For many years Japan has been criticized for the lack of growth of its economy, resulting in what has been labelled its ¨lost decades.¨  I argue below that far from an aging, backwards-looking country, Japan may have anticipated  (consciously or not) the winning formula for economic life in our globally warming, AI future.

 

During the 1980s, the Japanese economy grew strongly, with asset prices tripling, fueled by seemingly unlimited bank lending. When this financial bubble finally burst, Japan entered a long period of zero or negative growth and commentators in the West criticized Japan’s lack of economic dynamism.  This aging nation of savers refrained from consumer spending and protected existing jobs over the creation of new ones.  But what if they were right?

 

In the West we have largely been avoiding the bursting of bubbles by simply moving debt around and inflating new bubbles. Thus, the savings and loan crisis begat the internet bubble which begat the mortgage crisis which may yet beget a sovereign debt crisis.  We are addicted to growth, much to the detriment of our warming planet.  Of late, I have begun to think that perhaps the Japanese are better placed than Americans to weather the looming shift of work from humans to machines.  While traditionally economists have looked to population growth as the principal long-run driver of GDP growth, if there won’t be enough work to go around, perhaps a shrinking and aging but wealthy population is better placed to make this transition.  It will certainly consume fewer fossil fuels.

 

Interesting new economic solutions such as Universal Basic Income (UBI) have been proposed to replace wage-based employment as a source of family income.  However, no one can be confident that former workers will be able to adjust to not “working for a living” with the concomitant loss of self-worth.  The whole notion of “growth” may need a rethink in a future AI-driven economy where not only machines produce most of the goods, but they also trade with one another.  Productivity and hence GDP may initially rise as learning algorithms get more efficient, but this will likely plateau at some point.  In such a world we may come eventually to value health, learning and art over growth and consumerism.

 

It may, of course, not turn out so rosy.  For example, a class of future Zuckerbergs may come to own most of the wealth on the planet and fuse AI with genomics to perpetuate a new hybrid race of super humans; or killer AIs may decide to annihilate Homo Sapiens entirely or relegate us to a human zoo; or without being expressly targeted we might all fall prey to Nick Bostrom’s famous out-of-control paperclip optimizer..   I’d like to think that we will figure out a way to not destroy the richness of human civilization we have worked so hard to create. Towards this end we could do worse than study the Japanese example of fewer, older, wealthier and less violent citizens.

 

Perhaps Mrs. Watanabe knows what she is doing.

 

 

 

 

I have not written a new entry in this blog in some time as I have been very busy at work and my spare cycles have been consumed with watching and tweeting (@tglocer) about the slow car crash which is the Trump presidency.  At times it feels like The Donald is sucking all the oxygen out of the public square – which is undoubtedly one of the objectives he seeks with his barrage of daily outrages. Nonetheless, I have been thinking a lot lately about data – who owns them, the economic power of the large platforms that de facto possess them, and what we should do about it, if anything.

 

As we approach the 25^th anniversary of the World Wide Web, it should require little proof that vast repositories of our personal data are held by large corporations such as Facebook, Netflix and Equifax, as well as by national governments, primarily the US and China.  These vast databases were built-up with little fanfare by organizations that tracked and stored our every choice, like, retweet and movement online. Each individual data point is generally harmless; however, taken as a whole and analyzed by computer algorithms (especially those deploying machine learning techniques) they can become highly compromising of privacy.  For example, the license plate on my car is visible for all to see and all are free to jot down my plate number if I am involved in an accident; however, commercial data vendors will also sell you access to their databases of billions of license plate numbers, time and geo-stamped for analysis.  With a little simple co-variance analysis on this seemingly innocuous dataset, I can discover whether your car happens to be parked at 9pm in a motel parking lot next to the car of a married co-worker more often than random chance would suggest.  Getting worried?

 

The European Union has historically championed the privacy rights of individuals over the desires of private companies to store information.  In May 2014 the European Court of Justice formalized a “right to be forgotten” in a case brought against Google to suppress search results. (see Google Spain SL, Google Inc. v Agencia Española de Protección de Datos, Mario Costeja González (2014)).  This right along with a much broader set of rules governing consent to data collection, privacy and data protection has now been codified into EU law via the General Data Protection Regulation (GDPR).  The short-term effect of the new regulation has been an avalanche of browser pop-ups seeking user consent, but enactment of the GDPR will likely mark the end of an era of unconstrained database-building by the Facebooks and Amazons of this world.

