Intimacy II

Further to my thoughts this morning on the separation of public and intimate relationships, it occured to me that I missed some interesting connections.
I wrote that we need emotional commitment where we can’t achieve commitment via public enforcement (contracts) because the considerations required can’t be specified precisely enough (perhaps because flexibility is itself a key consideration). Possibly more important is the fact we can’t enforce publicly (using the law) something that is supposed to happen in private, without witnesses. This came up before when I defended old-fashioned courtship patterns as a way of avoiding the unpleasantness that can result from being alone without witnesses with an untrusted partner.
The concept that keeps coming up is the cost or difficulty of enforcing any arrangement. Whether I am talking about intimate relationships, the basis of property, the structure of government, law and order, or the business models of entertainment products, it keeps coming up as the decisive factor. Either I have a bee in my bonnet about it, or it is being generally overlooked: treated as a minor implementation detail to be worked out later. Or both, I suppose.

Another stray thought on drawing a boundary around the intimate is Linus Torvalds’ famous quote: Software is like sex — it’s better when it’s free. Taking the idea altogether too seriously, what might there be about the writing of software that makes it more suitable to being motivated by emotional commitment rather than public bargain?
It might just be the undefinability of the requirements. A piece of software isn’t much to look at, it’s very difficult to assess its value in advance. Even if you can determine that it functions correctly, that’s not a complete assessment — quality of software is notoriously difficult to define. If you have the freedom to take what you need from software, that is perhaps more valuable than a predefined functional specification.

Purchasing Intimacy

Listened to last week’s EconTalk, with Viviana Zelizer talking about the divide between the initimate and the commercial.
It struck me as a huge exercise in missing the point. Not once were the key words mentioned. They are trust and commitment.
Contracts are all very well when it is possible to specify precisely what each party expects to get out of a relationship. However, if I have expectations which I can’t practically define and enumerate, then I can’t put them in a contract.
However, it is frequently advantageous to be able to make binding commitments. How do we do that in cases where we can’t use contract enforcement to make the commitments binding?
Fortunately, there is a mechanism built into us. Humans can form emotional bonds with other humans. If parties to a relationship can see that the other parties have emotionally bonded to them, then they can have confidence that their needs in the relationship will be met, without recourse to contract lawyers and bailiffs.
It is possible to fake an emotional bond. The central question of much human interaction is whether, and how strongly, such bonds have genuinely formed. The literature on this subject is vast, and includes a large portion of all fiction ever written. We are continually on watch to check that the bonds others have to us are still strong.
This is the reason for what Zelizer calls the “Hostile Worlds” of the intimate and the commercial — the deliberate and socially expected attempt to separate, as far as is practical, intimate relationships from commercial relationships. If those who we believe are with us for emotional reasons are actually with us for commercial reasons, we can no longer rely on their emotional bond to enforce their commitments beyond what we can achieve in the courts.
This is by no means an original line of reasoning: I’m sure I’ve come across it in books by Diamond, Dawkins, Matt Ridley as well as writings by economists. The issue of signalling an emotional commitment came up at length in an earlier EconTalk podcast on religion, so I’m disappointed that Zelizer ignored the question, and that Russ Roberts didn’t bring it up. It defines the boundary of the intimate and the commercial (because it is the answer to “why do we care”) If we expect consideration from a party to a relationship beyond what we are able to define and enforce publically, then we must rely on intimacy – emotional bonds – which themselves require a certain amount of care and maintenance.

Update: more thoughts on the question

Property

There have been various attempts to derive private property rights absolutely from some kind of first principles. I have not been impressed by them. It’s not that arguments like this are obviously wrong, it’s just that equally persuasive arguments could be made for almost any basic political position, including many that I want no part of.

No, I am prepared to accept that the law that you can’t take my stuff the moment I turn my back on it is just another government regulation, not fundamentally different from the many that I howl against.

Given that property is not fundamentally a different kind of thing, why do I support it over the other ways that a society can organise its resources?

The root is that property is, relatively, very cheap and easy to enforce, compared to other possible rights. It is practical for me to take most of the responsibility for enforcing my private property rights myself, by keeping hold of my property and keeping an eye on it, leaving relatively little for the public sector to do. It is also relatively easy to work out whether I own something, compared to trying to determine, for instance, whether I most need it, or whether I most deserve it, or whether I can make the most productive use of it, all of which could be seen as “better” criteria for whether I should control it. Private property enables us to co-operate, not perfectly, but quite effectively, with a minimum of administrative cost.

