The Informationist, a blog written by Bruce Abramson

The Aftermarket Economy

Cross-posted at Breitbart.com's BigGovernment

So Facebook filed its IPO papers, and the numbers are eye-popping.  The company appears to be worth about $100 billion, or a bit more than the GDP of Tunisia.  Others shade it a bit lower, but one thing is certain: it’s good to be Facebook.

Facebook is special because, in network economic terms, its product is a platform, and successful platforms are few and far between.  For all its bells and whistles and features and privacy policies, Facebook remains—at heart—a place that people hang out.  As the proprietor of a popular hangout, Facebook gets to write the rules guiding all the folks who think it’s a good place to pitch their businesses or to make some sales.  In network economic terms, these businesses operating inside Facebook’s business comprise an aftermarket.

The Law & Economics of Aftermarkets

Coming up tomorrow (Tuesday 1/31): my one-hour intro to the law & economics of aftermarkets.  If you or someone you know plans to make money selling aps for the iPhone, Android, Facebook, or any other proprietary market, you need to know this stuff!

http://rimon.eventbrite.com/

What Government Should be Doing in the Markets

Cross-posted at Brietbart.com's BigGovernment

It’s hardly a secret that the 2012 election is shaping up as a contest between free markets and big government.  And while the choice seems clear in the current political environment, it’s important to recall that government does play a critical role in the development and maintenance of functioning markets.  Yet, as Tea Partiers, Occupiers, and Ron Paul acolytes all note, government has both abdicated that critical role and inserted itself where it does not belong.

If markets were magical places that flourished whenever government disappeared, Somalia would be the world’s leading economy.  Markets are sophisticated mechanisms that enable informed parties to exchange resources, voluntarily, to mutual benefit.  There’s a lot packed into that sentence.  For markets to work, participants must trust the system.  They must believe that they have—or least can access—the information they need to make informed decisions.  They must feel free from coercion—both explicit coercion and unacceptable take-it-or-leave-it offers.  They must trust the inherent fairness of the system, and they must believe that it is possible to enforce the rules of the marketplace by sanctioning cheaters.  The closer an actual market comes to meeting these needs, the better it will function.  The further a market drifts from these goals, the more likely it is to fail.  It is thus absolutely critical that someone—presumably the government—serve as the market referee and the guarantor of market enforcement.

First and foremost, market participants must believe that courts will honor contracts and property rights fairly, dispassionately, and smoothly.  Contracts allow strangers to exchange promises; property allows people to focus on matters in front of them without worrying about possessions that may be out of sight.  In the absence of enforceable contracts and property rights, people could never travel far from home, leverage their assets, or exchange current payment or performance for a promise of future delivery with anyone unfamiliar.  In short, a society that distrusts its courts cannot progress beyond a tribal or a village economy—even if it employs tribal or village markets.

 

Stopping Online Piracy - One Way or Another

Cross-posted with breitbart.com's BigGovernment

The Stop Online Piracy Act (SOPA), currently the subject of hearings in the House Judiciary Committee, has generated interest far beyond the community of copyright lawyers.

To its proponents, SOPA is a critical addition to copyright law, necessary to help creative Americans protect their legitimate property rights from foreign attackers, and thus to preserve the numerous American jobs in our world-class creative industries.

To its opponents, SOPA is an unprecedented attack on civil liberties that threatens to destroy free speech, the Internet, and the thriving American technology sector—not to mention the many American jobs that it creates.

Who is right?  It turns out that they both are: SOPA will help copyright holders protect the rights that copyright law grants them by suppressing free speech and impeding the functioning of the Internet, with predictable consequences on American jobs.

This result is hardly an anomaly.

What do Tech Investors Want?

Cross-posted at breitbart.com's BigGovernment

Last week, Google announced its plans to acquire Motorola Mobility, effecting a vertical integration from the Android operating system into hardware.  Investors responded by shaving roughly 13% off Google’s value—roughly twice as much as the NASDAQ lost and three times as much as the Dow.

