Featured Thought Merchant: Hernando de Soto

". . . Hernando de Soto is a Peruvian economist known for his work on the informal economy, or economic activity that is neither taxed nor monitored by a government. De Soto argues that an important characteristic of capitalism is the functioning state protection of property rights in a formal property system where ownership and transactions are clearly recorded. . . "

Interview with Hernando de Soto:

“. . . Capitalism is essentially the economic system of poor people. That's what allowed the people that came from humble origins of the world to have economic rights the way only nobility and the high bourgeoisie had it before. So capitalism is essentially a tool for poor people to prosper. . . The constituency of capitalism has always been poor people that are outside the system. That's the way it worked in the United States. That was the basis of the libertarian or liberal democratic revolution that occurred in Western Europe. I don't know why it is that everybody expects that when you go and you talk to rich people throughout Latin America or Asia or the Middle East you are in touch with people who have the same libertarian principles that you do. You don't. The real constituency is below, and until the people who consider themselves real capitalists realize that they're not real capitalists, they're talking about the systems of privilege that existed way before popular capitalism was in place. . . .”

Organic Economics: Regulatory Environmentalism or Market Loving Hippies?

“. . . It appears that the titans of the food industry are having their way with the USDA and the feds may soon approve a list of 38 non-organic items that may be included in foods marked "organic." All of this interesting regulatory play is inidicative of the fact that organic foods finally hit the big time, and thus became worth of Big Food's attention. We see a several different things happening here.

1. The public is becoming more concerned about the contents of its foodstuffs.
2. With more interest in organic food, Big Food decides to buy into to the industry.
3. Once bought in to the industry, making money off of the public's (perhaps legitimate) fear of the current foodsupply (that Big Food created and aggressively markets), industry immediately sought to make organic foods cheaper, more attractive, or tastier (or perhaps all three) by adding non-organic ingredients.
4. With its meaning diluted (and I'm not taking a position on whether this dilution is meaningful - whether these 38 ingredients make items more or less healthy), the term organic may slowly lose its value as an indicator that a food product is distinctively more natural.
5. This will open new opportunities for creative small food marketers to create new language signifying the concept that "organic" once conveyed. . . .” From Appropriating "Organic"
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“. . . But not everyone agrees that organic farming is better for the environment. Perhaps the most eminent critic of organic farming is Norman Borlaug, the father of the “green revolution”, winner of the Nobel peace prize and an outspoken advocate of the use of synthetic fertilisers to increase crop yields. He claims the idea that organic farming is better for the environment is “ridiculous” because organic farming produces lower yields and therefore requires more land under cultivation to produce the same amount of food. Thanks to synthetic fertilisers, Mr Borlaug points out, global cereal production tripled between 1950 and 2000, but the amount of land used increased by only 10%. Using traditional techniques such as crop rotation, compost and manure to supply the soil with nitrogen and other minerals would have required a tripling of the area under cultivation. The more intensively you farm, Mr Borlaug contends, the more room you have left for rainforest.

What of the claim that organic farming is more energy-efficient? Lord Melchett points out for example that the artificial fertiliser used in conventional farming is made using natural gas, which is “completely unsustainable”. But Anthony Trewavas, a biochemist at the University of Edinburgh, counters that organic farming actually requires more energy per tonne of food produced, because yields are lower and weeds are kept at bay by ploughing. And Mr Pollan notes that only one-fifth of the energy associated with food production across the whole food chain is consumed on the farm: the rest goes on transport and processing. . . .” From Voting with your trolley
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“. . . It appears that the FTC is moving to stop the proposed Whole Foods/Wild Oats merger. [Geoffrey Mann] would think that the triumphant entry of Wal-Mart alone into the natural and organic foods market would save this merger. But notice something important. The FTC doesn’t claim that the relevant market is the market for natural and organic food. The market is for natural and organic supermarkets. The agencies have been down this road before, mistaking channels of distribution for relevant markets. Now, in some cases, it may be that the market is defined by the merging distributors (as many would say was true in the Staples case). But because economically-relevant market definition turns on demand elasticity among consumers who are often free to purchase products from multiple distribution channels, a myopic focus on a single channel of distribution to the exclusion of others is dangerous.

In other words, there is a serious risk of conflating a “market” for business purposes with an actual antitrust-relevant market. Whole Foods and Wild Oats may view themselves as operating in a different world than Wal-Mart. But their self-characterization is largely irrelevant. What matters is whether customers who shop at Whole Foods would shop elsewhere for substitute products if Whole Food’s prices rose too much. The implicit notion that the availability of organic foods at Wal-Mart (to say nothing of pretty much every other grocery store in the US today!) exerts little or no competitive pressure on prices at Whole Foods seems facially silly. . . ." From Premium natural and organic bulls**t

