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

Policy Considerations Against Taxing Second Life Wealth

Despite its prolific number of small dollar transactions, its technological origins in the video game industry, and the initial perception that the utility derived from the activities in Second Life are somehow distinguishable from those in the real world, an analysis indicates that taxation of the wealth generated inside Second Life is proper appropriate under current U.S. tax law. [see other discussion here] Nevertheless, this article concludes with a few comments about some of the policy reasons not to tax Second Life. It also raises the most pressing issues that this paper failed to explore.

First, note that “Second Life’s grant of property rights to participants seems to have encouraged far greater experimentation and innovation than other virtual worlds. For example, one participant created a video game within the Second Life virtual world and then sold it to a real-world media company, a transaction that would be impossible in most virtual worlds.” Additional interesting and bizarre issues concerning Second Life come to light everyday. Just to list a few: John Edwards’s Second Life presidential campaign headquarters was vandalized with feces and a picture of him in blackface; a virtual riot broke out between members of the French extremist party National Front and Second Life Left Unity, a socialist and anti-capitalist user-group; reports have arisen that certain users have designed a way to override the mobility of other users and virtually rape unconsenting avatars; hundreds of companies from H&R Block and Colwell Banker to Coco-Cola and Mercedes Benz have an active business presence in Second Life; Reuters has a dedicated Second Life News center; gambling activities have become so wide-spread that the FBI is investigating the criminal activities by U.S. citizens. In essence, Second Life is allowing the public to explore the practical boundaries of a three-dimensional version on the Internet.

Perhaps most importantly is that this innovation is developing something as yet unseen in the real world or on the Internet: a viable system for micro-transfers of wealth with transaction costs approaching zero. The importance of this point cannot be overstated. The Linden Dollar has remained steadily at about L$270 per $1, so real people are activity engaging in millions of transactions that are valued as low around $0.0037. Thus far, these transactions have been secure and easy to administrate through electronic accounts where people can, in essence, deposit U.S. Dollars. From YouTube, which has announced that users will receive revenue according to the popularity of the video they post, to Google AdSense, which derives revenue on a per-click basis, the micro-commodification of the Internet is progressing to the point where society can efficiently and profitably trade in fractions of pennies. As a policy matter, the tax law should recognize the economic reality of these micro-transactions while avoiding spoiling the efficiencies created through plummeting transaction costs.

Leanda Lederman, the author of the article Stranger Then Fiction: Taxing Virtual Worlds discussed above, has suggested elsewhere that rather than including Second Life activity in the income tax, “the better result is to tax sales within Second Life (for Lindens).” While this may eventually be the best solution, it also implicates complicated issues as to whether requiring Linden Lab—a company that makes a point to take a hands-off approach—to withhold taxes from or to issue transaction records to millions of users will stunt the growth that Second Life is currently witnessing. This is an important question that merits further analysis.

Finally, and most unfortunately, this paper failed to provide a detailed analysis of how one measures basis in Second Life. Beyond the key operational limitations analyzed above, this is the next most important issue that could drastically affect how to think about the taxation of Second Life. Whether in the context of everyday users claiming hobby losses, active businesses claiming expense deduction, division of profits among in-world partnerships, or taxation of foreign businesses effectively connected to the U.S., the ability to account for basis will dictate what methods of taxation are plausible.

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.

