Man Without Qualities

Friday, April 19, 2002

Just What the Heck Is Paul Conrad Drawing, Anyway?

Matthew Hoy says cartoonist Paul Conrad "is challenging Ted Rall for the title of America's Dumbest Cartoonist. Conrad's latest cartoon (found here) likens the Israelis to Osama bin Laden's terrorists. An airliner with the Star of David on its tail heads toward the towers of two mosques."

It is not my purpose to disagree with Mr. Hoy's evaluation of Conrad's taste, which is often questionable, at least.

But solely as a detail, I believe the two towers featured in Conrad's cartoon are not mosques. They appear to be the towers of the Christian Bethlehem Church of the Nativity and another church nearby. [Scroll down to "Church of the Nativity" and click on the little magnifying glass to enlarge the tiny picture.]

The Church of the Nativity has recently been the site of much fighting and much controversy - which may be the "inspiration" for Conrad's repulsive drawing.

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Resplendent in their new rights ...

News on the radio today included a report of a California State Court decision than an undocumented worker who received less than minimum wage for years of California employment is entitled to sue and receive from his employer “back pay” based on the difference between the minimum wage and the actual wage he was paid. In contrast, the United States Supreme Court had held to the contrary a few months ago in another case involving the right of an undocumented worker to obtain back pay after being illegally dismissed for union organizing.

Regardless of one’s views of undocumented workers, it should be clear that this California State Court decision is a major blow to their economic well being, and a classic example of the often-perverse consequences of “liberal” positions. One of the major reasons – perhaps THE normal major reason - for an undocumented worker to enter this country is the prospect of finding and obtaining work. There are often other incentives, including avoiding civil unrest in the immigrant’s homeland or just the desire to be an American. But for most people, work is the focus of the decision.

And one of the biggest advantages an undocumented worker has in finding work is that he or she is cheap. California is full of homes staffed by undocumented nannies, and paved with patios laid by undocumented masons. This work is often done at far below minimum wage. Many people would and do object to that, and it is not my purpose here to address this fact one way or the other.

But it should be clear that anyone who might hire an undocumented worker will have a much-reduced incentive if it is known that once the job is done the worker is free to sue for the difference between minimum wage and the wage which served as the incentive for hiring the worker in the first place.

Now there are good reasons undocumented workers do not sue. Suing exposes the worker’s immigration status, for one thing. Undocumented workers don’t often personally have the knowledge of the American courts and the English language to sue effectively, or the money to do it. So, at least at first, the effects of this California decision may be muted – but not negligible.

If the decision is upheld and persists as law, eventually “workers rights” organizations and perhaps some churches may make attorneys available. Workers will have the option to reveal their status and collect the back pay – even if that means leaving the country at least for a while. And, of course, it will be possible for the worker to simply assign or sell the claim to an American (say, his or her church), who can then sue without fear of exposing the immigrant to INS enforcement. This assignment may create a problem with proof of the claim, since the worker will not be able to appear. But if the other evidence is sufficient, the claim may be good in the hands of the assignee. Also, employers should be aware that if there is an “amnesty” for a wide class of such workers, as is now proposed in some quarters, the beneficiaries of the amnesty will be free to sue after they achieve legal status without fear of revealing their immigration status.

Once the right of an undocumented worker to receive such back pay is fully established, the courts can in their usual way begin awarding punitive damages to account for the fact that many cases will still go unreported. And then there will be class actions against larger employers. When the process is complete, undocumented workers may obtain something close to full and effective vindication of their rights to minimum wage.

Resplendent in their new rights, they may then be all but unemployable. The most bitter opponent of such immigration couldn't have designed a more effective deterrence system.
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The root cause of terrorism is ... ?

In today’s OpinionJournal Benjamin Netanyahu argues that “the root cause of terrorism is totalitarianism. Only a totalitarian regime, by systemically brainwashing its subjects, can indoctrinate hordes of killers to suspend all moral constraints for the sake of a twisted cause.”

I wish it were true.

Mr. Netanyahu is almost certainly correct to deny that “the root cause of terrorism is the deprivation of national and civic rights.” Deprivation of national and civic rights is deplorable, but through history such deprivation has been perpetrated far too often without resulting terrorism to seriously be considered terrorism's “root cause.” But it does not follow that “the root cause of terrorism is totalitarianism.”

