Global warming, fractal delegation, and the non-delegation doctrine

The non-delegation doctrine is often believed by legal professionals to have been invented by the U.S. Supreme Court in some time in the late nineteenth century. Furthermore, the popular theory goes, the non-delegation doctrine was only enforced by the Court very briefly in a failed attempt to stop the New Deal which broadly delegated economic lawmaking authority to executive and "independent" agencies.

In fact, the non-delegation doctrine was well understood by the Founders and extensively debated in early Congresses. Proponents of the non-delegation doctrine observed that Article I put "[a]ll legislative powers herein granted" in the hands of Congress, and thus none of it in the executive branch. Thus, they argued, all important rules should be made by the people's representatives rather than by poorly accountable executive branch employees. James Madison in particular was a proponent of a very strong (by modern standards) version of the non-delegation doctrine. Madison and his colleagues used the doctrine to argue that several Congressional proposals were unconstitutional and thereby defeat the measures in Congress.

In the Post Office debate I have chronicled, Madison argued that Congress could not delegate to the United States Post Office the ability to define main post office locations and the broadly stated origins and destinations of the major post roads. He admitted, however, that at some level of detail Congress could constitutionally give discretion to the Post Office to define particular local routes. How far up, in the fractal structure of postal routes, the Post Office could constitutionally be delegated such discretion remained unclear. The outcome of this particular debate was that broad grants of power to generally define offices and routes were unconstitutional, but legislation defining the broad interstate and intrastate routes between major towns and cities, and leaving further detail to the Post Office, was fine.

The non-delegation doctrine has remained a slippery doctrine ever since, and since the New Deal has fallen into disuse. We thus now have very broad enabling legislation such as that of the Environment Protection Agency, which grants the agency broad lawmaking authority over "pollutants," including the authority to make rules regarding "any air pollutant from any class or classes of new motor vehicle...[which] may reasonably be anticipated to endanger the public welfare."

Thus, argue the plaintiff states and environmental groups in Massachusetts v. EPA, the EPA has the authority to regulate carbon dioxide levels, even though carbon dioxide is not particularly mentioned in the legislation: given the scientific evidence that carbon dioxide causes global warming, carbon dioxide is clearly a "pollutant" that "may reasonably be anticipated to endanger the public welfare." They go on to argue that the EPA further has the legal duty under this legislation to regulate carbon dioxide levels. Even though the Bush Administration has decided that the EPA will not start regulating carbon dioxide emissions, these states and environmental groups are suing for a court order to force the EPA to regulate vehicle carbon dioxide emissions.

President Bush's EPA disagrees. It argues (in part by invoking non-delegation doctrine precedents) that this broad language did not grant broad powers over emissions of a ubiquitous molecule that is a necessarily substantial part of life itself. If the harm of carbon dioxide emissions is admitted, literal interpretation of the EPA's enabling statute, would, if it weren't for the above limitation to motor vehicles (and presumably similar limitations to power plants and other industrial activities for similar phrases elsewhere in the stattute) give the EPA power to regulate not only power-plant and car emissions but everything from forest and camp fires to the very air we and our animal friends breathe out of our lungs. Our bodies after all "burn" food calories and the oxygen we breathe in, producing carbon dioxide that we breathe out.

Without a non-delegation doctrine, (or alternatively without narrowly interpreting the broad language to exclude such a ubiquitous part of our bodies and the air), a vast amount of lawmaking power woould accrue to the EPA, upon recognition that carbon dioxide is causing somebody, or somebody's property, some harm, without any further initiative by the people or its representatives. Surely Congress did not intend to grant the EPA such broad powers, despite the broad language, the EPA argues (due to the industry-friendly Bush Administration, since it's opposing its own bureaucratic turf interests). The EPA is thus essentially arguing that grants of power should be interpreted narrowly: a principle of least authority should be applied. Madison would have added that even if this is what Congress had intended, Congress is not allowed to delegate such broad lawmaking powers to a non-elected body, just as it could not delegate the broad decisions on where to locate main post offices and major postal routes to the Post Office. Such a vast new area of lawmaking power must be initiated only by the people's representatives, not by unelected bureaucrats.