 

While the State of California has followed the EU lead (see California Consumer Privacy Act of 2018), in general, the US has been slow to regulate the balance of power between corporate interests building deep and broad databases and the rights of individuals to use online services but limit data collection about themselves.  There has, however, been an increasing call to use novel interpretations of competition law to seek the break-up of large platforms that are viewed as having monopoly-scale power. See, e.g.,  The Antitrust Case Against Facebook, Google and Amazon.  While such challenges go well beyond data privacy concerns, I believe that the asymmetrical power of these platforms to collect and exploit our data may present the greatest threat to competition.  The data that Facebook collects about my likes and dislikes or that Amazon amasses about my purchase habits already provide a strong competitive advantage.  However, as these and other companies introduce ever more powerful machine learning algorithms, massive user data becomes an insurmountable barrier.  Just ask yourself whose autonomous vehicle you would feel safer to drive in: One trained on the driving experience of every user of Google Maps and Waze or one trained on data supplied by every driver of an Alfa Romeo in the US?

 

I would like to suggest a third way to address the imbalance of power between the data platform goliaths and all of us Davids – a technology solution, but one that will likely require a bit of collective action, social or political, to develop.  What if we could flip the data model and provide each citizen with a secure, encrypted digital “box” that would hold all of our browsing and search history, all of our driving and geolocation data, all of our health records and Fitbit data, and all of our media consumption and photo libraries, etc.?  Each of us would then be free to decide whether we wished to license our search history to Google for a fixed period in exchange for a small payment or separately license our media watching preferences to Netflix.

 

This distributed data model is now technologically feasible.  There are several initiatives underway, including the Solid (Social Linked Data) project at MIT led by Tim Berners-Lee, the scientist credited with developing the World Wide Web in 1989.  I see greater promise in the early efforts to build a more decentralized solution based on the inherently distributed trust model of the blockchain.  So-called dApps, or distributed applications, could provide one such model, especially if combined with individual digital wallets that could collect the micropayments associated with the licensing of our personal data.  A dApp is similar to the existing internet applications with which we are familiar, but rather than taking a hub-and-spoke format to data and processing, dApps take the form of a mesh of peer-to-peer autonomous endpoints.

 

In addition to restoring balance to our relationships with the corporate exploiters of our data, such a distributed model would enhance our security from cyberattack by eliminating inviting centralized targets and allow us more granular control over who gets to use our data, for what and for how long.  It would also finally provide a robust technical framework for implementing the long-sought European ideal of the law of forgetting.  Individual data licenses could be set for limited terms with all access removed after expiry.

 

It is not too late to reclaim our right not only to be forgotten but also to profit from the data that we rightfully own.

Shame has always struck me as a very negative emotion: Something to be avoided at all costs and a powerful force that can drive individuals to desperate acts up to and including suicide. Lately, with a nod to the Trump White House or the Pruitt Environmental “Protection” Agency, a bit more shame would be a very good thing.

 

Having grown up and been educated in the US (including a BA in Political Science and a law degree), I was always reassured that we were a nation of laws, replete with checks and balances carefully enshrined in law by the Framers to protect the nation. Some 40 years later I’ve come to learn that many of the rules I had taken to be law are in fact only political norms lacking the force of law and effective enforcement mechanisms. So, for example, every presidential candidate in modern history before Trump has released his tax returns because it was unthinkable not to be transparent about financial matters that could raise conflicts. Similarly, once elected, presidents divested of their material business interests to avoid actual conflicts or even the appearance thereof. Trump is happy to thumb his nose, with Mussolini-like indifference, to convention and happily maintain ownership of hotels and other properties at which representatives of foreign governments and special interest groups curry favor.