Mickey Kaus has formulated a more general explanation:

“In fact, there's a good argument that "welfare benefits + ethnic antagonism" is the universal recipe for an underclass with an angry, oppositional culture. The social logic is simple: Ethnic differences make it easy for those outside of, for example, French Arab neighborhoods to discriminate against those inside, and easy for those inside to resent the mainstream culture around them. Meanwhile, relatively generous welfare benefits enable those in the ethnic ghetto to stay there, stay unemployed, and seethe. Without government subsidies, they would have to overcome the prejudice against them and integrate into the mainstream working culture. Work, in this sense, is anti-terrorist medicine. (And if you work all day, there's less time to dream up ways and reasons to kill infidels.)”

In one direction Mr. Netanyahu’s theory appears to be a special case of Mr. Kaus’ theory. A modern totalitarian regime is virtually doomed to gross inefficiency, unemployment, underemployment and a servere lack of prosperity. The reasons are clear: Most of what makes a modern economy function is tied up in the free flow of information and a big role for markets, all of which is inconsistent with "totaltarianism." In addition, many of what are generally known as “human rights” (say, the right to a lawyer in a criminal case, to pick but one of many examples) are wealth enhancing for the society as a whole. Having impoverished its people and demolished its markets, such a regime will be have to put a lot of people on the dole in one form or another. Presto! One only needs to add an appropriate "ethnic antagonism" and the Kaus conditions are satisfied. The limits to this theory may be seen in a country like Singapore, where there are lots of restrictions on “human rights,” but the non-totalitarian regime (what Jean Kirkpatrick might have called an “authoritarian” regime) is careful to allow substantial freedom where the economic benefits are high and the costs to the regime’s power are seen as low.

But in the other direction Mr. Netanyahu’s theory seems wrong. Indeed, some regimes themselves are “terrorist,” a term often applied to the Nazis – which were scarcely themselves the product of totaltarianism. (Of course, whether the heavilly-state-involved pre-WWII German and Italian economies contituted "welfare" societies for the purposes of Mr. Kaus' theory deserves scrutiny. But that doesn't seem far fetched.)

Post-World War II, the steamy “permanent student” societies of Europe (which allowed young people to continue as "students" indefinitely at public expense) combined with a failure to deal with the uncomfortable memories of the fascist past to create and foster the infamous terrorist Bader- Meinhof Group and the Red Brigade in the late 1960’s and early 1970’s, mostly in Germany and Italy. "An underclass with an angry, oppositional culture" can take the form of subsidised student bodies, not just frustrated pied-noires hanging out in some French public housing project. Further, the forces that created these groups have clearly not yet been fully spent, and the "ethnic antagonism" in that case took (and takes) a particularly complicated form. As one academic commentator, Ursula Duba, notes:

“[T]he anger at their parents' generation quickly turned into condemnation of imperialism in general and the US in particular. Before long, young German students were preoccupied with demonstrations against the war in Vietnam. What was missing was the confrontation with the personal history of the family and the necessary mourning for the victims of the Nazi terror. It is notable that groups like the Red Brigade and the Bader-Meinhof-Group which resorted to extreme violence in their pursuit to end imperialism, took considerable hold in both Germany and Italy, but to a much lesser degree in the other European countries which experienced similar student revolts. It is equally notable that the sixtyeighters do not talk to their own children about the Third Reich and the horrors it perpetrated and thus continue the legacy of silence.

“During the massive demonstrations in Germany in 1991 against the Gulf War, no one thought to demonstrate against the numerous German companies which had sold equipment, chemicals and technical know-how to Saddam Hussein for the manufacturing of chemical weapons - even though it was known worldwide that Saddam Hussein had used chemical weapons against Kurdish civilians and that these weapons represented an enormous threat to Israel. To my knowledge, nobody has researched any possible connection of former Nazis among those manufacturers.”

True, the determination of the “host” democracies to extirpate these groups did eventually succeed, although at considerable costs to human and civil rights in Europe. Indeed, the European police came to understand that very strong methods were needed – methods with much in common with those now being used by Israel to deal with its own terrorism problem.

It is one more spectacular act of hypocrisy for Europeans to condemn Israel for understanding the same kinds of terrifying measures are needed in that country that were used of necessity in Europe to deal with the analogous problem. Nevertheless, Mr. Netanyahu does not advance his case by stating it without its necessary, if horrifying, nuances.

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Thursday, April 18, 2002

Local to Global... Local to Global ... Collect Call For You!

