Web one, two, three . . .

This is Joseph.

As I understand it, Web 1 is the original internet tools (e.g., email) that were completely distributed. The downside of these tools was that they were decentralized and hard to update. Which led to Web 2 (applications like Facebook) that could be centrally updated and maintained by a single company. 

Web 3 is a strange beast. It involves distributed blockchains that can't be changed and are a permanent record. They are maintained by distributed updates. By calling it Web 3 there is a sense that it is the future of the web. But there are some challenges that I think might be understated. 

One, there is a classic libertarian problem. Look at color museum where people can own (and get royalties) on colors that are used in NFTs (or the thing that NFTs point at). How does this improve anything? it does not create new colors that were previously unknown. It does not improve market efficiency but rather, if successful, creates a big source of rent seeking for those who successfully gambled that this would work. Will we need see an alphabet NFT with a race to mint both large and small case "e"? But why should early adopters get permanent property rights on what was previously communal property that they put no effort into creating or making available. It is not like minting the NFTs increased the range of graphics cards. 

Two, the blockchain itself is not easily able to handle errors. Look at Ethereum, where a coding error in the DAO (decentralized autonomous organization) led to a fork when a coding error led to the ability to transfer funds in a way that was not intended. There are now two Ethereum blockchains, with both being traded and used. This seems like a bad feature.

Three, people have wondered if DAOs can replace legal contracts. Please look above to see how coding errors can cause problems, and who has worked in any non-trivial coding project in which there are not errors or exploits?  Further, what is the enforcement mechanism? Insofar as the coding needs to be interpreted by outsiders, how is this possible (via Mike Dunford who is following the Spice DAO):

Now, as the thread goes on to say, maybe this is ok. But what is the point of a DAO if it does not automatically cover the issue of quorum. If quorum is not needed then why was a decision to ignore it needing to be taken? Remember these are real funds being spent. 

Four, the reason you need courts is ambiguity (like that above). There is a famous case of two ships with the same name using the same trade route. This required the court to decide when both parties thought that they were in the right because of an ambiguous phrase in the contract. Now, it is true that you never make these mistakes twice and it is easy to see how to handle this in hindsight. But I cannot imagine a faster way to introduce these problems then using code to "represent" the real world and disputes arising as to what a particular item in the code refers to. If the goal is to tokenize the whole world, how is that feasible, efficient, or better than Web 2? 

Five, I tried to get Mark interested in this because he has connections in the music industry. There is an NFT project minting NFTs based on hit music. The artists are discovering this by surprise. Also covered by Mike Dunford, he points out that it is an NFT -- you might not be able to alter the blockchain to remove infringing NFTs. Think about how that lack of flexibility might interact with copyright law.

Now if you are an anarcho-libertarian this might be ok. But this goes back to a central problem of libertarianism - namely, is current wealth justly earned? Does the Queen of England have a clear claim to her wealth that does not involve inheriting wealth that involved injustice (just look at King Henry the VIII and the dissolution of the monasteries). But do we really think that just minting NFTs and giving huge amounts of wealth to early adopters is a fair way to distribute web 3 wealth? Bored Ape Yacht Club NFTs are selling for more than a thousand times their original minting cost in less than a year (April 23rd, 2021) which, should the value be real, is a huge wealth benefit to early adopters. 

Of course, these may be mostly scams. In that case Web 3 is just a way to remove excess money from people who are naïve about technology. I don't know. But I am really having trouble seeing how this could possibly work better than Web 1 and Web 2, given the problems noted above. I hope to eventually get Mark to weigh in on how musicians view the minting of NFTs being marketed on their brand without permission, but this sort of action seems to be highlighting the problems that the blockchain is bringing with it.

So what are the benefits? 

EDIT: the day after I write this, Bret Devereaux does a very nice piece on the long term sustainability of trying to evade the state via cyberspace. He does not mention NFTs, but the issues with cryptocurrency would seem to extend to those of NFT players like Hit Music trying to evade US copyright and trademark laws.  

Texas versus California

I have been trying to decide if Scott Lemieux covered this too completely, but I decided that there were a couple of useful points in this article.  Especially as relates to my California versus Texas discussion with Mark, where we discuss the relative merits of the two states. For example:

And despite all the gloating by Texas boosters about how the state attracts huge numbers of Americans fleeing California socialism, the numbers don’t bear out this narrative either. In 2012, 62,702 people moved from California to Texas, but 43,005 moved from Texas to California, for a net migration of just 19,697.

This really points out how marginal the population shift is.  It isn't zero, but it is also not a mass population shift driven by the hellish California region.

Even more telling:

Oh yes, I know what you’ve heard. And it’s true, as the state’s boosters like to brag, that Texas does not have an income tax. But Texas has sales and property taxes that make its overall burden of taxation on low-wage families much heavier than the national average, while the state also taxes the middle class at rates as high or higher than in California. For instance, non-elderly Californians with family income in the middle 20 percent of the income distribution pay combined state and local taxes amounting to 8.2 percent of their income, according to the Institute on Taxation and Economic Policy; by contrast, their counterparts in Texas pay 8.6 percent.

