16:27:24 -0000

Dean Baker,

Interesting that copyrights were an invention of the middle ages. I'd just like to point out though, that private property rights and free markets are even older - and they're still good ideas. It also seems to me that if there is a "problem" with intellectual property rights, it is primarily that they are becoming ever more difficult to enforce. Software, especially Microsoft products, is routinely bootlegged, and knockoffs of branded items are easily available on the streets of every major city in the world. We don't really need to change the system, the world is changing it for us.

As for over valued stocks in the late 90's - its not the first time and it won't be the last. P/E ratios in the high double digits should have given people reason to pause, but it didn't. Were the losers sold? - or did they allow themselves to be sold? There's plenty of blame to go around, I think. And perhaps we're all a bit smarter - and only a little the worse for wear.

Re: Zero Sum Economics

Xmas — Sat, 23 Sep 2006 12:00:58 -0000

Helen's Kid,

Google makes money through advertising. It's a Long Tail type of business, where many small companies pay small amounts of money to reach many customers.

Google, the search engine, is also an advertisement for Google, the company. Google sells machines to companies to create search engines for their own, internal web sites. They also created a Global Maps application, that they give away for free, that also has an upgraded version that you pay for.

They are also working on an office suite of software. It's likely they will have a free version and an upgraded pay version.

The "Free Software" movement has a variety of different incentives and methods of earning money. A person that is the primary programmer for a useful tool can create a name for him/herself, increasing their marketability. Red Hat and the other Linux distributions make there money through technical support, customer service and customizations for fees.

(Look, I wrote that without saying anything bad about Microsoft.)

Re: Zero Sum Economics

cpurick — Sat, 23 Sep 2006 08:57:28 -0000

Seems to me Dean subscribes to the zero sum game no matter how he argues his position. The gains made by the folks at the top stem from the creation of additional wealth, not from redistribution.

You have to really cherry pick data to build an argument that anyone is getting poorer in the bargain. Absent that, it's not a zero sum game. Revoke his license.

Re: Zero Sum Economics

TGGP — Sat, 23 Sep 2006 08:04:25 -0000

You might be interested in this page at Mises on I.P from N. Stephan Kinsella, a patent lawyer and rather unpleasant person to engage in a discussion with, but whose writings can be quite interesting nevertheless: http://blog.mises.org/blog/...

I used to think I.P was necessary to create incentives, but I've realized that no one has given any evidence that the benefits outweigh the costs, and given that most governmental attempts to increase our welfare do the opposite, I should expect the same in the case of I.P. Something resembling copyright could be done with contracts, but it would be substantially different from current laws. Patents would be right out. It is simply government granted monopoly and protectionism.

Re: Zero Sum Economics

Dean Baker — Sat, 23 Sep 2006 05:26:21 -0000

Great to see that we seem to have a bit of a debate here. I'll make a couple of quick points. First, just because I think (like Professor Hayek) that copyright is a very inefficient way to foster creative work does not mean that I am opposed to providing incentives. I discuss alternatives in my book. I won't claim that my ideas are the best ones, only that this is an area where we need some serious debate. It is ridiculous to just assume that an institution (copyright) that has it origins in feudal guild system is the best way to support creative work in the 21th century. Whether or not anyone likes copyright, it is undeniably a form of government intervention, so I would think that real free market types would be wary.

A second point that I would make on our great fortunes is that the heavy hand of government can often be found not far below the surface. In the late nineties I frequently warned about the dangers of the stock bubble. I felt that the Fed had a responsibility to try to prick it before it got so big as to seriously damage the economy (I have made the same warnings about the housing bubble for the last 4 years).

You could say that I was looking for the government to control the market, but I would remind folks of the events of 1987. At that time, Alan Greenspan quite used the full weight of the Fed to reverse the stock crash and get the market back on its feet. I am less convinced today than I was at the time that this was the right thing to do, but regardless, I know of no economic theory that says the economy is better served by an over-valued market than an under-valued market. In other words, if it was appropriate for Mr. Greenspan to intervene to prevent what he believed would be an under-valuation of the market in 1987, then it is difficult for me to see why it would not also have been appropriate to intervene in what he perceived to be an over-valuation of the market in 1997. In fact, I think the case for the 1997 intervention is stronger due to the fact that the market run-up could be attributed at least in part to a false sense of security that many stickholders had as a result of the 1987 bailout.

I recount this history, because several of 400 billionaires made their fortunes as a result of what I would consider stock bubbles. One prominent case is Steve Case, who performed the wonderful trick of getting one of the largest media companies in the world (Time-Warner) to sell itself for almost nothing (AOL stock). This trick transferred hundreds of billions of wealth, but you would be hard-pressed to identify a comparable amount of wealth creation. I would say that a similar bubble story explains the current prosperity of our Google billionaires.

This is not to say that AOL and Google did not create any wealth or provide benefits to society. (I am a huge fan of Google's search engines.) I am just saying that Alan Greenspan helped to create a market pyschology with his bailout that led to gross exaggerations of this wealth. The loss comes primarily from the people who directly or indirectly buy stock at hugely over-valued prices. This list includes workers who have their pension funds invested and taxpayers who will bail out these funds.

In sum, I would point out that the wealthy 400 didn't just come by their fortunes through hard-work and talent, but were the beneficiaries of government action. True followers of Hayek should not be happy about the enormous growth in economic rents represented by these fortunes.

