Monthly Archives: April 2012

Free-market, Small Government and Regulations

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The free-market has been used to argue against regulations and for small government for years. However, I believe that the major supporters of using the free-market argument are disingenuous in their application of the argument. In addition, the free-market is a flawed theory which needs to be revisited by neoclassical scholars and adjusted.

The free-market theory comes from the idea that there is an invisible hand that guides the market towards equilibrium between supply and demand. This assumes that once the equilibrium is hit it will stay at that point until there is some shock to the system which would find a new equilibrium. Each time that there is a shock, the invisible hand would push the market into a new equilibrium. This idea came as a side comment in the Wealth of Nations. This idea has become enshrined in the minds of neoclassical economics in a manner that Newtonian Physics was presumed to be accurate. In both cases the theory is incorrect. Relativistic Physics has replaced Newtonian, but in Economics the free-market is still the prevailing mechanism for policy creation. There has been no evidence for an invisible hand at all. In fact Metcalf created the theory of a networked economy which argues that the value of a good becomes more valuable as more people use it. I’ve mentioned this in the past. Essentially, this will prevent any equilibrium from every being found as the price can increase and people will still adopt the networked item because it’s becoming more valuable to the user. Or the price can remain constant even when it should drop for other factors such as a reduction in cost of production. A perfect example is the iPhone. According to research Apple has a whopping 72% margins on the iPhone, even if production was moved to the US Apple would still make 42% margin on the iPhone. There also is an over production of the iPhone and strong competition, which would indicate that the iPhone should drop prices as they are capable with that large of a margin. This market has a great deal of competition and has a large number of companies producing, which indicates that it Apple should be under pressure to drop prices. However this isn’t happening because of the networked value of the iPhone. There are a huge number of apps for the phone, the apps are high quality and the product works well with other iPhones. The market has had no impact on the cost of the iPhone.

However, free-market champions would look at any effort to change the labor practices of Apple as wrong headed and regulation that isn’t required. The Market isn’t demanding any change to labor practices because the market can bear the current prices and the demand indicates that people don’t care about labor practices. However, it’s well known that there are no alternatives to Apple’s iPhone that are produced in an ethical manner. So voting with your money wouldn’t actually work here. The problem arises because there is something of a monopoly in the manufacturing of the smart phones in FoxConn. In this case there is a market failure. Which is something that neoclassical theorists argue cannot occur. The market cannot send a signal to firms because there is no mechanism in which the market could send a signal. This is can be understood if you view this industry as a networked economy. Where you see the ties between manufacturers and handset companies, which would show a massive connection to FoxConn.

Efforts to regulate the manufacturing of devices have been argued as the reason for moving the manufacturing to other countries. However, this is not the case in the case of Apple, as they would still have huge margins. It’s because the company is attempting to maximize profits, not reduce costs to be profitable. The same arguments have been used to argue for smaller government. Saying that since there are no market failures the government should not intervene in the industry.

The unfortunate thing is that these arguments immediately disappear when it comes to protecting the profits of record industries. The same free-market advocates then move to argue that intellectual property must be protected. Essentially, creating protection for a specific product through IP causes a market failure and prevents the market from operating at its most efficient because there are not other competitors in the market. Creating IP requires a huge regulatory framework from the mechanisms of registering, logging complaints and prosecuting actors that infringe on the IP.

This type of industrial policy is typically derided by the small government fans, as it is a type of regulation that selects a “winner” (IP owners) over “losers” (non IP owners). Which may be fine. However, whenever this selection pushes our government to select a winner (Music) over the fastest growing, possibly only growing, part of our economy (internet based companies) there is a serious risk to the future. As I’ve mentioned before these laws represent huge risks for innovation.

These laws are SOPA and PIPA, which I’ve discussed extensively. However, the next round of internet regulations come in the form of CISPA. This bill, which requires allows companies to share extensively with government agencies. This type of sharing of user data and information about the activities going on at the company would not go over very well from the the free-market advocates if this was a request for data about customer data for car dealerships or steel mills. Essentially, this is going to increase the cost of doing business in the US. This may prevent companies from working in the US and prevent innovation. If I was to create a company that dealt with social data I would not want to do so after the passing of this bill. It would be likely that I would be blackmailed into giving the government data about my users that I had no desire to give them.