Recollection Refreshed: Déjà Vu, False Memories, Witness Testimony

"The term "déjà vu" describes the experience of feeling that one has witnessed or experienced a new situation previously. The experience of déjà vu is usually accompanied by a compelling sense of familiarity, and also a sense of “eeriness,” “strangeness,” or “weirdness.” The “previous” experience is most frequently attributed to a dream, although in some cases there is a firm sense that the experience “genuinely happened” in the past."
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". . . U.S. researchers have identified the part of the brain responsible for this [déjà vu], and they think it may lead to new treatments for memory-related problems. They said neurons in a memory center of the brain called the hippocampus make a mental map of new places and experiences, then store them away for future use. But when two experiences begin to seem very much alike, these mental maps overlap and start to blur. “Deja vu occurs when this ability is challenged,” said Susumu Tonegawa, a professor of biology and neuroscience at the Massachusetts Institute of Technology in Cambridge. It is really just a malfunction in the brain’s ability to sort through new information, something called episodic memory. . . ." From Brain mechanism explains sense of déjà vu.
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"Episodic memory refers to the memory of events, times, places, associated emotions, and other conception-based knowledge in relation to an experience. Semantic and episodic memory together make up the category of declarative memory, which is one of the two major divisions in memory."
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". . . For many years researchers in cognitive neurscience have known that episodic memory does not work like a tape recorder or a computer hard drive. Recollection of events is not a simple replay from a fixed store. Rather, episodic memory (and memory in general) is today seen as a dynamic - even fragile - reconstruction process. As a consequence, errors can happen, and they do. One of these kinds of recall errors are false memories. The mere existence of false memories are serious news for the use of eye witness testimonies, even for victims of violent acts such. If memories cannot be treated as true, but are unstable, influenced by the context in which it is recalled, how can we make use of it at all. . . . "From The making of false memories.
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". . . University of Portsmouth scientists in the UK have developed a powerful new tool that ‘freezes’ the memory of crime scenes in the minds of witnesses. The tool—a self-administered interview applied by witnesses at crime scenes—combats natural memory decay by using the latest research in cognitive psychology techniques. It ‘freezes’ images and details of crime scenes and perpetrators in the minds of witnesses, particularly small and seemingly insignificant details that provide major leads for detectives that turn out to be crucial in solving cases.

Tests at simulated crimes scenes were remarkable with witnesses using the tool recalling forensically relevant information 42 percent more accurate than other witnesses who were simply asked to ‘report as much as you can remember.’ The tests also revealed the witnesses using the self-administered interview (SAI) were 44 percent more correct with details about people - therefore, possible suspects - who had been involved in the event. . . ." From Scientists Develop New Tool To 'Freeze' Crime Scene Memories.

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.

Second Life Tax: U.S. Federal Tax Laws Applied To In-World Second Life Activities

Part III.A: Introduction to Two Theories of Taxation: Cash-out Taxation and In-world Taxation

The first question one must answer is whether the activities in Second Life fit into the current tax system. One can begin with the Code and interpretations of §61. Recall that in Comm’r v. Glenshaw Glass, the Supreme Court interpreted gross income to mean “any undeniable accessions to wealth, clearly realized, and over which the taxpayer [has] complete domination.” This properly implicates notions of basis. For the exchange of some piece of property, § 1001 provides that taxpayers should subtract their basis from the amount realized, where “amount realized” is the sum of the cash received plus the fair market value of any property received. That is, when there is a realization event, a taxpayer must pay tax only on the total value that exceeds the original input value. How one measures basis in Second Life is a fundamental question one must answer in order to arrive at the taxable amount of income resulting from Second Life wealth. To reach basis, however, one must first one must establish the proper measure of virtual income. One cannot measure net income in Second Life until one can measure gross income, and since such measurements partially turn on how one defines the property rights, one must examine the property rights in Second Life that gave rise to the income.

It is through this property rights issue that one can divide the taxation of Second Life into two sweeping extremes: (1) taxation upon cashing out (i.e., no in-world taxation) or (2) dynamic taxation as accessions to wealth occur (i.e., some in-world taxation). One end of the spectrum dismisses the benefits derived and would not tax any of the economic activity that takes place in Second Life. That is, the only taxable events that would relate to Second Life are those that ex post involve accessions to wealth that are already taxed, such as receiving U.S. Dollars or receiving out-world services with a fair market value. The other end of the spectrum looks through the novelty at the underlying economic reality and tracks the theoretical framework developed above such that one’s taxes accrue in real-time on all gains that have a fair market value.

