The Knowledge Problem
Commentary on Economics, Information and Human Action

Tuesday, August 27, 2002  

HOW COOL IS THIS? Technology news from Hawaii -- "A Big Island company will be the exclusive seller of a new bladeless-turbine technology the manufacturer says will drastically reduce costs for electrical power generation and hydrogen fuel production for use in fuel cells and automobiles," according to the Pacific Business News. If you read the article, you'll see something that occurs over and over and over in the history of technological change -- the inventor stumbled on this innovation by accident, in the course of doing some other research. That's precisely why efforts that dirigiste control-freak folks think are duplicative and wasteful are very much NOT wasteful. It's the knowledge problem -- how do you know? How do you know what might arise from that effort?

The Hawaii company marketing this invention thinks this technology has great prospects for reducing energy costs of renewable resources, including hydrogen:

The breakthrough could one day be seen as being as important a discovery as the cotton gin, says Jack Dean, president of Hilo-based T.H.R.E.E.

"In much the same way … people could look back and say, wow, what a revolutionary new idea that allows us to move to a totally different level of self-generation," said Dean, a former executive for Puna Geothermal.

Because the bladeless turbine is ne-tenth the cost of a traditional turbine, it's able to provide better efficiencies in cogeneration applications such as heating water or running chillers for air conditioners and bring the cost of producing hydrogen down to where it is equal to or below the cost of gasoline, Johnson says.

"To use the electrolysis process to generate hydrogen required for a fuel cell is about three times more than gasoline, probably more than that," Johnson said. "We can make hydrogen, we estimate, at least at the price of gasoline and possibly closer to the price of natural gas."

Aaaaaah, the perennial gale of creative destruction!

posted by lkkinetic | 8/27/2002 11:26:00 AM

OIL AND GAS PRICE STABILITY: Even with the threat of military action in the Persian Gulf and the upcoming Labor Day holiday weekend, both crude oil and gasoline prices are pretty darn stable (although oil prices, especially, are high; more on that in a second). On gasoline, this Reuters article summarizes the results of the regular Lundberg survey of gasoline stations. In the most recent survey, gasoline prices were very stable, at levels sustained over 20 weeks! How often does that happen in the summer? Not very! This price stability is at least in part a result of the production substitution of gasoline for other distillate products such as diesel and jet fuel, which are less in demand because of economic slowness and the fact that many of us won't set foot on a plane unless we absolutely have to. So enough supply has been out there to meet demand without price having to adjust abruptly. Isn't economics beautiful?

Now, I'm sure you're thinking that I overstate the price stability of crude oil. Perhaps, but prices are not fluctuating as much as you might expect given that we are going into the fall/winter heating season and are talking about what to do in Iraq. According to this Bloomberg Energy article from Monday, oil prices have risen 49 percent during 2002, but they have been stable over the past month. This stability is at least in part due to changes in expectations -- even though talk of taking on Iraq continues, oil market participants have become less convinced that such action would lead to oil supply disruptions. Those changed expectations have brought some stability to oil markets.

Stable, yes, but at a pretty high price, toying with $30 a barrel. Today Forbes reported that oil prices are rising today, toying again with $30 a barrel. What's so magical about $30? Once prices go above $30, OPEC begins to consider raising its output, as the two articles linked above point out. OPEC continues to struggle with balancing the incentive to reduce output to raise prices with calls from some member states, such as Nigeria, to raise their quotas so they can raise some money. Combine these dueling incentives with the slow economic growth that we are currently experiencing, and you have OPEC caught between Scylla and Charybdis. That's why Bloomberg Energy reports today that OPEC will probably discuss increasing production next month. Fascinating.

posted by lkkinetic | 8/27/2002 11:01:00 AM

FOREST FIRES AND SUSTAINABLE DEVELOPMENT: Amity Shlaes has a good Financial Times column on forest policy and trying to control, plan, and manage "sustainable development." Here's a teaser to entice you to read the whole thing:

One way we know the fires are partly the result of federal policy, says Roger Sedjo, a forest expert at Resources for the Future, an environmental think-tank, is because so many fires are on public land. The older trees there (public lands are less logged) are simply more susceptible to fire. Private land, where logging is often less restricted, have seen fewer disastrous blazes. So has the Manitou Experimental Forest in Colorado, which was selectively logged to test the "thinning" hypothesis.