A few days later, HP announced its plans to shed its PC division and acquire a software company.  The combined effect will be a shift from hardware—long HP’s mainstay—towards software.  Investors responded by knocking close to 20% from its value in a single day.

Google and Motorola: Concentrating Attention on Concentrated Power

Cross-posted with breitbart.com's BigGovernment

Google is one of the worlds most intriguing companies.  From its humble beginnings as a search engine company, Google has leveraged its mastery of the elusive formula for monetizing web traffic into a force capable of tangling with China—making it considerably stronger than our own State Department by some measures.  Its recent announcement that it plans to acquire Motorola Mobile makes it heir to a grand tradition of American manufacturing—not to mention possessor of a valuable trove of intellectual property, and a sudden direct competitor to stylish hardware king, Apple.

Along the way, Google has managed to wander into numerous areas of public policy, including privacy, data security, and telecommunications regulation.  It has attracted antitrust scrutiny, patent challenges, and copyright suits—along with the standard collection of business litigation.  It has become a significant contributor to election campaigns and an active bidder for government IT contracts.  Above all, Google has riveted the attention of both devoted fans and committed opponents.

What does it all mean?  How can we make sense of such a company?  And how can the answers to these questions inform contemporary political debate?

The Policy-Driven Gold Rush

Cross-posted with breitbart.com's BigGovernment

Gold has a long history of being many things to many people.  To some, it is a shiny bauble, to others a commodity, and to still others a currency.  To financial economists, gold is the traditional hedge against inflation.  This month, however, it appears to have assumed a new role: The gold market is now the mirror image of the broad equity markets. And while the tight inverse correlation in day-to-day trading is unlikely to persist for long, this general relationship may be around for quite some time.  Why?  Because headlines notwithstanding, the rapid rise in gold prices is not a short-term speculative bubble, but rather a necessary consequence of our previous bubbles and an appropriate response to the shakiness of sovereign debt.

A Bit-Less-than-Full Faith and Credit

Cross-posted with breitbart.com's BigGovernment

“The full faith and credit of the United States Government.” That’s what backs up our currency—and that’s all that backs up our currency. Throughout most of history, governments had to back their currency with something tangible, typically a fixed quantity of gold. In fact, most coins actually contained the requisite quantity of gold because many of the folks who used those coins in commerce didn’t particularly trust the King whose likeness they bore. It’s good to be king and all, but if you wanted to add a ducat’s worth of wheat to the royal granary, you had to put up an actual gold ducat.

Innovation, Competition, and the Future of the American Economy

Congress is about to pass a new patent law.  The FTC has launched an inquiry into Google’s prized algorithms.  The FCC finalized its net neutrality news and sent them to the White House.

To most readers, these headlines qualify as second tier business stories.  Worth a read perhaps, but hardly gripping material.  Few take the time to wonder if any of these stories are part of a pattern—or more importantly, whether they are part of a policy.  Their significance to a few big companies and their shareholders is obvious, but their importance to overall economic growth?  To the future of American leadership?  To the annoyingly persistent absence of jobs, jobs, jobs?  Those connections seem harder to make.

They shouldn’t be.  All three of these stories—and the many similar lower-profile stories like them—relate to innovation and competition policy.  And innovation and competition are the lifeblood of the future American economy.  We can only grow, thrive, and continue our leadership of the global economy as a country if we motivate our finest minds and greatest talents to want to grow, thrive, and continue leading the world.  Our innovation and competition policies form the heart of that motivation.

Pro-Business or Pro-Market?

Two powerful competitors frequently end up locked in a stable, mutually beneficial dance of tit-for-tat—they collude, in short, to carve up a captive market.

via online.wsj.com

It's always nice to see an article that explains some basic concepts of industrial organization (IO). And though this one is set in the context of our political duopoly, its political implications are actually far broader.

The very idea that a stable duopoly (or oligopoly, for that matter), operates to the detriment of consumers is revolutionary. It underlines the fundamental problem with labeling particular political stances as "pro business." And if you play it out a bit, it explains why the politicians who truly deserve to be labeled as shills for big business are those--like Henry Waxman or Barney Frank--who emphasize expansive, complicated regulations.