Although a detailed analysis of property rights is outside the scope of this paper, recognize that in the context of a cash-out method the legal property rights assigned to anything in Second Life makes no difference, but that in the context of in-world taxation, property rights can make an enormous difference. One can analyze these two methods in turn. First, notice that irrespective of how one defines the property rights or the property exchanged in Second Life, anytime that someone receives U.S. Dollars, either by cashing out their Linden Dollars or by making a trade of in-world goods for out-world benefits, a taxable event has occurred. If a resident has property rights to the goods in question, then upon trading, the individual has realized an economic gain possessing a clear fair market value with a floor equal to the selling price. If the individual lacks property rights to the “good” in question, then payment received is simply payment for the service of transferring access to use the underlying computer software in question. “If the non-tax law concludes that a virtual item is ‘property,’ then its sale is subject to the formula in § 1001.” If the non-tax law concludes that a virtual item is not property, then the transfers of the computer code are still “services paid for in exchange for other services.” But under either formulation, “the transaction produces gross income within the meaning of § 61.” Thus, even without wading through theories of property rights for virtual goods, one can still bound some part of Second Life activity that is subject to a gross income valuation.

If users of Second Life were to be taxed on in-world aspects of Second Life before they cashed-out, there would need to be defined property rights. By analogy, if an individual takes ownership of 100 Euros in payment for some service, that person is taxed on the fair market value of the money at the exchange rate for U.S. Dollars. This holds true even if the money remains in a European bank account and is never actually converted into U.S. or European paper money because there is a recognized property interest in this money and U.S. tax payers are taxed on world wide income. If Linden Dollars operate like Euros, then having 100 Linden Dollars in one’s Second Life account should properly be subject to taxation because there is a floating exchange rate and discernable value in terms of U.S. Dollars. However, in Second Life, Linden places contractual restrictions on Linden Dollars. The Second Life Terms Of Services (“TOS”) agreement provides that users have permission to use the “‘textures’ and/or ‘environment content’ that are both (a) created or owned by Linden Lab and (b) displayed by Linden Lab in-world,” yet it also states that “Second Life does not grant participants intellectual property rights to the items it provides in the virtual environment, such as land and Linden Dollars.” With respect to creations, Second Life’s TOS “expressly states that participants have intellectual property rights in their creations, to the extent provided by law.” “The TOS thus appears implicitly to grant land holders only a limited license to use land in Second Life” creating “multiple tiers of property, one tier in which participants have substantial ownership rights, and additional tiers in which participants are mere licensees of property created by Linden Lab.”

Having established that property rights can divide the taxation of Second Life activities into a cash-out method and in-world method, one can further bound the methods of taxation by examining the operational limitations that exist in the current tax law. Again, recall that in Comm’r v. Glenshaw Glass, the Supreme Court interpreted “income” to mean “any undeniable accessions to wealth, clearly realized, and over which the taxpayer [has] complete domination.” Notice that while this appears to unify the economic and statutory formulations of income, this definition explicitly imports realization as an operational limitation. In fact, the current tax doctrine actually creates three exceptions to gross income which significantly impact the analysis of virtual wealth. These operational restrictions are realization, valuation, and imputation. If either the cashing out method or some in-world taxation method is applicable to Second Life based on property rights alone, then one must examine these additional limitations in turn, to determine whether Second Life activities are otherwise precluded from taxation. As a secondary matter, one can use these operational limitations to explore more deeply the novel property rights issues that Second Life creates. From The Taxation of Virtual Worlds: Understanding Theories of Taxation Through an Analysis of the Second Life Economy by Tim Miano.

Derrida Meets Disney: Fair(y) Use Explains Fair(y) Use

". . . Disney lawyers' heads must be spinning over this one. A movie posted on Stanford University's site called "A Fair(y) Use Tale" mashes up all your Disney favorites to humorously and effectively explain copyright law. Professor Eric Faden of Bucknell University provides this humorous, yet informative, review of copyright principles delivered through the words of the very folks we can thank for nearly endless copyright terms. The ten minute movie, directed by Prof. Faden, came out of Stanford University's Fair Use Project Documentary Film Program.