Real World Transactions Using Virtual Currency

“. . . The Virtual Goods Summit is a one day conference focused on the emerging market opportunity for virtual goods and economies. Once restricted to the world of online gaming, virtual goods and currencies are beginning to influence the development of social networks, community sites, and many other new and exciting markets. . . .” From Virtual Goods Summit 2007.
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“. . . Citizens within the virtual world of Second Life will be able to teleport to an in-world pizza restaurant and order their favorite pizza from their favorite national or local pizza chain. But the magic doesn’t stop there with the use of Dynamedia is releasing VirtuReal a revolutionary way for Second Life Citizens to use their Linden Dollars to purchase real world goods. They will be able to purchase real world pizza with their in world Linden Dollars. That’s right virtual world currencies used to purchase real world food. . . .” From Pizza enters the Virtual World of Second Life.
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“. . . A couple of weeks ago it was reported (via PlayNoEvil) that China aims to restrict the trading of virtual currencies that have become popular as a payment method even for third-party services. According to the joint announcement of 14 Chinese government agencies including the Ministry of Public Security and People's Bank of China, virtual currencies should not be used to buy real commodities and can only be traded back to real money for amounts not exceeding the original purchase price, eliminating any opportunity for profits. . . .” From Government rumbles, Chinese virtual money markets stable for now. More here.

The Relationship Between Price & Utility (For Beginners)

2. The Creation of Price Through Weighted Preferences

Previous analysis indicates that it is possible to maximize relative utility in certain circumstances with no information other than the disparately ranked preference sets of two individuals. Taking that conclusion as true, one can begin to understand the relationship between utility—measured in terms of wealth, consumption, and income­—and exchange. From a neoclassical perspective, exchange is possible when individuals recognize that they have disparate preference sets, each individual controls the means to satisfy the other’s need, and both recognize the other’s control. In the discussion of controlled and uncontrolled means above, control meant that an individual could realize utility from one half of a binary need, and which half depended entirely on which was higher ranked. In the context of exchange, control also is determined from the perspective of a second individual. That is, A controls the means to satisfy B’s preference if for some binary need, B will realize the utility from one half of the need according to some arrangement within A’s preference set.

For example, suppose that A can get apples from a tree but that B has no way to get apples other than through A’s consent. Suppose further that B has a preference set of getting an apple from A > not getting an apple from A. If A has a preference set of giving apples > not giving apples, then A will give B an apple and maximize B’s utility. However, if A prefers not giving apples > giving apples, then the lower half of B’s binary preference set will be met. In either case, B will realize one of the preferences from his binary need, and which one he realizes turns exclusively on A’s preference set. Thus, A controls the means to satisfy his own need (getting and giving v. not getting and giving) as well as B’s need (receiving v. not receiving). Notice that if A’s preference is entirely independent of anything that B can affect, then receiving an apple is an uncontrolled need with respect to B. However, if B can affect A’s preference set such that A’s preference to give an apple can turn on B’s effects, then receiving an apple is a controlled preference with respect to B. In that case, giving or not giving is a controlled need with respect to A, and receiving or not receiving is a controlled need with respect to B. In this situation exchange is possible.

Recall that, so long as fulfilling one individual’s preference set does not rearrange another’s preference set, then all thing being equal, no matter where those preferences lay in A and B’s larger preference set, if one must satisfy a need for both A and B, then it will always maximize utility to satisfy the higher ranked preference of both A and B for any pair of disparately ranked preferences (presuming no transaction costs). More clearly, when one has to satisfy some preference of both A and B, utility is always maximized by giving A one apple and B one banana with respective preference sets (1, 3) and (4, 1). This principle also holds when A controls the means to satisfy one of B’s needs and B controls the means to satisfy one of A’s needs. That is, so long as fulfilling one individual’s preference set does rearrange another’s preference set, then all thing being equal, no matter where those preferences lay in A and B’s larger preference set, it will always maximize utility for A to satisfy B’s preference and for B to satisfy A’s preference when those preferences are disparately ranked by A and B. Thus, when A controls one banana, B controls one apple, and A and B have respective preference sets of (1, 3) & (4, 1), ceteris paribus, utility is always maximized when A and B exchange their apple and banana. This is the abstracted version of what economic means when it refers to “gains from trade.”

Notice however, that if A controls one banana and B controls nothing, then once again, there is no way to tell if a transfer would be utility maximizing, even on a relative scale. Similarly, if A controls three bananas and B controls one apple, while both A and B would harvest utility when exchanging one for one, two for one, or three for one as compared to not exchanging at all, there is no way to tell which outcome is maximizes total utility because there is no common unit to measure A and B’s respective utility. Nevertheless, when A controls three bananas and B controls one apple, receiving one or two bananas for one apple increases utility for B, giving one banana for one apple increases utility for A, and giving two bananas for one apple decreases utility for A as compared to one trade. So if A and B cannot divide the apple or bananas into pieces, then one and only one exchange will take place. However, there is a point between A giving one banana and A giving two bananas where A continues to increase more utility than she loses when receiving an apple (i.e. she maintains positive diminishing returns). If A and B were able to divide their fruit into pieces, then given A and B’s preference sets, B could successfully insistent he receive up to 1.2 bananas in exchange for his apple, leaving A with one apple and 1.8 bananas. This outcome allows both A and B to realize the greatest amount of utility given each other’s preference sets, and is referred to as a Nash Equilibrium.