 

The United Kingdom has always relied on the power of shame and public shaming to shape the conduct of its citizens. The mere whiff of shame is usually sufficient to enforce the desired social norm and the recognition bestowed by the Crown on knights, dames, lords and ladies works as a carrot-like reward in counterpart to the stick of shame. An episode last year served to underscore both the positive and negative aspects of reputation in the UK. In April 2016 the retailer BHS fell into receivership with a £571 pension hole soon after its sale for £1 by Sir Philip Green. Over the years Sir Philip and family were reported to have extracted £586 in dividends and rent from the company. The ensuing public shaming campaign was relentless and included calls for Green to be stripped of his knighthood. By February 2017, Sir Philip coughed-up £363 to the Pensions Regulator to partially restore the gap and save his knighthood.

 

A more recent UK example of the effectiveness of shame as a force for social suasion involved the (now former) Home Secretary, Amber Rudd, who resigned in the Windrush scandal.. The Home Secretary resigned in April after it was disclosed that she was aware of Home Office deportation targets after denying such knowledge publicly. As lies go, Ms. Rudd’s untruth would barely qualify as one of Donald Trump’s 6.5 average daily lies (per The Washington Post).

 

Thus, how craven it is for Donald Trump to remain in office despite his daily onslaught of deliberate untruths, his repeated racist dog whistling, his misogynist groping and “locker-room talk,” his myriad conflicts of interest and graft, his disdain for the closest allies of the US and treasonous succor of its greatest enemies, and his ongoing obstruction of any attempt to hold him to the rule of law, let alone political norm.

 

Unfortunately, shaming is only really effective if the body politic and media speak with largely one voice. As long as Republicans in Congress, Fox “News” and a cabal of largely superannuated advisers and commentators fill the sails of this dreadful president with the winds of sycophancy, we should not expect Trump himself or his equally reprobate cabinet members like Scott Pruitt to act decently. Pigs seldom respond to requests for good table manners when snout-deep in the trough.

 

As with the Magna Carta and respect for the rule of law over the law of kings, the US still has much to learn from the UK. Such a shame.

Suffering through the second of what I fear will be four years of the Trump Administration, I began to ponder what drives some men over the age of 70 to increasingly shocking behavior. In the case of The Donald it is easy enough to imagine that there are some as yet-unpublished pharmacological side effects or interactions among the hair-loss, self-tanning and other performance-restoring drugs that the celebrated Dr. Bornstein may have prescribed.  However, Trump is not alone in his Tourette’s-like appearances on Fox & Friends. Rudy Giuliani was once “America’s Mayor;” Alan Dershowitz was once a highly respected constitutional lawyer. Each has now taken on such increasingly extreme positions that observers like me who once had a modicum of respect for their prior achievements are left to wonder what drives this behavior.

 

I think I know the answer: Fame kills.

 

Talented individuals who become public figures can lose their bearings -– their moral compass – between their core human identities and their public personas. This may pass unnoticed at first, but becomes increasingly difficult to ignore once one is no longer Mayor of New York or the go-to Constitutional law authority. Trump also understands that the power to shock represents the power to focus the media spotlight. Obama’s birth certificate, Mexican rapists, cheating on your wife with a porn star – these are media honeypots.

 

So why are these racist, misogynist provocations newsworthy? For the answer we need to turn to the pioneering work in Information Theory by Claude Shannon of MIT. Simplifying greatly, the informational value or “newsworthiness” of a given event varies in proportion to its capacity to surprise. This is intuitively obvious. A newspaper headline that declares: “Today War Did Not Break Out in Iowa” is hardly newsworthy. Similarly, if I devise a game in which you need to guess the third letter of a three-letter word and I tell you that the first two letters are “th” there is less informational value in revealing that the third letter is indeed “e.” However, if I had not told you the identities of the first two letters, revealing the “t” would have had significant informational or news value.

 

I would never suggest that someone as intellectually lazy and arrogantly illiterate as Trump has studied Shannon’s seminal 1938 work A Mathematical Theory of Communication; nonetheless Trump intuitively grasps that the power to shock and outrage carries with it the power to mesmerize the news media. Lesser disciples like Giuliani and Dershowitz are like apprentice moths to the media flame – they attach themselves to the master moth and emulate his wing flapping.