Re: Zero Sum Economics

Randy — Sat, 23 Sep 2006 03:45:12 -0000

Helen's Kid,

Re; "The distinction between wealth creation and and accidental wealth accumulation should be evident to anyone..."

A trivial point perhaps, but I honestly cannot imagine a case of accidental wealth accumulation. Even the thief must take some action. Now, do some instances of wealth accumulation require greater application of effort than others? Certainly. But we reward success, not effort.

Re: Zero Sum Economics

Stephen — Sat, 23 Sep 2006 02:41:25 -0000

How about copyrights/IP based on contract law? I make a piece of intellectual property. A condition upon the purchase/use of the property is that you agree to not distribute it to anyone else. If you don't like the conditions, don't buy it. The competition is free to not have such a restriction if they so wish.

Re: Zero Sum Economics

bartman — Sat, 23 Sep 2006 00:35:19 -0000

Mr. Baker:

Issues of copyright aside (a copyright clearly a net wealth generator), it sounds like you're merely describing existing wealth being transfered via rent-seeking mechanism versus new wealth created by entrepreneurship and trade.

Do you have any sort of empirical estimate of how much of the Forbes 400 money is transferred rents and how much is new wealth?

It's good to see at least one lefty concerned about the size and scope of government.

Re: Zero Sum Economics

Helen's_kid — Fri, 22 Sep 2006 20:20:38 -0000

"We pay nothing directly for Google"

What do we pay indirectly for Google? To say we pay nothing directly, suggests that we pay nothing at all for Google. If we are charged an invisible price in the products we buy then it is no different than a tax, a Google Tax. Google has billions, but none of it came from me. Granted, there is no such thing as a high price, and every price paid is a fair price, agreed to in private contract. Yet, I cannot help but feel cheated when I know that Google has accumulated billions. Especially, in light of the fact that I do not, knowingly, use their service and contribute to their success, indirectly, most every time I buy a product. My personal choice of a search engine is Ixquick. They do not keep tabs on my searches and there is, also, no direct charge for their service.

There is no way of foretelling which individual will be so successful as to make the Fortune list. Mr. Gates was the fortunate recepient of a blunder on the part of IBM. In fact you might call him the accidental billionaire. In fact, anyone becoming a billionaire has luck on his side. The distinction between wealth creation and and accidental wealth accumulation should be evident to anyone who looks beyond the numbers.

Re: Zero Sum Economics

Steve — Fri, 22 Sep 2006 19:39:48 -0000

Mr. Baker,

I'm impressed that you would be so bold as to comment here and defend your ideas. Kudos for that. I, too, have been intrigued by the Open Source movement, Coases Penguin and the whole Commons Based Peer Production thing. But isn't one of the fundamental mantra's of Econ 101 that whole "people respond to incentives" thing. Are you suggesting that people would innovate, expend capital and resources and take risky ventures without the incentives provided by IP law? Would capitalists put their capital at risk? Sounds rather utopian!

Steve

Re: Zero Sum Economics

Ed C — Fri, 22 Sep 2006 19:30:46 -0000

The Pedant-General:

Open-source software constitutes a small portion of the overall market, and a large part of that is supported with revenues generated from selling instructional books about open-source software. (e.g., the Ruby on Rails model)

Re: Zero Sum Economics

happyjuggler0 — Fri, 22 Sep 2006 18:12:09 -0000

I strongly suspect that in a world without patents and copyrights that the Forbes 400 would be made up of industrialists who capitalized on the ideas of suckers known as inventors, and that Dean Baker would've been quoted as saying that if only we had copyrights and patents that things would be more fair.

Spielberg and Lucas and others would be highly paid directors of commercials and wouldn't dream of directing or producing movies. Assuming of course that Edison would have bothered with the means to invent even 1% of the things he invented. J K Lansing would still be on welfare. Elected officials would still be traveling to Washington via horse and buggy, or possibly train. Forget about cars and airplanes though.

But at least Bill Gates, Steve Jobs and other thinkers wouldn't have a chance in hell at making it onto the Forbes 400 list by "impovershing" the rest of us dupes.

Re: Zero Sum Economics

Ed C — Fri, 22 Sep 2006 17:51:00 -0000

Adam, Dean:

Respectfully,

At no point did I appeal to natural rights to defend copyrights.

I was employing an analogy to demonstrate that when producers possess rights over the product of their labor, production flourishes. This was in response to your claim that absent copyrights, software would be ubiquitous and free. It wouldn't be, for the same reason that cattle, grain, and forested land wouldn't be ubiquitous and free absent property rights in land.

My argument is not undone by the fact that intellectual property rights are sometimes amorphous or that one is able to make copies of books.

I do completely agree, however, that the merits are best judged according to some standard of efficiency, and I look forward to reading Dean’s take (for free).

But that's not the argument Dean made in his posts. He says, in essence, that Bill Gates is a thief who uses copyright law to effect wealth transfers, and that the same choices would be available to consumers for zero price if only copyright laws were repealed. This is simply untrue. Some software would undoubtedly be available, but certainly less, and of poorer quality, than the current stock.

Re: Zero Sum Economics

Chris Meisenzahl — Fri, 22 Sep 2006 17:06:06 -0000

"If these people pull away so much wealth," he said, "that means everyone else has less."

That's truly sad. How can these people call themselves economists?