Drinking and lawyering don't mix

If you're a fan of court TV, or a lawyer, or enjoy seeing lawyers tormented, you might enjoy these bits of courtroom dialog, or at least be a bit disturbed. Here's a news story about the incident. For the best part of the dialog, though, you gotta watch the video. If your browser doesn't support the video directly, here is part 1 and here is part 2.

How to become a dictator in a democracy

Jacob C. Horberger has a great article on how Hitler became a dictator in a democracy. A key point came with the Reichstag fire, in which the German capitol building was burned down by a communist terrorist:

"The day after the [Reichstag] fire, Hitler persuaded President Hindenburg to issue a decree entitled, 'For the Protection of the People and the State.' Justified as a “defensive measure against Communist acts of violence endangering the state,” the decree suspended the constitutional guarantees pertaining to civil liberties..."

Specifically Hindenburg (not Hitler) declared that the government could restrcit civil liberties "beyond the legal limits otherwise prescribed." This was the first step to dictatorship, the Reichstag Fire Decree. The second step was the Enabling Act, which destroyed separation of powers by giving the executive branch legislative power. It was only supposed to be temporary, until the government had dealt with the terrorist threat.

This was hardly the only time in history a republic or democracy has been converted by a perceived or actual emergency or war into a dictatorship. The examples are numerous, but perhaps two more major ones suffice: the 1917 October Revolution destroyed the shaky parliamentary government of Kerensky with the dictatorship of Lenin. Dispute over the legal powers of officials and ensuing civil war turned the Roman Republic into the Roman Empire.

Why the housing inflation?

What has caused the recent and unprecedented housing inflation, rendering houses less affordable in the U.S. than they've been for over a century? Almost surely the answer is the recent rapid increase in zoning and code regulations, driven by coalitions of homeowners under the aegis of Baby Boomer environmentalist and smart growth ideology. Much of the extra costs go to "architects" who must be paid to approve both new housing and additions, but much also come from severe restrictions, for example on height, and from vast areas of land simply being put off-limits to housing. The result is a large benefit to homeowners who sell or get equity loans, but an even larger loss to non-owners who would like to purchase, including millions of people stuck in substandard or cramped housing and over a million outright homeless.

This study, among many other studies and observations, shows a strong correlation between local regulations and local housing prices. The correlation between housing prices and other plausible variables, such as density, is by contrast relatively weak. A reaction which purports to solve the housing costs problem, while actually making it worse, is inclusionary zoning, which more than tripled in California between 1990 and 2003.

See also my previous post on rent-seeking coalitions at the national level.

(Click to enlarge. The following graphs come from the above-cited study).

"Do you think government is too big, too powerful?"

Yes, I do, I say readily. Of course, I'm not being interrogated after losing an iPod down an airplane toilet. I'm not normally a big fan of FDR, but "we have nothing to fear but fear itself" seems rather apropos.

Pollution reduction with cap & trade

The EPA has an interesting report on the cap-and-trade programs for acid rain pollutants. These markets have led to dramatic reductions in the pollutants while costing industry (and therefore consumers) relatively little. This is reflected by the fact that electricity prices have also fallen since the advent of the acid rain pollution markets. Anybody who is serious about reduction of large-scale pollution from large sources sees cap and trade as the leading method of reduction. The program has been so successful the EPA has been able to set new ambitious goals of reducing sulfates by a further 70% and nitrates by a further 60% without serious objection from Republicans.

The next big challenge is carbon dioxide, the probable main cause of global warming. The European Union Emission Trading Scheme is the first stab at this. According to critics the European authority has given away too many grandfathered credits and bought too few back, causing the price to decline too far and, allegedly, too few actual emissions reductions to be implemented. While emission markets themselves work remarkably well, where the actual cap of emissions should be set remains a political hot button. Fortunately, the pollution market also makes it far easier to far more accurately estimate cost-benefit ratios, thus greatly informing the political debate.

Besides the cap level, the most interesting debate is over auctions versus grandfathering for allocating the initial rights. While the U.S. acid rain market achieved great results with grandfathering the initial credits, it's probable that emissions markets would work even better by auctioning off the inititial credits rather than giving them away based on current emissions. Grandfathering creates an incentive for polluters to increase their emissions in the years befor the grandfathering levels are determined. On the other hand, there's an argument to be made that current emitters have by their legal operations developed prescriptive rights to their current levels of emissions, and the acid rain markets have demonstrated that grandfathering works.

The U.S. market also shows that it takes some time to develop these market institutions. An initial dry-run period which focuses more on developing the market and monitoring institutions rather than steep carbon dioxide reductions is probably a good idea. Once the institutions have evolved into an efficient form dramatic reductions in carbon dioxide emissions from large sources will likely be possible, as indicated by the EPA now being able target dramatic reductions after a decade of acid rain emissions trading.

The third interesting issue is whether to include third party carbon dioxide sinks in the market. This would be a novelty not yet tried in other pollution markets, but it makes quite a bit of sense since we don't really know yet whether emissions reduction or creating carbon dioxide sinks is the better strategy for carbon dioxide reduction. The market should motivate both solutions. But measuring the amount of carbon dioxide sunk, and determining for how long a period into the future it must be sunk for, are among the novel issues to be addressed.

The fourth issue, crucial to getting carbon dioxide markets to actually cut back the rising global emissions, is to extend them to other developed countries and, most challenging of all, to developing countries.

Colliding galaxy clusters show dark matter

Astronomers have now observed dark matter separate itself out from normal matter. Normally dark matter and ordinary matter are too well mixed to observe separately. However, when galaxy clusters collide at high velocity (the cloud observed here was produced by a 4,700 kilometer per second collision) ordinary and dark matter can become separated.