By now the problem of overzealous conservation has been generally acknowledged; many players in the forest fire debate now advocate some form of "thinning". But environmental lobbies still oppose cutting to such a degree that they are even stopping thinning. A consortium of public and private entities recently wrote a plan for thinning in the area around Flagstaff, Arizona. But legal appeals by environmental groups have so far blocked the plan; and the area is now highly vulnerable to wildfire.


The burning skies of America's west are not visible in Johannesburg. But they are worth calling to mind as planners consider the future development landscape. Sometimes it is not the development but the sustaining that is the problem.

posted by lkkinetic | 8/27/2002 10:33:00 AM

Friday, August 23, 2002  

GOOD NEWS ON THE ELECTRICITY COMPETITION FRONT: There's a lot of cheery news today about retail electric competition in the U.S. and how the black eye that California and Enron have given electricity restructuring have not been fatal. This Pittsburgh Post-Gazette article reports on a study showing that Pennsylvania's retail electricity rates in 2001 were 20 percent lower than in 1996, on average. Nationally, retail rates were 14 percent lower for residential consumers, 13 percent lower for commercial consumers, and 5 percent lower for industrial consumers. The article correctly points out that states with retail competition have seen green power providers come in and serve the market demand for renewable energy. What the article fails to point out, though, is that it's unclear how much of those rates decreases has come from real competition and how much has come from mandated rate freezes. Pennsylvania, for example, has frozen its rates over a 10-year phase-out period. Ten years? The interaction of this continuing relic of regulation with other regulatory hangovers, like standard offer prices or "price to beat", and provider of last resort at discounted rates, stifle potential entry and lengthen the timeframe over which consumers and innovative suppliers actually reap benefits from retail competition. Here's another story on the report.

Another study, this one by the energy consulting firm Xenergy, shows that retail electricity restructuring is proceeding, according to this article. Xenergy estimates that 36,000 megawatts of energy are now being competitively supplied, a 140 percent increase on the 15,000 megawatts supplied competitively in 2001. Texas accounts for 11,000 megawatts, and Illinois, Ohio, New York, and ... California account for over 3,000 megawatts each. California? Must read the study ...

And our neighbors to the north, in the Canadian province of Alberta, want to remove Calgary's and Edmonton's ability to set retail electricity rates. Alberta has been a shining star in electricity restructuring in North America, and according to the Center for Advancement of Energy Markets, Alberta has done the best job of retail electricity deregulation on the continent. Now it's challenging the municipally-owned electric utilities.

These are all good things.

posted by lkkinetic | 8/23/2002 09:35:00 AM

Thursday, August 22, 2002  

Unless something exciting happens today, I am incommunicado -- we have a monstrous storm system moving through Chicago, and the pressure drop has triggered a nasty migraine.

posted by lkkinetic | 8/22/2002 08:45:00 AM

MY SENTIMENTS EXACTLY: Glenn Reynolds' Fox News column on airport "security" hits the nail on the head, elegantly and incisively. Particularly since March, when I had a horrendous encounter with a megalomaniacal, misogynistic law official, I have stayed out of airports as much as possible without hampering my career.

Glenn's headline could have said "Revenge of the Tweezer, and Nail Clipper, and Knitting Needles People". Yes, I've been traveling with a stamped self-adressed envelope in case I have to send my knitting home to myself; thankfully, using bamboo needles means that I've not had many problems, although more than a few flight attendants have questioned me. The FAA took knitting needles off of the restricted list in February, but according to stories I've heard from fellow knitters, that change has not been universally adopted by "security officials". And that's just one example of the absurd, mindless rule-setting and rule-following with not a whit of common sense in sight. For example, I have a computer backpack with a nylon interior bag for my laptop. This has been extremely convenient in the current environment, where passengers have to remove laptops from their bags -- I simply grab the top loop, pull out the nylon bag, put it on the tray, badda boom badda bing. But NO MORE! Now the security agents require me to remove the laptop from its protective nylon bag, which just adds to my fumbling, confusion, and delays for me and other passengers in line. Just pathetic and brainless.