It's not clear whether the Supreme Court, if it decides to hear the appeal in Massachusetts v. EPA, will pay much attention to Madison's non-delegation doctrine. The car industry's brief (intervening on the side of Bush's EPA) dwells on a related phenomenon: given the broad grants of power in modern federal statutes, the regulatory powers of agencies often overlap, and it is this concurrent and thus conflicting lawmaking jurisdiction, rather than grant of lawmaking powers generally, that is improper. Thus, the interventors argue that regulation of carbon dioxide is better classified as regulation of fuel efficiency than as regulation of a pollutant. Thus, it is under the jurisdiction of another regulatory agency, not under the EPA.

Furthermore, the states and enviromental groups may lack standing for failing to demonstrate that global warming harms them in particular. As a scientific matter, much of the recent average global warming is highly likely to be related to rising carbon dioxide levels; a jury could find this as an unreviewable (i.e. not clearly in error) matter of fact. But contentions made about global warming as actually causing particular kinds of harm (such as the idea that it is causing more severe storms or bad crop yields in some areas) are highly speculative and probably cannot be reasonably proven in court. Thus, plaintiffs hoping to force the EPA to regulate will probably fail to demonstrate that carbon dioxide is causing them particular harm, and thus will probably fail to establish standing. Both the standing issue and the "no conflicting delegation" version of the non-delegation doctrine may thus prevent this case from reaching the traditional non-delegation doctrine issue. Nevertheless, the proposed massive expansion of the EPA into carbon dioxide regulation, without any Congressional act specifying that the EPA should regulate this ubiquitous molecule, but only harm-causing "pollutants" generally, is a very good example of the kind of thing that Madison was worried about and, for a time, successfully opposed.

Property, security, and freedom

I have written about how historical forms of political and legal structures have depended on needs to secure property. Recently scholars and writers ranging from Michael L. Ross to Thomas Friedman have pointed out how oil revenue tends to vary inversely with democracy and freedom. Their main theory for this is that oil revenues allow governments to boost their own power and protect themselves from irate citizens. This is particuarly the case when oil prices are high, as now, whereas lower oil prices tend to decrease government power and encourage freedom. Taxing citizens or their more diffuse property directly tends to encourage democracy movements, but pricy oil allows despotisms in today's Venezuala, Russia, Saudi Arabia, Iran, and elsewhere to avoid depending overly on such diffuse taxes for their power. (Historically, democracy tended to emerge, for example in England, by the need for kings to get the "consent" of the realm via Parliament to tax internal property).

What these scholars tend not to have focused on, however, is why governments derive so much revenue and power from oil as opposed to manufactured goods, information, or services. The answer lies in the legal uncertanties and the physical insecurity of investments in oil relative to other kinds of taxable property. Private property rights in oil have tended to be problematic, because of the novelty of the industry, because these legal structures were created during an era (early 20th century) when private property was unpopular in most legal circles, and because of the large ratio of initial capital investment to subsequent operating costs needed to extract the oil.

All mineral rights give rise to legal problems, due to the interferences (externalities) that occur between mineral rights and rights in the overlying land. Mineral investments tend to be insecure because of the large ratio of initial capital investment in discovery and development to subsequent operating costs. In other words, once the exploration companies do the hard work, it is easy for whoever has the political or military power to come along and steal the benefits. This ratio is far larger for oil in particular than for the farmland which we have seen historically was very dependent on large scale militiaries for protection, and it is high for minerals generally. Once most kinds of minerals, and especially oil, are found, they are far more vulnerable than other kinds of property to political appropriation. Legal uncertainties and the nationalist and socialist traditions surrounding oil encourage this in particular for oil. As a result, most oil deposits around the globe have been nationalized, and even where they have not been nationalized their extraction is usually subject to steep taxation. Michael L. Ross has shown that the inverse relationship between oil and indicia of freedom is "valid and statistically robust" and extends to states rich in other kinds of minerals, which share the large ratio of initial capital investment in discovery and development to subsequent operating costs. The security needs of oil and other mineral property, combined with the unwillingess of governments providing that security to forego the revenue windfall (for example by privatizing oil fields and not steeply taxing them), explains why this is so.