In this research, the position of hot gas (ordinary matter) in a vast odd cloud resulting from such a collision was measured with an x-ray telescope. The center of gravity of the combined ordinary and dark matter was observed by measuring its gravitational lensing effect on bright galaxies behind the cloud with an optical telescope. The difference between the two positions showed that the dark matter (which normally outweighs ordinary matter 6 to 1) had become separated from the ordinary matter.

The leading explanation for the separation is that the dark matter doesn't experience drag from electromagnetic forces -- it only reacts to gravity -- and thus doesn't get as perturbed from a collision as ordinary matter.

The image above shows dark matter positioned as indicated by gravitional lensing (blue) painted onto the optical image. This video shows a simulation of galaxy clusters made out of dark matter (blue) and ordinary matter (red) colliding and producing such a cloud. More here.

Astronomer Sean Carroll says this research "proves beyond a reasonable doubt" that dark matter exists. I love it when scientists talk my language. :-)

Patents: the coming obviousness showdown

The most notorious feature of the U.S. patent system is the current test for obviousness. On top of being "novel," patents are supposed to be "non-obvious." The novelty test is relatively straightforward: nobody must have previously described a device that has all the elements of the disputed patent claim. Thus, if A+B, B, and C have already been made or described, then A+B+C and B+C are novel but A+B is not.

In order to not bother people with trivial combinations, patent law has longed deemed that on top of novelty there be an "inventive step," which in the U.S. now goes under the name of "non-obviousness." To the Supreme Court in the 1950s, this meant that a patent claim must demonstrate "the extraordinary level of innovation, beyond the capabilities of a person having ordinary skill in the art, that warrants the award of a patent." This expressed most engineers' aspirations about what a true invention consists of, but it was notoriously subjective, leading to arbitrary decisions by patent examiners and courts. To create a more objective test, in the 1970's the Supreme Court held that a new combination which did not change the respective functions of at least some of the elements was obvious.

Then Congress created the Federal Circuit and granted it a virtual monopoly over patent appeals. The Federal Circuit proceeded to radically change patent law in a variety of areas, usually in favor of the patent seeker or holder. Until this most recent term, the Supreme Court has largely let it do so. But now, first with eBay and now with this obviousness case (KSR v. Teleflex), the Supreme Court is starting to rein it in.

Among the law the Federal Circuit changed, it made the obviousness test far more difficult for a patent examiner or alleged infringer to prove, but also made the test far more objective and straightforward. To be obvious, according to the Federal Circuit, there must be a teaching, suggestion, or motivation in prior literature that would have led a person of ordinary skill in the art (i.e. your typical engineer in the particular field) to have made the claimed combination. For the purposes of this counterfactual test it is assumed that this hypothetical engineer had all relevant prior art pasted on the walls of his office. The teaching or suggestion doesn't have to be a full-fledged description of a combination of the elements, as in novelty, but in practice the infringer almost has had to prove a lack of novelty in order to prove a lack of obviousness, rendering the obviousness test almost superfluous and leading to the raft of trivial patents engineers complain of these days.

I'm proud to say that the professors of two of the best patent classes I took in law school are leading the charge to overturn the Federal Circuit's obviousness test. John Duffy is co-counsel for the petitioner, KSR, which is challenging the Federal Circuit law. Robert Brauneis is Counsel of Record for the 24 Law Professors as friends of the Court who support reforming the obviousness test. These are two very talented individuals and I predict a splendid success.

KSR in its brief argues that the Supreme Court's test(s) should be restored, but it gives short shrift as to what specifically the test of obviousness should be. If you have good idea(s) for what the test(s) for obviousness should be, now is the time to let us know.

Patently Obvious has more discussion of the issue and links to all the various briefs.

Colonialism just ain't what it used to be

1891, British armed forces stationed in (undivided) India: 90,666
Population of undivided India: 287, 223, 431
Number of Indians per British soldier: 3,168

2006, American troops stationed in Iraq: c. 150,000
Population of Iraq: 26,074,906
Number of Iraqis per American soldier: 174

More here. The ratio of Indians to soldiers of British origin was even higher under the old British East India Company. Furthermore, even though the British East India Company, and later the British Crown, unified and controlled and radically changed the government of India, British civil service in India "had a maximum strength of little more than a thousand," according to Niall Ferguson's colorful book Empire.

It's no longer our highly educated and culturally unified mercenaries taking sides in wars between badly divided and largely illiterate native polities, as during the colonial era. National sympathies, stemming mainly from ties of a written language and shared religion, now unify millions of people at a time into cohesive, educated, and highly motivated political blocs that we try to control at our peril. The sophisticated communications and financial networks such nations set up (even if they are stateless) cannot be disrupted for long. A small subset of such megagroups who have particularly strong views can, on the other hand, now severly disrupt traditional occupation and traditional government.

It's not now and never was a problem of "not enough troops on the ground." We are already deploying far more troops in Iraq than is historically normal for a successful overseas occupation. If we continue to try to play Empire, or even just world policeman, it will destroy us.

What was the Coalition Provisional Authority?

The Coalition Provisional Authority (CPA) governed Iraq between April 2003 and June 2004. Despite the governmental powers it wielded, its legal nature is "shrouded in ambiguity," according to federal district court Judge T.S. Ellis III. This Congressional Report concurs.

The issue made it to court due to a lawsuit against various CPA contractors. The issue was whether the CPA was a U.S. federal agency, and thus the CPA's contractors federal government contractors. Judge Ellis held that the plaintiffs could not prove that they were. (Incidentally, some of these contractors, such as Custer Battles LLC, are also interesting entities: private companies apparently wielding some governmental and military powers delegated from the CPA. But that will have to be a subject for another time. First we have to figure out what the authority was that CPA had to grant).