These principals give rise to a theory of price. In this case, A has bananas but prefers apples, making her a banana seller and an apple buyer. Because A prefers apples to bananas at a ratio of 1/3, the price of one of A’s bananas is anything greater than 1/3 of an apple. Thus, for any individual, the minimum offering price is the ratio of any two weighted preferences within a preference cluster where the numerator is the need that the individual wants satisfied through another’s control and the denominator is the controlled need the individual is offering to satisfy another’s need. Conversely, the price of B’s apple is anything greater than 1/4 of a banana, or to leave things in terms of A, B is a banana buyer and an apple seller, which means than B is willing to pay anything less than an apple for a 1/4 of a banana. Therefore, there is a price range in the banana market of 1/4 – 1 apples, and both A and B will harvest utility from any sale in this price range. As noted, given A and B’s preferences, a sale of 1 apple for 1.2 bananas maximizes utility for both A and B, so the final market price of banana will be 5/6 apples, which properly falls within the price range. From The Taxation of Virtual Worlds: Understanding Theories of Taxation Through an Analysis of the Second Life Economy by Tim Miano.

Multitasking Turing Test Technology

". . . CAPTCHAs—short for "completely automated public Turing tests to tell computers and humans apart"—are the simple distorted word puzzles commonly used to register at Web sites or buy things online. Computers can't decipher the twisted letters and numbers, ensuring that real people and not automated programs are using the Web sites. Researchers estimate that about 60 million of those nonsensical jumbles are solved everyday around the world, taking an average of about 10 seconds each to decipher and type in.

Instead of wasting time typing in random letters and numbers, Carnegie Mellon researchers have come up with a way for people to type in snippets of books to put their time to good use, confirm they're not machines and help speed up the process of getting searchable texts online. Many large projects are under way now to digitize books and put them online, and that's mostly being done by scanning pages of books so that people can "page through" the books online. In some cases, optical character recognition, or OCR, is being used to digitize books to make the texts.

Internet Archive scans 12,000 books a month but has hundreds of thousands of files that are images that the computer doesn't recognize. Those files are downloaded and split up into single words that can be used as CAPTCHAs at sites all over the Internet. If enough users decipher the CAPTCHAs in the same way, the computer will recognize that as the correct answer. . . ." From Researchers Turn Web Blather to Books.

A Transient Quandry: Game Theory and Kaushik Basu's Traveler's Dilemma

". . . Some decisions are often irrational in game theory terms, but can still be more beneficial than the supposed rational choice. Game theory tries to understand choices when individuals are working independently and each choice affects the other person's gains or losses. This Scientific American article discusses the Traveler’s Dilemma and looks at situations where game theory predicts the most rational outcome, but which may actually lead to much less gains for everyone than if people make an irrational response:

Lucy and Pete, returning from a remote Pacific island, find that the airline has damaged the identical antiques that each had purchased. An airline manager says that he is happy to compensate them but is handicapped by being clueless about the value of these strange objects. Simply asking the travelers for the price is hopeless, he figures, for they will inflate it.

Instead he devises a more complicated scheme. He asks each of them to write down the price of the antique as any dollar integer between 2 and 100 without conferring together. If both write the same number, he will take that to be the true price, and he will pay each of them that amount. But if they write different numbers, he will assume that the lower one is the actual price and that the person writing the higher number is cheating. In that case, he will pay both of them the lower number along with a bonus and a penalty--the person who wrote the lower number will get $2 more as a reward for honesty and the one who wrote the higher number will get $2 less as a punishment. For instance, if Lucy writes 46 and Pete writes 100, Lucy will get $48 and Pete will get $44.

To see why 2 is the logical choice, consider a plausible line of thought that Lucy might pursue: her first idea is that she should write the largest possible number, 100, which will earn her $100 if Pete is similarly greedy. Soon, however, it strikes her that if she wrote 99 instead, she would make a little more money, because in that case she would get $101. But surely this insight will also occur to Pete, and if both wrote 99, Lucy would get $99. If Pete wrote 99, then she could do better by writing 98, in which case she would get $100. Yet the same logic would lead Pete to choose 98 as well. In that case, she could deviate to 97 and earn $99. And so on. Continuing with this line of reasoning would take the travelers spiraling down to the smallest permissible number, namely, 2.