With that as the basis of my support for private property, this quote by Lawrence Lessig has incredible power:

…the government has designed [the copyright system] so that there’s no simple way to know who owns what, the very essence of a property system.

When to leave Iraq

Some of the violence in Iraq is caused by the presence of occupying troops there.
Some of it is caused by rival factions within Iraq.

If the Iraqi government can get to the stage where it is able to control the country and hold it together with just its own forces, the whole regime-change process will have been, by some measures, a success.

Opinions differ as to how likely that is. I am going to assume for the purposes of this discussion that there is a realistic chance it will happen.

If this stage is to be reached, there will come a point where the dangers of staying outweigh the dangers of leaving. I think it would be very optimistic to think that the country will be completely stabilised and pacified while a substantial US and British military presence remains.
Because there is a deep-seated tendency to overestimate risks which are completely outside one’s own control, compared to risks over which one has some control, when that point is reached, it will look as if it is still a long way off.

That is, at the optimal time to leave, it will look far too early. The risks caused by leaving will appear greater than the risks caused by staying.

The time might even have come already. I think there is a considerable risk that, if the Iraqi government were left to try to manage on its own now, it would fail. But there is a risk it will fail anyway. The question is which risk is greater, after correcting for our own biases.

I do not pretend to have sufficient knowledge of the situation on the ground to answer whether the time has come. But, just playing with the basic principles, I am fairly sure that when the time comes, it will not be at all obvious.

Clean energy subsidies

There has been some discussion on econblogs, originating, I think, with this Economist blog piece, attacking the idea of carbon offsets and particularly of subsidising clean energy as a way of reducing pollution from traditional energy sources.

The first pro-subsidy argument is that subsidising clean energy will cause clean energy to be substituted for dirty energy, which is good.

The reply, in the Economist piece, and also Arnold Kling’s recent TCS article, is that a subsidy to clean energy is a subsidy to energy, and will increase overall consumption of energy, possibly producing more total pollution than would otherwise have been the case. Pigouvian taxes on dirty energy can be justified, but not subsidies.

In a comment on a Kling EconLog entry on the subject, I put forward a second pro-subsidy argument:

The purpose of subsidising clean energy is not simply to displace dirty energy in the immediate sense — that is undoubtedly done better by taxing the dirty energy.

New technologies require a lot of development investment to bring to market. Once they are being successfully produced and sold in the market, experience and competition often produce rapid improvements, particularly in efficiency. The subsidy to clean energy use should not be seen so much as encouraging a certain quantity of clean energy to be produced, but more as a subsidy to the of clean energy technologies, to bring them more quickly to the stage where they can be rapidly and profitably developed.

The intervention in the market is then not aimed at correcting the direct negative externality of pollution, but at the positive externality of improving technological knowledge.

I believe that this is what the proponents of subsidised clean energy have in mind.

I brought the argument up not because I agree with it, but because I don’t like to see important points being missed.

Note that because the point of the subsidy is to encourage industry to invest in the relevant technologies, the effects if it works correctly — increasing the profits of businesses in the relevant sectors — would end up looking an awful lot like pork, which is the major criticism. The profits might not be rents, but fair reward for valuable additions to the knowledge of clean energy technology.

There are, nonetheless, a number of problems with the argument.

First, there are other mechanisms which are intended to address this very general market failure (that is, the positive externality of R&D). Most relevant in this case are patents and direct state-funded or state-subsidised research. The existence of these alternatives do not automatically invalidate the use of energy subsidies — one would have to show that it is a less effective approach. Both government research and patents are far from perfect, and should not be presumed to be the best solutions.

As an example, subsidising the research, rather than the energy, reduces the incentive on the producer to actually improve efficiency. If the subsidy directly targets the energy use, then there is competition between firms producing the subsidised energy, whereas if the subsidy is on a particular research project, it is a pure rent.

More significantly, there is no guarantee that the subsidies will go to the most promising technologies. I don’t believe that making ethanol from corn will ever be a useful contribution to the energy industry, no matter how much more efficient the process becomes. It will be carried on only for as long as it is actively subsidised, and is pure deadweight loss. But as long as it is subsidised, it might be profitable for producers and consumers. Solar panels, on the other hand, while not really worthwhile at the moment, might well, if pushed into the market by subsidy, and improved in efficiency once there, develop to the point where they are a major portion of energy production at a genuinely low cost.

Since the policy is currently directed far more to biofuels than to solar energy, I think it is not working.