And unlike in California, middle-class families in Texas don’t get the advantage of having rich people share equally in the cost of providing government services. The top 1 percent in Texas have an effective tax rate of just 3.2 percent. That’s roughly two-fifths the rate that’s borne by the middle class, and just a quarter the rate paid by all those low-wage “takers” at the bottom 20 percent of the family income distribution. This Robin-Hood-in-reverse system gives Texas the fifth-most-regressive tax structure in the nation.  

That leads to some really interesting questions about he relation of tax rates to prosperity.  If most people in Texas pay more taxes than California, then maybe this is another data point on the scale of more money for government leading to a stronger and more prosperous state.  But these points really don't make the case that Texas is clearly better than California.  Now both states have a strong streak of pro-business advocates, and so I think that both could end up as engines of American prosperity.  But I think that the future for California is pretty optimistic once the actual facts are broadly considered. 

Just a quick dip of the toe in the water

One of the interesting pieces that is coming out about some of the high performance charter schools suggests that at least some of their success is due to selecting the most promising students.  These posts, from New Jersey and Arizona, is due to selecting students from higher income families (less school lunch eligible kids), less learning disabilities, and expelling problem students.  Clearly any school that engaged in these tactics would do better relative to public schools (who have a mandate to accept these students and an accountable procedure for expulsions). 

I am reminded of parents I know who had their kids "kicked out" of daycare.  The theory was a private daycare can select who will and will not be in their clientele and remove kids who do not "fit in".  And good for them -- that flexibility is a key part of private business and it can be useful to be able to focus on people your model is compatible with. 

But we should realize that this business model flies in the face of the ideas of universal schooling.  I challenge you to look at the chart on African-American male students in Northstar and not worry.  It's nearly a complete attrition over the course of the cohort's lifespan.  It seems incompatible with any strict definition of a 100% graduation rate, unless all of these children went on to transfer to and graduate from public schools.  If we value universal education as a public good and an underpinning of American prosperity then maybe we need an approach that is actually designed to do this? 

I will also note that it is a key principle of outcomes analysis that you need to look at what happens to the study drop-outs when evaluating an intervention.  After all, all of the adverse events on a drug could happen in the post-drug quitting phase.  This is not evidence of safety.  Nor is sending children who are struggling to public schools evidence that you are able to meet these children's educational needs. 

I would be shocked if Mark Palko didn't have a much more detailed analysis to follow this up. 

Reactions to DeLong's piece on Global Warming

I am sure that this section will be roundly ignored, but it was the most interesting to me: 

Even half a generation ago, economists interested in global warming like Thomas Schelling saw natural justice to this argument, and expected the North Atlantic to finance the carbon-neutral industrialization of the Global South--an environmental Marshall Plan for the 21st century. Global politics has not been kind to such dreams. I do not know of a way to represent a number as small as the probability that the next generation will see large-scale transfers from the North Atlantic to the Global South to fund its carbon-neutral industrialization.

But it may well be that continued inaction on dealing with global warming itself has mammoth antiegalitarian distributional consequences for the world. There are 2 billion peasants in the great river valleys of Asia from the Yellow to the Indus. Few of them have the human capital or the relationship chains needed to do well in the cities of Asia. For most of them, the economically valuable asset that they have the land that they farm--the land that requires for its economic value that there be enough melting snow off the Tibetan plateau but that the snow not melt too quickly. Global warming means either more or less snow on the Tibetan plateau. Why the governments of East Asia and South Asia are not now screaming about the consequences for their 2 billion peasants of global warming seems to me explicable only as the result of a strange kind of political myopia. To wait for large-scale transfers from the North Atlantic to begin carbon neutral industrialization in East Asia and South Asia seems to me likely to be viewed by historians a century from now as a classic dog-in-the-manger story.

I think that there are two levels that I really like this argument.  One, probably not surprising, is the public health argument.  The biosphere is under a lot of pressure -- pushing on it hard right now is likely to result in all sorts of adverse public health outcomes as things like water supplies become more constrained.  I think that the economic value argument (the melting snow makes the land economically valuable) is less salient than the potential for human suffering if there is a loss of food and clean water in this area.  DeLong doesn't address this directly, but I presume it is subsumed into the consequences of the economic changes. 

The second, though, is to think about the net present value of improved renewable energy sources.  Even with a modest discount rate, the development of improved solar, wind, or water energy production is huge because it extends the likely window of exploitation far into the future.  It is plausible that there might not be petroleum used as fuel in the future; the horizon over which the sun will stop providing energy likely exceeds the expected lifespan of the human race.  Heck, even Nuclear, with known disadvantages, has a much longer time horizon for viability.  This creates a real value to investment in these technologies as small improvement in efficiency could well pay large dividends. 

Of course, Mark would point out that existing technology is also potentially helpful as well. 