Charles Murtaugh, who writes a very nice blog which I often enjoy in my pseudonymous privacy, is calling for a boycott on links to pseudonymous blogs (like this one). I don’t agree, and not just because of my personal status.

As the cartoon line goes “On the Internet, nobody knows you’re a dog.” This site is known to be maintained under a pseudonym because I chose that. I could just as easily have pretended to maintain it under a phony “real” name (say, “Charles Murtaugh”). Who would know? In fact, it turns out that there is a very politically active Robert K. Musil out there – who has nothing to do with this blog and whom I have never met. It seems to me that what Charles is suggesting just creates an incentive for bloggers with frankly pseudonymous blogs to instead maintain clandestine pseudonymous blogs. Not everyone would see that development as an advance. The situation would resemble that in the theory one sometimes sees advanced that all of Shakespeare’s plays were written by another person …. WITH THE SAME NAME!

Further, it isn’t the pseudonymity (my God, this vocabulary is turning into a black hole!) that is bothering Charles. It’s the content of the some pseudonymous blogs. That seems to lead to advocating not linking to sites whose content one does not care for. Most people probably do that anyway to some extent, at least locally.

But perhaps Charles should advocate that before linking to a particular article in a blog one should survey the blog more generally to determine whether one approves of the blog globally? Wouldn't that be a more targeted and effective approach? I don't generally follow that approach myself, and I don't intend to - unless a blog (or other site) is very offensive indeed. I'm just suggesting that it would serve Charles' concerns better.

All of which draws to my attention that for some reason I do not have a permanent link in the left column to either Charles or to Derek Lowe, an astounding situation which will be remedied immediately.

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Wednesday, April 17, 2002

Update: Earnings, Earnings, Earnings ...

Max Power begs to differ with some of the points raised in earlier posts regarding the recent Enron civil action. His comments are all worth reading.
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Universal Education.

The interesting things John Fund says in OpinionJournal today about the recent Democrat confab at Disney World (the Democrats appear to have closed their in-house “Department of Unintentional Irony Avoidance”) includes this note on the performance of North Carolina Senator and Presidential aspirant John Edwards:

“Mr. Edwards's speech scored points with a Clinton-like call to support middle-class workers ‘who play by the rules.’ But his vague policy proposals left many cold. He called for creating a public education system in which every child "can get as good an education as the richest person in America." Who isn't? But Mr. Edwards's suggestions on how to do that involved higher pay for teachers and smaller class sizes, ideas that have failed many times.

Mr. Edwards and Mr. Fund’s comments are deliberately symbiotic political nonsense from which much can be learned.

It is hard to imagine that many people – even many Democrats – think that there is an unlimited supply of top quality education in the world available at any price, still less a price the public would even conceivably want to pay, or be able to afford, to supply free to every child. So how could any sensible person be in favor of a public education system in which every child “can get as good an education as the richest person in America?” Did either Mr. Edwards or Mr. Fund ask anyone at, say, Harvard or the exclusive private Washington D.C. prep school, Saint Albans, about how easy it is to find top quality educators at any level? Messrs. Edwards and Fund make Lake Wobegon’s fictional communal belief that all of its children were “above average” seem like flinty realism. Mr. Fund rhetorical question, "Who isn't?" has as its serious answer: “Everybody isn’t” or “Nobody is.” The teachers who are normally over-represented at Democrat gatherings were probably acutely aware of how hard it is to obtain quality education, so it is possible that Mr. Edwards’ “policy proposals left many cold” in the way one may be left cold by an elderly friend whose increasingly daffy “policy proposals” leave one feeling that his dotage is progressing apace.

But the Edwards/Fund interchange (it isn’t really a “dialogue,” of course, it more resembles an exchange of deliberately partially responsive voice mail messages) conceals a deeper rift – much deeper than can be accounted for in “Mr. Edwards's suggestions … for higher pay for teachers and smaller class sizes, ideas that have failed many times.” Such ideas have, of course, failed just as Mr. Fund says. But there is likely a much bigger divide than that. When Mr. Fund says that he (or “everyone”) supports a public education system in which every child “can get as good an education as the richest person in America,” he probably means a system in which every child can be educated to the best of that child’s abilities – but in which student “merit” plays the biggest role (perhaps the only role) in rationing public education. (Of course, this asserted “probability” is based on my perception that Mr. Fund generally values “merit” – but he may have written to the contrary.) But when Mr. Edwards says he supports a public education system in which every child “can get as good an education as the richest person in America,” he probably (assuming he at least to some extent shares the public agenda of his party) means a system in which merit does not play such a big role as Mr. Fund is contemplating and in which many "academically unqualified" students are admitted, by way of affirmative action and other non-“merit” criteria, to the very highest realms of education. Such students would largely waste that extra measure of education but they will obtain a debased “credential.” That result seems to be close to the current Democratic ideal – and even some Republicans seem willing to flirt with it, as evidenced by Republican support for State university systems being required to accept the “top 10%” of even low-performing high schools.