Jurisdiction as property: the paper

Here's my paper on private jurisdiction in English history. Franchise jurisdiction played a crucial but unheralded role in the history of English law and politics. Some private jurisdictions existed in Anglo-Saxon times but they grew in importance in the Norman and Angevin periods, and in the corporate form remained an important part of the British Empire until the 20th century.

A franchise, such as a corporation, a jurisdiction, or a right to collect certain tolls or taxes, was a kind of property: an "incorporeal hereditament." English property law was very flexible; as a result franchise jurisdictions came in a wide variety of forms. Franchise jurisdictions included those of manorial courts appurtenant to manors, secular courts appurtenant to ecclesiastical corporations (on top of the Church's own jurisdiction over family law), borough courts appurtenant to municipal corporations, merchant courts appurtenant to markets and fairs, and mining courts apputenant to mines and mining villages.

For many substantive areas of law, the king's courts acted only as "night watchmen" courts that reviewed, not the substance of the case, but only whether the courts stayed within their jurisdictional and certain procedural bounds. Generally, the only way to remove or undo the remedy of a franchise court case in royal court was to bring one of several varieties of lawsuits for trespass (tort) against the franchise court. Only if the franchise court was trespassing on the defendant (because it was not acting as a proper legal authority) or trespassing on the jurisdiction of the king or of another franchise court could the case be overturned. Development of the legal authority defense to trespass played a substantial role in developing many modern constitutional rights of procedure, such as the right to a jury trial. Under legal authority for trespass royal courts and officials were treated in basically the same way as franchise courts and officials. Thus, except for this "night watchmen" role of royal courts, where franchise courts and police had exclusive substantive jurisdiction the law operated in a peer-to-peer fashion via property relationships rather than in the hierarchical fashion via principle-agent or master-servant (employer-employee) relationships of imperial Rome and most modern court and police systems.

Franchises could also be for jurisdiction over partially or entirely privatized administrative territories such as "hundreds" (often like rural townships) and counties. Broad governmental powers, including almost all, and sometimes more, of the jurisdiction normally granted to royal common law and equity courts, were granted to counties Palatine and many colonial corporations (such as the East India Comany and the American colonies). The results, in terms of civil liberties, were quite varied.

In English property law, land tenures and incorporeal hereditaments (including jurisdictions) were either granted or recognized in charters in a form similar to the deeds of modern property law. When the charters involved large amounts of land with appurtenant military services and jurisdictions, they were political as well as economic in nature. These charters were the ancestors both of modern property deeds and of modern state and national constitutions.

The Anglo-Norman legal idea of jurisdiction as property and peer-to-peer government clashed with ideas derived from the Roman Empire, via the text of Justinian's legal code and its elaboration in European universities, of sovereignty and totalitarian rule via a master-servant or delegation hierarchy. By the 20th century the Roman idea of hierarchical jurisdiction had largely won, especially in political science where government is often defined on neo-Roman terms as "sovereign" and "a monopoly of force." Our experience with totalitarianism of the 19th and 20th centuries, inspired and enabled by the Roman-derived procedural law and accompanying political structure (and including Napoleon, the Csars, the Kaisers, Communist despots, the Fascists, and the National Socialists), as well as the rise of vast and often oppressive bureaucracies in the "democratic" countries, should cause us to reconsider our commitment to government via master-servant (in modern terms, employer-employee) hierarchy, which is much bettter suited to military organization than to legal organization.

Fortunately, franchise jurisdiction has left permanent influences on modern governments, including on the republican form of government in general and the United States Constitution, federalism, and procedural rights in particular. It also left a record of a wide variety of forms of law and government that can provide us with alternatives to the vast employee hierarchies weilding coercive powers that have given rise to modern oppression.