Gary Leff's website and bumperstickers put it well: "Liberty and Security ... Not Bureaucracy". Thanks to Glenn and Gary for being courageous in pointing out these absurdities and failures of policy and common sense.

posted by lkkinetic | 8/22/2002 08:44:00 AM

Wednesday, August 21, 2002  

FUEL OUTLOOK FOR THE WINTER: This DOE Energy Information Administration presentation does a really nice job of explaining the complex interactions among different distilled products, foreign and domestic sources, etc. It's well worth a scroll through. Note that the EIA folks are less sanguine about distillate inventories than the API folks. That's the beauty of "redundant" investigation -- we use different assumptions, come up with different results, and learn a lot in the process.

posted by lkkinetic | 8/21/2002 02:57:00 PM

LESS JET FUEL, MORE HEATING OIL: The July American Petroleum Institute report indicates that the inventory of distillate for heating oil and diesel fuel increased 7.2 percent relative to July 2001. This is a good thing, because it gives refiners a jump on the seasonal demand for home heating oil, which (all other things equal) should lead to more stable heating oil prices this winter. Part of the reason for these increased stocks is the continued sluggish demand for air travel (from which the demand for jet fuel is a derived demand).

Interestingly, relative to July 2001, crude oil imports from Canada increased 18.1 percent. Most people who listen to media bluster do not realize that we import most of our crude oil from Canada and Mexico. Three cheers for free trade with our neighbors.

posted by lkkinetic | 8/21/2002 02:32:00 PM

Tuesday, August 20, 2002  

OIL CLOSES ABOVE $30: This Financial Times article recounts today's close at $30.11, attributing it to war fears. I think it's more complicated than that, but it's not worth quibbling. The next OPEC meeting will be quite interesting ...

posted by lkkinetic | 8/20/2002 03:03:00 PM

FREE TRADE: This OpinionJournal editorial lays it out. I especially like:

Of course, the idea of opening our market to imports has plenty of enemies--such as steel, textile and agriculture industries. And there is lots of political hay to be made by representing these interests. But the economics are clear: Imports offer American consumers more choice, higher quality and lower prices.

Importing competitive goods also means importing knowledge. The more domestic goods are exposed to superior foreign goods, the greater the transmission, or spillover, of know-how across countries. And that holds true not only for the U.S. but for the rest of the world. Countries with lots of trading relationships are in a better position to absorb the technological progress of more advanced nations. The result is more rapid productivity growth.

The flip side of restricting imports is subsidizing exports. But this, too, is a dubious economic notion. A country that cossets its export sector creates pockets of inefficiency. The concept was accurately, if wickedly, characterized 200 years ago by Frederic Bastiat, the French libertarian. Bastiat suggested that since exports were preferred over imports, the optimum thing to do was sink all ships leaving home ports--thus creating exports without imports.

The importation of knowledge and Bastiat, all in one editorial. Trade is by far the best conduit of technology from rich countries to poor ones, making them less poor. That's the most incontrovertible lesson of economic history.

posted by lkkinetic | 8/20/2002 02:50:00 PM

BLOOD SUGAR AND MOOD: Norah Vincent asks about protein intake and mood. My experience as a recovering carbohydrate fanatic is that increased protein intake has improve my body's ability to burn fat for fuel, has increased my alertness and productivity, and has had an effect on my mood (although mood has never been a real issue for me). For me it's sufficient to eat eggs, cheese and fruit for breakfast, and eschew refined starches and sugars, juice, and other carbohydrate foods with little fiber. I find Atkins to be a little over the top, YMMV. But gee whiz, do I miss good french bread, risotto, polenta ... I've been on the "protein for breakfast and high-fiber the rest of the day" approach for two years, and as long as the exercise level stays up there, my attention and sleep are good. BTW, I've heard that the vivid dreams are a function of vitamin B12, of which you get more in spinach and meats.

posted by lkkinetic | 8/20/2002 10:39:00 AM

MORE ON SPAM: Common sense and good advice from the reliably sensible Dan Gillmor.

posted by lkkinetic | 8/20/2002 10:28:00 AM

Back from a week of Adam Smith, but still exhausted! Today and tomorrow we should be getting petroleum inventory information from API and the DOE, so I may have something to say on that subject. And more on Smith, of course.

posted by lkkinetic | 8/20/2002 10:15:00 AM

THE COASE THEOREM: It's a mind-boggling insight that has transformed the way that (at least some of us) do economics. Megan McArdle has an outstanding description of the Coase Theorem and how it relates to spam. She points out something that usually gets lost in how people discuss and, gasp!, teach the Coase Theorem -- in order to get the efficient outcome regardless of the allocation of property rights, transaction costs have to be zero. Now, we all know that the only place that happens is on a blackboard, so the interesting analyses come in when you think about changing transaction costs and how that affects our choices and the outcomes derived from them. This is where I spend a lot of my life, in this avenue of research, so I am grateful to her for raising it.