The internet is the perfect example of a networked economy. Facebook’s value comes from the fact that it has a huge user base. This is true for Google, Amazon and Instagram (List of companies that support CISPA). Without the users the services is literally worthless. With the users a company without any revenues can be worth $1 Billion (Instagram). The difference between this bill and other bills like SOPA and PIPA is that the agreement is bidirectional. The government will likely help Facebook and Google fight Chinese attacks and give information to each other about the activities of online hacktivist groups like Anonymous. It is likely that 4chan will end up giving over IP data and other information related to anonymous and Anonymous users.

This is regulation that the internet doesn’t need and will stifle innovation. The government already has these powers, which maybe why the Obama administration is opposed to CISPA. It is also ironic that Obama plans on sanctioning countries that use Tech to abuse human rights specifically committing genocide. A whistle blower has recently announced that the NSA has intercepted 20 TRILLION emails and likely has copies of all of these stored somewhere. The passing of CISPA and any other law of similar persuasion  would likely protect companies like AT&T from future lawsuits for being complicit with these activities.

For devotes of the Free-Market these laws create market distortions and will cause serious harm to innovation on the internet. For people that understand networked economies, this will greatly undermine the value of these networks as users will likely change their behavior to mitigate the amount of information the Government can compile on them. CISPA and its sister laws SOPA and PIPA represent big government actions attempting to control and regulate industries that do not need to be regulated. In this case there is no market failure that needs to be addressed. Privacy is something that the users have been pushing for and Facebook and Google have steadily improved on those accounts. Surprisingly industry is doing a decent job at regulating itself. Finally, regulations being pushed by advocates of small government and free-market smack of hypocrisy and a lack of understanding. These laws require a deep understanding of the internet and how the market of the internet works. Without this understanding terrible laws will be passed that will damage our privacy and freedoms. For the issues that this law would protect from there are other methods that could be employed to gain the desired results without passing laws.

Contact your congressional members to fight against this bill.

Evolution and Synthetics

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An amazing scientific announcement has recently occurred, we have been able to show that synthetic DNA, XNA, is capable of evolving. This is interesting for several reasons. First, it’s just more evidence of evolution, which should be a rather no brainer at this point. Second, it shows that there are other materials that can function similarly to DNA and RNA. Finally, we can make these structures and they will behave in a similar fashion to DNA and RNA.

If we can create something that evolves under stress, it indicates that evolution is still extremely robust. If this type of material did not evolve, it would have made scientists look at both that material itself and check a few things. First, would we expect this material to evolve. Second, if yes, why doesn’t it evolve. If we are developing a material that is expected to mimic DNA/RNA, it is likely that we would expect it to evolve in a similar fashion. If it doesn’t evolve, then this could have serious consequences. This would not disprove evolution, as DNA/RNA both evolve, it would indicate that either we have the wrong material or that only DNA/RNA can evolve. It would explain why only DNA/RNA have been found on earth and not any other type of xNA material.

Since this material can evolve it leads to interesting questions itself. Did evolution occur  between DNA/RNA and other xNA’s? Did the RNA/DNA combination beat out every other stain of xNA’s? This would be interesting to understand. If RNA/DNA did evolve because it was better suited to Earth’s early environment does that mean that our current environment still suits it best? Could we evolve completely new life forms based on these structures? Only time and more research will allow us to answer these questions. But we do know that these new strains could allow us to develop treatments and other solutions to biological problems.

One way we could answer these questions is if we discover alien life that is based off of non-RNA/DNA combination. This could be in the form of anything from bacteria to full blown organisms. At this point, it is more likely we’ll find a bacteria life form based on another XNA than anything else as they are capable of surviving exposed space transportation, such as on an asteroid.