That’s not to say it can’t work. There are many other points that can be made pro and con. I am, as always, sceptical that any interventionist policy will be effective in the long run, but the argument has too much merit to be ignored or dismissed out of hand.

Films and tax

Film industry facing ‘tax crisis’

Production in the UK “will fall dramatically” because new tax laws are scaring off investors.

Apparently, there is a very strong relationship between the levels of taxation on the film industry, and the amount of investment that the industry receives.

I wonder if the normal tax regime “dramatically” discourages investment and production in industries other than film, as well.

I believe it does.

What policy implications would the great and good of the film industry draw from this?

The Iran Thing

I’m not well-informed as to the current state of affairs on the ground in Iraq, but there is an important general point that is not being made.

The USA and its allies invaded Iraq with the stated justification that the existing regime was a danger. As I wrote earlier, that is a reasonable justification. One can certainly argue whether the invasion was advisable, but I accept that it was justifiable.

However, whatever strategic interest the allies have in what happens in Iraq, the Iranians have more. Expecting the government of Iran to stand idly by while western countries attempt to fashion a new government there is not only unrealistic but unfair. Of course Iran is going to seek out allies among the factions struggling for influence, and of course it is going to support them, and, in a a situation of civil war, of course that support is going to involve arming them as well as funding them. It would be stupidly reckless of the Iranian government not to arm its allies in Iraq.

Now, if, as is alleged, Iranian-backed groups are fighting against US and British forces in Iraq, there is a problem that needs to be addressed. But pure outrage that Iran could seek to challenge the “rightful invaders” of Iraq will not do. The same logic that puts American and British guns in Iraq puts Iranian ones there too.

One could argue that Iran should refrain from intefering based on an ideal of absolute subservience to the U.N., which recognises the current Iraqi government. I challenge the commentators most hostile to Iran to make that argument with a straight face: I would be quite unable to do so myself.

Alternatively one could take an absolute imperialist line, and say that a Pax Americana is being imposed in Iraq, it will all be for the best, and everybody else better help, stay out of the way, or be squashed. I think that is the line that is taken in effect by the hawkish commentators, but I’m not sure they are really doing so consciously. Not that it would necessarily be a bad thing if such a peace could be imposed without local allies or compromises, but I am sure it is practically out of the question.

I would favour an acceptance that Iran has legitimate strategic interests in the internal struggles of Iraq, and a positive outcome is more likely to flow from some level of cooperation and compromise. Such an approach is made more difficult by the hysterical rhetoric that both parties have used against the other, as well as by the outstanding dispute over Iran’s nuclear ambitions. At the very least, Iran will be seeking assurance that a powerful enemy is not being created on its border, either in the form of a hostile Iraqi administration, or an American base for further aggression. Neither seems likely to me, but governments of every country tend towards the paranoid in assessing the intentions of such unstable regimes.

If the USA does not make it absolutely clear that it has no intention of attacking Iran, then the natural assumption is that it does have such an intention. And that being the case, it would be an essential act of self-defense for Iran to attempt to prevent such an attack by keeping Iraq too unstable. And then, of course, that would be used to show that Iran is part of the problem and that regime change there would be desirable.

The only case in which it would make sense to make a fuss about Iran’s interference in Iraq would be if it was insignificant. In that case it can be used to build up opinion for an attack on Iran, while forcing the interference to continue to escalate wouldn’t matter because it’s not significant anyway. If it is a major problem, the only way to stop it would be to not make a fuss about it, but to try to assure Iran that it is safe. Threats will not be successful, as the more Iran is threatened, the more incentive it has to keep Iraq unstable.

Iran could be expected to favour an outcome in Iraq of a stable representative government, provided it is confident that would not lead to an American leader saying “we have achieved what we set out to do in Iraq, we no longer need the army in Iraq, let’s do the same now to Iran, after all it worked in Iraq.”

Trademark Perversion

The same Register article I just referred to contains another interesting quote, this time from the Gowers Review:

“Trading Standards have powers and the duty to prevent the sale of trade mark protected goods. However, where the infringement of rights relates to copyright alone Trading Standards do not have the power to act, and cannot perform searches and seizures. This means, for example, that where there are sales of counterfeit CDs and DVDs, Trading Standards have only a limited response. This creates an inconsistency in the way that the law treats piracy and counterfeiting.”