UPDATE: Then I trundle over to Virginia Postrel's house, and find that she wrote about Coase late last week while I was away. Scroll down to the heading "READ COASE" and I strongly recommend her advice. The Coase article she mentions was one of the most transformative things I read in graduate school.

posted by lkkinetic | 8/20/2002 10:13:00 AM

Tuesday, August 13, 2002  

Okay, NOW I'm going back to the Theory of Moral Sentiments!

posted by lkkinetic | 8/13/2002 01:34:00 PM

IT NEVER RAINS, BUT IT POURS: In the shameless self-promotion department today, I am quoted in the Orange County Register's editorial today. I think that the FERC standard market design is baby steps, and at well over 300 pages does smack of micromanagement. The important question is, do those baby steps get us toward freer, more competitive markets? Are there better feasible ways of getting more of the benefits of more competitive markets?

Their point about technological change is absolutely bang on -- micromanaged baby steps will slow the Schumpeterian "perennial gale of creative destruction" that will make the transmission grid contestable and then increasingly competitive -- but we're really only at the start of that process. Distributed generation is becoming increasingly economical relative to centrally generated power, but it's a process. I hope the FERC standard market design provides good first steps in that process. But I'm not convinced yet.

posted by lkkinetic | 8/13/2002 01:28:00 PM

BOY, YOU DRIVE TO THE OTHER SIDE OF LAKE MICHIGAN INSTEAD OF READING NEWS, AND LOOK WHAT HAPPENS? This Washington Post editorial from Monday is very good. It discusses FERC's standard market design proposal, which is open for public comment through mid-October, and the snipey comments that state regulators have been making about it as an unbridled power grab. I think the editorial lays out the argument pretty well, although the standard market design proposal is not an hommage to the "simple rules for a complex world" context that would bring the most long-run benefit from competitive electricity markets. It's baby steps, but it's not the fiasco that the California state regulators (and other state regulators) have made it out to be.

posted by lkkinetic | 8/13/2002 01:16:00 PM

Here's an interesting New York Times article (registration required) from Sunday on BP's Marlin deep-water oil drilling platform in the Gulf of Mexico, and the economics of its being worth pumping. Very worth a read if you are interested in the economics of world oil markets.

posted by lkkinetic | 8/13/2002 01:10:00 PM

ELECTRICITY MARKETS AND DEMAND RESPONSE: I have a column on Tech Central Station today, on the importance of consumer choice and demand responsiveness in electricity pricing. I will have more to say on this over the next few weeks, but for now, it's back to Adam Smith's Theory of Moral Sentiments.

posted by lkkinetic | 8/13/2002 01:05:00 PM

Monday, August 12, 2002  

OFF FOR A WEEK OF BRAIN CANDY: I am leaving today for a week-long conference on the works of Adam Smith. There's so much more to him than the "invisible hand" that most people associate with him, and this week will give me a chance to dig into all of that. I'll post as possible.

posted by lkkinetic | 8/12/2002 10:32:00 AM

PHOENIX FROM THE ASHES, UNFORTUNATELY: The California Power Exchange will not die. After a year and a half of bankruptcy and the disappearance of anything resembling a market for electric power in California, the PX is still around. This article summarizes the soap operatic nature of its ongoing existence.

The article does one thing that drives me nuts -- it complains about the auction design of highest bid going to all suppliers instead of "pay as bid" auction design, where the supplier gets paid its actual bid. A long, long list of theoretical and practical reasons exist why the single-price auction is preferred to the pay as bid auction, not the least of which being that the single-price auction gives suppliers the right long-run incentives to invest in the capital to meet the demand at the equilibrium price. Pay as bid auctions also create incentives for sellers to do what's called bid shading -- if you are a seller and you know you'll get paid your bid, you have an incentive to say that your bid is higher than your actual marginal cost. That's inefficient. People who complain about high prices through single-price auctions should think about creating a demand-side to counter supplier market power. Rate caps stifle that response. Grrr.

posted by lkkinetic | 8/12/2002 10:26:00 AM

FLUX IN THE ELECTRICITY WORLD: A period of extreme stress in energy markets because of trading liquidity and debt problems at energy companies. There is value there, but it's hard to see right now with so much uncertainty.