The fact that we’re able to create XNA is an amazing accomplishment. It indicates that we understand biochemicals required for life to an extent that we are able to create new enzymes that mimic RNA/DNA. We also understand that the most important metric for this experiment is not the fact that we could make a stable XNA, but that it must evolve. A stable or static XNA would not be interesting as it would have no ability to adapt in an environment where there is competition. The ability to change as the conditions change is what separates RNA/DNA from other proteins and enzymes. Only the best combinations are able to change and develop over time.

I’m excited to see how these changes will impact us. I think there are some significant long term implications for this, but at this time I’m not sure what they are. The fact that we’re capable of doing this is an incredible step.

CISPA and the problem with volunteering data

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So, CISPA, Cyber Information Sharing and Protection Act, is the newest cyber bill on the block. There is a difference between this and the other laws though. In SOPA and PIPA the laws were mandatory, and the government could simply act. In CISPA companies can willingly filter material and this may be based upon information the government provides as a threat. This was a bad situation and internet companies seem to like this law. Facebook and Microsoft are straight up supporting the law. There is uncertainty in the public if Google is or not.

So, in this law the government and internet companies can voluntarily share information about cyber threats and suspicious activities online. However, the problem with voluntary sharing programs is that they can turn into “voluntary” programs. What do I mean? Well, if the government is not required to give the information to all parties that could be affected in some sort of terrorist act the government could decide to give information to companies that are sharing information with the government. Additionally, the government could punish companies, like Twitter, that fight the government over privacy issues by not sharing information.

These are pretty obvious problems with this type of law. It assumes that each event is independent and previous actions have no consequent. This is a faulty premise. If this is viewed as a multi-turn prisoner’s dilemma, it’s obvious that with repeat interactions the best actions will always be to share. This will likely lead to sharing when there are cases of doubt over if the company should share or not. Companies will fault on the side of security over privacy, because the future benefits outweigh any punishment the users can enact on the companies.

These types of pseudo quid pro quo is impacting the US government in other ways including lobbying. It is likely that this information exchange will be used by companies whenever there are negotiations for future laws. They will be able to say, “you need to respect our rights to X, look how friendly we’ve been with the government” and then show a list of times they voluntarily gave data to the government. This was a tactic that Ma Bell used to keep their monopoly as long as they did. Because the company was providing the government with extra public goods (military research), the government was willing to over look the fact that the company was a monopoly and perhaps should be broken up.

CISPA is a dangerous law that we need to carefully weigh accepting. We need to pressure internet companies to step away from the law. We also need, if it passes, better understanding of when companies hand over data willingly and for what reasons. We should also be notified any time a company hands over our data about us to the government for any reason.

Are we talking past each other with the net neutrality debate?

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I started reading (yes another book) “Internet Architecture and Innovation” on my flight to Portland Tuesday night. It’s going to be a really interesting read, if you like the internet, economics and innovation of course. One of the first parts discusses the history of the internet and a design principle called end to end. This means that when something is transmitted certain events must happen. There are two meanings to the same principle though, which complicates things. In one version only peers can “talk” to each other and share the information. This isn’t exactly literal, because if I’m skyping the data isn’t just between skype on my pc and yours, it goes through many, but the idea is that only your pc and mine know we are skyping. In the second method, some intermediaries might know that we are skyping, through something called deep packet inspection where a router is able to read the information it processes. Both ways are still called end-to-end. Which is obviously a problem.

Another easy example. One version would require equal up and download speeds, the other doesn’t. Let’s say you have a picture and want to upload it, in the one version it would take you the same time to upload as to download it the next day back to your pc. We know this doesn’t happen.

Until reading this book I really thought that the internet was truly designed in an equal and neutral manner. However, this isn’t the case. Using these two design principles results in an internet that looks very different and we would expect it to evolve differently based on which understanding was applied.

It’s obvious that for consumers the first option is better. Where the network behind the internet is neutral and a “dumb” pipe. Why is it better? Because no one would be able to intercept your data or change the speeds you get your information or even cap your data downloads. This is bad for network owners because they can’t charge or filter as easily for specific content. They simply become a pipe that information flows through.