Jurisdiction as property and peer-to-peer government

Modern civics and political science is often taught as an absurd dichotomy: that government is a "monopoly over the use of force" and that the absence of government is anarchy. Using this fallacious dialectic, many highly lawful societies, such as most of medieval Europe, and in particular medieval and renaissance England, were "anarchies." Even the United States is really an "anarchy": jurisdictions are divided up among federal, state, county, municipal and other entities, including shopping malls and mass transit authorities whose security guards can legally arrest probable criminals. (Some states even still allow "citizen arrest," although it's not recommended that people who don't understand the procedural distinctions between arrest and kidnapping try it). Government does not, and should not, come in the abstract forms taught by high school civics and political science, nor as in the economic models of law that talk about law being enforced by "the government."

In medieval and renaissance England (and in many later instances), English jurisdictions were property. The king had granted (as property called a "franchise") much jurisdiction to lords and corporate bodies (such as Church organizations, municipalities, and colonies) but owned the residual jurisdiction of the realm (i.e., all jurisdiction not owned by somebody else). This grant would take the form of a property deed called a charter. A franchise could also be owned by prescription -- i.e. by having exercised the jurisdiction since the English "time out of mind" year for prescriptive property rights, 1189 A.D.

Where franchise courts had exclusive jurisdiction, the king's courts were merely "night watchmen" courts that insured that the franchise courts stayed within their property boundaries, i.e. their jurisdictional and procedural bounds. Medieval and early colonial English courts thus formed more of a "peer-to-peer" system than the hierarchical current (Roman imperial style, or "sovereign") system where "higher courts" generally review both the procedure and substance of judgments in "lower courts."

Franchise jurisdictions were defined, by custom or statute or express charter language, by the people and legal subjects over which jurisdiction could be exercised. For example, a merchant court could exercise jurisdiction over merchants doing business at the market fair the court was appurtenant to, and the law it exercised was merchant law. This only had to be consistent with royal law in keeping within its jurisdiction (procedurally as well as territorially): substantively such laws could and often did diverge sharply from royal substantive law.

There were dozens of standard jurisdictional franchises. For example, "infangthief" enabled the franchise owner to hang any thief caught red-handed in the franchise territory, whereas "outfangthief" enabled the owner to chase the thief down outside the franchise territory, catch him red-handed, and then hang him. "Gallows" enabled the owner to try and punish any capital crime, and there were a variety of jurisdictions correponding to several classes of lesser offenses. "View of frankpledge" allowed the owner to control a local militia to enforce the law. "The sheriff's pleas" allowed the owner to hear any case that would normally be heard in a county court. There were also franchises that allowed the collection of various tolls and taxes.

A corporation was also a franchise, and corporations often held, as appurtenances, jurisdictional franchises. The City of London was and is a corporate franchise. In the Counties Palatine the entire government was privately held, and most of the American Colonies were corporate franchises that held practically all jurisdiction in their territory, sometimes subject to reservations (such as the common law rights of English subjects and the right of the king to collect customs reserved in the American charters). The colonies could in turn grant franchises to local lords (as with the Courts Baron and Courts Leet in early Maryland) and municipalities. American constitutions are largely descended from such charters.

In terms of protecting personal liberties, franchises in general and colonial corporations in particular ranged all over the map. Those where Englishmen themselves settled in large numbers, such as the American colonies, tended to be protective and even expansive of liberties, but many other English colonial corporations, from the East India Company (first chartered in the late 16th century) to the Royal South Africa Company (Cecil Rhodes' colonial corporation, chartered in the late 19th century) could be authoritarian and brutal especially to non-Englishmen.