The game's logic dictates that 2 is the best option, yet most people pick 100 or a number close to 100--both those who have not thought through the logic and those who fully understand that they are deviating markedly from the rational choice. Furthermore, players reap a greater reward by not adhering to reason in this way. Thus, there is something rational about choosing not to be rational when playing Traveler's Dilemma. . ." From The Traveler's Dilemma.
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". . . One possible response to this is that in the real world, market prices tend strongly toward uniformity. This tells Pete and Lucy that the “best” guess, the one which makes a penalty least likely while tending to maximize reward, is the very same price they have already paid. By happy coincidence, this also happens to be the honest answer. Even if I am not entirely certain that the other player is honest, I still have some idea that he might be, and this alone pushes me strongly toward honesty as well. Thinking further, I will realize that the same dynamic applies to him,— and if you’re going to be caught in some recursive logic—which will happen in any case if you try to undercut—then you might as well use it to your advantage. . . ."

Real World Outsourcing of Virtual Work: Gold Farming, Free Trade, and the Growing Pains of Capitalism in China

". . . A new documentary, Chinese Gold Farmer, travels into several different Chinese gold farms. Several gold farmers tell their own stories and see their everyday struggles to live at the border of the virtual and the real.

Multiplayer online games have given rise to a virtual economy, in which all kinds of virtual assets---from in-game currency to magic shields & whole characters---are traded against real world currency. In China, there are tens of thousands of gaming workshops that hire people to play games like World of Warcraft and Lineage. The gaming workers kill monsters and loot treasures for 10-12 hours a day to produce virtual assets that are exported all over the world. They are called Chinese gold farmers by western gamers and many myths about them are circulated in the game universe.

According to estimates, around 100,000 people in China are employed as gold farmers, as of December 2005. This represents about 0.4% of all online gamers in China. Chinese gold farmers typically work twelve hour shifts, and sometimes up to eighteen hour shifts. Wages depend heavily on location and the size of the gold farming company. One gold farming operation in Chongqing in central China with 23 gold farmers was reported to pay its employees the equivalent of about 120 U.S. dollars per month, while workers at a larger gold farm in Fuzhou earn the equivalent of about 250 U.S. dollars per month. The rising prevalence of gold farming has led to the creation of gold farm brokerages.

China is in fact dominant in this industry and Jin Ge—a 30-year-old Shanghai native—has done a documentary on "gold farms" in China as part of his doctoral research at the University of California, San Diego. You can read an interview with him here. He is one of the many researchers who has invested his time in investigating how farm owners manage their production and distribution of virtual commodities across the border between the virtual and the real as well as the border between nations. “I tried to find out what this job, combining work and play, means to Chinese gold farmers and how it feels like to live at this peculiar intersection of the virtual and the real.” . . ."

(Hat Tip Freakonomics)

Engineering a Paradise with Featured Thought Merchant David Pearce

". . . David Pearce promotes the abolition of suffering in all sentient life. He argues that the abolition of suffering can be accomplished through paradise engineering. In The Hedonistic Imperative, Pearce outlines how technologies such as genetic engineering, nanotechnology, pharmacology, and neurosurgery could potentially converge to eliminate all forms of unpleasant experience in human life and produce a post-human civilization. . . ."
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". . . The term “abolitioinism,” used to describe the use of biotechnology to eliminate suffering, was first proposed by Lews Mancini in 1986. Abolitionism is the use of science to maximize happiness and minimize suffering—not just in humans but in all sentient life. It is a philosophy inspired by utilitarian ethics: if happiness equals value, then the elimination of suffering or 'maximization of value' should be the prime objective of the human race. . . ."
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". . . It is hard for me [i.e., Barry Schwartz] to see much reason for concern over a society that dedicates itself to promoting happiness by cultivating virtuous character and human excellence. It strikes me that this is a vast improvement on the pursuit of increased per capita GDP. Making this point, I think, is Richard Layard’s main objective in his book, Happiness: Lessons from a New Science, which is cited by McMahon as a prime example of the current interest in identifying happiness-promoting policies. Layard’s argument, in essence, is that one of the things nations do is pursue policies. Given that nations pursue policies, they ought to be pursuing policies that promote the welfare of their citizens. All nations have pretty much taken it for granted that the way to promote the welfare of citizens is by increasing national wealth. It has seemed reasonable to take wealth as a proxy for welfare, because the more wealth citizens have, the better each citizen will be able to pursue welfare as he or she sees it. If wealth is not an end in itself, but rather a means of promoting welfare, then it would certainly be good to know whether it is achieving this end. . . ." From Why Societies Should Pursue Happiness.
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". . . Four of the world's biggest pharmaceutical companies are proposing to launch a television station to tell the public about their drugs, amid strenuous lobbying across Europe by the industry for an end to restrictions aimed at protecting patients. Pharma TV would be a dedicated interactive digital channel funded by the industry with health news and features but, at its heart, would be detailed information from drug companies about their medicines. . . ." From Coming soon: the shopping channel run by drug firms.

Inter-Virtual-World-Exchange: Contracts, Regulation, and Taxation

". . . Anshe Chung Studios, a company that emerged from inside a virtual world by reinvestment of value created within virtual worlds, is preparing to launch a virtual financial market, financial products and a set of services that are going to allow direct capital flow and investment across virtual world boundaries. No real money trades will be involved. This step will be the first of many in the creation of an open, cross platform Metaverse economy that transcends individual virtual worlds.

