Hmm, I guess it’s not so hard to get a Harvard MBA after all …

As I’ve mentioned before, the online game EVE has hired a professional economist to look after its in-game economy. The EVE game has about 200,000 active (paying) subscribers. I don’t play it myself but it seems to be a sci-fi strategy game based on trading and space warfare. Their economist has recently written his first blog post analysing some of the vast amounts of basic economic data that the game generates. He concentrates on activity in the game’s markets for ‘minerals’ which I presume are used in the production of spaceships and other things in the game.

The analysis proves that, as always, the laws of demand and supply work, even in online fantasy games. For example this graph shows the prices of two of the game’s “minerals” over time:

As their economist explains, the price of zydrine fell over time as greater supply was released into the game environment, while in recent times a steady supply of megacyte combined with increased demand have lead to increased prices.

The EVE economist promises a quarterly economic report where he looks at other macroeconomic indicators like growth and inflation. The game seems to have a natural rate of growth due to new players entering, which is similar to population growth in the real world. Unlike the real world, however, the supply of other resources (eg minerals) seems to be controlled by the people who run the game. I guess it’s necessary to gradually increase the supply of resources over time otherwise if the quantity was fixed at the beginning then those who got in early may have had an unfair advantage in accumulating resources (ie wealth) over others. Such an uneven distribution of wealth is indeed observed in the real world, but the game’s objective is to make money for its creators I guess, and you’re not going to get a lot of players if only the early players have all the success. So they have an incentive to generate a more even distribution of wealth by introducing new resources over time that can be exploited by all players.

Anyway, since the supply of resources was under control of the game operators, I presume that these effects can be corrected for (in a statistical sense) when estimating things like economic growth. It would be very interesting to see how much of the growth in economic activity in the game has come from people learning to play the game better (ie productivity increases) versus the ‘artificial’ growth due to increased population and increased resources. Inflation is also interesting. The game has a currency and I presume the supply of that is also under control. It would be interesting to see how changes in money supply affected inflation.

As I’ve said before, I think games like this are a very good way of studying economic phenomena. Economics is at a disadvantage compared to other sciences in that we can’t often run experiments to generate data and test our theories. Experimental economists do run experiments with subjects in a lab that try to mimic some particular economic situation. But these experiments are often very simplified versions of real situations, and there’s a question about whether the subjects take them seriously enough and behave as they would in the real world. With an online game, the players may have more incentive to take things seriously, since they care about doing well in the game. Of course the game still needs to be designed well to give people the right incentives to test any particular theory, but I think it’s a very promising area for economic research.

This video shows Trent Reznor (of Nine Inch Nails) encouraging his fans to steal (copy/download) his music (warning - contains swear words):

Actually, Trent isn’t the first musician to think of this idea, Robbie Williams thought of it back in 2003. It’s interesting for two reasons. First, why would a musician want to encourage fans to copy his CDs? Doesn’t he get royalties for each CD that sells? Second, as Trent observes, the price of CDs has not reduced over time. Why not?

The answer to the first question is that musicians have many other sources of revenue aside from selling CDs. You may notice that Trent is at a concert. Popular musicians can earn a lot of money from concerts, and the record label that sells their CDs typically doesn’t get any of that money. Taking into account other potential revenue sources such as merchandise and advertising, musicians have a greater incentive to make themselves popular than their record labels do, since all the labels care about is selling CDs. By encouraging people to copy his CDs or share MP3s, Trent will lose some royalties on those CDs, but he might become more popular, and more people will want to come to his concerts, driving up the price of concert tickets and earning more revenue for him. Thus the incentives of musicians and record labels aren’t always aligned with regards to encouraging or discouraging people to illegally copy music.