But obtaining the “ideals” expressed by either of these men would be absurdly expensive – leaving little if any resources for anything else in life. How many people are there in the world who are qualified to sit on the Harvard faculty? How many students could all those people teach? That number – and a very small number it will be - is the number of people who can be given top-flight education (objectively defined by a credentialist) at the college level, like it or not. Even if the definition of “top flight education” is generalized away from this credentialist norm, the number of people who can be given such an education is very small. Education is a scarce good. And no concept of “merit” is going to get the number of “deserving” students down that far, even if it were for some reason desirable to tell wealthy people that their money is no good when it comes to buying top quality education, an argument which is far from made. Mr. Edwards’ probable “ideal” is even more expensive and wasteful than Mr. Fund's.

Both of these men know that in America today wealthy people with unintelligent or underperforming children are free to purchase for them whatever level of education they want – provided a private school or other source of such quality education may be found to supply it. Mr. Gore, for example, appears to have consumed large quantities of marijuana and did not excel at Saint Alban's, but nevertheless applied to only one college – Harvard – because he knew in advance that he would be admitted there (presumably as a beneficiary of his family connections and the famous Harvard slogan: “There has to be a bottom ten percent!”). Politicians and editorialists both are nearly universally loath to admit that this aspect of the American educational system is nearly universally accepted, if grudgingly.

There is much to be learned from this pseudo-exchange. Messrs. Edwards and Fund use the same language with deliberately different meanings to assert ideals neither they nor anyone else with any sense would actually hold, but which neither they nor anyone else would actually dare deny publicly. Both sides sound good, and nothing much comes of it. As a result, most of the education market remains rationed by price. This “exchange” is a microcosm of how education issues are treated generally in America today. It takes a game with a lot of fast moving shells to keep something as important as education economics nearly rational and efficient – but America has shown that it can be done! Indeed, polls suggest that Republicans have recently at least pulled even with Democrats on the issue of education.

As noted in prior posts, the Man Without Qualities views the market for education (and, more generally, information and knowledge) and the market for medical services to have much in common. Their commonality is perhaps nowhere more in evidence than at the points where these markets intersect the political system. This kind of “exchange” which Messrs. Edwards and Fund provide therefore should be studied as a model for future methods by which the public’s “demand” for universal availability of top quality medical services can be sublimated into something more rational and efficient. Surely most politicians and editorialists would like a system in which “basic” medical care is broadly available, some top quality medical care is available to “meritorious” people (however defined) even of lesser means, the bulk of the medical services market is rationed by price, and Democrats and Republicans can each claim they are in favor of “universal top quality medical care” while meaning different things which they don’t intend to be taken seriously anyway. Who wouldn’t be?

Just like education. Just like Messrs. Edwards and Fund.

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Monday, April 15, 2002

Further Update: That “Notorious” Amazon Used Book Resale Service

Steven E. Landsburg has discussed the issue of whether publishers reduce the durability of textbooks in an interesting 1999 Slate article, where he says:

“The naive answer to why publishers might want to discourage the used book market is that they prefer to get paid every time a student buys a book. But by that logic, you should never sell your house when you can rent it: Why get paid only once when you could get paid every month? The logic is wrong because the sale price is likely to be far higher than the monthly rent. And the logic is still wrong when applied to textbooks, because the sale price for a book that can be resold is likely to be far higher than the price of a book designed to lose its value.”

“If a student is willing to pay, say, $30 for a textbook, that same student will be willing to pay $60 for the use of a textbook that can be resold for $30 at the end of the semester. (For the sake of simplicity, let's ignore the fact that the $30 delivered a few months from now is worth a little less than $30 delivered immediately.) And for a book that can be resold twice, the second owner's willingness to pay $60 means that the first owner is willing to pay $90.”