The Stanford Fair Use Project--to which Stanford Law professor, Copyright guru, Creative Commons advocate and Wired writer Lawrence Lessig contributes--was founded last year to "support to a range of projects designed to clarify, and extend, the boundaries of fair use in order to enhance creative freedom." And, well, the movie is damn sure creative, and certainly seems to take the boundaries of fair use about as far as they can go.

The mashup cuts up and splices audio from more Disney movies than I could begin to list (or even identify) to explain the intricacies of copyright law and the fair use doctrine. It takes the works of "the very folks we can thank for nearly endless copyright terms" and flips them to argue against longer copyrights and attacks on fair use. It leads to some beautifully surreal moments, often highly recursive, with the characters of The Jungle Book and The Lion King asking questions such as "what is the public domain?" or proclaiming "fair Use is not a right; fair use is only a legally defensible position, and this is not fair...The point is if fair use actually works then movies like this one will have legal protection." . . ." From Hijacked Disney Characters Explain Copyright.

Three Sectors of Geospatial Technology

A. The Scientific Development of Geospatial Technology

The term “geospatial technology” refers generally to global satellite surveillance systems or similar technology. The term “land remote sensing” generally means the collection of data which can be processed into surface feature imagery of the Earth—such as those one Google Earth. Google Earth makes accessible to users remotely sensed data that has been processed into picture form. Through this compilation of images, users can examine an aerial view of most parts of the world—many with greater than 1-meter per pixel resolution.An easily recognizable example of this is the set of images posted on Mahmood’s Den showing palaces and islands owned by the Bahrain Monarchy.

Bahrain’s November, 2006 elections saw a novel form political speech. Mahmood al-Yousif writes Mahmood’s Den, one of Bahrain’s most popular blogs. In the run up to the elections, Mr. al-Yousif posted photos retrieved from Google Earth of the land (palaces, parks, yachts, and water-front property) owned or controlled by the Monarchy and their supporters—totaling 80% to 90% of the entire country. A vocal critic of the ruling class, Mr. al-Yousif commented that the appropriation of the land by the government left “nothing for development projects and low income housing.” On August 7, 2006, Mahmood’s Den reported that “the Ministry of DISinformation has instructed the Bahrain Internet Exchange to block Google Earth.” Mr. al-Yousif promptly posted a link for circumventing the block, and within three days government officials lifted the ban acknowledging the futility of their efforts.

On a more technical leveling “remote sensing” means “the sensing of the Earth’s surface from space by making use of the properties of electromagnetic waves emitted, reflected or diffracted by the sensed objects.” This is important to note because it means that the private companies and governments collecting this data have much more than what most people think of as aerial photographs of buildings, cars, and people. For example, the U.S. Geological Survey (“USGS”) uses satellite images to monitor environmental changes by processing data differently than the companies like DigitalGlobe and GeoEye that supply the images for Google Earth and similar engines. USGS applies distinct algorithms to the remote sensing data such that the near infrared (“NIR”) portion of the electromagnetic spectrum can be seen in the visible portion of the spectrum. Because vegetation almost completely reflects NIR light, but the surrounding terrain absorbs it, these researchers can produce images that clearly demarcate where vegetation growth begins and ends, tracking environmental changes over time.

More narrowly, there are actually three classes of data in remote sensing: primary data, processed data, and analyzed data. Primary data is the “raw data . . . acquired by remote sensors borne by a space object.” Using electromagnetic signals, primary data is “transmitted or delivered to the ground from space.” Processed data is the product of “processing of the primary data.” It is necessary “in order to make such data usable.” Finally, analyzed data is “the information resulting from the interpretation of processed data, inputs of data and knowledge from other sources.” The value of the analyzed data is largely dependant on the resolution of the images. “Ten-meter resolution is sufficient for detecting bridges, buildings, and even concentrations of tanks,” whereas “two-meter resolution is sufficient to generally identify aircraft, vehicles, roads and bridges.” However, a large portion of all remote sensing data today is well under one-meter resolution. “One-meter resolution is sufficient to precisely identify types of aircraft, tanks, airport and harbor facilities, cars in railroad yards, vehicles on roads and bridges, and troop units. It is also precise enough to distinguish fighters from bombers or missile launchers from trucks.”