The answer to the second question of why CD prices haven’t changed is less clear. The introduction of file sharing networks represents a substitute good for legitimately purchased CDs. It’s reasonable to assume that this substitute is inferior — at the same price people would probably prefer the legitimate CD over an illegal download, and the quality of downloaded files can be variable. But the price is not the same, of course. Downloaded files are ‘free’ in that you do not have to pay for them, but CDs must be paid for. Although downloading is not competely free in the sense that there are opportunity costs — it takes time to find and download the appropriate files, it can expose your PC to viruses, and there’s the risk of being sued, among other things. Nevertheless, taking everything into account, at the prevailing price of CDs before file sharing became common, it seems safe to assume that some people will choose illegal downloads over CD purchases if the price of CDs remains unchanged.

One rational response of a record label to the introduction of this (albeit somewhat inferior) substitute to legitimate CDs is therefore to lower the price of CDs. This could help to offset some of the negative impact on its profits of the availability of illegal downloads. Of course, the label still suffers compared to when there was little piracy, but a price reduction can help to soften the impact by offsetting some of the demand reduction for CDs. However, it seems that CD prices have remained more or less constant over the past five years or so. What explains this? Are music labels stupid or evil? One possible explanation is that instead of cutting their own price, labels have been trying to raise the ‘price’ of the substitute illegal downloads by suing people who share files. This raises the perceived price of downloading and makes it less attractive, which can be an alternative strategy instead of cutting the price of CDs. The second possible explanation is that labels have been ‘entering’ the substitute market, through selling legitimate downloads such as through Apple’s iTunes service. This will help them to capture some sales from some consumers who would have chosen illegal downloads if there was only a choice between illegal downloads and legitimate CDs.

So there are plausible legitimate strategies that music labels may be following to respond to the invention of file sharing networks without lowering the price of CDs. As an economist I like to believe in these rational explanations. However, a part of me can’t help thinking that it may also be due to stubbornness on the part of music label executives to recognise that file sharing is now part of the business environment that they operate in, and that they should respond to that optimally.

It really helps to have influential friends. Apparently, Steve Fossett’s buddy Richard Branson got in touch with his buddies at Google and asked them if their satellite images could be used to help in the hunt for Steve who has been missing for almost two weeks after his light plane disappeared in Nevada. Subsequently, a set of fresh high-resolution satellite images were taken of the relevant area after he disappeared and uploaded to Amazon’s Mechanical Turk service.

Mechanical what? The Mechanical Turk is a website that allows people to collaborate on tasks that only humans are good at (at present). They call it ‘artificial artifical intelligence’. For example, looking for Steve’s plane in thousands of satellite photos. I tried it myself and found that I can check an image in less than 10 seconds. A computer may be able to do it faster, but computerised image analysis is probably not as accurate as human eyes. The Mechanical Turk site facilitates projects like this, where many people can contribute a small part of a larger data-processing project that would be difficult or impossible to program into a computer algorithm.

The Mechanical Turk includes a payment system where you can get paid for each little bit of work that you do. When searching for Steve you don’t get any reward except the warm fuzzy feeling of doing a good deed. But for other projects on the site you can get paid small amounts (usually less than 10 US cents) per small task that you do. Still, at say 5 US cents per task you can make US$10 per hour if you can complete each task in around 18 seconds. For people in developing countries that’s a pretty good wage, and that kind of speed seems feasible for relatively small well-defined tasks.

I have a couple of comments. The first is quality control. Since people get paid by the quantity of work that they do, they have an incentive to do it as quickly as possible. In the search for Steve, they’ve set each image to be examined by multiple people before it’s eliminated from the search set. That’s one way of doing quality control — get multiple people to do the same task and compare the results. However that could be expensive when you have to pay people to work. Alternatively, I’m not sure if Amazon does this already, it might be useful to incorporate some kind of reputation system for workers. If people can establish a reputation for high quality work, and if this could be linked to how much they are paid, then maybe people would have an incentive to work accurately in the first place. It’s a matter of setting the right incentives for speed versus quality.