Mr. Landsburg is suggesting that the publisher can “capture” the resale value of its book – and therefore doesn’t care about competition from recycled durable books. If that is true generally, then an aluminum monopolist would not care about competition from recycled aluminum for the same reasons. So if Mr. Landsburg’s argument were universally correct (which, of course, he is not asserting in this example), then the government was right to prosecute its 1940’s aluminum monopoly case – and most knowledgeable people now don’t think that is right, based on Ronald Coase’s original insights. Indeed, Mr. Landsburg's argument seems to be essentially that of Learned Hand - the judge who wrote the aluminum case decision - modified to fit the textbook particularities.

In Mr. Landsburg’s approach the resale book price is a lot lower that the new book price. Why? Well, even in his example, it seems that the book has durability problems. Otherwise, why would a perfectly preserved used book clear the market at only half the price of an identical new book? Obviously, the books aren’t identical. The used one is, well, “used:” A little torn up, with some notes in the margin and the occasional tomato seeds squished between the pages. Mr. Landsburg’s argument seems to suggest that if the resale price of the book is always greater than some constant and the book could be sold any number of times (that is, the book is truly durable), then the original price will be very, very large indeed, limited only by the prevailing interest rate! In fact, if we do as he does and ignore the fact that a sale or resale price delivered in the future is worth less (by the interest rate) than the sale or resale price delivered immediately, then the original price of a completely durable book that could be sold any number of times at full price (or any constant price) would be arbitrarily large. So his example really does seem to depend seriously on books not being very durable.

But how much durability will the publisher sacrifice? That’s the tough question. The point of the fancy economic articles linked below is that if there is a really good resale market, then the publisher will make its books less durable than is economically optimal for the society as a whole. But to get to that point, one needs to consider the market power created by the copyright laws - which does not figure in Mr. Landsburg’s approach.

Mr. Landsburg makes another interesting point: “[P]lanned obsolescence occurs only under special conditions. Mistrust, for example, is a special condition. If a publisher says, ‘Buy this book for $90, and you'll be able to resell it next year for $60,’ a student might well respond, ‘How do I know you won't bring out a new edition next year and undercut my resale market?’ Unless the publisher can quell such doubts, students won't pay premium prices for books with lasting value, so publishers won't provide them.”

I’m not sure what “special conditions” are (perhaps the existence of market power is a "special condition," for example), which is no criticism of Mr. Landsburg’s informal article, but he certainly does seem correct that “distrust” will aggravate the publisher’s durability decision with respect to certain types of books.

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Update: Yes, and you know what that means …

An article in today's New York Times says that Andersen will settle the obstruction of justice charges brought against it with the Justice Department in the next day or so, and has this to say about the settlement:

"The agreement could result in a deferral from prosecuting Andersen for as long as three years. Andersen's lawyers were uncomfortable with a deferral lasting that long, but the Justice Department was concerned that its investigation into possible wrongdoing at Enron isn't close yet to filing any criminal charges, people close to the negotiations said."

So it appears to come to this: After four months of intense investigation, the Justice Department feels it needs a margin of three more years to bring possible charges against Enron and its officers. If the frauds at Enron were as "obvious" and "egregious" as the company's critics have been saying on the basis of publicly available information, why does the Justice Department - which for months has had access to vastly more information than what has appeared in the media - think it needs another three years to decide what to do?

What's wrong? Didn't the New York Times indict and convict the whole Enron management team, together with all relevant accountants, banks and attorneys, months ago? Maybe the Justice Department should just ask the Times for the evidence they used!

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Sunday, April 14, 2002

Yes, and you know what that means …

In the fetid days of the late Clintonian era rumors rose like vapors from a marsh that some, including even the President and First Lady, might yet be charged by the Independent Prosecutor with “obstruction of justice.” At that time the Man Without Qualities dined with a close relative, a woman who toils selflessly for the good of the Republic in an antifraud division of one of the Federal intelligence services, frequently and with casual elegance referring the fates of ambitious business executives to United States Attorneys for prosecution. After some rehearsal of the “obstruction of justice” rumors over portions of either Bouillabaisse or Bourride (memory fails), this relative smiled most winningly across the candle-lit expanse of linen and silver and crystal, and opined with unerring judgment: “Yes, and you know what that means, don’t you? It means the prosecutors have nothing, absolutely nothing – and they know it.” I believe we enjoyed pears poached in wine for dessert.

