Death by government

Should we be more worried about death by terrorist, or death by government? Matthew White and R.J. Rummel put our current hysteria in perspective.

Two views of Tiananmen Square

U.S. Google view.

Chinese Google view.

Via Liberty Belles.

Free banker to be on Federal Reserve Board?

Larry White reports on President Bush's nomination of Randy Kroszner for the U.S. Federal Reserve Board. I'm so used to Bush doing such destructive things to our institutions that I'm doubly amazed and delighted by this choice.

If Alan Greenspan, who once strongly favored the gold standard, didn't turn the dollar into a gold currency as head of the Federal Reserve (at least, it didn't stay that way in recent years), I suppose we can't expect a partial fan of free banking to return the U.S. to private competition in money just by being on the Board. But it would be nice to know that somebody who shares Greenspan's knowledge that fiat legal tender is not the only useful kind of money is going to be on the Board. Perhaps Kroszner can unconfuse federal law enforcers about private currencies.

E-gold challenges forfeiture

The U.S. government has confiscated some e-gold related funds on the pretext of failure to obtain a license as a "money transmitter," as Ian Grigg reports. Apparently e-gold has already had to put up with "approximately 300 summonses, subpoenas, and other requests for information." Unless they are counting routine stuff, that sounds rather like harassment. The feds are arguing that the U.S. portion of e-gold, G&SR, is a "money transmitter" even though the U.S. Treasury has refused to recognize e-gold as a "currency."

Thanks to the out-of-control Washington D.C. bureaucracy, the U.S. is becoming a poor place to do business if you have an innovative business that rubs some people in D.C. the wrong way. For example, if you claim that you have a new form of money that competes with inflating U.S. dollars.

Another thing that may rub feds the wrong way is the embarrassing fact that e-gold has appreciated by over 100% compared to the U.S. dollar since 1999. In other words, if you held $1,000 worth of e-gold since 1999, it would be worth over $2,000 now. It's closer to the truth to say that the dollar is worth about half what it was in 1999 than to say that e-gold is worth twice as much. Which currency is the funny money?

Interestingly, Yahoo Finance considers gold (although not e-gold in particular) to be a "currency" for the purposes of their currency converter.

History, property, and security -- update

In response to comments, for example those on Brad DeLong's blog, and otherwise due to further thinking and research, I've updated by paper on History and the Security of Property.

BlackBerry appeal denied

The U.S. Supreme Court has declined to hear RIM's appeal in RIM v. NTP. On the other hand, the U.S. Patent Office is re-examining NTP's patent and has preliminarily rejected some of its claims.

Estimating the value of favors

Ian Grigg's post on Bill Monk reminded me that I had written the following (excerpts from Measuring Value, with a few edits):

The value measurement problem is very broad. It comes into play in any system of exchange -- reciprocation of favors, barter, money, credit, employment, or purchase in a market. It is important in extortion, taxation, tribute, and the setting of judicial penalties. It is even important in reciprocal altruism in animals. Consider monkeys exchanging favors -- say pieces of fruit for back scratches. Mutual grooming can remove ticks and fleas that an individual can't see or reach. But just how much grooming versus how many pieces of fruit constitutes a reciprocation that both sides will consider to be "fair," or in other words not a defection? Is twenty minutes of back-scratching worth one piece of fruit or two? And how big a piece? And just how long is twenty minutes anyway? In some cases this is relatively easy to solve, as with the delayed barter of blood for blood in vampire bats. These bats can come home from a hunting mission either overstuffed or starving. Overstuffed bats can regurgitate blood to feed hungry ones. The grateful recipient can remember the favor an return it in a future hunting trip when the tables might be turned. And indeed, some degree of reciprocal trade takes place between vampire bats, even among non-kin.