"Some virtual worlds like Second Life, Entropia Universe, and IMVU have demonstrated the enormous economic potential that exists when key sectors of a virtual world economy such as content creation, trade, banking and services are privatized. This has lead to a boom in each of these worlds that has yet to be matched by any other economy, real or virtual," says founder Ailin Graef a.k.a. Anshe Chung. "Now the time is right to go further and link these exciting spaces together, to begin with the creation of the global Metaverse."

"In the real world, the flow of capital and investment across national borders has always been a driving force for political progress, economic reforms and the emergence of a global conscience and economy", adds Guni Graef, CEO. "We believe that allowing residents in a virtual world, no matter which one they have chosen to live in, to easily diversify their portfolio of virtual investments into other virtual worlds is going to lead to a paradigm shift. At ACS we are convinced that once capital is flowing freely, people, goods and services will follow and eventually we will see incentive and pressure for the emergence of open tools and standards. It is our vision that one day even traveling across virtual worlds and taking your belongings with you should become as easy as a mouseclick." The new financial market will allow Second Life residents to invest their Linden Dollars directly in ventures such as banks, malls or biospheres in Entropia Universe while those who earned their fortunes in Entropia Dollars will be able to easily diversify their investments into assets such as Second Life virtual land funds, virtual game development businesses or the IMVU fashion design industry. . . ." From Anshe Chung Studios to Link Virtual World Economies.
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". . . [This] clearing and exchange system would be fully governed by private contract with a single company. It is, in essence, a proprietary system with some unspecified exposure to "real world" public regulation. This is by contrast to standard international economics in which the relation of private agreements and public regulations is relatively clear (or at least we have a sense as to how to resolve debates over who regulates what). How the evolution of the online economy will interface with the mainstream economy—and economic regulation—is still an open question.

Despite the hype from some quarters that the online economy is its own entity, separate from the regulatory dinosaurs of the "real" world, I would not sell the mainstream regulators short. How the interactions of old economy regulators and new economy companies evolve will play an important role in determining the success of private attempts at financial market-construction. Moreover, whether this one particular attempt to build a “virtual” financial transfer system will take hold or if it will be overtaken by another privately-run system is a question that will be left to the market. . . ." From Brave New World(s): From International Finance to Inter-Virtual World Finance.
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". . . Unlike poker chips, which are heavily regulated by the casinos that use them as units of exchange, Second Life—and the Internet in general—is more or less a free-form marketplace. “Although Zarin acquired tangible property, the chips, the chips were not property in the relevant tax sense because they were only a ‘local’ medium of exchange, like currency or banknotes. The chips had no independent existence or value other than to facilitate gambling at Resorts [Casino].” While in a casino, “chips are merely symbols denominating the amount of the bets at stake,” the currency and goods in Second Life take on a fungibility of use that pushes the limitations that chips in a confined setting cannot. Not surprisingly, the users of other virtual worlds and other virtual currencies are already testing their supposed boundaries with great success. These parallel innovations inform the potential boundaries of Second Life. Despite clear rules and multiple attempts to eliminate real-money trading of goods from various virtual worlds, third-party grey markets are still used and easily accessible by users. Whereas, Blizzard, the owner World of Warcraft, has tried with minimal success to restrain the continued commodification of its virtual goods by banning real money transactions associated with the game, Sony, the owner of EverQuest, has taken the opposite approach by “creating its own auction site where it can control and profit from the player demand for sales of virtual items.”

Removing these issues from the virtual-world context does not solve the problem, as seen in markets of related technology. Chinese regulators have ordered websites to limit the use of “QQ coins,” a form of virtual money, stemming from “concerns that the online credits might be used for money laundering or illicit trade” after news reports that customers were using credits to “gamble, pay for phone-sex services and to shop online.” In keeping with its mission to create a user-defined world of general use in which people can interact, play, do business, and otherwise communicate, Linden takes an even more hands off approach then Blizzard, Sony, or the Chinese government, and unlike the Resorts casino in Zarin plays little no part in defining how Linden’s are used—in or out of Second Life. Shielding Second Life income from taxation under an imputation theory is proper only to the extent that the Second Life economy can be enforceably bounded—a requirement that is at best tenuous. . . ." From The Taxation of Virtual Worlds: Understanding Theories of Taxation Through an Analysis of the Second Life Economy by Tim Miano.