Was the CPA created by President Bush as a separate federal agency in a National Security Directive? Was it a division of the United States Department of Defense as the Department of Justice now argues? Was it a United Nations agency created pursuant to a U.N. Security Council directive? Was it as Paul Krugman calls it a "private fiefdom"? Was it a private contractor wielding today's version of the colonial franchise? Was it a government created by a secret charter? (Imagine if the U.S. Constitution was a state secret. I can't do it, but let's try). Or -- most likely of all -- was it simply an ad-hoc creation based on no good legal procedure whatsoever? According to Judge Ellis, "....there is no formal document – whether statute, United Nations Security Council resolution, or other organic document – that plainly establishes the CPA or provides for its formation." The Congressional report agrees: " Detailed information that explicitly and clearly identifies how CPA was established, by whom, and under what specific authority, is not readily available."

The CPA's direct predecessor in governing Iraq was the Office of Reconstruction and Humanitarian Assistance (ORHA). The ORHA is the product of the still-classified National Security Presidential Directive (NSPD) 24 in January 2003. Its first head, retired Lieutenant General Jay Garner, was apparently hired by the Secretary Defense. A news story stated that he would report to the commander of the U.S. Central Command, who was at the time General Tommy Franks. But Garner's position description stated:

This Office [ORHA] is established at the direction of the President of the United States, and is located for administrative purposes under Boards, Commissions and Task Forces, Washington Headquarters Services. This Office is under the supervision of the Under Secretary of Defense for Policy.

Garner's tenure was short-lived as the OHRA was within two months replaced by the CPA:

On May 13, 2003, the Secretary of Defense designated Ambassador Bremer as CPA Administrator. The first regulation issued by Ambassador Bremer, dated May 16, 2003, identified him as Administrator of CPA. The authority’s Inspector General (IG) stated, in his initial report to Congress, that OHRA became CPA in May 2003. However, a March 2004 DOD IG report stated that the Deputy Secretary of Defense, in a June 16, 2003, memorandum, dissolved ORHA and shifted ORHA’s functions, responsibilities, and legal obligations to CPA.

The senior officials of the CPA were various active and retired U.S. military officers, U.S. ambassadors, and a liason from the U.S. Agency for International Development (USAID).

NPSD 36 in May 2004 retroactively defined the CPA as a "temporary organization" under 5 U.S.C. § 3161. But it is still unknown under what "law or Executive order," if any, the CPA was established so as to qualify as a "temporary organization."

In a report to Congress the Office of Management and Budget stated the following:

The Administrator of the Coalition Provisional Authority (CPA) reports to the President through the Secretary of Defense. He oversees, directs and coordinates all U.S. Government (USG) programs and activities in Iraq, except those under the command of the Commander, U.S. Central Command (CENTCOM)... The CPA is vested by the President with all executive, legislative and judicial authority [i.e. governmental power] necessary to achieve its objectives, exercised consistent with relevant U.N. Security Council resolutions, including [U.N. Security Council] Resolution 1483,32 and the laws and usages of war. The CPA Administrator has primary responsibility for exercising this authority.

"The CPA is vested by the President with all executive, legislative, and judicial authority..." sounds very much like the language of Britain's colonial charters. But it subsitutes "vest" for "grant" (I'm not sure what thelegal implication of that might be) and lacks anything like the very redeeming feature of the American colonial charters that reserved rights to their "English liberties" for the residents of the granted area -- one of the main origins of the United States' Bill of Rights. Only the "laws and usages of war" seem to have restricted the CPA under the charter language reported here. This is more like the charter of the Royal Guinea Company that granted said corporation martial law power so that the company would have a free hand to defend its taking of slaves. To be fair, the United States was fighting a war, and the CPA unlike the Guinea Company was temporary and not, as far as I know, taking slaves.

Under the principle of conservation of rights, the President could not grant any more authority than he himself possessed under law. But that's an interesting side issue.

If indeed the Adminstrator of the CPA "reports to" the Secretary of Defense, this suggests a principle-agent or employment relationship rather than a property relationhip (the owner of one property does not "report to" another). So that rules out a true private franchise (or, as Paul Krugman crudely and naively puts it in today's New York Times, a "private fiefdom") as a theory. Thus it wasn't as independent as the typical British colonial corporation. That doesn't rule out some other kind of contracting relationship, however, or just a DoD internal hierarchy, either of which could be at least as or more corrupt than a so-called "fiefdom." There was never any such legal entity as a "fiefdom," by the way -- the term is a figment of non-legal historians' imaginations and of uncritical readers of history like Paul Krugman.

Of course the Brits, still playing Empire, chimed in to say that they, too, helped set up the CPA in this letter to the United Nations:

In order to meet these objectives and obligations [disarming Iraq and providing for the humanitarian needs of Iraqis] in the post-conflict period in Iraq, the United States, the United Kingdom and Coalition partners, acting under existing command and control arrangements through the Commander of Coalition Forces, have created the Coalition Provisional Authority, which includes the Office of Reconstruction and Humanitarian Assistance, to exercise powers of government temporarily, and, as necessary, especially to provide security, to allow the delivery of humanitarian aid, and to eliminate weapons of mass destruction.

The CPA's status was also a matter of PR:

Billing itself as an international coalition, while eschewing the label “federal agency,” might be construed as an effort to make the organization more palatable, at least symbolically, to Iraqis and others. For example, the CPA website address ended “.com” and the PMO website ended “.net.” United States government website addresses typically end “.gov.” Furthermore, the Iraqi flag is the only flag that appeared on the two websites. No flags from coalition countries were displayed.