posted by lkkinetic | 8/12/2002 10:18:00 AM

WHERE DID LAST WEEK GO? Between writing a book chapter on retail pricing, demand responsiveness and dynamic pricing in electricity, and having a contract accepted on a house, I lost last week. Wow. More to come over the next few weeks on dynamic pricing and the importance of demand response in getting efficient, integrated wholesale and retail electricity markets. And, assuming all goes well with our house purchase, more on the 1921 arts and crafts Chicago bungalow!

posted by lkkinetic | 8/12/2002 10:16:00 AM

Friday, August 02, 2002  

ADAM SMITH ON EDUCATION: Yesterday Joanne Jacobs posted a quote from Adam Smith on education and teacher retention. Just to add to what Joanne said: Smith experienced what he considered to be the worst of incentives when he attended Oxford University, where the faculty droned on and on and on, and didn't seem to care whether the students were getting anything out of their lectures. Smith advocated a teacher remuneration system whereby the students paid teachers directly; in fact, this system was in place when he was chair of logic and then of moral philosophy at the University of Glasgow. Talk about the incentives to exchange value for value.

posted by lkkinetic | 8/02/2002 02:49:00 PM

WALTER WILLIAMS ON MARKETS: This column by Walter Williams illustrates a very important point about markets: they are not things, they are not places, they are not individual people. Markets are the interaction of our choices and decisions, based on our private, local knowledge.

What we call the market is really a democratic process involving millions, and in some markets billions, of people making personal decisions that express their preferences. When you hear someone say that he doesn't trust the market, and wants to replace it with government edicts, he's really calling for a switch from a democratic process to a totalitarian one.

Now you see why I call this site the Knowledge Problem.

posted by lkkinetic | 8/02/2002 02:41:00 PM

CARP AND INTERNET RADIO: When I am writing, I like to listen to ambient techno music. My favorite source for this music has been, for the past two years or so, SomaFM from San Francisco, on their channel called "Groove Salad." Like most people, I suspect, I have been meaning to send them a donation for a while, but some things slip when life is hectic, even though I knew that Soma and other internet radio stations were under threat of closure depending on what the Librarian of Congress decided about royalties to pay to artists, as was required under the Digital Millennium Copyright Act. Then in mid-July, after the Librarian had decided on the royalties they should pay, I went to SomaFM and saw this headline:

Killed by the RIAA. June 20, 2002.

With CARP royalties of $500 a DAY, SomaFM cannot continue broadcasting. SomaFM is just one of many internet stations forced off the air by RIAA-sponsored legislation.

Yes, you read right. $15,000 a month, $180,000 a year (well, based on our last few months extrapolated over the next 12 months, we would have to pay $176,541 in RIAA royalties.

Don't listen to the RIAA press release that says most small webcasters will only pay the minimum $500 a year. Any station with more than an average of 5 concurrent listeners will be paying more than that minimum.

I have been struggling with this issue for the past three months. I enjoy internet radio (especially given how much of broadcast radio is utter drivel and commercials), especially SOMA-FM and WOXY 97-X, the station I listened to in college. But I deeply, truly believe that the exchange of value for value is a core component of life, and that artists deserve some recompense for their artistic endeavors. In this case, though, it's not clear that the artists would be the real beneficiaries of the CARP royalties, and it's more clear that the RIAA is using this as another tool in its toolkit of technological stultification in an attempt to maintain its grasp on existence in the face of dynamic change.

The small internet radio broadcasters are not the flawless heroes here, though. Why did they not consider a subscription model, in which regular listeners like myself would pay for full access to all channels, or a by-channel subscription? They could still offer some free content. I think this business model would work better for radio than it has for, say, But the fact remains that even I would support such a model only if I had confidence that the CARP/DMCA royalties were going to the artists, and not to RIAA. This means that IF SomaFM does successfully come back online, I am writing a check to them, pronto, because I believe in the exchange of value for value, and I need to get off of my flaky duff and put my money where my soul is.

The Doc Searls article in Linux Journal is a fabulous analysis of what's going on, including the recently introduced Internet Radio Fairness Act that may modify some of the consequences of the CARP/DMCA legislation. I have not read the IRFA, and I cannot comment on pending legislation, but take it upon yourselves to learn about this debate (visit sites like Save Internet Radio and Radio and Internet Newsletter, and RIAA, think about its effects on your life and liberty, and act accordingly. Don't be complacent; remember the importance of eternal vigilance.