Within this system there are also three sectors that conduct remote sensing: the governmental civil sector, the U.S. governmental military sectors, and the non-governmental commercial sector. The governmental civil sector is operated by the Earth Observation Satellite Company (“EOSAT”), which is a joint venture between RCA Corporation and Hughes Aircraft Company under the supervision of the National Aeronautics and Space Administration (“NASA”) and The National Oceanic and Atmospheric Administration (“NOAA”). They provide “low and moderate resolution imagery for different purposes” such as weather patterns and agriculture supplies. The governmental military sector, which “provides highly classified imagery for military and intelligence purposes,” is operated by the Department of Defense and the Central Intelligence Agency. Today, “U.S. military satellites are believed to provide real-time or near real-time streams of images.” By 1996, these agencies were already operating systems with 0.1-meter resolution capability.

The non-governmental commercial sector is owned and operated by private companies such as Space Imaging Inc., GeoEye, DigitalGlobe, OrbView, and EarthWatch. These groups have been granted licenses by the Department of Commerce to operate remote sensing systems which “are highly advanced and technologically sophisticated, with resolutions varying between 8 and [less than] 1-meter.” DigitalGlobe, the company that supplies the images used by Google Earth, “snaps photos with a resolution of 0.6 meter per pixel” and “photos from other satellite-imagery companies, such as GeoEye or ImageSat International, range from 0.7 meters to 1 meter per pixel.” Moreover, “a next-generation satellite from GeoEye, due to be launched in February 2007, will have a resolution of .41 meters per pixel.” From The Rise of Little Brother: A Survey of the Legal Constraints on Geospatial Technology by Tim Miano

The Royal Treatment: UK Report on Second Life Legality

". . . A report from a British advisory group said on Monday that governments should apply real-world laws and regulations to virtual currencies in online worlds like Second Life to prevent potential money laundering, fraud, and tax evasion. The Fraud Advisory Panel, set up by the Institute of Chartered Accountants in England and Wales, said legal loopholes were exposing virtual world users to “a growing risk of theft and deception.”

In recent months law enforcement and tax authorities have focused increasing attention on virtual worlds, including a U.S. Congressional probe into virtual world taxation, a German criminal investigation into child pornography in Second Life and a new South Korean law that cracks down on money transfers in online games.

While the report said the dangers were hypothetical at this point, it warned that people seeking to avoid law enforcement and tax authorities were likely to seek out loosely regulated online economies. “My experience has been that fraudsters migrate to areas that are most vulnerable,” said Steven Philippsohn, chairman of the panel’s cybercrime working group. “(They) always benefit where countries are loosely regulated, and this is an environment that is unregulated all together.”

Online money laundering is a primary concern, according to study author Mark Johnson. “I see this as a virtual version of the hawala or hundi system,” said Johnson, who heads risk management firm TRMG, referring to the informal money transfer network that is commonly used through the Middle East, Asia and Africa. “[Hawala] is trust based — I give you 1,000, you give someone else 1,000 — it serves to move money from A to B to C to D while obscuring the trail.”

He recommended treating virtual currencies like the Linden dollar as “real money,” including a requirement for virtual world operators like Linden Lab to report suspicious financial transactions, just as for real-world banks and financial institutions. “At the moment, Second Life had the most sophisticated economic model. But the model is so clearly compelling and successful that there will be a number of variants,” Johnson said. “Linden Lab and its servers are based in the United States. But when you start to get domains based in Belize and the Congo and such — that’s when it really gets messy.” . . ." From UK panel urges real-life treatment for virtual cash.