Of course Congress' biggest concern of is

Further compounding the problem, oversight initiatives might have been met with theresponse that the activity in question was carried out under an authority over which the oversight body — Congress — had no jurisdiction.

Shades of Parliament declaring oversight authority over the American Colonies? (That was the main legal issue of the American Revolution, I hope my U.S. readers recall). It's better than the leading alternatives of unaccountable Presidential authority or United Nations authority, I suppose. And unlike Parliament's claim it is presumably like the CPA a temporary one.

The Congressional report concludes that "[t]he status of this organization remains open to question." It suggests that the CPA has a "capacity as an entity of the United State government" but that it also had "other roles." That means that the CPA was able to operate with more flexibility and less accountability: "[p]ossibly, the mix of arrangements allowed CPA to operate with greater discretion and more authority, and have access to more resources, than if it had been solely a federal agency, or an arm of the United Nations."

Available information about the authority found in materials produced by the Administration alternatively (1) denies that it was a federal agency; (2) states that it was a U.S. government entity or instrumentality; (3) suggests that it was enacted under United Nations Security Council Resolution 1483; (4) refers to it, and OHRA, as “civilian groups ... reporting to the Secretary [of Defense]”;143 (5) states that it was created by the United States and United Kingdom; and (6) asserts that it was established by the then-Commander of CENTCOM. Without a clear, unambiguous statement that declares the CPA’s organizational status, clarifies what its relationship was with DOD and other federal agencies, and addresses the competing explanations for how it was created, various questions are left unanswered, including whether, and to what extent, CPA might be held accountable for its programs, activities, decisions, and expenditures.

I couldn't agree more. But I'd add the following: bureaucratic hierarchy is not the be-all and end-all of government, nor is Congressional oversight, especially when the people being governed (here the Iraqis) are not voting for said Congress. (No taxation without representation, remember?) Just as the printing press era led to substantial reorganization and the rise of bureacracy, so the era of Internet consciousness and asymmetric warfare may lead to the rise of new, and the recreation of the best of old, alternatives to a command-and-control bureaucracy for basic governmental functions. Franchise government -- the colonial corporation and its subsets -- probably has a valuable role to play if we insist on conducting "democracy building" operations overseas. The crude recapiulation of this form (alas, sans most of the legal protections that historically accompanied it) in the form of the CPA and its contractors suggests that the franchise form is indeed re-emerging.

Democracy spread to America, not in the form of a central government bureacracy, and certainly not in the form of a military authority, but in the form of colonial companies whose charters preserved for residents our "English liberties." If we use franchises, however, we need to use them openly, and we need to revive the limitations we imposed on them -- especially the ability of victims of their abuses to sue in royal courts (for the U.S. that would be federal courts), especially for violations of the kinds of procedural rights now found in the U.S. Bill of Rights and the international Geneva Conventions regarding war.

Meanwhile, we should have no secret charters. How much freedom would we have under the U.S. Constitution if it were secret? How well would our "English liberties" have been preserved in the American colonies, and the institutions of democracy developed, if our charters had been secret? How accountable would such a government be? NPSD 24 should be declassified immediately, and no secret charter should be considered to have any legal authority by any government official or any other citizen any time in the future.

A disturbing new beast

Cancer cells have been discovered that escaped from their hosts and evolved into contagious parasites.

Conservation of rights

Under the first sale rule, a patented or copyrighted work can be resold without the permission of the patent or copyright holder. For example, if you buy a book you can give it away or resell it without getting permission from the publisher, even if the book contains a copyright notice that purports to forbid this. Similarly, if you buy a patented widget, you can generally resell it without the permission or against the objections of the patent owner. The first sale is said to exhaust the rights of the patent holder over that object.

The Federal Circuit court in the United States has held that for patents the first sale rule does not apply to copies, including seeds based on purchase of the parent seed:

The fact that a patented technology can replicate itself does not give a purchaser the right to use replicated copies of the technology. Applying the first sale doctrine to subsequent generations of self-replicating technology would eviscerate the rights of the patent holder.

Furthermore, the Federal Circuit held that the farmer had no implied license to use the daughter seeds, because Monsanto's license to the wholesaler restricted this use and "a seller cannot confer broader rights via an implied license than it has been granted by the patent holder."

This latter is based on a general principle of the common law of property: you can't grant more than you own. There is an interesting exception to this principle for financial property (negotiable instruments).

The idea at work here might be called a conservation of property rights: you can't sell what you don't own and you can't take back what you have sold. It is a sensible principle that greatly simplifies the legal relationships we have with each other. However, this case, and some other recent cases providing for exceptions to the first sale rule, seems to give rise to a new and odd violation of rights conservation. A patent owner can lose its rights over an object, but later they can re-appear again. Here, the patent owner Monsanto lost its residual rights of control over the seeds when it sold them, via the first sale doctrine. But then, when the farmer grew the seeds and planted the daughter seeds, the patent owner's rights suddently re-appeared.

For the case of seeds, this paradox can be resolved by treating the daughter seeds as separate objects from the parent seeds. Under this view, what the farmer was doing was the equivalent of manufacturing new widgets rather than simply repairing the same widget (which would not require the patent owner's permission under U.S. law).

A more disturbing violation of rights conservation occurs in the issue of national versus international first sale exhaustion. Many countries have a simple rule: the first sale of an object by a patent owner anywhere in the world exhausts that owner's patents covering the object in that country. This was also the view in the majority of federal circuit courts in the U.S. before creation of the Federal Circuit and its monopoly over patent law.