Through medieval and renaissance times, and to some extent well into the colonial period, the basic laws of English jurisdiction were property laws. The basic actions (kinds of lawsuit) contesting the jurisdiction or procedure of a court were those of title and trespass. Infringement of jurisdiction was a trespass, and abuse of a defendant by a court (i.e. violating certain common procedural laws) could be a trespass. If any person, including a royal or franchise official, confiscated a person's goods, or imprisoned an individual, or administered some other coercive remedy, he could be sued for trespass. He then had to defend his use of force as a matter of legal authority -- that he had rights as a victim seeking remedy, or rights by owning a jurisdictional franchise, and that he exercised those rights within the personal, substantive, and procedural bounds of the jurisdiction.

The king's courts could only reach inside exclusive franchise jurisdictions through the "extraordinary" or "prerogative" writs, which were writs of trespass or title. Thus, where franchise courts held the substantive jurisdiction, the king's courts generally could not review their proceedings for substantive error: only for trespassing on jurisdiction and committing certain procedural defaults, such as depriving a defendant of a right to jury trial. Indeed, many of the procedural rights specified in today's United States Constitution probably have their origins in the legal authority defense required of both franchise and royal courts to exercise coercive process without trespassing on the defendant.

David Friedman has described the legal system of medieval Iceland. This was also a peer-to-peer justice system, albeit less specialized and in some ways even more decentralized, and where personal jurisdiction was tied more to choice than to territory. In political science terms medieval Iceland has been called an "anarchy," but it is more realistic to describe it as a very peer-to-peer kind of government, where medieval England was partly peer-to-peer and partly hierarchical, and modern governments tend, on the imperial Roman model, to be quite hierarchical.

The Icelandic system was also based on a jurisdictional property, the godord. However, the godord was more a protection service, champion, legal advocate, and executor of the law than a judge. The court of last resort, since Iceland had no king, was the democratic allthing, but it was more than a night-watchman court as it reviewed substance as well as procedure of dispute settlements arbitrated between godord.

In our modern system of arbitration, based on choice-of-forum clauses in contracts, personal jurisdiction is based even more on choice, but it is embedded within our imperial Roman style hierarchical and territorial court system that reviews arbitrations for substance as well as procedure, and arbitrators depend on normal governmental entities to execute their judgments: they have no police powers of their own.

At the same time as the American Revolution eliminated most titles, it (on top of the early Parliamentarian revolutions) eliminated most franchises, except for certain rigid forms such as municipal corporations which are no longer considered an instance of a franchise. Corporate colonies and Counties Palatine were converted into States. (Actually this process started well before the American Revolution, which was more of a climax to this process). The modern laws of interstate jurisdiction came to be derived largely from international law rather than from franchise property law, and the procedural rights of defendants were encoded in constitutions which succeeded the colonial charters. Today the word "franchise" is typically reserved to official monopolies such as water utilities and jurisdictional and police powers are defined by statute not property grant. The laws of procedure are now based on constitutions and statutes, and the laws of jurisdiction are generally derived from international law (treating for this purpose States as sovereign states) rather than the old franchise law. However, some of the extraordinary writs, such as habeus corpus, survive in the ability of the U.S. Supreme Court to reach into non-Article III courts (e.g. state courts, military courts, etc.) to review their proceedings, usually still on jurisdictional and procedural grounds.

I will have much more to say about the "peer-to-peer plus nightwatchmen" model of "government," and the extraordinary writs, in future post(s). I have also describe the actual English system in much more detail, in a paper to be forthcoming.

Supreme Court weakens U.S. patents?

The United States Supreme Court in eBay v. MercExchange has held that, instead of applying a general rule that patent infringement leads to an injunction barring the infringer from using the patent, courts instead should, as in most other areas of law, apply the four-factor equity test used for deciding whether to order permanent injunctions. In other words, the plaintiff must show that:

(1) it has suffered irreparable injury from the infringement,
(2) monetary damages are inadequate to compensate for the injury,
(3) the balance of the hardships warrants a remedy in equity (roughly speaking, that the plaintiff will be hurt more by lack of injuntion than the defendant will by the injunction), and
(4) the public interest would not be disserved by a permanent injunction.