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.

The Rise of Little Brother: A Survey of the Legal Constraints on Geospatial Technology (Introduction)

The Rise of Little Brother: A Survey of the Legal Constraints on Geospatial Technology by Tim Miano

Introduction:

Since George Orwell first published his now infamous dystopia novel 1984, “Big Brother” has become the paradigm of government feared by the public. Every day a poster of an enormous face with the slogan “BIG BROTHER IS WATCHING YOU” greets the story’s protagonist. He trudges to his apartment where an obligatory “telescreen” continuously spouts propaganda, and through which the Thought Police monitor the actions of the citizenry. Although the technology has changed, the model of an all-knowing all-watching government has not. From chasing Will Smith to assisting James Bond, today’s Big Brother employs real-time satellite feeds that remotely read body temperature and triangulate on which floor of a building the hero is hiding. Interestingly, this accurately portrays some of the technological capabilities that a government could employ to monitor certain individuals. However, affirming the pop culture vision of Big Brother is not the goal of this article. In fact, the opposite is true.

At least in the United States, Orwell’s vision of a monolithic state has always been constrained by Articles I – III segregating power between the branches of government and the Fifth Amendment placing procedural safeguards between the state and the citizenry. Conceptually though, it is not clear that even without these legal protections, any state could achieve the opaque, paternalistic monitoring this vision fears. The technology that provides the state with the power to watch—computer networking, satellite imaging, and mass communication—is the same technology that allows governments to be watched by its own citizens (or at minimum the citizens of other nations). The Big Brother paradigm is fundamentally flawed because it assumes the state can eliminate transparency, or at least keep all of its secrets. The purpose of this article is to examine the rise of Little Brother—or to be precise, Little Brothers—and the implications therein.

This discussion will be limited to remote sensing technology (i.e. satellite imaging). The author hopes to use this technology as a vehicle to draw out some of the more interesting flaws in the Big Brother paradigm, and show how the information free market—rightly or wrongly—allows each the citizen to keep a watchful eye on government activity. Because this article is meant to be academic—analyzing the legal framework and implications of geospatial technology—and not an attempt at dystopian fiction, the analysis will refrain from wildly creative ‘what ifs.’ Instead, the article will examine the rights, duties, and limitations between the U.S. government, its commercial sector, and its citizenry to record, access, and distribute this type of data using real examples. Given the historical roots and current ties of the applicable U.S. legal structure to international laws of space and the laws of war, this discussion will take into account certain global rights and duties as well.

Part I will provide background for the state of geospatial technology and will provide some of the high profile examples of its use by the public. Part II will examine the international and domestic legal framework through which the nations and the private sector operate satellites used in remote sensing. Parts III and IV will examine the policing powers the United States can exercise to prevent or limit the dissemination of sensitive information. Part III will discuss the First Amendment rights individuals have to broadcast potentially compromising data and the limitations the U.S. government can place on those individuals. Part IV will apply the laws of treason and espionage to public use of this technology and examine whether under the same or similar facts to some of the high profile examples, how and whether the U.S. government could hinder or criminally prosecute the actions of Little Brother. Each Part will consider some subset of the rights and duties of three groups: the U.S. government, the private companies who gather and supply the data, and the individuals or groups that use or publish this data.

Theories of Taxation Through an Analysis of the Second Life Economy (Part I Introduction & I.A)

PART I: Introduction to Virtual Worlds & Second Life

In order to study the novel legal ramifications of Second Life, one must have a basic understanding of its parameters and nomenclature. Second Life is an Internet-based virtual world first developed by Linden Lab in 2003. Users within Second Life, known as residents, interact within the computer simulated environment via avatars. Avatars are customizable three-dimensional graphical representations of humanoids. More clearly then, the Second Life software acts as a gateway and provides a three-dimensional forum that enables users to interact with each other through motional avatars. This platform creates a sophisticated level of a social network interactivity combined with general aspects of the Metaverse, or the meta-universe, that exists through the instantiation of an Internet-based virtual reality. The stated goal of Linden Lab is to create a world like the Metaverse: a user-defined world of general use in which people can interact, play, do business, and otherwise communicate.