Even this simple case of trading blood for blood, is, however, far more complicated then it seems. Just how do the bats estimate the value of blood they have received? Do they estimate the value of a favor by weight, by bulk, by taste, by its ability to satiate hunger, or other variables? Just the same, measurement complications arise even in the simple monkey exchange of "you scratch my back and I'll scratch yours".

For the vast majority of potential exchanges, the measurement problem is intractable for animals. Even more than the easier problem of remembering faces and matching them to favors, the ability of both parties to agree with sufficient accuracy on an estimate of the value of a favor in the first place is probably the main barrier to reciprocal altruism among animals.

It is also likely the most important barrier to exchange among humans. Many kinds of exchange, probably many more than most economists perceive, are rendered infeasible by the inability of one or both parties to the exchange to estimate its value. For most of human history, most kinds of markets that are possible today were not then feasible, in large part due to the inability of potential market participants to measure value: to estimate the value of the transaction to themselves and then use these estimates to discover and agree on a common objective measurement. Measurement of value was and is also important to the development of many economic institutions related to markets. Accounting was crucial to the development of large companies and modern systems of taxation.

The process of determining the value of a product from observations is necessarily incomplete and costly. For example, a shopper can see that an apple is shiny red. This has some correlation to its tastiness (the quality a typical shopper actually wants from an apple), but it's hardly perfect. The apple's appearance is not a complete indicator -- an apple sometimes has a rotten spot down inside even if the surface is perfectly shiny and red. Yoram Barzel calls an indirect measure of value -- for example the shininess, redness, or weight of the apple -- a proxy measure. In fact, all measures of value, besides prices in an ideal market, are proxy measures -- real value is subjective and largely tacit.

Such observations also come at a cost. It may take some time to sort through apples to find the shiniest and reddest ones, and meanwhile the shopper bruises the other apples. It costs the vendor to put on a fake shiny gloss of wax, and it costs the shopper because he may be fooled by the wax, and because he has to eat wax with his apple. Sometimes these measurement costs comes about just from the imperfection of honest communication. In other cases, such as waxing the apple, the cost occurs because rationally self-interested parties play games with the observable.

Measures are critical components of institutions-- such as auctions, contracts, accounting systems, legal damage rules, tax rules, etc. -- that align incentives between parties who, prior to participating in the institution, have incompatible incentives. We can divide the measurement problem into two components -- the first, choosing the phenomena and units that will be measured, and second, measuring those attributes in a way that minimizes spoofing of the measure between parties whose incentives with respect to the value are misaligned.

Cost can usually be measured far more objectively than value. As a result, the most common proxy measures are various kinds of costs. Examples include:

(a) paying for employment in terms of time worked, rather than by quantity produced (piece rates) or other possible measures. Time measures sacrifice, i.e. the cost of opportunities foregone by the employee.

(b) most numbers recorded and reported by accountants for assets are costs rather than market prices expected to be recovered by the sale of assets.

(c) non-fiat money and collectibles obtain their value primarily from their scarcity, i.e. their cost of replacement.

Long distance trade in pre-Roman northern Europe

Bog men dating from between 390 and 175 BC in Ireland used hair gel made out of pine resins imported from Spain or southwest France.

From contracts to money

In the middle of the Darby century came the important decision of Miller v. Race. Surprisingly, no copy of this case is to be found online save in the syllabus of Professor Gregory Maggs. So with his permission I've appended his edited version of the case (with some additional very minor edits of my own) below.

Negotiable instruments – checks, bank notes, and so on – are promises to pay or orders with an implied promise to pay, and are thus contracts. But they differ from contracts in two important ways. First is the idea of “merger.” Normally, a contract right is an abstraction that is located nowhere in particular but belongs to a party to the contract or to a person to whom that party has assigned that right. Possessing a copy of a normal contract has nothing to do with who has rights under that contract. But in a negotiable instrument, the contract right is “merged” into the document. Assignment of that right takes place simply by transferring the document (in the case of a bearer instrument) or by indorsing (signing) and transferring it.

