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Information goods are costly to develop and costless to distribute. So Google's idea of using a contest as a way of rewarding software developers has some merit. The winner receives $10,000. However, all entrants are subject to this:

With regard to an entry you submit as part of the Contest, you grant Google a worldwide, perpetual, fully paid-up, non-exclusive license to make, sell, or use the technology related thereto, including but not limited to the software, algorithms, techniques, concepts, etc., associated with the entry.

The problem that I have with these rules is that a loser who gets nothing still has to grant Google a license. Instead, I would argue that any entry that Google chooses to license should be declared a winner and receive $10,000.

In general, I like the idea of prizes and contests for research and development. In our current system of dealing with intellectual property, your "prize" is a patent or copyright. Whether this benefits you personally depends on your ability to exploit the temporary monopoly, which requires a different skill set than doing research and development. Moreover, patents and copyrights are costly to administer. In addition, the temporary monopoly leads to pricing above marginal cost.

Discussion Question. In drug research, the "prize" is the exclusive right to sell the drug until the patent expires. What are the pros and cons of instead giving a pharmaceutical company a dollar reward for development of a successful drug and then allowing any company to manufacture and sell the drug?

In a New York Times column, Alan Krueger surveys the economics of volunteer programs, which recently were promoted by President Bush.

Some volunteer jobs, like mentors and tutors, have been found to have a high social benefit, while others, like teacher aides, have a low benefit. In most cases, however, little evidence exists on the social payoff.

This rather discouraging finding should not be surprising. If an organization does not pay someone, then there is no incentive to use that person efficiently. In fact, at the margin you might expect that a volunteer would be allocated to an activity that has almost no value.

I currently teach on a volunteer basis at a couple of local high schools. I believe that this is a good thing to do. However, by disconnecting my work from market rewards there is a risk that what I am doing is far from socially optimal.

Discussion Question. Economists would tend to prefer a system that gives cash vouchers to people who need social services, rather than a system that is focused on voluntary provision of social services. What advantages does the voucher system have?

New Growth Theory emphasizes the contribution of ideas to growth, where the previous focus was on capital. James Surowiecke, in an article in Wired, talks about the history of standards from the first machine tools to the present.

the obvious importance of standards in the world of information technology makes it tempting to look to some expert body to lay down the law. But the argument for allowing the marketplace to do the work of rules-making is, if anything, stronger in the case of information technology.

One aspect of standards that fascinates me is the loose relationship between value creation and value capture. The Internet protocols, which made the Internet possible, were created by task forces whose members captured essentially none of the value for themselves. Microsoft's standards, which enabled it to overcome Apple's proprietary system, resulted in the richest capture of value in history.

Discussion Question. Standards have a downside in that they can be used to restrain competition and innovation. If government plays a large role in setting standards, will this increase or reduce the ability of incumbents to freeze out innovations?

PBS frontline revisits the Internet Bubble with dotcon.

Business Week chief economist Michael Mandel takes the "consenting adults" point of view.

If someone offers to sell me a lottery ticket, is that exploitation? No. People wanted a piece of these deals, they begged for a piece of these deals. I would much much rather err on the side of encouraging people to take risks, rather than discouraging them.

John Maynard Keynes argued that speculators play a game in which they try to gull one another as well as the general public. Without citing Keynes, but in that spirit, James Fallows says,

But the more damaging forms of irrationality were, as you suggest, probably practiced by the "rational" people in charge of large pools of other people's money -- including the "investment" sages who put the mutual-fund hoardings of people like you and me into nutty dotcom prospects.

Overall, I think that Steve Johnson has the most interesting comments, including

What the bubble did do, though, is popularize the medium at an unprecedented pace, and explore the possibility space of interesting Net-based models with incredible precision. My 89-year-old grandmother one-click shops on Amazon via her cable modem. Would she even be using email now if it weren't for the bubble? I doubt it.

Discussion Question. Enron officers deliberately sold overvalued stock to the public, and there is talk of putting them in jail. Venture capitalists deliberately sold overvalued stock to the public, and there is no talk of putting them in jail. Why the difference?

Lawyers are becoming more aggressive in defining and defending intellectual property rights. After looking at several absurd examples, Greg Reynolds suggests,

But the real problem isn't so much the money extracted by these monopolies. It's the hassle, and the paralyzing fear of litigation. That could be dealt with simply by requiring compulsory licensing...

As an economist, my first thought is...at what price? The copyright owner wants a large fee, while the user wants a small fee. If the owner sets the license fee, we are back to where we started. If the user sets the fee, then the owners are bound to feel that something they worked hard to create has been confiscated.

Maybe I'm missing something, but I think that you need to spell out the process for setting the license fee. Otherwise, I do not see how Reynolds' proposal gets us any closer to a solution.

Discussion Question. A slogan developed in a two-hour brainstorming session and a drug formula developed after years of research would both be considered intellectual property. Is there a single legal principle that can be applied to both equally well?

This year's Economic Report of the President leads with the growth doctrine. The overview says,

As it raises standards of living--consumption, in the language of economists--growth also provides resources that may be devoted to a variety of activities beyond the traditional marketplace. Growth can fund environmental protection, the work of charitable organizations, and many other activities of interest and value to the United States, other industrialized economies, and developing economies alike.