Paging Mark P

Mark Thoma posted this today.

I think the whole idea of charter schools has some merit as a means of educational experimentation.  But if this sort of cheating occurs, it makes it impossible to trust the data and that removes most of the benefit of being able to "let a thousand flowers bloom in the hopes that one will be especially amazing".  It could be an isolated incident, but even a single case this egregious makes it much harder to trust that education reform is adhering to strict metrics. 

[My response is here -- Mark P]

Intellectual property and genes

More on intellectual property:

Advocates of tough intellectual property rights say that this is simply the price we have to pay to get the innovation that, in the long run, will save lives. It’s a trade-off: the lives of a relatively few poor women today, versus the lives of many more women sometime in the future. But this claim is wrong in many ways. In this particular case, it is especially wrong, because the two genes would likely have been isolated (“discovered,” in Myriad’s terminology) soon anyway, as part of the global Human Genome Project. But it is wrong on other counts, as well. Genetic researchers have argued that the patent actually prevented the development of better tests, and so interfered with the advancement of science. All knowledge is based on prior knowledge, and by making prior knowledge less available, innovation is impeded. Myriad’s own discovery — like any in science — used technologies and ideas that were developed by others. Had that prior knowledge not been publicly available, Myriad could not have done what it did.

I think that this is one of the themes of intellectual property arguments; the advocates claim that the huge positional benefits of these policies (in generating revenue for incumbents) are necessary to encourage progress.  But it makes all sorts of tough assumptions, like incumbents will deploy these resources to encourage social benefit. 

One thing that makes a lot of sense is to look at times and places that showed evidence for fast growth and innovation.  It seems that tight trade guild rules, for example, seem to be anti-correlated with fast progress on industrial or technological progress.  That should be a cautionary note.

And, as Mark has carefully noted before, there isn't a binary choice here between massive intellectual property protection and no intellectual property protection.  There are some pretty reasonable middle ground positions that are less extreme than the modern regime but still protect the rights of private discovery.  Nor should we entirely rule out government funded research programs -- these can be much less expensive than the private sector (see the NSF, for example) but still ensure that innovation is not under-supplied. 

Intellectual Property

Mark Thoma points us towards a potentially really important finding:

By linking a number of different datasets that had not previously been used by researchers, Williams was able to measure when genes were sequenced, which genes were held by Celera's intellectual property, and what subsequent investments were made in scientific research and product development on each gene. Williams' conclusion points to a persistent 20-30 percent reduction in subsequent scientific research and product development for those genes held by Celera's intellectual property.
 

As we have long discussed on this blog, the justification for intellectual property is to encourage and promote innovation.  There has long been a concern that the innovation would have happened with or without the patent (software patents are a good example of this phenomenon) but a general consensus that the profits from patents increase innovation (due to the rewards generated by a successful innovation).  However, if the granting of a patent were shown to decrease innovation then the argument for granting them would be weakened.

If granting a patent reduces future innovation and the patented innovations would have occurred with or without the patent then the patent process becomes pure rent seeking.  It's clear that these two conditions do not universally hold (i.e. medication discovery as currently constructed is too expensive without a clear path to future profits).  But the possibility that this could be true for same areas of technology is a sobering thought indeed. 

Of outhouses and automobiles

Both Megan McArdle and Matt Yglesias have interesting posts about how important network effects can be to the adoption of new pieces of technology (Megan is talking about indoor plumbing, Matt about automobiles).  An except: 

Saying that people are choosing the a cell phone over an outhouse is not the same as saying they’re choosing a cell phone over an indoor toilet. Maybe that’s the choice they’d make, if they had it—I don’t know! But as Kelly’s own account acknowledges, they don’t actually have that choice, and certainly not at anything like the same cost.

Indoor plumbing requires either electricity to pump the water, and a nearby well to pump it from, or a connection to a public system with enough pressure to force the water high enough to flush your toilet. That’s a lot of power, not a trickle charge off of a small solar cell; I believe my great grandparents used a gasoline generator when they installed indoor plumbing in the mid-thirties. Gasoline generators are fairly expensive, as is the gasoline to run them, and I gather that they were only able to do it because their newly married son (my grandfather) saved up to help pay the installation cost, and then paid them rent that covered the cost of the fuel. Most farmers, I am told, waited until rural electrification brought them grid power.
 

Mark also pointed out just how important these elements of infrastructure were in transforming American society.  It's humbling to think about just how much effort was required to actually do all of these things (and concerning that infrastructure moves much slower today). 

However, I am hoping that the shift to an information based economy will have other benefits.  In some sense, there is a possibility that information, stored as pixels, could be something of real value (think of books or television programs) yet require very little resources to create.  In that sense maybe we could end up being happier (overall) while using less resources.

That being said, I have also used an outhouse and have absolutely no interest in giving up my indoor plumbing.  I am not even all that happy camping, unless there is a rest area in the middle of the campground with flush toilets (essential) and showers (highly desierable).