The second big way negotiable instruments differ from contracts is the “good faith purchaser” or “holder in due course” rule which is illustrated by Miller v. Race. In a normal sale of goods under common law, the new owner’s title to the goods is at risk to the contractual defenses of a prior owner. For example: Alice is Dr. Barb’s patient and is feeling ill. Barb says to Alice, “sell me your Mercedes for $100 and you’ll feel a lot better.” Alice complies, but then later realizes she was snookered. Meanwhile, Barb sells the car to Chuck, who knows nothing of how Barb acquired it, for $50,000. Under contract law, Chuck can get no greater title to the car than Barb had. But the contract is void for undue influence, so Barb doesn’t have legal title to the car. Ergo, Chuck does not, either. Alice can sue Chuck to get her car back. Chuck must then sue Barb for his $50,000, an expensive and often-futile thing to do.

Contract defenses are invoked so commonly that any downstream owner of a good is at significant title risk under common law. This risk could make things very bad for paper money, which to work efficiently should change hands dozens of times or more. Thus, Miller v. Race has long been celebrated as an advance that made bank notes under the common law a more efficient form of money. Miller helped create for promissory notes under common law (including, crucially, bank notes) what is now known as the “good faith purchaser” or “holder in due course” rule. Summarized, this rule says that a holder in due course who obtained the instrument for value, in good faith, and without notice of any upstream claims or defenses, is entitled to enforce the promise to pay in that instrument regardless of most kinds of such claims or defenses.

The good faith purchaser rule can cause its own problems. For example, when you sign a promissory note to get a mortgage, these days the bank usually sells that note to an aggregator, who bundle up these mortgage notes in packages and sell them to investors. In most states if you make your mortgage payments to Bank A, who has meanwhile sold the mortgage to Bank B (and perhaps not told you), Bank B can bill you for that same payment and foreclose on your house if you don't pay. You have to pay Bank B and then beg, plead, or sue Bank A to get your money back.

Today, the differences between negotiable instrument law and contract law are sufficient that negotiable instruments and sale of goods are in different and largely distinct sections of the U.S. Uniform Commercial Code.

Mr. Race was a clerk at the Bank of England who refused to pay on demand when Miller presented the Bank’s note. Miller was an innkeeper who had unknowingly taken the note as payment from a lodger who had stolen the note from the mails. Forthwith, Miller v. Race:

Miller v. Race
Court of King’s Bench
1 Burr. 452, 97 Eng. Rep. 398 (K.B. 1758)

It was an action of trover against the defendant, upon a bank note, for the payment of twenty-one pounds ten shillings to one William Finney or bearer, on demand.

The cause came on to be tried before Lord Mansfield at the sittings in Trinity term last at Guildhall, London and upon the trial it appeared that William Finney, being possessed of this bank note on the 11th of December 1756, sent it by the general post, under cover, directed to one Bernard Odenharty, at Chipping Norton in Oxfordshire; that on the same night the mail was robbed, and the bank note in question (amongst other notes) taken and carried away by the robber; that this bank note, on the 12th of the same December, came into the hands and possession of the plaintiff, for a full and valuable consideration, and in the usual course and way of his business, and without any notice or knowledge of this bank note being taken out of the mail.

It was admitted and agreed, that, in the common and known course of trade, bank notes are paid by and received of the holder or possessor of them, as cash; and that in the usual way of negotiating bank notes, they pass from one person to another as cash, by delivery only and without any further inquiry or evidence of title, than what arises from the possession. It appeared that Mr. Finney, having notice of this robbery, on the 13th December, applied to the Bank of England, “to stop the payment of this note:” which was ordered accordingly, upon Mr. Finney’s entering into proper security “to indemnify the bank.”

Some little time after this, the plaintiff applied to the bank for the payment of this note; and for that purpose delivered the note to the defendant, who is a clerk in the bank: but the defendant refused either to pay the note, or to re-deliver it to the plaintiff. Upon which this action was brought against the defendant.