A. An Overview of the Development and Content in Second Life

Second Life is frequently clustered with massively multiplayer online games, such as World of Warcraft or EverQuest, because the software provides a graphical interface and permits user interactivity that appear quite similar to these games. However, Second Life is not a game as it lacks scores, winners/losers, levels, a defined objective, or other such traditional parameters that characterize an activity as a game. Instead, at its inception, the world within Second Life was analogous to an undeveloped tract of land offering little more than open space, which has since been developed with whatever residents want for themselves or for which there is a market. Second Life residents visit this virtual world almost as if it were a real place, exploring what others have created, meeting other residents, socializing, participating in individual and group activities, and buying items (virtual property) and services from one another. Thus, while Second Life is not exclusively a social networking site like MySpace, a user driven commercial forum like eBay, a currency exchange like Citibank, a game like EverQuest, or a encyclopedia like Wikipedia, Second Life contains aspects of all of these things. Given the success of these services to satisfy certain human needs and the ability of residents to create real-world wealth by satisfying the needs of residents, it is not surprising that modified facets of these services make their way into Second Life.

This point draws out one of defining characteristics of Second Life. Namely, besides the open land and the basic parameters/limitations/rules of the environment, all of the content is user generated. (“Well over 99% of the objects in Second Life are user created.”) Using open access software, Second Life computer protocol, and three-dimensional modeling tools, any resident can build virtual buildings, landscape, vehicles, furniture, machines, games, people, and generally anything (referred to here as “items”) to use or to sell. Residents can incorporate various graphics, animation, and sound tools to create elaborate, farcical, or realistic content. It is this method of generating content that has given rise to the elaborate system of internal (as opposed to legally enforceable) property rights found in Second Life—one of the necessary conditions for a viable system of exchange. The legal status of the property right is unclear and will be examined in the context of taxation in greater detail in Part III below.

As an introductory matter, under Linden Lab’s Terms of Service agreement, any resident who creates an item retains copyrights in that item. Thus, from the perspective of the virtual-world resident the item is like personal property, but from the perspective of the real-world user the item is like duplicable software and more analogous to intellectual property. For a particular item then, users have some flexibility in how they may exercise their property rights. For example, the user who creates an item can limit it to behave like personal property by labeling it as a “no copy.” This means that a subsequent owner cannot reproduce, but may use, the underlying computer code, raising issues of use rights verses ownership rights. “No mod” on the other hand means that the owner may not modify the item’s characteristics, much like closed source software which is supposed to prevent hacking and customization—creating a more complex hierarchy of use rights. Finally, an owner of an item can label it “no trans,” which disallows transfer of ownership to another resident. Most importantly, all of these limitations can spring upon transfer. That is, creators or current owners can set these rights for future owners, much like land use covenants or servitudes. From a legal perspective then, any piece of property within Second Life can possess a wide array of property rights borrowing from real, personal, and intellectual property that remains, more or less, user-defined.

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.

Conservation of Law and Science

" . . . As advanced science plays a larger role in courtrooms across the country, judges who earned degrees in English or the humanities face the daunting task of making informed decisions about some very technical disputes. That's why judges from across the Southeast gathered Friday for a crash course with medical and genetics experts at the University of North Carolina at Chapel Hill.

About 60 judges are attending the conference, which is exploring emerging and often contested areas of science. Unlike other judicial seminars, this three-day intensive training session - dubbed The Southeast Regional Science and Technology Boot Camp - aims to prepare judges for some of the most politically charged issues of the day: gene therapy, genetic discrimination, genetically modified foods, human cloning and stem cell research.

"We aren't here to weigh in on one side or another of these controversie