Earlier this year the Federal Ciruit in the Jazz Photo took a different view. Now if you buy, for example, a widget in Japan, paying royalties to the Japanese patent owner in Japan, and then export the widget to the U.S., you still need permission of the U.S. patent owner (usually the very same person with the same kinds of patent claims as the Japanse patent owner). The patent owner's rights over that object disappear upon first sale in Japan but magically re-appear when the object crosses the border into the U.S. This can only be reconciled with conservation of rights by the idea that that the Japanese patent is a different property right than the United States patent, even though they are owned by the same person and protect the same invention. It is as if you drove your car from Virginia to Maryland and the dealer you bought it from came along and repossessed it, because your Virginia title did not give you Maryland title. That would be a very strange and unfortunate world. It is far simpler, and makes for much more secure property rights, to treat property rights as universally conserved even though they are titled by a local authority.

Limits on the income tax

The D.C. Circuit held today that the definition of "income" in the Sixteenth Amendment does not include "damages received solely in compensation for a personal injury." More generally, a "restoration of capital" is not income, nor is “a substitute for [a] normally untaxed personal ... quality, good, or ‘asset’." If it's not income, and it's not taxable elsewhere in the Constitution (which severely limits the federal power to tax), then the federal government may not tax it, regardless of what Congress or the IRS say.

Because of the "sanctity of property" (what a refreshing phrase to read in a federal court case!), the court says it cannot defer to Congress to define what constitutes "income" and thus what is taxable under the Sixteenth Amendment. Thus, even though the Internal Revenue Code excludes from the income tax only compensation “received ... on account of personal physical injuries," compensation for emotional and reputational injuries is not "income," therefore not taxable. A good application, I'd say, of charter-based law and the principle of least authority (more commonly known in this context as the principle of enumerated powers, as opposed to the scheme of unenumerated rights per the Ninth amendment).

One interesting objection that may be raised by the IRS on appeal is that even if "restoration of capital" and compensatiion for "normally untaxed personal...asset[s]" are not taxable under the Sixteenth Amendment, they may under some circumstances (including non-physical personal injuries) be taxable under the original Constitutional grant of the power to tax to Congress. This gets us into the old argument over proportionment, direct taxation and the income tax that was current during the years before the enactment of the Sixteenth.

The grant of tax power to Congress under Article I severely limits direct taxes: "direct Taxes shall be apportioned among the several States which may be included within this Union, according to their respective Numbers." (A. 1, S. 2, C. 3). This language would have to be quite severely twisted (as it unfortunately was in some late nineteenth century cases, though not this far) to fit in a direct tax on compensation, since such a tax is not apportioned among the states according to their population, but rather is apportioned according to the amount of the compensation. That's why they passed the Sixteenth Amendment in the first place: because the Court back then would not stretch the language far enough to include a general income tax. The principle of least authority, via the Ninth and Tenth Amendments, strongly urges judges who read the Constitution thoughtfully to not interpret the necessarily concise language of the enumerated powers to include more power than ratifiers intended to grant.

The opinion was written by Douglas Ginsburg, one of my favorite judges.

From parody to politics

Bastiat versus Clinton in the battle of the candles.

Psychological pricing and mental transaction costs

A common kind of mental transaction cost is demonstrated by psychological pricing, and in particular the strong tendency to price things at $(X-1).99 instead of $X.00.

As Brian Moore points out, an extra digit is an easy visual way to filter out higher prices:

If I see the following prices for gas:

.99
.98
1.02
.89

My brain immediately dismisses the 3rd price, then goes back and looks at the others to find the lowest A seller doesn't want to be eliminated like that.

Furthermore, we save on mental transaction costs by processing the more signicant digits first and often ignoring the rest. That fits our habit of scanning numbers from left to right.

The return of human uniqueness?

There's been a lot of rhetoric about how human genes are only 2% (give or take a wide margin -- there are many ways to count it) different from chimpanzees. Despite all our fancy culture, biologically we're just another mammal, nothing special, according to this comforting and generous-sounding gem of relativism. Just, however, as in a computer some bits are more significant than others, some genetic differences are far more significant than others. So I've never been much convinced by the "small difference" argument to stop, despite the inevitable frowns at my supposed provincialism, believing that humans are, biologically as well as culturally, rather strange and wonderful as far as animals go.

When you think about it, from several points of view, apes are already a bit strange for mammals, and we are a quite strange kind of ape. Our cerebral cortex is three times as big as a chimp's, but that is hardly the most qualitative difference between ourselves and other apes. We are bipedal -- quite a rarity in mammals. Unlike almost all mammals and any near relative we are naked. We have vocal chords and speak grammatical language full of metaphor. We have something close to monogamy, again rare for mammals, and many of us seem to instinctively collect decorative objects -- AFAIK a habit shared with no other mammals but only a few birds. Then of course there are hands and technology -- with which we've done unprecedented things like strip other mammals of their fur so as to don it ourselves and keep our own otherwise preposterously exposed bodies warm. The facial evidence has always suggested that some rather improbable and important things happened during our evolution that didn't happen with other mammals.

Some genetic evidence for this human uniqueness has just been published. In particular, a very interesting RNA gene called HAR1F that operates during fetal development, and has been remarkably stable among almost all the other land vertebrates for the last 300 million years, has radically changed in the last 5 to 7 million years since our line split off from the chimps'.

The difference between chickens and chimps - which are separated by 310 million years of evolution - is just two mutations out of a total DNA sequence of 118 "letters" of the genetic code. Yet the difference between chimps and humans - separated by 6 million years - is 18 mutations in the same DNA region.

I don't expect this to be the last revelation of improbable and fundamental genetic changes that occurred between chimps and humans.