The jury found a verdict for the plaintiff, and the sum of 21l. 10s. damages, subject nevertheless to the opinion of this Court upon this question—“Whether under the circumstances of this case, the plaintiff had a sufficient property in this bank note, to entitle him to recover in the present action?”
* * *

Sir Richard Lloyd, for the defendant.
The present action is brought, not for the money due upon the note; but for the note itself, the paper, the evidence of the debt. So that the right to the money is not the present question: the note is only an evidence of the money’s being due to him as bearer.

The note must either come to the plaintiff by assignment; or must be considered as if the bank gave a fresh, separate, and distinct note to each bearer. Now the plaintiff can have no right by the assignment of a robber. And the bank cannot be considered as giving a new note to each bearer: though each bearer may be considered as having obtained from the bank a new promise.

I do not say whether the bank can, or cannot stop payment; that is another question. But the note is only an instrument of recovery. Now this note, or these goods (as I may call it,) was the property of Mr. Finney, who paid in the money: he is the real owner. It is like a medal which might entitle a man to payment of money, or to any other advantage. And it is by Mr. Finney’s authority and request that Mr. Race detained it.

It may be objected, that this note is to be considered as cash “in the usual course of trade.” But still, the course of trade is not at all affected by the present question, about the right to the note. A different species of action must be brought for the note, from what must be brought against the bank for the money. And this man has elected to bring trover for the note itself, as owner of the note; and not to bring his action against the bank for the money. In which action of trover, property can not be proved in the plaintiff: for a special proprietor can have no right against the true owner.
* * *

Mr. Williams contra for the plaintiff.
The holder of this bank note, upon a valuable consideration has a right to it, even against the true owner.

1st, the circulation of these notes vests a property in the holder, who comes to the possession of it, upon a valuable consideration.

2dly, this is of vast consequence to trade and commerce; and they would be greatly incommoded if it were otherwise.

3dly, this falls within the reason of a sale in market-overt; and ought to be determined upon the same principle.
* * *

Lord Mansfield now delivered the resolution of the Court.

After stating the case at large, he declared that at the trial, he had no sort of doubt, but this action was well brought, and would lie against the defendant in the present case; upon the general course of business, and from the consequences to trade and commerce: which would be much incommoded by a contrary determination.

It has been very ingeniously argued by Sir Richard Lloyd for the defendant. But the whole fallacy of the argument turns upon comparing bank notes to what they do not resemble, and what they ought not to be compared to, viz. to goods, or to securities, or documents for debts.

Now they are not goods, not securities, nor documents for debts, nor are so esteemed: but are treated as money, as cash, in the ordinary course and transaction of business, by the general consent of mankind; which gives them the credit and currency of money, to all intents and purposes. They are as much money, as guineas themselves are; or any other current coin, that is used in common payments, as money or cash.
* * *

Here, an inn-keeper took it, bonâ fide, in his business from a person who made an appearance of a gentleman. Here is no pretence or suspicion of collusion with the robber: for this matter was strictly inquired and examined into at the trial; and is so stated in the case, “that he took it for a full and valuable consideration, in the usual course of business.” Indeed if there had been any collusion, or any circumstances of unfair dealing; the case had been much otherwise. If it had been a note for 1000l. it might have been suspicious: but this was a small note for 21l. 10s. only: and money given in exchange for it.
* * *

A bank-note is constantly and universally, both at home and abroad, treated as money, as cash; and paid and received, as cash; and it is necessary, for the purposes of commerce, that their currency should be established and secured.
* * *

Lord Mansfield declared that the Court were all of the same opinion, for the plaintiff; and that Mr. Just. Wilmot concurred.