And, of course, she was absolutely right. Especially in a politically charged, high profile case, any prosecutor would prefer to indict on the basis of the principal wrongs alleged - not some paper shredding rap. That the Independent Prosecutor was driven to dependence on obstruction of justice charges was a very serious sign that the President and First Lady – indeed, everyone of significance not then already charged – was unlikely ever to be charged.

My relative's insight came back forcefully when David B. Duncan, the Arthur Andersen partner in charge of auditing Enron, agreed to plead guilty to a charge of obstructing justice. According to some observers, the Duncan plea was a great blow to Andersen, and might provide the government with needed leverage against Enron.

Is the Duncan plea significant? As my relative might say: “Yes, and you know what that means, don’t you? It means the prosecutors have nothing, absolutely nothing – and they know it.”

Or, put another way, Duncan’s plea is significant, but not primarily for the reasons described in the media articles linked above. Recall that according to Enron’s critics the company’s frauds were supposedly “obvious” and “egregious,” at least once the basic data were obtained – and nobody in the Justice Department (or even the financial pornographer Lerach!) has said Duncan or anyone else succeeded in actually denying material information to investigators (as opposed to destroying material documents). Yet, despite all that investigating and the supposedly “obvious” and “egregious” frauds not one individual at Enron or Andersen has even been indicted or agreed to plead guilty to accounting, securities or bank fraud. NOT EVEN THE DEMONIC MR. FASTOW, THAT INCARNATION OF EVIL HIMSELF, HAS BEEN INDICTED AFTER MORE THAN FOUR MONTHS OF INVESTIGATING.

Further, the terms of Mr. Duncan’s plea bargain hardly suggest that the government has been deluged to date with evidence of “obvious” and “egregious” fraud – or, for that matter, any fraud. As the New York Times described Mr. Duncan’s plea bargain:

“[T]he government made concessions that are unparalleled in a corporate criminal prosecution in which charges have already been filed. Under the terms, the government will defer prosecution of Andersen — and ultimately drop the obstruction charge without trial if the firm follows the terms of the deal. The terms, legal experts said, are surprising, given that the government seemed to be holding the best cards. ‘If the government agrees to defer this prosecution and not make them plead guilty, it's a huge victory for Andersen,’ said Stephen M. Ryan, a former federal prosecutor and a partner at Manatt, Phelps & Phillips. ‘But it's a very curious result.’”

And, of course, the Duncan plea agreement admits only “obstruction of justice” – not accounting crimes. Even the plea bargain Andersen itself is negotiating is not reported to go beyond obstruction of justice.

The entire proceeding highly suggests that despite four months of intense work and full access to Enron’s and Andersen’s records the prosecutors have nothing – and they know it. They are hoping that Mr. Duncan will be able to provide the evidence that is lacking to date.

So much for “obvious” and “egregious" accounting fraud.

Now, it has always been the position of the Man Without Qualities that Andersen’s document destruction was serious business. Moreover, there are individual cases – especially the uber-knowledgeable Robert Rubin’s sly attempted intercession with his former Treasury subordinate on behalf of Citigroup (including its investment bank subsidiaries) – where I have been rather hard in suggesting the likelihood of shady practices. I have also made quite clear that investment bank analysts may have a good deal of shoddy work to explain in this case - there is no shortage of villians. But document shredding is not obvious and egregious fraud - and individual cases do not support the nearly universal sliming of “Wall Street” implied by the sustained or “cross-country” accusations contained in, say, the Lerach complaint, or the more airless reaches of New York Times coverage of the matter, for example. Such a universal sliming amounts to assertions of a "vast conspiracy" for which there is grossly inadequate support - no matter how fulsome the rhetoric may become.

Perhaps evidence of widespread “obvious” and “egregious” fraud may come. Perhaps there was even a vast conspiracy. But we’re still waiting after four months – and the signs are not auspicious.

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Update: That “Notorious” Amazon Used Book Resale Service

Mickey Kaus correctly points out that nobody has a monopoly on books and the linked articles talk about monopolists. Is this a problem?

The purpose of copyright is to confer on the author (and therefore a licensed publisher) a bit of "market power" like a monopolist's - which is supposed to up the returns on book sales. No one has a monopoly on books, but the author has a monopoly on the author's book, which competes with other books which are not perfect substitutes as to its contents. A re-sold book will be a perfect substitute as to its contents (it's the same book). That's why the authors are upset.