I'm sure this will suggest to some intelligent intervention. There's already a big group of late night radio fans who think aliens intervened in human evolution, and it's also a good bet that religious "intelligent design" folks will use this finding as fodder. To me, it doesn't matter much how improbable we are, because we wouldn't be thinking about these things in the first place if it hadn't happened. In any case, the small number of chemical changes that these researchers have found in the HAR1F gene are not, just by counting them, improbable. Their improbability can only be deduced from the fact that anything similar occurred so rarely among other land vertebrates. But you can't deduce from that fact that it's so improbable that it's a puzzle why it occurred at all.

The high improbability of our own evolution may actually make the alien-tinkering hypothesis less likely because it makes aliens less likely. If the evolution of intelligence is highly improbable this would substantially lower the factor f(i) in the Drake Equation, helping to explain the Fermi Paradox.

Another point to consider is that evolution often doesn't follow neat statistical distributions. Rather it exhibits leptokurtism, wherein one improbable changes often makes other otherwise improbable changes more likely to occur. Once one improbable change occured, functional synergy and the exploration of uncharted evolutionary territory made the others more likely to follow. The leading candidates for the first improbable change that triggered the others are bipedalism, monogamy, and nakedness, not vocal chords or brain size increase, which are known from the fossils to have occured much later than at least bipedalism. Thus I conclude that the HAR1F changes, most likely implicated in brain development, were probably a late set of changes in human evolution made possible by some earlier improbable genetic changes.

Smart contracts, tying, and product liability

Ed Felten redubs smart contracts, at least for the purposes of tying, "PRM" (Property Rights Management). A traditional example of tying is the razors-and-blades strategy: a company sells you a razor at a loss and recoups the profit on the blades. This marketing strategy is also popular with printers and cartridges. To prevent consumers from buying off-brand cartridges and thereby foiling the marketing strategy, some printer manufacturers have embedded a cryptographic protocol whereby the printer authenticates the cartridge as containing the private key of the manufacturer. Extrapolating from this example, Felton complains about looming restrictions on our use of everyday items if "PRM" becomes a reality. Tyler Cowen rebuts Felten's complaints with respect to tying on economic grounds, pointing out that where manufacturers have an incentive to tie, it generally increases the welfare of consumers as a whole as well as manufacturers.

While I am a proponent of most kinds of smart contracts, I'm also quite sympathetic to the freedom-to-tinker movement. I generally oppose legislation like DMCA that artificially protects insecure smart contracts. And consumers should be empowered to choose their smart contracts wisely. I support open source protocols so that somebody neutral has read the smart fine print. Smart contract protocols, like legal contracts, should be in the public domain.

As a commentor to Felten's post pointed out, manufacturers usually don't have contractual privity with consumers, unless you order direct. Through smart contracts, manufacturers may gain some digital privity with the end user.

At least in the context of the United States legal system, it's fair for manufacturers to restrict how consumers can use their products, since, breaching privity, U.S. courts at least have already decided that manufacturers are strictly liable for unsafe products, often even when the consumers misuse them. Thus manufacturers go to great lengths to make products "idiot proof" and also, alas, "tinker proof." Since Felton wants the freedom to tinker, he should oppose strict product liability. At least, people who tinker and get hurt should not be able to sue the manufactuer.

Finding jammers in a DC network

David Chaum's dining cryptgraphers network is a nifty alternative to his digital mix to untraceably share encrypted information. But it suffers from the problem that since the participants are untraceable, one or more of them can jam the channel, preventing other participants from having their messages received. Bryan Turner has figured out a way to find the jammers if they are less than one-third of the total participants. Presumably this is accomplished without being able to find out much of anything else interesting about a participant. I suggest that a similar technique may also work for a jamming attack in a secure multiparty computation.

Book consciousness

Marshall McLuhan, Elizabeth Eisenstein and others have described the importance of the "printing revolution" to European developments such the Reformation, Renaissance, and science. According to Eisenstein, printing finally foiled the entropy that had destroyed the vast majority of written works since ancient times. Printing also enlarged the bookshelves of scholars all over Europe: by a factor of fifty or more by the middle of the 16th century.

I'd go even farther than Eisenstein. Printing soon brought literacy to vast numbers of people (eventually to the vast majority of us). Printing, especially printing in newly standardized vernaculars, changed the very consciousness of people, and turned a small corner of the world, Western Europe, into a culture that in many ways conquered the world. Widespread decentralized printing and the accompanying book markets, new schools, and rise of literacy gave rise to a new form of consciousness -- book consciousness.

Colombus was among the first generation of navigators who had been reading avidly and widely since a child. On his bookshelf was Marco Polo's Travels. On his voyages he carried maps made by geographers who had been literate sincethey were children, and he carried astronomical tables that had been printed widely across Europe. These tables had been made by a Hungarian-Italian mathematician whose bookshelf was full of ancient Greek science and mathematics. Such information had been rather inferior and far less available just a few decades before.

With the easy conquest by tiny Portugal of Asia's vast and ancient sea trade routes, rapidly literizing Western Europeans were by the early 16th century demonstrating a vast superiority in naval affairs. In navigation as in battle officers using accurate charts and astronomical tables were at a premium. (Europeans did not have quite such good luck on land against the Turks). Western Europeans would retain completely uncontested (except among each other) naval superiority on the world's oceans until the Japanese victory over Russia in the early 20th century. The Japanse by then had long since taken up printing and had a very well read population . Even on the ground by the 18th century English merchants, officers, and civil servants, practically all of them literate and widely read since young children, were finding it quite easy to conquer and take over the administration in far larger and otherwise highly advanced civilizations like India.