This holding overturns that of the U.S. Federal Circuit favoring the general rule that, subject to a few exceptions, injunctions should issue when there is infringement. The Federal Circuit generally hears all appeals in U.S. patent infringement cases. It has been a de facto supreme court of patents, since, at least until this year, the actual Supreme Court accepted patent appeals quite infrequently. If past history is any indication, the Federal Circuit will probably try to liberally interpret the Supreme Court's opinion to maintain the rules that it has championed. Here, it may try to read its rule of general injunctions into the four-factor test.

There are a number of clever arguments the Federal Circuit might accept in order to effectively revert to the general rule. It might favor the plaintiff with presumptions that each of the four factors are generally found in patent cases, or reason by analogy that where injunctions were issued in a similar case in the past, the four factors impliedly must have been found, and thus should also be found in the present case. This would allow the Federal Circuit to distinguish eBay as involving a particularly problematic variety of patents (business methods), or even just a particularly problematic instance such patents, and in effect keep applying the general rule to other kinds of patents.

Thus, given the structure of U.S. federal courts, where generally all patent appeals go through the Federal Circuit, the U.S. Supreme Court may have to take several more injunction cases involving different circumstances than eBay before it effectively overturns the ubiquitous use or threat of injunctions in U.S. patent cases.

The concurring opinions also suggest that Justices Thomas and Alito may be the swing votes in the Court's upcoming decision in Metabolite. Chief Justice Roberts will recuse himself. Stay tuned.

USPTO to re-examine Amazon "one-click" patent

The USPTO has agreed, per Peter Calveley's request. to re-examine claim #11, the most notorious portion of Amazon's "one-click" patent.

Medical bureaucrats must respect life and liberty, says court

Alex Taberrok writes about a wonderful decision out of the D.C. Circuit. The court basically held that the FDA is violating the Fifth Amendment (and I'd add, natural and common law) rights to life and liberty of terminally ill patients by preventing them from getting drugs for their purpose of saving their lives unless the FDA has a compelling interest in doing so that outweighs these rights. Amazingly enough, up until this court's decision one had a Fifth and Fourteenth Amendment right to terminate the life of a fetus (a right with which I agree) by getting an abortion (or taking an abortion pill) without the government placing an "undue burden" on these medical procedures, but no such right under United States law to try to save one's own life with relatively safe medication.

Here's the court's opinion. I find the court's argument quite compelling, as it's based on both liberty and life, rather than just pitting one against the other as in the abortion debate. Alas, despite the compelling argument this doctrine may have a tough time surviving our current legal positivist (statutory language can do no wrong, and neither can regulation...) Supreme Court, not to mention a political environment where most of the planet thinks that medicine should be centrally planned by state bureaucrats, the patients be damned.

Security and the burden of lawsuit

The need to sue can be an expensive burden. A plaintiff often needs to go through a very long and expensive legal process, the results of which may be little or nothing due to the insolvency of the party sued.

Because of this problem, large chunks of commercial law and practice -- and especially the areas of mortgages involving real property, secured transactions involving goods, and negotiable instruments -- deal with allocating the burden of lawsuit. Generally, the burden of lawsuit over a transaction should be shifted to the partie(s) who are more likely to breach the legal obligations created by the transaction, or more likely to become insolvent, or both.

Creditors often use collateral to shift the burden of lawsuit to debtors. Instead of having to sue to get their money, creditors simply repossess the collateral, shifting the burden of lawsuit to the debtor. Creditors sometimes also use a surety (e.g. a co-signer) to reduce the burden of lawsuit by adding a target who is more solvent.