 

So, how do we combat this demagogic trend toward ever more outrageous public speech? I believe that the answer lies in raising the costs associated with such bad behavior. As The Donald has shown, shame is not enough to deter the truly shameless.  Instead the media should more aggressively fact check and challenge those who lie and not invite repeated liars back on air.  Similarly those who engage in hate speech have the First Amendment right to do so in the town square but not on CNN or the pages of mainstream media. Finally, we as citizens must also do our part. Just as it is difficult to avoid “rubber-necking” and gazing at a highway accident, we must not rush to play the latest Trump obscenity on endless loop.

 

Finally, our real hope lies with the activism of the Parkland teenagers. It is their time to take back the country from the septuagenarian fame-seekers.

 

I have a close friend whom I will call “Tal” who is a great tech entrepreneur with a strong track record for building applications in financial markets. Tal is smart, worldly and tech friendly. He also thinks blockchain is bullshit.

 

As regular readers of this blog can imagine, we argue about the significance of blockchain, cryptocurriences and distributed ledger technology. Tal may be right. His argument boils down to (i) blockchain is a solution in search of a problem and (ii) nothing of real commercial value has been built to date. My view is that these remain early days in the development of a set of promising new technologies. While there are significant technical challenges, including scalability, security and performance, it is wrong to write-off blockchain today based on an early snapshot of its utility.

 

In Blockchain, Coase and the Theory of the Firm  I argue that blockchain fundamentally changes the economics that dictate which activities are performed within a company and which can now be undertaken by individuals via contract. The key change is the reduction in transaction costs that makes new forms of economic organization possible.

 

In this post, I argue that initial coin offerings (ICOs), made possible by tokens represented on a blockchain, will breathe new life into traditional forms of organization such as the mutual company or cooperative society.

 

Coin offerings are all the rage these days among cryptocurrency enthusiasts, serious founders, as well as online scammers. In 2017 an estimated $4 billion equivalent was raised in ICOs across several hundred offerings worldwide. Coin offerings have been banned (at least temporarily) in countries including China and Korea, and are under close watch by the SEC and CFTC in the US as well as the FCA in the UK. However, my interest is less regulatory and more based on the innovation that token sales represent in the form of economic organization.

 

In a coin offering, investor/participants are offered the right to purchase cryptocurrency-based coins or “tokens” that confer the right to participate in the economics and/or governance of a project. Unlike a traditional equity offering such as an IPO, the project need not take the form of a legal entity such as a corporation; however, the tokens purchased in this novel form of offering do represent the right to participate in the success of the venture. It is this collective aspect that suggests to me that ICOs owe much to the history of economic organization.

 

Mutual societies or benefit companies are ancient forms of collective organization dating to Roman Imperial times. They reached peak adoption in the 19^th and first half of the 20^th centuries as many savings and loan societies and life insurance companies were organized as mutuals (See e.g., Mutual of Omaha Insurance Company in the US and Nationwide Building Society in the UK.). Mutual companies are owned by their members and run for their benefit. Profits are typically reinvested in the business to improve the services offered to members or returned to members in the form of lower prices or distributions. This may provide a certain marketing benefit by convincing customer/members that their purchases are not going to line the pockets of a separate class of investors. Mutual organization is also seen as reducing agent/principal conflicts and information asymmetries (especially in insurance). However, the lack of access to investment capital (and perhaps the chance to profit personally) convinced the managements of many former mutual companies to “demutualize” over the last few decades.

 

Coin offerings provide the potential to reinvent the mutual company on a modern infrastructure or “set of rails.”   Individual projects or series of projects organized as a company can be financed via ICOs; follow-on investment can take the form of subsequent token sales; and customers of the business can be rewarded with participation through token awards.

 

So while I still disagree with my friend Tal about the importance of blockchain technology, he is correct in the sense that it does not magically create value out of nothing. It is a powerful enabler and a radical reducer of transaction costs, but it may be no more novel than your average 19^th century English mutual building society. As the poet T.S. Eliot wrote in Little Gidding V:

We shall not cease from exploration
And the end of all our exploring
Will be to arrive where we started
And know the place for the first time.

Much attention has been focused on the role of social media such as Facebook and Twitter as enablers of Russian interference in the 2016 presidential election in the US and the Brexit referendum in the UK. I argue here, as JFK might have, that of those to whom much is given, much is required.

