Presentation to EEA Law & Economics Workshop, NYC, Feb 28, 2009
James Stodder, (Ph.D., Economics, Yale 1990)
Lally School of Management & Technology
Rensselaer Polytechnic Institute at Hartford
Hartford, Connecticut, USA
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by Yochai Benkler
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• Agriculture => Manor, Plantation
• Feudalism
• Industry => Family Firm, Corporation
• Capitalism
• Research => Scientific Circles, Universities, Firms
• New System?
The Economist, “The Next Society,” November 2001
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“The Nature of the Firm,” Economica, 1937
- Firms exist to minimize “transaction costs”
“The Problem of Social Cost,”
Journal of Law and Economics, 1960
- Property Rights evolve to allocate property when transaction costs are too high
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The Common Law is “an attempt to increase the value of the resource by assigning property rights to those parties … in whose hands the rights are most valuable.”
- Richard Posner, The Economic Analysis of the Law, 1972
Without flexible property rights, “the only way we thought we could test out the value of the pollution was by the only liability law we thought we had.”
- Guido Calabresi and Douglas Melamed, “Property
Rules, Liability Rules, and Inalienability”, Harvard Law Review, 1992
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Paul Rubin on
(T
A
– T
B
) > 2C (5)
“… the evolution toward efficiency… would be faster as
• current rules are more inefficient [ (T
A
• net court costs … are lower [C
– T
B
)
], and as
] …
• inefficient rules are less soundly entrenched [R
] .” http://business.baylor.edu/Charles_North/4318Files/4318Rubin1977.pdf
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The Economist, Sep. 20, 2007: “A Matter of Sovereignty”
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The Economist, March 8, 2008: “America's patent system: Methods and madness”
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“Josh Lerner of Harvard Business School found that patents on financial innovations were 27 times more likely than average to result in litigation. …. The most frequent plaintiffs … are patent-holding companies whose only line of business is the litigation of patent suits .”
The Economist, March 8, 2008: “America's patent system: Methods and madness”
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http://en.wikipedia.org/wiki/Copyleft
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Copyright Creative Commons Public Domain http://creativecommons.org/
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Table 1: Ideal Organizational Forms as a
Function of Transaction and System Costs
SYSTEM COSTS (from
TRANSACTION Implementation)
EFFECIENCY (Operational)
MARKET EXCHANGE
> Coordination or Peering
COORDINATION
> Peering or Market Exchange
PEERING
> Market Exchange or Coordination
INCENTIVE GAINS for Private Property >
IMPLEMENTATION COSTS for Private Property >
Implementation Costs
Markets
Incentive Gains
Public Goods
(Stock, Commodity, Books) (Roads, Police, Ideas)
Firms Club Goods
(Automobiles; Shoes) (Swiss Pastures, Schools)
Private ‘ open source ’ Peer Production
(Google, Faculty) (Clickworkers, Wikis)
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Information Problems in
Pervasively Networked Environments (PNEs):
1. Accounting – Multiplicity of information, many kinds and sources.
2. Cooperation / Coordination – ‘Publicness’ of Consumption and Production. Important externalities (+/-) are public (Coase).
3. Complexity – Fundamental Non-Convexity of Externalities (Starrett).
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Table 2: Ideal Forms as function of Major
Informational and Organizational Problems
INFOR-
ORGANIZATION
PROBLEM
MATION PROBLEM
ACCOUNTING >
Cooperation or
Non-Convexity
COOPERATION >
Non-Convexity or
Accounting
NON-CONVEXITY >
Accounting or
Cooperation
INCENTIVIZE COORDINATE COOPERATE
Money > Power > Status >
Power or Status Status or Money Power or Money
Markets
(Stock, Commodity,
Books)
Public Good Commons
(Roads, Environment) (Public Radio,
Ideas)
Firms
(Automobiles,
Shoes)
Patents
(Drugs, Microsoft,
Biz Methods)
Teams
(Police, Military,
Research)
‘Open Source’
(Google, Faculty,
Artist)
Club Goods
(Swiss Pastures,
Students)
Peering
( Clickworkers ,
Wikis)
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Smoke 0.0 0.5 1.0 1.5 2.0 2.5 3.0
Total
Value to B
Marginal
Value to B
0
Total
Value to N 35
Marginal
Value to N
30
5
30
30
20
10
50
20
10
20
60
0
Ronald Coase, Journal of Law & Economics, “The Problem of Social Cost” (1960)
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Smoke
TotalVal-B
MargVal-B
TotalVal_N
MargDam-N
0 0.5
0
30
80
50
1 1.5
30
20
30
10
2 2.5
50
10
20
20
3
60
0
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Less Cost: Sender of +X Damage: Receiver of +X
Benefit: Receiver of -X Cost: Sender of -X
Benefit: Receiver of +X Cost: Sender of +X
Less Cost: Sender of -X Damage: Receiver of -X
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+ 0.75
My Firm
+ 1.00
+ 0.75
+ 0.50
+ 0.50
+ 0.25
+ 0.25
+ 0.00
- 0.25
+ 0.00
- 0.50
- 0.75
- 1.00
- 0.75
- 0.50
- 0.25
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“ As the flow of water is determined by the earth , so the victory of military force is determined by the opponent.
Military force has no constant formation, as water has no constant shape.
To gain victory by changing and adapting to the opponent is called genius.
Therefore the consummation of forming … is to arrive at formlessness . When you have no form, undercover espionage cannot find out anything, intelligence cannot form a strategy.”
- Sun-Tzu, The Art of War, 500 B.C.
“… the great uncertainty of all data in war is a peculiar difficulty, because all action must
…be planned in a mere twilight, which … like the effect of a fog or moonshine — gives to things exaggerated dimensions and an unnatural appearance. What this feeble light leaves indistinct to the sight, talent must discover , or must be left to chance.”
- Von Clausewitz, On War, 1874
“The Law of Requisite Variety [relates] the number of control states .. to the number … necessary for effective response. This allows us to formalize … the limitations of hierarchical control …, e.g., the military, healthcare, and education systems.”
- Yaneer Bar-Yam, www.necsi.org
, 2004
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