Virtual Economies of Scale: Jacking-In To the Corporate Metaverse

". . . Regardless of these uncertainties and despite the assertions by Congress’s Joint Economic Committee that “taxing transactions that occur within virtual economies . . . would be a mistake,” it clear that it is only a matter of time before the wealth generated in Second Life (or its technological progeny) will be sufficiently great that Congress is passing virtual-world tax legislation and tax lawyers are specializing in the virtual world sections of the Internal Revenue Code. The implications this could have on currently untaxed income like frequent flyer miles and casino chip will have to be left for another paper. . . ." From The Taxation of Virtual Worlds: Understanding Theories of Taxation Through an Analysis of the Second Life Economy by Tim Miano.
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". . . On the heels of IBM’s recent announcement about their new mainframe-class machines geared for 3D virtual worlds comes the news that Sun Microsystems has constructed its own 3D virtual environment for business. Judging by recent initiatives from Sun and IBM, the latest trend is a corporate-controlled, business-centric virtual world architected for internal use only– call it the intranet metaverse. In Sun’s case, it’s MPK20, a “a virtual 3D environment in which employees can accomplish their real work, share documents, and meet with colleagues using natural voice communication.” The MPK20 environment is built atop the open-source Wonderland software and the Project Darkstar infrastructure designed to run online games.

According to Sun, the key difference between MPK20 and other 3D environments is that it is explicitly designed for business use. The idea is to bring remote workers in Sun’s worldwide offices together into a single embodied space, “where the spacial layout of the 3D world coupled with the immersive audio provides strong cognitive cues that enhance collaboration.” The Wonderland software permits the creation of live, shared applications that are ideal for a workplace environment, Sun says. “The next stage in the MPK20 project is to design complementary physical and virtual work spaces. If personal and team workspaces primarily exist in the virtual world, then people in physical spaces should be able to project their workspace around them no matter where in the world they are and interact seamlessly with people who are remote.”

In IBM’s case, it’s a rough-and-ready 3D environment created by their Innovate Quick team, using the Torque graphics engine from Garage Games. “The project team is exploring ways to scale, and also applying different models of operation,” says Ian Hughes of IBM’s UK branch. Hughes spearheaded IBM’s early explorations of Second Life as a private development lab for the future 3D Internet, where the team creates cool applications like a universal language translator for avatars.

While some Net pundits have quickly dismissed Fortune 500 interest in virtual worlds as mere marketing hype, it’s projects like these which suggest that high tech companies are serious about their potential to transform the Internet. If they privately come up with new protocols and technology that adds real value to the way they do business, the future of the broader Net as a 3D medium is all but insured. By the same token, they may just end up adding another level of aggravation to the conference call. Without a casino or lap-dancing club furry in sight it is a more sober world, maybe, but one perhaps better suited to the business user. . . ." From Sun Aims New 3D Environment at Business and from Here come Virtual World Intranets… Seriously.

(Hat Tip Slashdot)

What Does It Mean that Virtual Worlds Have Economies?

B. What Are Virtual Worlds and What Does It Mean that Virtual Worlds Have Economies?

One of the most important and interesting aspects of virtual worlds such as Second Life is the depth and sophistication of the economies that develop among the users. Perhaps surprisingly, the economies of these virtual worlds frequently satisfy all the fundamental characteristics that neoclassical economic theory demands in the real world. First, the virtual items possessed by users—essentially the actualization of computer software—are no different than any other real-world goods. Users are human beings with real-world and virtual-world needs, and the properties of some of these items satisfy some of those needs. As in the real world, users are aware of the causal relationship between attaining the virtual good and satisfying a need, and users have ways of accessing these goods and retaining control over them. Most importantly, virtual goods are scarce, making them “economic goods” no different than real-world economic goods. This last point is especially true in Second Life, where, unlike other virtual worlds, all the virtual goods are created by the users themselves. “Well over 99% of the objects in Second Life are user created.”

But these virtual items are not merely economic goods. They are economic goods within an interactive environment that satisfies principles of exchange. Different users own different virtual goods and have unique subjective needs, which allow them to reverse value one other’s goods. As users recognize that others have these disparate needs and perceive that if they could trade they would receive a net benefit, the only additional element necessary for exchange is a mechanism for excluding others from using the good without permission. Like the real world, virtual worlds solve this problem by maintaining a system of property rights over virtual goods. Whether users create new goods, receive free goods, or trade others for goods, users hold virtual-world property rights for each of these virtual possessions—a right defined by the ability to exclude and to transfer that ability to another user. Thus, all of the necessary elements for bargained-for positive sum exchange of economic goods exist within Second Life.

These two characteristics, virtual economic goods and virtual environments that foster exchange, are not surprising. Indeed, the economic properties of these virtual goods are equally present in a computerized version of the board game Monopoly. Most people would agree that Monopoly money, helpful as it may to buy Park Place or pay the Luxury Tax, has no value outside of the well defined parameters of its game environment. However, several unique features—now norms within virtual worlds like Second Life—have distorted traditional demarcations of value, wealth, and trade. As noted, users have the ability to barter with each other for virtual items and trade these items among themselves. Users can sell items to each other using this currency in place of bartering. Unlike Monopoly, however, real-world systems of trade such as eBay and PayPal allow virtual-world users to auction/sell the rights to virtual goods or the right to an account that holds virtual goods for real-world currency. These items are subsequently transferred within the virtual world. Additionally, just like Monopoly, most virtual worlds like Second Life have their own form of currency. But perhaps most surprisingly, either through the companies themselves or through sophisticated virtual-world entrepreneurs, some virtual worlds including Second Life have currency exchanges where users can trade real-world currencies for virtual-world currency and vice versa. This means that all currency, goods, and services within the virtual marketplace have a corresponding real-world monetary value.

