The Artist as Entrepreneur

In the Review of Austrian Economics, my graduate student, Rania Al-Bawwab, and I develop a theory of Renaissance art market organization.

Here’s the abstract:

We develop a theory of the supply side of art markets building on Kirzner’s understanding of entrepreneurship as alertness to profit opportunities. Whereas Kirzner’s entrepreneur is alert to the existence of resource misallocation, the artistic genius is alert to the opportunity of producing aesthetic value out of mundane objects and resources with no such value of their own. Our theory produces an important empirical implication: when market conditions are such that most art is “high art,” the artist will perform both functions, alertness to artistic value and alertness to profit opportunities. Instead, when most art is “low art,” the two functions will belong to distinct individuals. To substantiate our theoretical arguments, we discuss their relevance to the markets for paintings in Renaissance Italy and contemporary visual art.

More on the paper here.

Specialization and the firm in Renaissance Italian art

A new draft of my paper on the organization of the production of Renaissance frescoes and altarpieces is available at SocArXiv.

Here’s a passage from the introduction that summarizes the argument of the manusript:

This paper develops a theory of ownership and specialization on the supply side of the market for Renaissance paintings. This theory explains several features of the economic lives of master painters in Renaissance Italy. First, it sheds light on the propensity of artists to assume residual claimancy over their paintings, own the workshop that produced them, and bear liability over their quality vis-à-vis patrons. Allocating residual claimancy to the artist—as opposed to any of the many other specialized artisans involved in the fulfillment of commissions—economized on the costs of ensuring the performance of tasks that were both more expensive to monitor and more consequential to the ultimate value of the painting. Second, the theory accounts for the division of labor in the production of Renaissance paintings. It explains why even the most talented artists did not fully exploit their comparative advantage and instead performed some more mundane tasks as well. Finally, it provides a rationale for the master painters’ choice of how to allocate the remaining tasks between employees of the bottega and independent contractors. According to our theory, the equilibrium degree of specialization by the artist and the boundaries of his firm are determined by a trade-off between the benefits of specialization, the costs of delegation to a subordinate, and those of delegation to an independent contractor.

DuckDuckGo Can’t Exist

As I noted recently, commitment problems are the stuff of life. And according to some, that means the internet can’t satisfy our preferences. We want more privacy, the argument goes. But unlike demands in “regular” markets, this one won’t be satisfied.

Why? Profit-maximizing firms always have an incentive to collect more consumer information–regardless of consumer preferences. A “goody two-shoes” firm might refrain from collecting our info, but they’d only lose out to their less scrupulous rivals who make money from selling our data to advertisers. (Note: It’s not really “our” data in the first place, but that’s a discussion for another time). For some, markets might provide safety in the workplace or unadulterated food, but privacy on the internet is beyond reach.

Chris Hoofnagle, in The North Carolina Journal of Law and Technology, expresses this argument. For Hoofnagle, the attempt to provide privacy is a prisoner’s dilemma that results in a “race to the bottom” vis-a-vis privacy. According to this perspective, firms that offer privacy-protective services are unicorns. They don’t exist. Hoofnagle:

I think we will eventually come to a consensus that self-regulation will fail to protect privacy for the same reasons that it failed to ensure quality food and drugs. Self-regulation shields companies from accountability and encourages a race to the bottom. It gives little incentive to design products with privacy in mind.

Examine this highly deterministic view in vain for any sign of an entrepreneur who can devise solutions to this problem. In my opinion, positions like this stop the analysis short. Where is the endogenously emergent institutional solution–introduced by the very profit-seeking entrepreneurs maligned in this paper–which will solve this conundrum?

One way out is for firms to use hostages. Expensive signage and reputation make ideal hostages. Should a firm renege on its commitment to quality (i.e. privacy), it will never recoup the substantial investments it made in promising to maintain quality.

That’s exactly what DuckDuckGo did starting in 2008. The company spent millions of dollars on expensive billboards, which they plastered all over Silicon Valley. DDG’s privacy-protectiveness was literally it’s sole differentiator relative to much larger search engines like Google. And the only way it can stay afloat is by keeping the promise to safeguard user privacy.

This seemingly simple solution demonstrates the power of institutional solutions to break out of prisoner’s dilemmas, enabling parties to seize the gains from exchange that defection/opportunism would seemingly destroy.