 

From a business model perspective Facebook[1] has a brilliant monetization engine. Thousands of international advertisers can pay to reach millions of consumers largely without the intervention of human employees at Facebook. This has allowed the company to grow rapidly at high margins (nearly 50% annual growth at 50% margins). The darker side of this hyper growth and scale is that it is impractical for Facebook to police the identity and content of its advertisers without either adding huge numbers of additional staff or developing new automated systems. Despite being a Facebook shareholder of long duration and an admirer of its senior team, I believe it is time to insist that they do more –either voluntarily or by law.

 

Many commentators label Facebook as a media company and argue that it should be required to identify political advertisements in the manner familiar to old media: “This ad is paid for by the few friends of Tom Glocer, etc.” I believe a higher standard should apply – one applicable to banks around the world. In the last century, banks were free to take deposits and trade with wealthy clients without asking difficult questions about the source or nature of their assets. Switzerland, in particular, came under the wraith of US prosecutors for its “discretion” in accepting client deposits. Since the 1970 adoption of the Bank Secrecy Act in the US and similar laws elsewhere, banks have been obligated to “know their customers” and police money-laundering to the point that “KYC” and “AML” are now familiar business acronyms.

 

Banks also complained that the new KYC regulations would impose unfair costs on them and hurt their revenues. They were not wrong and some institutions were never able to adjust to the new more transparent operating model (e.g., BCCI, BSI). Nonetheless the global banking system while not immune from abuse is a less welcome deposit and payment system for drug lords, dictators and terrorists — especially after the 2001 passage of the Patriot Act in the US.

 

Given this success I propose we impose similar KYC obligations on social media platforms with greater than 100,000 users. Will this move initially restrict business and hurt margins? Of, course. However, the threat posed to democracies around the world by weaponized social media are greater than the dangers that were present in international banking before the adoption of AML laws. Moreover, it won’t be long before Silicon Valley cranks up the same innovation it has shown in developing the underling social media platforms to automating KYC checks on the source of its advertising. I am not suggesting that Facebook can never accept an ad from the Russian FSB (or the US CIA for that matter), only that the true source of the funding needs to be prominently disclosed. Front men and cutouts such as “Friends of Charlottesville” are not enough. The stakes are high and so the burden placed on those who would profit from such powerful platforms must be commensurate with the challenge.

 

 

 

[1] For ease of reference I will refer to Facebook as proxy for all other social media.

 

I have always been interested in the question of how individuals organize themselves to perform work. In this I am not alone as this issue lies at the heart of a rich vein of modern economic scholarship. The seminal work in the field was and remains The Nature of the Firm written by Nobel economist Ronald Coase in 1937. I argue below that “gig” economy innovators such as UBER and Airbnb and the advent of blockchain and its promise of smart contracts and initial coin offerings will extend the boundaries of efficient market contracting into what was once the exclusive province of the firm.

 

The central tenet of Coase was that there was a dynamic tension between those functions a company chooses to perform internally and those functions that it would choose to contract for externally. The tension exists because there are transaction costs that act upon the form of organization chosen. An entrepreneur who overly relies on external production will soon find that the transaction costs associated with price discovery, contracting and enforcement will outweigh returns. Similarly, but at the other extreme, the costs of managing an overly large and sprawling enterprise will outweigh the benefits of the command and control system of firm management. William Baumol and Oliver Williamson, among others, further explained the boundaries of the firm by introducing the behavioral elements of principal-agent conflicts: In large firms mangers seek to maximize personal benefits that range beyond returns to disaggregated shareholders

 

In Coase’s Penguin, or Linux and the Nature of The Firm (112 Yale L.J. 369 (2002)), Yochai Benkler reviews the traditional tug-of-war between the individual and the firm as analyzed by Coase through Williamson and posits a third way: “Free software is only one example of a much broader social-economic phenomenon emerging in the digitally networked environment, a third mode of production [called] ‘commons-based peer production.’” (Benkler at 369). The volunteer army that supports, edits and enlarges Wikipedia is perhaps the best known, but by no means the only example of large-scale software/data projects maintained by the commons (see, e.g., Linux, Apache, Mozilla, Symphony). Promoters of open source collaboration rely upon a variety of motivational mechanisms to substitute for markets and contract rights, on the one hand, and internal managerial command, on the other, more familiar to Coase. For example, individuals choose to contribute to open source projects for their own psychic and social benefits, to enhance their reputations (socially as well as with potential employers), or to build consulting or service businesses around the open source code. Benkler does not claim that commons-based production will replace firms or markets, just that it represents a novel “third way” not heretofore witnessed.