The implication of this real-world valuation of virtual-world goods is that users can participate in the virtual world for the purpose of creating real-world wealth. As such, there are implicit incentives within this system for users to participate in the activities that are wealth maximizing. Therefore, unlike Monopoly or other virtual-world games that may nevertheless have internal economies, virtual worlds such as Second Life take on the unique and dynamic ability to satisfy a whole range of real-world needs in ways that have never been done—needs that are measured in U.S. Dollars. From The Taxation of Virtual Worlds: Understanding Theories of Taxation Through an Analysis of the Second Life Economy by Tim Miano.

An Example of Liberalism on Public Television

". . . The Chicago school of economics is a school of thought favoring free-market economics practiced at and disseminated from the University of Chicago. The leaders were Nobel laureates George Stigler and Milton Friedman. It is associated with neoclassical price theory and free market libertarianism, refutation and rejection of Keynesianism in favor of monetarism (until the 1980s, when it turned to rational expectations), and rejection of regulation of business in favor of laissez-faire. In terms of methodology the stress is on "positive economics"--that is, empirically based studies using statistics, with less stress on theory and more on data. The school is noted for its very wide range of topics, from regulation to marriage, slavery and demography, that it studies. . . ."

Watch the complete program and "explore theories, facts, and trends that drive our understanding of economic forces and events" in PBS's Commanding Heights.

Light Reflections on Perception Bias

Cognitive Load refers to the load on working memory during problem solving, thinking and reasoning (including perception, memory, language, etc.). Most would agree that people learn better when they can build on what they already understand. But the more things a person has to learn in a short amount of time, the more difficult it is to process information in working memory.

Consider the difference between having to study a subject in one's native language versus trying to study a subject in a foreign language. The cognitive load is much higher in the second instance because the brain must work to translate the language while simultaneously trying to understand the new information.

Inattentional blindness, closely related to the subject of change blindness, is an observed phenomenon of the inability to perceive features in a visual scene when the observer is not attending to them. That is to say that humans have a limited capacity for attention which thus limits the amount of information processed at any particular time. Any otherwise salient feature within the visual field will not be observed if not processed by attention.

(Hat Tip Wired Science)

Theories of Taxation Through an Analysis of the Second Life Economy (Introduction)

Introduction:

A virtual world is a computer simulated environment in which human users interact with each other via graphical representations of themselves. Second Life is an Internet-based virtual world developed and released by Linden Lab in 2003. Other popular examples of virtual worlds include massively multiplayer online games such as World of Warcraft, which boasts more than 8 million users, and EverQuest, which as early as 2002 was estimated to have the 77th largest GDP in the world (between Bulgaria and Russia). Typically, virtual worlds appear similar to the real world, with constraints such as gravity, topography, locomotion, and communication.

One of the most important and interesting aspects of virtual worlds such as Second Life is the depth and sophistication of the economies that develop among the users. In fact, some virtual worlds, including Second Life, have currency exchanges where users can trade real-world currencies for virtual-world currency and vice versa. This means that the currency, goods, and services within the virtual-world marketplace have a corresponding real-world monetary value. The implication of this real-world valuation of virtual-world goods is that users can participate in the virtual-world activities for the purpose of creating real-world wealth. As such, there are implicit incentives within this system for users to participate in the activities that are wealth maximizing.

The overarching purpose of this work is explore the federal income tax consequences of the creation of Second Life—a virtual world where real people can engage in behavior constrained only by the time and effort of the users who wish to have a medium for a particular activity. Because it has developed the most mature systems of property rights, trade, and fungibility of wealth, and because it has been designed intentionally to be a more-or-less unregulated three-dimensional free market, Second Life is the focus of this work. Note, however, that much of the discussion also applies to the many other virtual worlds on the Internet, some of which currently boast millions more users and much larger internal economies than Second Life.

This work will proceed in three major parts. Part I will introduce the basic terminology and boundaries of Second Life and virtual worlds in general. It argues that the goods and services in Second Life posses all of the same economic characteristic as real-world goods and services, and that it is improper to dismiss Second Life as no different than the video games that have, in part, given rise to the technology that makes Second Life possible. Part II will introduce some basic concepts for income taxation and briefly examine the Haig-Simons definition of income. It will examine Haig’s original work that gave rise to this definition, and then, using introductory economic concepts develop the fundamental framework underlying the modern definition of income that Haig and Simons failed to explain. The purpose of this inquiry is to establish that as a purely theoretical matter, the wealth generated from the activities in Second Life is indistinguishable from those in the real world. Finally, having established that Second Life wealth is taxable income under the theoretical premises for § 61, Part III will analyze the activities in Second Life under the current tax law. First it will examine whether the three primary operational limitations that currently exists in the tax code would exempt Second Life from taxation. Second, using partnership tax law as a model, it will explore whether the efficiencies and substantial reduction in transaction costs that are unique Second Life too easily create accidental tax liability such that the current tax law fails to incorporate operational limitations special to Second Life. This work concludes that under the current law the users of Second Life would properly be subject to some form of taxation for their in-world activities. It also briefly speculates at some policy reasons for why the government should delay taxing those activities despite the applicability of the tax law and lists some important tax questions left unanswered by this work. From The Taxation of Virtual Worlds: Understanding Theories of Taxation Through an Analysis of the Second Life Economy by Tim Miano.