This is not exactly news. Regardless of which party is in power, the President's Economic Report is produced by mainstream economists, who support the Growth Doctrine.

Discussion Question. Why do environmentalists often argue that growth harms the environment, while economists say that economic growth can help the environment?

Apparently, the Senate could not muster enough votes to override Senator Daschle's veto of the economic stimulus bill. It will not be missed. As Morgan Stanley's Dick Berner points out,

Incoming data almost conclusively validate the recovery that is now under way. Consumer and business demand has held up better than expected, the push from increased government outlays is gathering momentum, and forward-looking demand indicators point to further improvement.

My guess is that a fairly big fiscal stimulus is coming, regardless. Defense spending is going to rise. My guess is that Congress will not swallow the "cuts" (relative to planned spending levels) that President Bush proposed in nondefense outlays. My guess is that President Bush will have to acquiesce to higher nondefense spending in order to have his other priorities passed.

Discussion Question. With government spending of $1800 billion, how could a stimulus package of $80 billion be considered anything more than rounding error?

Linda Gorman and Dave Kopel make the Luddite case against a national database that could be used for security screening.

I am not going to argue that a national identity card is some magical cure for security. However, I do believe that security screening needs to take advantage of the data that is available to sort people into risk classes, and that this process will be more effective if identity can be established with greater confidence.

I want to quote the article in detail and give my rebuttal.

Consider the problems with Colorado's Central Registry of Child Protection...

When the auditor's office compared a sample of 31 incident reports with their registry entries, it found 44 data-entry errors. Fifty thousand of the 107,848 records were incomplete.

Errors by themselves are not an indication of a flaw in a database. If in one entry my middle initial is incorrect, that counts as an error. It is possible that a statistical screening program could be very effective, even if the underlying data has numerous errors.

On the other hand, the authors also point out the following:

Forty percent of a sample of 48 registered sex offenders known to have committed crimes against children were not listed in the registry.

What this tells me is that there is a lot of mis-classification in this particular database. However, this database relies on one factor (past conviction records) to carry out classification. That is like trying to evaluate a person's credit risk based on the performance of their Sears account. One-factor classification systems are unreliable.

Another example cited by the authors:

One product of the matching program that the Social Security Administration (SSA) runs with the IRS is a pool of invalid Social Security Numbers created either by mistake or by people using false identities... There are currently more than 227 million records in the file...

What this shows is that we should not use social security numbers for identification purposes. The social security system was not designed to serve that function.

the unforgeable document has yet to be invented.

This is true. Relying on a single card or identification number would be hazardous. Again, single-factor systems are unreliable. However, screening systems that rely on multiple sources would be much more difficult to evade. I may be able to forge a U.S. passport with a name "John Smith," but if "John Smith" living at the address listed on the passport has no credit history, no record of tax payments, no entry with the motor vehicle administration, etc., a red flag will show up.

Crooked government employees present another practical problem. In 1997, 29 Social Security Administration employees were convicted of crimes ranging from creating fictitious identities, to fraudulently selling Social Security Administration cards to abusing confidential information.

Once again, the authors are acting as if social security were designed to be part of the national security infrastructure, when this is not the case. A fraudulent social security card may be easy to get. Obtaining a fraudulent FBI identity card or NSA identity card is rather more difficult. There has to be a focus on secure processes.

Since evildoers are a small fraction of the general population, this boils down to building a security system that concentrates its limited resources on monitoring the innocent. Freed from intensive surveillance, real criminals should have no problems hiding in the system's inefficient cracks.

Our current security system is the one that infringes on the innocent, subjecting airline travelers to long lines and intrusive searches. A data-driven security system would sort people into low risk and high risk. Low-risk people (the innocent) would move more freely than they do today through airports, sporting events, and so forth. High-risk people would be subject to more scrutiny than they receive today.

Gorman and Kopel do not offer a single constructive suggestion for making national security more effective. As I wrote in Privacy Luddites, the net result is that they marginalize themselves from the debate. There is a valid reason to worry about ineffective security and about the potential for abuse of power. But unconstructive opposition to data-driven screening makes no contribution to addressing the problem.

In his outstanding new Macroeconomics textbook, Brad DeLong characterizes the equilibrium exchange rate as being determined in part by what he calls the "fear-greed factor." The idea is that expected returns on assets may be higher in a foreign country, but your willingness to buy those assets depends on your greed for higher returns as balanced by a fear that something will go wrong.

In the United States, the locus of the fear-greed factor is the stock market. When greed is dominant, investors are worried about missing out on gains. When fear is dominant, investors are worried about losses.

Although economic performance has been weak this year, the fall-off is not nearly as sharp as the drop in the stock market. Moreover, the decline in interest rates should have offset some, if not all, of the effect of slower economic activity on the value of share prices.

To what would you attribute the large decline in U.S. stock prices over the past two years? In my opinion, it has to be a shift in the fear-greed factor. Greed was potent in the late 1990's, and fear has gained potency since early 2000.

Discussion Question. DeLong attributes some international financial crises to shifts in the greed-fear factor. Could the United States suffer a financial crisis merely on the basis of shifts in attitudes about risk?