 

I think we have now entered a period in which many of the attributes of the open source movement will be absorbed into the vastly distributed forms of commerce made possible by cloud computing platforms, “gig economy” services, and blockchain and other distributed ledger systems. Through each wave of technology innovation, the new capabilities have tended to reduce transaction costs (friction), unbundle offerings, and expand the possible scope of the enterprise (e.g., steam engine, telegraph, TCP/IP, etc.). Cloud services like AWS permit small businesses to deploy very sophisticated and resilient computing resources, now priced per second of compute time or lines of code. Gig economy services such as UBER, Airbnb, WorkFusion and Mechanical Turk allow asset owners to fractionalize the offering of third party transportation or lodging, and parcel out work to part-time workers. And finally, blockchain will enable firms to raise capital via initial coin offerings, transfer funds and settle property transactions using near zero cost payment “rails” and smart contracts, and greatly reduce the transaction costs that Coase recognized as the primary driver of organizing work within firms.

 

While these blockchain developments will not eliminate all of the reasons individuals contribute to open source projects (e.g., pride of authorship, joy of creation), the combination of micropayment functionality, crowdfunding, and smart contracts will permit global coordination of work outside the walls of the firm on a scale unimaginable to Ronald Coase.

The recent revelations concerning the grotesque and likely unlawful sexual aggressions perpetrated by movie mogul Harvey Weinstein over many years have prompted me to revisit the evolving body of law concerning the rights of “whistleblowers.”

 

For some time the SEC and other Federal agencies have taken the position that obligations contained in standard confidentiality or non-disclosure agreements purporting to restrain employees from reporting wrongdoing may not be enforced. The SEC has gone further, interpreting its Rule 21-F17(a) as prohibiting any confidentiality agreement that does not include an express whistleblower carve-out for the reporting of securities law violations. In fact, the SEC has gone as far as suggesting that it would take action against any attorney that drafts such a non-complying agreement (In the Matter of KBR, Inc.). Other parts of the Federal Government have also endorsed whistleblower carve-outs (e.g, Department of Labor, EEOC, NRLB).

 

So you may fairly ask me at this point what my esoteric and nostalgic tour of the law concerning non-disclosure agreements has to do with the ugly revelations about Harvey Weinstein?  Simply this: The Weinstein Company (and Miramax before it) are widely reported to have required employees and third parties to sign very strict non-disclosure agreements. I think Congress should pass a law prohibiting the enforcement of any confidentiality, non-disparagement or similar non-disclosure agreement against any whistleblower that comes forth to report any crime in general, and sexual aggression/harassment in particular. If this Republican Congress refuses to act, or the Predator-in-Chief vetoes the legislation, California and New York States should act as these states are home to most of the entertainment industry which has for too long condoned the “casting couch.”

 

It already takes great courage for the victims of sexual aggression to come forward and complain about the powerful men (yes, almost always men) who seek to leverage their wealth and power for sexual favors. They should not be required to risk the high cost and uncertain outcome of litigation to bring their stories to light.

 

I do not mean to gloss over the distinction between reporting alleged crime to the authorities versus telling the story to the media in violation of a non-disclosure agreement. Here legislators will need to balance the legitimate desires of organizations to maintain confidentiality versus the importance of having multiple victims come forward with their testimony. I for one would lean in favor of public disclosure with perhaps a standard such as the reckless disregard of the truth recognized under Frist Amendment precedent for alleged libels of public figures.

 

Since the Great Financial Crisis we recognize as a matter of good public policy that whistleblowers should be protected to encourage them to come forward and report wrongdoing at our financial institutions. After Weinstein, Ailes, O’Reilly, Cosby and Trump we should accept no less in the entertainment industry or elsewhere.