Presentation to EEA Law & Economics Workshop, NYC, Feb 28, 2009

James Stodder, (Ph.D., Economics, Yale 1990)Lally School of Management & Technology

Rensselaer Polytechnic Institute at HartfordHartford, Connecticut, USA

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The Economist, “The Next Society,” November 2001 3

• Agriculture => Manor, Plantation • FeudalismFeudalism

• Industry => Family Firm, Corporation• CapitalismCapitalism

• Research => Scientific Circles, Universities, Firms• New System? New System?

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“The Nature of the Firm,” Economica, 1937- Firms exist to - Firms exist to minimizeminimize “transaction costs” “transaction costs”

“The Problem of Social Cost,” Journal of Law and Economics, 1960

- - Property Rights evolve Property Rights evolve to allocate property when to allocate property when transaction costs are transaction costs are too hightoo high

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The Common Law is “an attempt to increase the value of the resource by assigning property rights to those parties … in whose hands the rights are most valuable.”

- Richard Posner, The Economic Analysis of the Law, 1972

Without flexible property rights, “the only way we thought we could test out the value of the pollution was by the only liability law we thought we had.”

- Guido Calabresi and Douglas Melamed, “Property Rules, Liability Rules, and Inalienability”, Harvard Law Review, 1992

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(1-R)(1-R)(T(TAA – T – TBB) ) > > 2C 2C (5)(5)

“… “… the evolution toward efficiency… would be the evolution toward efficiency… would be fasterfaster as as

•current rules are more inefficient current rules are more inefficient [ (T[ (TAA – T – TBB) ) ↑↑ ] ]……

•net court costs … are lower net court costs … are lower [C[C ↓↓ ], ], and as and as

•inefficient rules are less soundly entrenched inefficient rules are less soundly entrenched [R [R ↓↓] ] .”.”

http://business.baylor.edu/Charles_North/4318Files/4318Rubin1977.pdf

The Economist, Sep. 20, 2007: “A Matter of Sovereignty”7

The Economist, March 8, 2008: “America's patent system: Methods and madness”

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The Economist, March 8, 2008: “America's patent system: Methods and madness”

“Josh Lerner of Harvard Business School found that patents on financial innovations were 27 times more likely than average to

result in litigation. …. The most frequent plaintiffs … are patent-holding companies

whose only line of business is the litigation of patent suits.”

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• Wikipedia• Apache WebServer

• MIT Open CourseWare

• Google• EBay• Apple

• Firefox• Linux

• Amazon• MySQL (Sun)• Travelocity

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http://en.wikipedia.org/wiki/Copyleft 11

http://creativecommons.org/

Copyright Creative Commons Public Domain

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• Dual Licensing (MySQL)

• Attribution (96% of licenses)

• Attribution + No-Derivatives

CC

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Table 1: Ideal Organizational Forms as aTable 1: Ideal Organizational Forms as a Function of Transaction and System Costs Function of Transaction and System Costs

SYSTEM COSTS (from INCENTIVE GAINS IMPLEMENTATION COSTS

TRANSACTION Implementation) for Private Property > for Private Property >

EFFECIENCY (Operational) Implementation Costs Incentive Gains

MARKET EXCHANGE Markets Public Goods > Coordination or Peering (Stock, Commodity, Books) (Roads, Police, Ideas)

COORDINATION Firms Club Goods > Peering or Market Exchange (Automobiles; Shoes) (Swiss Pastures, Schools)

PEERING Private ‘open source’ Peer Production > Market Exchange or Coordination (Google, Faculty) (Clickworkers, Wikis)

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1.Accounting – Multiplicity of information, many kinds and sources.

2. Cooperation / Coordination – ‘Publicness’ of Consumption and Production. Important externalities (+/-) are public (Coase).

3. Complexity – Fundamental Non-Convexity of Externalities (Starrett).

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ORGANIZATION INCENTIVIZE COORDINATE COOPERATEINFOR- PROBLEM Money > Power > Status > MATION PROBLEM Power or Status Status or Money Power or Money

ACCOUNTING > Markets Public Good CommonsCooperation or Non-Convexity

(Stock, Commodity, Books)

(Roads, Environment) (Public Radio, Ideas)

COOPERATION > Firms Teams Club GoodsNon-Convexity or

Accounting(Automobiles,

Shoes)(Police, Military,

Research)(Swiss Pastures,

Students)

NON-CONVEXITY > Patents ‘Open Source’ Peering Accounting or Cooperation

(Drugs, Microsoft, Biz Methods)

(Google, Faculty, Artist)

(Clickworkers, Wikis)

Ronald Coase, Journal of Law & Economics, “The Problem of Social Cost” (1960)17

Smoke 0.00.51.01.52.02.53.0TotalValue to B 0  30  50  60Marginal Value to

B  30  20  10 Total Value to N 35  30  20  0Marginal Value to

N  5  10  20 

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Smoke 0 0.5 1 1.5 2 2.5 3TotalVal-B 0  30  50  60MargVal-

B  30  20  10 TotalVal_N 80  30  20  0MargDam

-N  50  10  20 

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Less Cost: Sender of +X Damage: Receiver of +X Benefit: Receiver of +X Cost: Sender of +XBenefit: Receiver of -X Cost: Sender of -X Less Cost: Sender of -X Damage: Receiver of -X

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My Firm

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• US v. Europe• Google v. Yahoo• Linux v. Microsoft• Apple v. Microsoft

• Guerilla Bands v. Centralized Army

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“As the flow of water is determined by the earthAs the flow of water is determined by the earth, so the victory of military force is determined by the opponent. Military force has no constant formation, as water has no Military force has no constant formation, as water has no

constant shape.constant shape. To gain victory by changing and adapting to the opponentchanging and adapting to the opponent is called genius. Therefore the consummation of forming consummation of forming … is to arrive at formlessnessarrive at formlessness. When you have no

form, undercover espionage cannot find out anything, intelligence cannot form a strategy.”- Sun-Tzu, - Sun-Tzu, The Art of WarThe Art of War, 500 , 500 B.C.B.C.

“… the great uncertainty of all data in war great uncertainty of all data in war is a peculiar difficulty, because all action must …be planned in a mere twilight, planned in a mere twilight, which … like the effect of a fog or moonshine —like the effect of a fog or moonshine — gives to

things exaggerated dimensions and an unnatural appearance. What this feeble light leaves indistinct to the sight, talent must discovertalent must discover, or must be left to chance.”

- Von Clausewitz, - Von Clausewitz, On WarOn War, 1874, 1874

“The Law of Requisite Variety The Law of Requisite Variety [relates] the number of control states .. to the number … necessary for effective response. This allows us to formalize … the limitations of

hierarchical control …, e.g., the military, healthcare, and education systems.” - Yaneer Bar-Yam, - Yaneer Bar-Yam, www.necsi.org, 2004, 2004