The payoff for giving authors what is called the "copyright monopoly" to society is supposed to be the incentive for the author to produce the book in the first place. Congress makes each author a little monopolist with a little market power in exchange for the author writing a book that would not otherwise exist - or so the increasingly controversial theory goes. The more a copyrighted book is distinctive and original, the less perfect the competition to it will be from other substitute books, and the greater the author's market power will be. For such reasons it is sometimes said that the "copyright monopoly" is supposed to allow the author to gather the fruits of his or her own originality. Since most authors and their works are not very original, the market power conferred by copyright is low - and so are their sales. Patent and trademark laws works in a similar - but not identical - ways.

One will sometimes read that the "copyright monopoly" is a "misnomer" and that the right to exclude conferred by the copyright laws is no different from the right one has to exclude others from one's car - a bare property right. But as one better commentator puts it:

"Not only does the Copyright Act create economic incentives for innovators by allowing them to establish a market niche from which they may derive monopoly profits; but by making it unlawful to infringe the copyright holder's exclusive rights, the Act deters free-riding. The remedies accorded copyright holders against infringers under the Act create a disincentive to infringe for those wanting free access to the copyrighted good. As an alternative to the unlawful appropriation of the copyrighted good for personal consumption or to compete in the marketplace, a potential infringer has an incentive to create a substitute."

So Mickey is right to suggest that without the argument connecting the linked articles to the copyright monopoly, this post is hard to follow!

That “Notorious” Amazon Used Book Resale Service

The ongoing expansion of on-line resales of books, and its potential adverse effect on authors and publishers, has generated a fair amount of controversy recently This controversy – at least as reported in the mainstream media - has approached the topic in a kind of vacuum, as if the question of the effect of Internet resales of durable goods on the original seller’s profits was something quite new.

There is a tendency on many people’s parts to think that because the Internet is involved in, or even a necessary part of, a commercial development, then the development is without relevant antecedents. This tendency drove much of the dotcom retail silliness, in which what were nothing more than on-line catalogues services, for example, presented themselves as somehow fundamentally new.

There is an old saying: "A goose wakes up to a new world every day." The tendency was deeply and explicitly wrong in the dotcom arena, and it is just as deeply, if implicitly, wrong in regard to on-line resales of books and other durable goods.

The effect of the existence of a resale market on profits from resales of a durable good came up in a big way in the 1940’s in a monopoly case in which the government charged the country's main supplier of aluminum with "illegal monopoly" under the Sherman Act. The supplier argued that it was not a true monopolist because its supplies of “virgin” aluminum ingots competed with supplies of “recycled” aluminum ingots. The 1940’s courts didn’t agree with the supplier, but later economic learning (most importantly by Ronald Coase) showed that much of what the supplier was saying was true: the existence of a good resale market for a durable good strongly tends to drive its price down to the competitive level. To the extent an author hopes to extract extra high (“supracompetitive”) prices from book sales, Mr. Coase brought bad news.

But, fortunately for authors, books are not made of aluminum. In fact, unlike aluminum, books are not really very durable at all. This leads to some curious results. In fact, recent research indicates that if the durability of the book is determined by the publisher (which it largely is), the existence of a good resale market will lead to an overabundance of books with low durability. Put another way, if there is a good market for resale of books, publishers will print more physically crummy, non-durable books than is efficient. Moreover, the same research indicates that in such a market authors and publishers will retain almost all of their profitability. [If book durability is not determined by the publisher, book economics and aluminum economics look more alike.]

The mathematics gets daunting, but the concept is pretty clear: If publishers know that a resale market allows resold durable books to compete with new books and publishers can choose to publish durable or non-durable books, then the publisher will choose to make a lot fewer durable books if the resale market exists than if it doesn't. In fact, publishers will produce fewer durable books than is economically optimal for the society as a whole. And, of course, there won't be much for the re-sale market to re-sell.

In sum, if Amazon provides a good book resale market, then the public will suffer from an inefficient oversupply of nondurable books, but the profits of authors and publishers may not suffer. Authors and publishers looking for an argument against on-line book resale services which is both not self-serving and advances the public welfare might take note.

The economics and mathematics of the more recent research cited above are already complex, and the reader may wish to just review the first few pages for conclusions. The rise and fall of Napster has led to even more complex economic analyses which depend on the characteristics of the durable good in question. [Predictably, a software file and a hard-copy textbook lead to rather different game results.]

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