Thanks to Glenn Reynolds for posting the Doc Searls link; I am one of the people who has been haranguing Glenn for months to write about CARP, because sensible people read him and think.

posted by lkkinetic | 8/02/2002 09:50:00 AM

Thursday, August 01, 2002  

MORE EVIDENCE THAT WARREN BUFFETT SEES VALUE IN ELECTRICITY: Berkshire Hathaway has provided financing for Williams. His credibility, integrity, and vision are things that the electricity industry needs right now, as well as his capital. He also knows a bargain when he sees it. Here is a more thorough article on the deal from

posted by lkkinetic | 8/01/2002 11:24:00 AM

HOW AUCTIONS WORK, AND WHY DESIGN MATTERS: Hal Varian, writing today in the New York Times' Economic Scene, describes auctions, how they work, and how design can influence whether or not participants can collude. This article summarizes a recent journal article by Paul Klemperer, an economist at Nuffield College, Oxford, and one of the most pre-eminent auction theorists.

Mr. Klemperer argues that the principles of good auction design are the same as for any other market: try to encourage entry, and try to discourage collusion.

It's a great, easy to read article on a process that is becoming increasingly important, especially in energy and telecom industries.

posted by lkkinetic | 8/01/2002 11:07:00 AM

FERC'S STANDARD MARKET DESIGN PROPOSAL: The press release on it is 20 pages, the design proposal runs to 800 pages. The comment period extends to 21 October, so expect to see some comments here as I process and analyze this proposal.

posted by lkkinetic | 8/01/2002 10:57:00 AM

SONIA ARRISON ON HOLLYWOOD HACKING: Sonia's Tech Central Station article on the proposed bill is very good. She hits the nail on the head with

Many of Hollywood's Internet pirates are also paying customers in real space, putting Hollywood in the strange position of wanting to attack its own customers. Intellectual property is, of course, important both in principle and to the U.S. economy. But new technologies force intellectual property holders to re-examine their beliefs and business models -- something that the entertainment industry tried and failed to avoid in the past with the introduction of audio and video cassettes. A similar situation is occurring now.

This theme is echoed in many critiques of such recording industry intransigence, including the Janis Ian article I mentioned earlier.

posted by lkkinetic | 8/01/2002 10:28:00 AM

TRANSACTION COSTS AND FRAUD LEGISLATION: This Dow Jones newswire article indicates that one consequence of more stringent SEC regulatory enforcement to reduce corporate accounting fraud will result in increased litigation and decreased settlement out of court. This is one of the most striking costs of increased regulation -- the litigation and slow-as-molasses process of resolution. Lawyers are probably raisin' the roof and figuring out how they'll spend that extra income.

posted by lkkinetic | 8/01/2002 10:23:00 AM

Wednesday, July 31, 2002  

THE NEPTUNE PROJECT: The Neptune project is a privately-funded, high-voltage, direct current (yes, DC, not AC!) project to connect Manhattan and Long Island with other areas that have larger supplies of generated power. This type of interconnection of markets is a driving force in reducing transaction costs and increasing efficiency in energy markets. The progress of this project is very important as an indicator of the investment value of new, private transmission, and of the fact that just because electricity transmission is network infrastructure, that does not imply that it must be either provided by government or subject to government economic regulation (I am happy to concede the importance of safety standards in electricity transmission). This story, about TXU joining the investment consortium that is funding the Neptune project, illustrates the investment appeal of competitive electricity transmission to reduce bottlenecks. TXU's development capital will expand the construction to include DC lines connecting Manhattan and New Jersey, which gives Manhattan better access to the liquid and well-supplied PJM (Pennsylvania-Jersey-Maryland) wholesale electricity market. This is a good thing.

posted by lkkinetic | 7/31/2002 02:18:00 PM

GAME THEORY AND HUMAN NATURE: This Wired News article highlights remarks by Martin Shubik, an eminent economist and game theorist, who is advocating pushing the use of game theory in economics beyond its grounding in rationality and strategy, to incorporate such human traits as emotion and error.

Last Wednesday, Shubik told the audience of game theorists with mathematics backgrounds that the next theories have to be hammered out "in concert" with other disciplines. The next theories, he said, have to consider emotions and their consequences, the culture and the context.

"Our simple models are no longer sufficient to answer many of the questions we have raised. The very successes of game theory are forcing us to move on," said Shubik, an economics professor at the Yale University School of Management and a consultant to major corporations and agencies of foreign governments.