Soon after the spread of the printing press, the very fundamentals of organization in Western Europe began to change. In the late Middle Ages organizations, even royal and papal bureaucracies and banking "super-companies", rarely engaged more than a few dozen employees. Organizational size came up against the severe limit of the Dunbar number. By the end ofthe 16th century, the colonial companies and bureaucracies of Spain and Portugal were vast, highly literate, and well coordinated. Officer corps had often been raised on military books and thus able to draw lessons from a wide variety of ancient and recent battles. Even a minor salt extractor in Wear, England, was employing 300 men by the mid 16th century. (Large organizations in manufacturing would largely have to wait until the 18th century and the industrial revolution, however).

Before book consciousness there had been no national languages, but only a range of often mutually incomprehensible dialects and in Western Europe the language of the tiny literate elite, Latin. With newly unified national vernaculars, organizations were able to coordinate and grow in an unprecedented manner. A much larger group of people, raised on the same written language, increasingly also came to look and speak similarlyand become far more mutually trusted. It was the birth of national loyalty and nationwide webs of trust. The "tribe" to which we are instinctively loyal vastly increased in size. The pool of already somewhat trusted "same tribe" people from which a bureacracy could recruit new members vastly increased. National polities and militaries were able to coordinate political, economic, and battlefield strategies in an unprecedentedmanner. The 16th century saw the first major growth of the joint-stock corporation, enabling far more capital to be invested in the enlarging organizations that engaged in mining and manufacture as well as government and conquest. This development is probably a response to the new ability to form larger organizations, since the basic ideas (corporate law, shares of stock, etc.) had already been in use in Europe for quite some time. Some of the early English 16th century joint-stock companies included military expeditions (Drake's privateering voyages and naval actions were financed through joint stock companies: a different company for each expedition), trading and slaving companies (the Muscovy and Guniea companies) and mining and manufacturing companies (the Royal Mining Company and the Royal Batteries & Mines Company). The most famous became the English East India Company, but many of the American colonies were also joint-stock corporations. The first widely traded and initially most successful joint-stock company was the Dutch East India company,which quickly grew far beyond the Dunbar number to have thousands of employees.

Book consciousness changed almost every profession. Good books on a trade could greatly increase the knowledge imparted during apprenticeships, and indeed eventually led to the end of the apprecenticeship system. Meanwhile, widely printed books on mathematics and science, such as Euclid's Geometry, gave knowledge that could be used in a wide variety of occupations, and training was often restructured to assume and build upon such new general knowledge. This led to a profound change in labor productivity, moving mankind away from the Malthusian curve and (along with the expansion of organizational size beyond the Dunbar limit) eventually to the industrial revolution.

A typical example of the rise of book consciousness was the radical improvement in how cases were reported in the English legal system by the late 16th century. For the first time, cases and statutes were widely and accurately cited. This reflected the fact that judges, barristers, attorneys, and even some of the parties had for the first time printed books of statutes and cases at their fingertips -- instead of having to find the single copy of a scroll hidden away in some monk's or bureacrat's library. The first great English opinion writer, Sir Edward Coke, dates from this period. In turn, the wide availability of printed statute and case law led to basic changes in the way we interpret and view the law.

Almost invariably, during the colonial period, when largely illiterate cultures (i.e. cultures where mostof the second-tier nobility, military officers, and merchants, and almostall craftsmen and farmers, had not been raised on books) were encountered by literate Europeans, the latter described the former with severe ephithats, suchas "savages." This makes our forbears seem odious to us, who understand that all human races are capable of literacy, and indeed by now book consciousness has spread to most of the globe and most of us encounter a widevariety of highly literate people every day. However, at least in the 16th century for book-raised Western Europeans this was not so much a racialprejudice as a largely accurate observation. "Savage" was applied not only to neolithic Africans and Americans, but also to Irish backlanders and Scottish highlanders. There was a similar Western European attitude to otherwise very advanced civilizations in India and China. From the 16th century onward, any culture that did not have book consciousness was a culture of savages.

It's possible that today the availability of thousands of times still more material to read, readily accessible by search engine, and the expansion of a small number language groups (but especially English) to a worldwide real-time network is creating a new "Internet consciousness." People within this network may soon come to see people outside of it as savages. But that is a topic for another post.

Charters and judicial review

There is a long-standing controversy about the idea of parliamentary supremacy -- the idea that legislative law trumps all other law. That is currently the dominant theory in England, but the United States holds a contrary view -- here judges review legislative laws against a prior and higher law: a written constitution (and perhaps also against natural law, but that is a subject we won't pursue here).

Parliamentary supremacy was not always the view in England. Sir Edward Coke, for example, considered some old statutes and case precedents part of a higher "common law" that could on occasion trump statute. Coke's doctrine was not overtly repudiated by English legal courts for several hundred years, but neither was it strictly followed by later judges. Parliamentary supremacy was a major legal issue in the American Revolution which separated the United States from England.

One of the problems with the modern debate over this issue is that the question is put in modern terms that assume that statute and case law where on point must always be followed --the modern rigid view of written law. But this was, if out of practical necessity if for no other reason, not the medieval view of the law. Books (or, more often, scrolls) of statutes and case records were often locked in dusty libraries where students and barristers and attorneys and even judges had difficulty gaining access to them. Sometimes they had simply been destroyed. As a result, prior to the 16th century printed editions, much of the learning about the law came from oral instruction rather than books. It was gestalt in nature. This rendered it, by our standards,very flexible but also disconcertingly uncertain. Not only did judges sometimes forget statutes and cases; they could often also effectively just ignore statute or case precedent if they felt it didn't lead to a just outcome in the case at hand. The legal historian Theodore Plucknett, for example, recorded several medieval cases where statutory law was clearly on point but ignored. Judges thus could effectively nullify statutory law, which is even more powerful than the ability to review statutes against a higher law. Records of cases prior to the 16th only rarely cite either statutes or prior cases, but simply declare what the interlocutor believes the law to be.