Another way creditors shift at most of the burden of lawsuit is by having the debtor sign a promissory note. The creditor can then sell the note to a third party who is entitled to collect the note as a holder in due course, free of most defenses to payment on the original contract. Freedom from most defenses (such as fraud, failure to perform, etc.) to the original transaction makes the debt owed by the debtor to the holder in due course very clear-cut, thus greatly lowering the burden of lawsuit for the new creditor. The original creditor benefited because it could sell this unburdened debt at a higher price than a debt burdened by legal problems with the original transaction. If the original creditor breached a contract with the debtor (for example by failing to deliver promised goods), the burden of lawsuit is now on the debtor to sue the original creditor: the debtor must pay the note regardless. (In the United States, there are some recent consumer protection exceptions to this general rule). If the debtor fails to pay the note, this is a very straightforward lawsuit compared to the usual breach of contract, and thus likely to be settled at little cost. Thus, the promissory note has shifted most of the burden of lawsuit from the creditor to the debtor.

At a more basic level, the burden of lawsuit is shifted by shifting actual control as well as legal possession over objects of value. "Possession is 9/10 of the law." To this end, security technology and in particular smart contracts will likely become very useful devices for shifting the burden of lawsuit in commercial transactions.

The Bellamies, nationalism, and socialism

The American cousins Edward and Francis Bellamy had a rather baleful influence here in the States and elsewhere. The first is more infamous for his socialism, and the latter for his nationalism, but the duo were both essentially national socialists and we suffer under their legacy to this day.

Smart contracts reduce mental transaction costs

In my old essay on micropayments and mental transaction costs, besides pointing out that mental transaction costs were a far more important barrier to Internet micropayments than computational transaction costs, I sketched some ideas for tools to lower mental transaction costs. Lowering mental transaction costs enables pricing at finer granularity, which increases price-sensitive behavior and thus the efficient allocation of scarce resources. I also used electricity conservation as a practical example of how mental transaction costs pose a barrier to price flexibility and thus to conservation. It turns out that electricity conservation is among the first areas to benefit from smart contracts that lower mental transaction costs.

This paper I presented at the Second Berlin Internet Economics Workshop in 1999 provides more detail on the economic theory behind mental transaction costs. Basically, mental transaction costs are the "hassle factor" one experiences when spending money: the costs of translating one's own knowledge and preferences into buying decisions. Mental transaction costs pose a severe limit on the efficiency of markets in general and on useful price granularity in particular; they are the main reason consumers generally prefer flat-rate pricing and why high price granularity (and thus micropayment) is usually useless.

Tools to lower mental transaction costs have vast potential but present many problems, especially "determining what the parties want in the first place." The most promising tools are smart contracts -- computerized devices that respond to the environment according to price signals or other contractual terms, customer preferences, and other states or events that are encoded in them or that they are encoded to respond to. Many smart contracts in the future may be programmed using a contract drafting language for specifying their event-driven behavior.

(I have also emphasized making smart contracts securely self-enforcing or self-verifying, but that is a different topic from this post, which deals with the role of smart contracts in lowering mental transaction costs).

Mental transaction costs pose a barrier to any scheme to go from flat rate to variable pricing in order to conserve resources. Such a scheme may be made possible only by technological or institutional breakthroughs which lower mental transaction costs. Faruqui and Earle[1]'s description of California's Demand Response scheme for peak-demand pricing of electricity is generally a good description of a successful and promising program that increases conservation and reduces the danger of blackouts by going from flat pricing to three price tiers (off-peak, peak, and critical peak). But the article fails to recognize the important role of mental transaction costs when increasing the number of price tiers. The authors do, however, recognize two important success factors. The importance of these factors provides strong evidence that mental transaction costs and tools that save on these costs will crucial in determining the scope and success of California's demand-sensitive pricing scheme. The authors observed that "[o]n average, residential customers reduced peak loads on critical days by 13.1 percent." The reduction was much larger for customers with central air conditioning. More interesting still, customers with "automatic price-sensitive thermostats" saved twice as much energy as customers that did not have these smart contract devices.[2]

The first effect comes about because on average each central air unit consumes far more power than each window unit; correspondingly the same mental transaction costs expended in controlling the thermostat of the former saves far more energy and thus money than controlling the latter. The second effect comes because the price-sensitive thermostat is a specialized smart contract that allows for simple input preferences (a simple table of preferred temperature at each of three to five price levels depending on the contract) and then runs automatically. It thus fulfills (for this particular function) my hopes of using simple user interfaces to input preferences into smart contracts which then make purchases automatically, thereby reducing the the mental transaction costs otherwise imposed by multi-tier pricing.