Always Efficient or Just for the Environmentalism of It?

". . . Procter & Gamble has introduced rigid tubes for Crest toothpaste that can be shipped and displayed on shelves without boxes. Aveda, a beauty products company, is expected to soon roll out a men’s care line that is packaged in bottles made of 95 percent recycled materials. Coca-Cola plans to cut the plastics in its Dasani water bottles by 7 percent over the next five years, just by tweaking the shape of the bottle and the cap. “Waste of any kind is inefficiency, and inefficiency equals cost,” said Scott Vitters, Coca-Cola’s director of sustainable packaging. . . ." From Incredible Shrinking Packages.
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"The Coase Theorem holds that, regardless of the initial allocation of property rights and choice of remedial protection, the market will determine ultimate allocations of legal entitlements, based on their relative value to different parties.” Francesco Parisi on the Coase Theorem.
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". . . Coke was clearly an exceptional example of rigid prices. Daniel Levy and Andrew Young, the economists who analyzed the case, report that Coke's price stayed at 5 cents a serving while the price of other products bounced all over the place. The price of sugar tripled after World War I before falling back somewhat; over the past six decades, the price of coffee has gone up eightfold. Coke itself was taxed first as a medicine, then as a soft drink, and survived sugar rationing. All the while, the price stayed at a nickel.

Part of Coke's problem was the cost of replacing vending machines that accepted only nickels—and the fact that the alternative, dimes, represented a 100 percent price hike. (The boss of Coca-Cola wrote to his friend President Eisenhower in 1953 to suggest, in all seriousness, a 7-and-a-half-cent coin.)

Most companies don't wait so long to change prices if they need to. Researchers have tended to conclude that many prices change every year or so, often sooner. Levy and some colleagues looked at supermarket pricing in the mid-1990s and found, based on detailed accounting data, that to change the price of a single type of product in a typical supermarket cost 52 cents in printing, labor, and errors. The total of all such changes was about $100,000 per store, per year—still less than 1 percent of revenue.

Technology makes it ever easier to change prices using bar codes, Web sites, and laser-printed menus. Amazon always seems to be changing book prices. Coke vending machines now take very little effort to reprogram. So, should we conclude that "menu costs" no longer matter?. . ." From The Mystery of the 5-Cent Coca-Cola.

The Spacing Gestation of Wired Technologies

" . . . Chris Anderson, the editor of WIRED, explores the four key stages of any viable technology: setting the right price, gaining market share, displacing an established technology and, finally, becoming ubiquitous. To demonstrate this trajectory, Anderson explores the evolution of the DVD player as it passes through each of these four tipping points, then offers specific examples of current trends in technology -- ranging from DNA sequencing to the hybrid -- to illustrate each stage of the game. . . ."

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". . . Wired Magazine debuted with a new logo that it “obeys the Law of Optical Volumes.” The Law of Optical Volumes states that the area between any two letters in a word must be of equal measure throughout the word, and remain consistent throughout the body of text, and is Wired creative director Scott Dadich’s term for a typography rule that governs the spacing of characters within a font.

The Law boils down to the science of kerning. In typography jargon, kerning is the act of adjusting the space between two letters to make words and sentences lay out more evenly. For example in the word “VAST,” there is usually reduced space between the V and A, and maybe extra space between the S and T. Otherwise the “VA” would seem too far apart and the “ST” would seem cramped.

The formal definition for a font includes not only the shape of each letter, but also a series of kerning pairs that specify a customized distance between certain pairs of letters, such as the “Yo” in “You.” Without the adjusted spacing, these pairs appear too far apart or too close together.

Typographers strive to balance letters so that the area of space between each pair of letters is identical. The premise is that human eyes unwittingly measure that area to decide how far apart each pair is. If Scott were more of a geometry wonk, he’d have dubbed it the Law of Optical Areas rather than volumes, but that doesn’t sound as imposing.

The same goes for Wired’s new logo. It alternates between letters without and with serifs, yet the area between each pair of letters is about the same, thanks to the serifs on the I and E and lack thereof on the W, R and D. This equivalence makes the logo easier to see and read across a crowded supermarket aisle. The alternating fonts also make the letters seem to blink on and off as you read them from left to right, in emulation of digital ones and zeroes. . . ." From Law of Optical Volumes: The Math Behind Wired's New Logo.