Of course, the fact that DDG is tiny suggests consumers don’t really value privacy all that much, but that too is a topic for another day.

DuckDuckGo Challenges Google on Privacy (With a Billboard) | WIRED

Promises, Privacy, Patronage

A few yeas ago, I gave a talk on how institutions emerge endogenously to enable people to capture the gains from trade in the face of potential opportunism.

Except I didn’t use any of those words. My talk was about commitments and how people make them credible.

Most economic problems have a commitment dimension because most economic problems deal with the future. As I tell my “Law and Econ” students, you can read the classic “I, Pencil” with an eye toward contracts, as much as toward prices! Anonymous exchange coordinated through time requires a series of credible commitments or else the pencil will never arrive on your store shelf.

In my talk, I discuss one classic and two unique (to my knowledge) examples of credible commitments.

The classic example comes from Margaret Brinig’s excellent paper, “Rings and Promises.”

My first unique example comes from the world of digital privacy about which I’ll write a follow-up post.

My second unique example comes from the very interesting case of Cummins Engine Company and its relationship with the municipal government in Columbus, Indiana. To learn more about that case, see these videos or read my paper with Dylan DelliSanti.

Are NFTs Property?

Are non-fungible tokens (NFTs) property?

It’s a good question. Spoiler alert: I don’t know the answer. However, I think a good definition of NFT would be helpful toward deciding one way or the other. And as big as NFTs have been this year, I’ve seen not a single definition that wasn’t lacking (or outright wrong) in some significant ways.

Here’s my attempt at a definition:

An NFT is a unit of data stored on a digital ledger (i.e. blockchain) that certifies a digital asset to be unique and (therefore) not interchangeable. An NFT can be associated with anything, but is (thus far) usually associated with a digital asset of some kind — photos, videos, audio files, etc. But theoretically, this kind of ledger could represent even physical items.

Another angle: An NFT is a deed. And whereas a normal deed (say, to a house) is recognized and upheld by some governing authority, an NFT is defined by the fact that it requires no such authority to recognize or enforce. The author of some asset associates his or her work with an NFT, and then every transfer is logged in the NFT itself.

I think that’s a pretty good definition and explanation.

Now, given this definition, can an NFT actually be property?

Non-Competes Benefit Workers

Nick points to Walter Block on non-competes. Economists like Brian Albrecht and Tyler Cowen have also weighed in.

As Brian notes, non-competes protect the investments that employers make in their employees. This is a specific instance of the more general–and commonsense–principle that investment is more likely when it’s protected. On-the-job training (a form of investment), which raises the marginal productivity and wages of workers, becomes more likely under a regime of free contracting. The employee voluntarily “ties his hands” in order to receive other benefits he deems more valuable than a low cost exit option. If he preferred the ability to swiftly switch to a rival employer, he could take lower wages in return for this perk.

Check out chapter twenty-four of Alchian and Allen’s recently published Universal Economics. A&A describe and defend one of the most (in)famous examples of a non-compete: the baseball reserve clause. In their own words:

How could the reserve clause be defended in baseball? The defense rests on the necessity of expensive training and testing of athletes during their early careers. A team owner makes exploratory, developmental investments in many rookies, hoping that a few players will ultimately be worth the expense. The reserve clause restriction protects the team owner’s investments. Absent the initial investments by the team owners, the aspiring players would have had to bear more of their own investment costs during their early careers, possibly playing with no salary in the minor leagues or not trying at all.

The same sort of reasoning applies to the seemingly “lopsided” contracts signed by no-name actors and musical artists. But good luck explaining this reasoning to your average Hollywood leftist.

Incidentally, Harold Demsetz wondered if the “reserve clause” would have any allocational effects at all, given the Coase Theorem. However, to me, this seems like the classic high-transaction-costs-case that Coase cared most about.

Block on Non-Competes

Over at Econlib, Walter Block tackles the banning of non-competes.

After pointing out that non-competes yield compensating differentials, Block also makes the following insightful point:

Another supposed flaw is that these pacts limit mobility. Of course they do. But we do not want infinite mobility, wherein workers switch jobs every millisecond. Rather, if we want economic development, we need optimal mobility. It would appear we could locate closer to that ideal on the basis of freely agreed upon contractual arrangements rather than by precluding options.