My second comment is on the design of the site, which I think is bad. As with Amazon’s main website, it’s not very well laid out, and most importantly it’s not optimised for speed. I could review Steve images much faster if the site design were changed a little. For example I had to scroll down to see each image and mark whether it contained anything interesting or not, and then scroll up again to submit the result. The important buttons are just too far apart, and this slows down the work speed. Also the entire page has to reload between images, which is slower than it should be.

Overall, I think the Mechanical Turk is a great idea, provided that the quality control problem can be solved and the site is optimised a bit further. It’ll be interesting to see if this kind of outsourcing (’crowdsourcing’) can be economically viable, or whether the costs and difficulties associated with generating quality work are too great.

If you want to help look for Steve, click here.

Over at the Google Public Policy Blog the latest post is about the economic value of fair use. Fair use is a provision under copyright law that permits certain uses of copyrighted works without seeking permission from the copyright owner. These uses include things like the freedom to quote from and comment on copyrighted works.

Some people argue that some of Google’s services violate copyright law because they go beyond what is permitted by fair use. For example, Google book search has scanned copies of a huge number of copyrighted books. Copies of the text of the books are stored on Google’s servers, and you can search the text via their website. Unless Google has gained permission from publishers (or the works are out of copyright), they do not however display the entire contents of the books on their site, but rather small ’snippets’ relevant to what you searched for. Whether or not this violates copyright law is not clear, and I’m not a lawyer so I won’t comment on it, but there does seem to be some doubt.

Another service at issue is Google’s cache. When Google indexes web pages for its search engine, it may also store a copy on its servers. When you search for something on Google, if you click the ‘cached’ link in the search results, you will be presented with the copy of the page that Google has copied to its servers, rather than sent to the original website. It is possible for websites to prevent their pages from being cached, but the default is to be added to the cache unless you specifically set otherwise, which is easy to do. Nevertheless, this cache also raises some copyright questions, because the ‘default’ of copyright law is that permission to copy must be granted, rather than the copyright owner having to take explicit steps to prevent copying.

Anyway, we can leave the definition of fair use for the lawyers to sort out. Turning to economics, on the public policy blog Google refers to a recent study by Capital Trade, Inc prepared for the Computer & Communications Industry Association (of which Google is a member) that estimates the “economic value” of industries that depend on fair use to some extent for their operations. The headline results are that such industries contributed US$2.2 trillion (16%) of total US GDP in 2006, and employed 17 million workers, who were paid US$1.2 trillion in wages. Big numbers indeed.

Aside from exactly how you define “fair use industries”, I want to stress that it’s important to be very very careful about the interpretation of these numbers. Assuming no mistakes were made, these figures do estimate the fraction of economic activity that can be attributed to these industries. However, it is not possible to say that US GDP would shrink by 16% or that 17 million people would become unemployed if all fair use were suddenly banned. As far as I can tell, the study does not make such claims, which is good, but it is easy for people to interpret these figures in an invalid way. For example, Google concludes its blog post by saying:

This study suggests that [fair use is] also an important part of the U.S. economy.

Strictly speaking, this is not quite true, because if fair use were to vanish, then in a well-functioning economy like that in the US, the resources that are used in the fair use industries will be picked up and re-used in other alternative uses. Those 17 million people won’t be sitting around idle (at least not for very long) as there are plenty of alternative things for them to do. An economic impact analysis such as the Capital Trade study that Google refers to does not take into account the possible economic responses to any kind of policy changes regarding fair use. All it tells us is how much these industries contribute to current economic activity, but not how economic activity would change in their absence.

To properly assess the effects of any changes in policy towards fair use, we need to use a more sophisticated economic model that takes account of how the resources used in fair use industries would be re-allocated to other industries if fair use were restricted. The key then is the difference in productivity of resources in fair use industries versus their productivity in their next best alternative use. Since this alternative productivity will be greater than zero, the loss in GDP, employment and other measures of economic activity will be far smaller than the measures of economic impact that Google cite.

And one other thing … never never never use 3D charts, especially not 3D pie charts.