The “inconsistency” between “piracy” and counterfeiting is hardly random or arbitrary. Copyright law exists to favour producers. If I sell you a copy I have made of Pirates of the Caribbean, you are not the victim, Disney is. On the other hand, trademark law exists in theory to protect consumers. If I sell you a Rolex watch that was not really made by Rolex, you are being cheated. The job of trading standards is to protect consumers, and therefore it has been concerned with enforcing trademarks, and not with enforcing copyrights. No inconsistency.

The Gowers Review recommends that this non-existent inconsistency be eliminated by having Trading Standards officers enforce copyrights also. How has this come about? It is because in reality they are already working for producers, not consumers. Trademark law is now being used as another form of copyright. If I buy a pair of Ray-Ban sunglasses for £2 from a street vendor, I know full well that they have not come from the Luxottica Group. By prosecuting the street vendor, the Trading Standards Officer is not protecting me, he is protecting the producer. It is indeed an inconsistency that the officer can act to protect the monopoly privileges of LVMH or Chelsea Football Club, but not those of Disney or Microsoft. However, he should not be doing either.

There is an efficiency argument for combining the functions of consumer protection and monopoly protection, but that needs to be set against the danger that one will overwhelm the other.

Update: By coincidence, John Kay makes a very similar point in today’s Financial Times about the proper purpose of trademarks.

Criminal Financing

The latest news on enhanced enforcement of copyright law contains the usual claim from the government that “People should realise that the proceeds from the sale of these goods are used to finance a whole range of criminal activities.”

Sensible people usually ridicule these claims, pointing out that professional criminal activity is generally profitable in its own right, and therefore does not need subsidy from generous counterfeiters.

It is only fair to recognise, however, the plausible rationale behind the “financing” argument.

The likes of Ron Gainsford (the TSI chief exec quoted above) are using the word “finance” in the technical sense of “credit”. What is plausible is that criminal activity is somewhat restricted by lack of access to credit. If you turn up at your local HSBC and tell them you have a promising business opportunity based on robbing a jewellery shop, and you need a £10K loan to cover weapons, a getaway car, a rented safe house, and labour costs for monitoring the activity of the shop for a couple of weeks prior to the raid so that you can exploit this advantageous business opportunity, the bank staff are likely to be even less helpful than the guy in the annoying Nationwide adverts.

To enter a business of this kind, you either need to have the capital yourself, or know someone who has capital and is a criminal. Therefore the less profitable criminal activity there is going on around the place, the more difficulty criminal entrepreneurs will have obtaining credit.

Having recognised the argument, it is possible to dispute it. What is the total value of the trade in counterfeit or infringing goods, compared with, say, that in prohibited drugs. My guess would be approximately zero, meaning that the effect on the availability of criminal credit of effective enforcement would not be significant.

The finance argument also supports a liberal policy of reducing the number of victimless crimes. The most effective way of depriving criminal entrepreneurs of access to loans from drug dealers is to legalise drugs. Boots or Pfizer are no more likely to make loans to armed robbers than are HSBC or Marks and Spencers.

I have another unrelated point on the article which will follow shortly…

The Mercantilist Subsidy

Cafe Hayek is the place to go for tireless education on why trade deficits aren’t anything to worry about.

But another way of looking at them has occurred to me.

One thing that would make a trade deficit sustainable for a country would be if other countries contiually subsidised that country to sustain it.

That sounds a little far-fetched for a country like Britain or America, but I wonder…

I’ve probably mentioned before my amusement that at the peak of the internet and telecoms boom, a huge portion of Britain’s internet and telecom sector was bought by Europeans at inflated prices: one-2-one and Orange to Deutsche Telekom and France Telecom, Freeserve to Wanadoo, most smaller ISPs to Tiscali, and some others.

That’s a bit like a subsidy (because of the exaggerated valuations), but there’s no reason to think it was anything but a one-off fluke.

But it’s when an industry is in the throes of irrational exuberance that political pressure against foreign takeovers is strongest. And while France is the clear leader at resisting the sale of highly-valued companies for political reasons, the Blair administration has shown a very praiseworthy restraint towards such irrationality. Given that, I suspect there is a long-term bias towards overvalued assets being sold by less-protectionist countries like Britain to more protectionist countries like France. There may well have been buyers in Britain wanting to spend too much money on companies from France or Italy, but their governments would have prevented it.

One might conclude that these governments’ bad policies are benefiting Britain, but it’s important to bear in mind that we’re only talking about trade deficits — not about anything really important. The bad effects – spread globally – of protectionist policies reducing efficiency may well outweigh the benefits to people on Britain of having people near them restrained from beggaring themselves in global asset bubbles.

update: A case in point