The differences in incentives and contexts which the design rules are applied drives this discussion. Since the participants believe they are talking about the same thing there is confusion over the disconnect. This leads to an obvious other problem, our clueless elected officials. They don’t understand how the internet works at the simplest level, let alone the esoterics of the minute differences in this argument. It is no wonder they have tried to do back door deals to get this topic to go away.

This also has led to confusion within the internet community of how the telcoms can say that the internet wasn’t developed as a neutral platform. In a way they are correct, in other ways they are wrong. It was just a matter of what was being discriminated. Before it was up vs down speeds, now it could be content. Which to them is no different. For us, it matters a whole lot more.

Book Review: Idea Factory, the history of Bell Labs

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Yea, I know I’ve just been doing book reviews.

This book was amazing. I had no idea of all the different things that Bell Labs produced from the mid 1920’s until the 1970’s and later. The book focused on the high point of Bell Labs innovation run. It followed the career of several, at the time, famous and prominent scientists that were employed at Bell Labs. Please such as Mervin Kelley (vastly improve the vacuum tube and was a long running director, VP and President of the Labs), William Shockley (inventor of the transistor) Brattian (inventor of a different kind of transistor), Claude Shannon (inventor of the field of Information Science), John Pierce (inventor of passive and active satellite). These there were many others, however, they each had significant impacts on how our modern society works.

The book does an excellent job in explaining some of the basics of how the research was conducted, what work needed to be done to make it work on an experimental level, the method of transferring the invention into innovation or a full product and the goal of each of these inventions. Mervin Kelley was famous for saying that to implement a change in AT&T’s network the new technology must be “better or cheaper or both.” This prevented a great deal of frivolous technologies from being implemented into the telephone network. Additionally, this was required to ensure that AT&T was always able to work towards reducing rates for subscribers as they were a “natural” monopoly.

This was a time when research was done to ensure that the network would be operational for 30 years without malfunction. This required huge investments in quality control and required that additional costs were built into the network for redundancies and protection. In fact Statistical Process Control was invented at Bell Labs to ensure proper quality.

How did all of this work? Well, there were two factors going on here. First, Bell Labs was able to hire the best and brightest to work on interesting problems. Second, the scientists had a continually evolving project that always needed more innovation. These two combined with a freedom to explore allowed the scientists to delve into basic and applied research. In some cases they did not know how or why something would work, but felt that it would improve the quality of the telephone network.

One of the goals of AT&T was to create a coast to coast network with universal service. This required the company to figure out how to address signal decay due to distances over several miles. To address this the company developed the vacuum tube repeater, which significantly increased the distance a voice call could travel. The manufacturing of a tube was extremely difficult and expensive. Bell Labs felt that there had to be a different way to create a repeater. Over the next 20 years they investigated off and on (with a break for WWII) how to make semiconductors work as a repeater. Bell Labs was capable of making this sort of investment because it had a guaranteed revenue stream and a mandate to continually improve the network. These two together allowed the Labs to do work that they otherwise would not have been able to investigate.

This is a very different model for innovation than we currently have in any organization. Universities come close, but they fall short in the fact that the professors are continually required to apply for more money and seek permission from someone to pursue their work. Bell Labs was much more relaxed about this.

This innovation method is also very different than some of the historic events in the US, such as the Manhattan Project or the Moon Landing. Those were single goals which allowed the focus of a great group of minds.There was never any intention of keeping those minds together for the next big project. Bell Labs had the ability to do this.

There are some organizations that should be able to do something like this. The National Labs are one, but there’s no direct business need so even this doesn’t exactly work. An organization like TNO in the Netherlands, which focuses more on practical matters could increase the amount of basic research they conduct in various different areas. TNO is structured differently than the National Labs in the US, because they are expected to work closely with both industry and universities. This gives each of the groups a strong business focus and could serve as a pipeline from basic research into business activities for the companies that work with TNO. However, at this point TNO does not perform these activities.

I give this book a 4.5/5. It was extremely well written, well organized and dealt with some amazing subject matters.