Another crucial point is that up to the 16th century in England (and even, at least nominally, somewhat later) parliamentary statute was consideredto be an opinion about what the law was, not a statement of new law. The same held true for case precedent (and nominally still does even up to today). Of course, in reality law was always evolving, and statutes might indeed radically change things. But this ancient attitude towards the law was plausible at the time, again due to the primarily oral nature of the law, and it had legal consequences. It meant, first of all, that the modern "last-in-time rule" (when two statutes conflict, the later statute has effectively repealed the earlier one) was not in force -- a later statute could be reviewed equally against an earlier statute and the judge could decide which version most suited the case. Thus the earlier statute was neither a higher law (as in modern judicial review against a constitution), nor a lower law (as in the modern "last-in-time" rule) but merely another opinion about the law to be weighed against the more recent opinion. The more recent or more ancient statute might weigh more heavily depending on which was considered more authoritative Secondly, the fact that statutes were merely an opinion about the law, not the law itself, gave a judge justification to ignore them when they felt they were not very authoritative, which for the practical reasons cited above they often did. If you couldn't remember the law but had to look it up (which before printed editions could involve quite a bit of trouble), it probably was not so authoritative. Third, it meant that there could be two leading theories about judicial review against case law:

(1) Parliamentary statutes trump cases from the Kings Bench, Chancery, and other courts because Parliament is the highest court in the land.

(2) Parliamentary statutes are simply dicta (since they typically did not involve a specific case and controversy brought to trial), and therefore take lower priority than case precedent.

I'm not aware of any participant in this debate expressing the second theory, but some might have thought it implied, as I do. The first theory has often been cited as the leading argument for parliamentary supremacy, but not much before Blackstone made it popular in the late 18th century.

Sir Edward Coke, the leading opponent of Parliamentary supremacy, (and whose opinion in Dr. Bonham's case is perhaps the only unequivocal precedent against such supremacy), muddled the issue by often quoting at least one old statute, the Magna Carta, as a law that trumped later statute. Coke effectively treated the Magna Carta as the United States treats our Constitution. In the habits of the time, he simply weighed its authority very highly. An argument for Coke's view is that Magna Carta took the form of a property grant that effected the entire property of the realm (including all incorporeal rights, such as what we call civil liberties), and that it was a charter for England itself analogous to the charters the king was granting for early American colonies at the time, which trumped the statutes of the resulting colonial legislatures.

But Coke also considered certain long-standing procedural doctrines derived from case precedent, such as the right to a properly trained judge, to be part of the higher law against which statutes should be reviewd. He did not consider most everyday aspects of what we now call the common law (the law of real property, tort, etc.) to be part of this higher common law that trumped statute. Rather, the higher common law was confined to certain important procedural rights, similar in style to those later found in the United States Bill of Rights.

Americans had a stronger case for judicial review. First, our (mostly corporate) colonial governments were franchises expressly set up by charter. The power of colonial legislatures was thus not unlimited, but rather was constrained by clauses in the charter. Colonial legislators could not, for example, deny the king his right to customs, and could not contravene the English liberties of residents, since these rights were both expressly reserved in the charter grants. So judicial review became the American habit from the start. Second, these charters were printed, thus immediately available to the judge and all parties; this and the fact that they were a higher law than local legislative statute helped them to be applied, using the modern view of written law, and a strict way. (The extent to which Parliamentary statute applied to the colonies, beyond the extent to which Parliament could regulate the king's customs and military affairs, and whether Parliamentary statutes could themselves be reviewed, per Coke, and against what,were far more controversial issues, and played a leading role in the Revolution). As a practical matter, Americans also got in the habit of conducting judicial review of statutes, and thus in contrast to English judges acquired much practical experience at the task. Judicial review of statutes is not something one immediately learns to do once one thinks of the idea, and if one has not learned how to do it properly, it's easy to imagine why one would be opposed to the idea.

Update, Sept. 14th 2006: Todd Zywicki has made similar points about case law, precedent, and the doctrine of stare decisis in his paper "The Rise and Fall of of Efficiency in Common Law: A Supply Side Analysis," available at SSRN. Before the printing press, and to some extent for several centuries thereafter, case precedent was very hard to access through other than oral communications and was considered more or less authorattive according to a variety of factors rather than followed rigidly. Thus stare decisis, the modern doctrine that courts must follow precedent, was not rigidly adhered to. I'd also add something that Zywicki's account and my own research experience with medieval cases implies, namely that the the idea of "overturning" a case was unknown. A contradictory older case could always be treated as more authoratitive than the more recent case, or vice versa, in parallel with the lack of a "last-in-time" rule for statute law.

Smart contracts in pieces

One thing I've notice as smart contracts have been evolving (rather obliviously to the idea of smart contracts) is that they are being implemented in little pieces. For example, instead of the full-blown protocol I describe in that article, wherein the ability of one's car to start is automatically tied to the lateness of one's payments, the "auto repo auto" has been implemented as a somewhat simpler gizmo that responds to radio signals from a trusted (and legally regulated) party: a "starter-interrupt device." Instead of a full-blown market translator, we get simple gizmos like this price-sensitive thermostat. Both the market translator and the price-sensitive thermostat reduce mental transaction costs by obtaining consumer preferences and translating them into purchasing decisions. The price-sensitive thermostat has the advantage that people already enter their preferences into thermostats, so there is already a digital source of preferences.