In its most general form, a smart contract will have a market translator that specifies a purchasing or selling action based on a function of current budget, environmental variables, and current and predicted (e.g. according to rational expectations models) prices:

transaction_decision = f(preferences, budget, environment, prices, price model)

That general description makes it all rather complicated; in practice there will be quite simplified versions based on simple versions of a subset of these variables that work in particular niches where those variables dominate preferences. An example of this simplicity is the "automatic price-sensitive thermostats" mentioned above. Programming this thermostat is only a bit more complicated than a normal thermostat: one programs in multiple temperatures each corresponding to a price level. For example, at an off-peak charge of 9 cents/kilowatt*hour, the summer air conditioning thermostat might be set to 72 degrees, while the normal peak price of 22 cents might be set to 74 degrees and the critical peak price (the hottest days when California would without substantial conservation otherwise be in danger of blackout) of 60 cents set to 77 degrees. So you input three settings instead of one. Presumably when you want to change the settings you can do it one at a time or change all three at a time by the same amount. That takes substantially more effort than a normal thermostat, but the California experiment showed that where the overall use controlled by that thermostat is great enough and the price differential high enough, it's worth the effort.

A bit more generally, a preference for physical state of the world can be specified by specifying a function

preferred_state = f(current price)

The thermostat then, like any thermostat, purchases electricity based on the function

if actual_state > preferred_state then purchase (turn on consumption)
else don't purchase (turn off consumption)

(Reverse to "<" when heating rather than cooling and analogously for other kinds of physical states). The most typical example is the thermostat where the desired state has one dimension (temperature), but one can think of other desired states such as illumination patterns (also tied to current electricity prices), high network bandwidth and low latency applications such as video on demand, and so on which are multidimensional. Where price granularity is small and discontinuous (as in the three-tier price scheme described above) a simple table is probably the lowest mental transaction cost way of inputting the preferences. Where the price changes continuously, a simple graphical interface with a touch-sensitive cursor to define the price/state curve may be the best option, but realize that the transaction costs for the latter may be far larger than the former for the typical user, and so justified only when the value of resources conserved by price is much greater.

Offline References:

[1] Ahmad Faruqui and Robert Earle, "Demand Response and Advanced Metering," Regulation v. 29 n. 1 (Spring 2006).

[2] Id. at pg. 25.

Water from a comet

When my old employer the Jet Propulsion Laboratory slammed a 370 kilogram projectile into comet Tempel 1, it caused the release of at least 250,000,000 kilograms of water from the comet over a period of two weeks, according to the BBC. The peak rate occurred at 5 days, and it's a reasonably continuous flow. This suggests a variation on my ice rocket manufacturing technique: instead of going to all that work to extract, liquify, distill, and then freeze water from the frozen mudball, just make this kind of coma (something like a vapor geyser) and put the slowly rotating and shaded cylinder forms in the path of the coma. One probably has to tether the cylinders to the comet to keep them from blowing away, and I haven't worked out what the best distance from the comet surface is, or indeed if the deposition rate on the forms will be fast enough at a safe distance (deposition from gas is a different regime from the freezing spheres I proposed in 1992). Also the comet throws off carbon dioxide, methane, and other gases with the water, and the vapor carries some dust, so it's unknown whether the purity of the deposited ice will be sufficient to avoid overly rapid corrosion of the thermal ("steam") rocket. But the economics are potentially quite attractive so it's worth looking into. The basic economic advantage of rockets using native ice as the propellant source is that (once we've moved the ice to the starting orbits of our desired journeys) they save not only on the expensive launch of propellant from earth, but also on most of the remaining mass one must now launch out of earth's vast gravity well, namely propellant tanks. The BBC Tempel 1 story comes via Emergent Chaos.