Very interesting. Perhaps the technocratic mathematization of my profession is in retreat? I'm not holding my breath, but as more prominent scholars recognize the need for interdisciplinary study of human action, I get more sanguine.

posted by lkkinetic | 7/31/2002 09:59:00 AM

MONOPOLISTS, OLD AND NEW: Microsoft and AT&T are forming a strategic alliance to provide wireless connectivity, particularly in work environments, according to this article.

posted by lkkinetic | 7/31/2002 09:53:00 AM

FERC SETTING MARKET RULES TODAY: According to this Bloomberg News article, FERC will announce rules today to govern cross-regional wholesale electricity sales, including market monitoring and pushing "regulated utilities to cede some authority over transmission lines." This has been coming for a while, with lots of industry and public comment time. I hope Commissioner Massey's quote in the article is not indicative of the policy stance, though:

"We now have enough information to know what works well,'' Massey said in an interview.

What disturbs me most in that statement is the missing "for now" that I wish were there -- we know from history of the past five years what not to do, given existing technological and regulatory environments. But what if FERC's standard market design is not flexible and robust to changes, especially in technology? And what if it doesn't allow for regulatory change that would be mutually beneficial for consumers and for innovative producers? Then I worry that FERC's standard market design will freeze the institutional structure underpinning the industry, and that it will be rigid, unresponsive, and eventually obsolete, but still legally binding, to the detriment of consumers and innovative producers. It could also create vested interests who benefit from the institutional structure frozen in that way, who then have an incentive to lobby and use the political process to stymie change.

The biggest benefit is reduced transaction costs; transaction costs have been a big impediment to regional coordination that will bolster and liquify wholesale markets. See also this Reuters article on the topic.

posted by lkkinetic | 7/31/2002 09:41:00 AM

TECH CENTRAL STATION COLUMN: I have an article on Tech Central Station this morning, on how markets discipline companies who are not transparent and full of integrity.

posted by lkkinetic | 7/31/2002 09:30:00 AM

Tuesday, July 30, 2002  

POPE AND CRANE ON THE ENERGY BILL: Anytime that Carl Pope of the Sierra Club and Ed Crane of the Cato Institute agree on something, it's worth reading. Such is the case with this opinion piece in the Washington Post today.

posted by lkkinetic | 7/30/2002 05:41:00 PM

HOW COOL IS THIS? Also courtesy of Slashdot, this New York Times article (registration required) describes the flywheels that the NY Port Authority has installed in the subway to collect and use the energy given off when subway trains brake. What a win-win -- their energy bills go down, and subway stations are less hot!

posted by lkkinetic | 7/30/2002 02:37:00 PM

A WIRELESS FUTURE? Courtesy of Slashdot, this Business Week article discusses the prospects and hurdles for wireless, "wi-fi" networks. My favorite quote:

Adds Ramesh Rao, director of the California Institute for Telecommunications & Information Technology: "History tells us that we cannot rely on the FCC's ability to anticipate the future and write rules to allow progress."

In the absence of a regulatory rescue, wireless advocates, including Rao, are trying to solve Wi-Fi's problems through technological innovation. Right now, anyone can head down to Radio Shack and, for a few hundred dollars, wirelessly network their laptop to their cable or DSL broadband connection.

posted by lkkinetic | 7/30/2002 02:31:00 PM

JANIS IAN GETS IT; WHY DOESN'T THE RIAA? As Janis Ian wrote in an article on her website, the internet and music downloads can and do benefit artists. This is a well-researched and well-written article. Thanks to my husband for forwarding it to me.

UPDATE: I thought that Glenn Reynolds at Instapundit had mentioned this article before, and he did, here, in reference to Reid Stott's posting and analysis of her arguments.

posted by lkkinetic | 7/30/2002 12:53:00 PM

CRUDE OIL UPDATE: We're drivin', there's political uncertainty in the Middle East, and it's almost August, so U.S. inventories are being depleted in a typical seasonal pattern. Thus, as this Bloomberg News article reports, crude prices have gone up. But they have not gone up much, because the continuing economic malaise is countering the price-increasing factors mentioned above. (Bonus points to those of you old enough to recognize my Carter reference in the previous sentence)

posted by lkkinetic | 7/30/2002 09:45:00 AM

MORE ON HOLLYWOOD HACKING: Here and here are two articles from Wired that are good complements to Dan Gillmor's article referenced below. Not only would this bill have unintended consequences, as the first article discusses, the large media companies would not have to stop their P2P music distribution under this bill.