Google challenges sweeping subpoena for search engine records

Not two days after I observed that the United States gives litigants intrusive discovery and subpoena powers, the Justice Department provides a good example. In pursuit of its case defending the Child Online Protection Act (COPA) in ACLU v. Gonzales that Department has commanded, via a subpoena for production of evidence, various search engines that are not parties to the suit (Google, Yahoo, etc.) to hand over very large samples of URLs available to be searched and search queries from you and me. For example, it commanded Google to hand over all "URL's" available to be searched "as of July 31, 2005" and and all queries performed on their search engines between June 1 and July 31st of 2005.

Fortunately, the subpoenas have not asked for information that might identify the querier (besides the query itself, which identifies all us "ego surfers" who like to keep track of what people are saying about us). Thus, it has not asked for your Internet protocol addresss that search engines could and probably routinely do record, or cookies which also can be used to tie together different searches that you have made.

Perhaps the DoJ is just looking to make a statistical study to justify the law, for example that some fraction of Internet searches are for porn. They may argue that if porn is available to a search engine, then it is effectively available to minors. According to Professor Orin Kerr, the DoJ is arguing that COPA requires password protection for pornography, not just filters: "DOJ's argument is that it needs the information from Google to explain the role of search engines in locating and obtaining pornography, which is then integral to understanding why filters are not an effective alternative to COPA screens [i.e., password protection]." However, unless the data is securely protected by the procedures (archaically designed for paper documents) specified in the protective order, the DoJ could use this data for a wide variety of surveillance unrelated to porn and COPA.

Here's a declaration that includes the subpoena, Google's response, and the protective order. Whereas MSN, AOL, and Yahoo complied with the subpoena (after apparently negotiating to reduce the amount of data), Google has objected to the subpoena. Good for Google! Powers to intrude on new kinds of privately collected data should never be given to a government without challenge, except where absolutely necessary in a truly urgent emergency, which this surely is not. (In other words, if this was September 12 and DoJ was asking airline web sites to hand over search queries for trips by plane to the East Coast the morning of the 11th, I'd expect Google to be patriotic and comply. Short of that kind of very rare and very urgent extremity, I expect and am happy to see them be patriotic and resist). If the Department of Justice wants Google's records, it will now have to ask the court to compel production under Federal Rules of Civil Procedure 45(c)(2)(B).

I hope the federal court allows the ACLU to examine that kind and volume of data in its discovery of the NSA. Much more likely is that the Department of Justice is going to invoke national security to set up a very big double standard when it comes to discovery. The NSA can argue that protective orders designed for paper are woefully inadequate for protecting top secret digital data. Alas, they'd be right, even if it were just commercial trade secret data. Our law firms need and our courts should require 21st century security techniques for protection of discovered or subpoenaed digital evidence. We could, for example, use key splitting techniques and require that discovery be done on tamper-evident court computers with the evidence owner and a court official present. We might also in the future use multiparty secure computation for studies of the kind the DOJ, the ACLU, the FISA court, and so on would like to perform on sensitive digital data.

Given federal discovery rules, PATRIOT, FISA, and the unchecked and infinite power claimed by the executive branch, the sad fact as things stand now is that the feds claim the right to snoop on us almost at will. Indeed, the Justice Department is currently arguing that they have a perfect right to snoop on any aspect of our lives, whether we consider said aspect to be private or not, at will, if at their sole discretion they believe it is relevant to national security. But despite the supposed even-handedness of federal discovery rules, the federal government is going to declare that, when they get sensitive about it, we have very little right to check up on them. Since when do "public servants" get to conduct surveillance on "we the people" and not vice versa?

What data is on your hotel card key?

ComputerWorld has a good article on what data they did and did not find on hotel card keys from various U.S. chains. They generically claim that some European and older U.S. card key systems put personal information on hotel card keys, which could leave guests vulnerable to ID theft or other privacy violations. The article's author, Robert L. Mitchell, concludes that current card keys used at major U.S. hotel and motel chains are OK, although in some cases they found data which they were unable to decode. Via Emergent Chaos.