posted by lkkinetic | 7/30/2002 09:41:00 AM

SCHUMPETER'S PERENNIAL GALE OF CREATIVE DESTRUCTION: This Financial Times article analyzes Dynegy's recent sale of a pipeline it acquired from Enron to bolster its balance sheet and reduce its debt. Dynegy's stock price increased accordingly yesterday. The first paragraph of the article says it well:

When Dynegy snatched the Northern Natural Gas pipeline company from a collapsing Enron for $1.5bn, it did not know how valuable the asset would become. On Monday, it proved to be Dynegy's salvation.

Warren Buffett bought this pipeline for $928 million (note how much less that is than what Dynegy paid in December, a big price decrease, but Dynegy is desperate). This chain of capital transfer, from Enron to Dynegy to Warren Buffet, is a beautiful illustration of the value that Schumpeter's perennial gale of creative destruction has the possibility of creating. Entrepreneurial, opportunistic risk taking (such as buying a pipeline in this market, even if it was at a good price) works with other factors like technological change to create value where no one had anticipated it or considered it before. That's the big reason why our economy continues to thrive.

Interestingly, though, Buffett has been wanting to increase his investments in the electricity industry, apparently because he sees the potential to create a lot of value. He has been stymied in many dimensions by the byzantine and, in many ways, obsolete layers of regulation in the industry. He has particularly hit the wall of PUHCA -- the Public Utility Holding Company Act of 1935, a stultifying relic of the early abuses and lack of transparent financial information in the industry. See also my earlier analysis of PUHCA and the arguments for and against repeal.

posted by lkkinetic | 7/30/2002 09:06:00 AM

HOW MARKETS DISCIPLINE COMPANIES: I don't know whether or not Perot Systems actually did share confidential information about the structure and design of the California electricity market, but as this Financial Times article indicates, what matters is what investors believe, and how they act on those beliefs. As the article says, investors are not convinced by the arguments that Perot Systems has put forth to this point, and they respond by selling in anticipation of some future bad thing happening that would affect the value of the stock. It's those expectations and those actions that discipline companies, and deter them from behaving badly. Prices communicate valuable private knowledge (like how much a given investor believes their arguments) to a wider audience, and induce companies to take those beliefs into account. That's what I call effective regulation.

posted by lkkinetic | 7/30/2002 08:48:00 AM

Monday, July 29, 2002  

THIS IS GREAT, BUT ... : In this press release titled "LADWP Funds Innovative Energy Efficient Technology Ideas", the Los Angeles municipal utility announced an initiative to fund innovative energy-efficiency technologies that will particularly reduce peak-load demand. You know, if you just allow for market-based real-time pricing, even just for large industrial users, LADWP wouldn't have to spend $750,000 on this program -- innovative companies would come out of the woodwork and seize the marketing opportunities! Grrrrrr ... why is demand responsiveness so culturally difficult for utilities? Why don't they see the opportunities to earn more money by selling less power? (NOTE: I have to credit Vernon Smith for that last sentence, it's his phrase) I am actually writing a paper in which I try to answer my own questions, so I welcome any suggestions.

posted by lkkinetic | 7/29/2002 01:55:00 PM

HOW DEPRESSING IS THIS? Dan Gillmor on the proposed "Peer to Peer Piracy Prevention Act," under which the music and movie industries would be legally allowed to hack into computers running file-sharing programs. Dan puts it very gloomily.

posted by lkkinetic | 7/29/2002 12:44:00 PM

COMMON SENSE IS THE VICTIM OF UNTHINKING BUREAUCRACY IN AMERICAN AIRPORTS: This OpinionJournal editorial by George McGovern is an incredibly eloquent statement of how ridiculous and unthinking airport security bureaucracy has become. Read it, tell your airlines that you'll avoid flying and they are more likely to go out of business because of this static, backward-looking approach to making us feel safe that instead just makes us, as Senator McGovern said, "flustered, humiliated and exhausted."

I haven't had a bad airport experience since a horrendous one in March in Sacramento, California, but stories like Senator McGovern's just quicken my resolve to stay off of airplanes, and to make damn sure that Southwest, United and American all know why I'm not there as much as I used to be. Videoconferencing technology, anyone?

posted by lkkinetic | 7/29/2002 12:40:00 PM
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