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As weekly opinionated newsmagazines go, nothing holds a candle to The Economist. I rarely read everything I want to in an issue, but I always feel enriched by what I do read. I adore their well-written prose, and I often agree with their analysis, and even when I don’t it seems compelling. Were I stranded on a desert island with reliable mail service, it would be my link to the outside world. (At least until I remembered how to send snail mail.) So I was pleased to see an article on their website about Hollywood and piracy. This is an important story, and the article Businessweek posted a few months ago had little insight.

The Economist article was pretty good, given how early we are in the development of this saga. However, it had one analogy that was illustratively misguided. Consider the following comparison between movies and PC software:

In the 1980s, software companies used to fight online pirates with DRM technology. But they found that copy protection annoyed users, and got rid of it. The makers of Lotus 1-2-3, a spreadsheet program, abandoned it after finding that they had merely created a new market for software that could defeat copy protections. Now the music industry is realizing that often some of the downloaders it labels as thieves are actually trying out music before they buy it, and that controlled, legal file-sharing could be a marketing tool. Viral marketing of that kind, says John Rose, head of the anti-piracy effort at EMI, a music company, could be powerful. Hollywood should take note.

This comparison initially seems insightful and appealing. Both software and movies are information goods. The market for personal digital distribution of movies is in its infancy, just as software was in the 80s. Maybe the movie studios need to learn from the software companies and drop DRM, which will both make them more money and stop annoying consumers. However, a closer examination of the contexts of these examples shows it to be misleading.

First of all, one must understand why software vendors eliminated copy protection. Sure, the fact that it annoyed users and was circumventable was probably part of that decision. But there was a bigger story. First of all, you need to realize that the market for productivity software is one that includes significant network externalities. This means that even if I don’t pay for it, Microsoft benefits from my using their word processor, because I become trained in it and I help make its file format standard. Furthermore, people rarely have reason or desire to use more than one word processor (particularly in the 80s, where learning to use WordPerfect was about as easy as learning to fly a prop airplane). This is what led to the mantra that ‘it is better to have a user pirate my software than buy my competitors’.

But there was yet another reason that software vendors were willing to let users freely pirate software: those users were likely to eventually buy it. Being a legal owner of software entitles users to support and upgrades, which many business users want. And the software industry eventually developed a system of software audits that would allow business users to steal software, but forced them to pay for it later.

By comparison, it is unlikely that my owning a music company’s CD will either make someone else more likely to buy that CD or that it will keep me from owning one of their competitors’. (There might be a slight network effect if someone hears a CD in my house and then buys it, but given that the most sold music is by artists that are otherwise widely promoted, this seems minimal.) And as nice as the packaging of CDs and DVDs are, realistically once I possess them there is little value that can be delivered by the media companies. The Economist contends that non-DRM media can be a useful promotional tool. This might be true, but only if some other product that the consumer pays for is protected. This is a case for selective copy protection, not none at all.

Perhaps the consumer software market would be a better analogy, because music and movies are ultimately a consumer product. In my mind, there are two key categories of consumer software: games and operating systems. Games function similarly to music (this may be why every mall record store now seems to stock more video games than CDs), and game producers have been embracing a variety of DRM measures for years. One of the primary benefits that console makers provide to their publishers is the console’s built-in DRM. And Microsoft has embraced the much-maligned Windows Product Activation, which does a pretty good job of keeping most people from pirating their operating systems. Maybe they would stop this if there was a risk of someone installing a competitor’s product, but we won’t know that any time soon.

After learning a little more about it last year and applying that knowledge over the summer, I decided I wanted to take a class in game theory this fall. The class I found was a graduate-level economics class, which seemed like it would be a nice change of pace from business classes. I realized that the pace would be a little quicker and the professor wouldn’t be conditioned to be as nice, but that seemed like fun.

It turns out that I was in for quite a surprise on the first day of class, when the professor informed us that his travel schedule would only allow him to teach during five weeks of the semester, so we would have to increase our meeting time from two-and-a-half hours to nine during those weeks. (This is accomplished by adding three-hour evening sessions twice a week.) As excited as I was for the class, this seemed unworkable in my schedule so I was ready to give it up. However, I tried the first three-hour class and it convinced me to make the time. The professor was superb; we covered most of the game theory I knew and quite a bit more on the first day. We got to use a fixed-point theorem, which I haven’t done in eight years or so. Even though I had already been to four hours of class when it started, I was energized and transfixed for almost the entire lecture (which was only interrupted when the class pizzas were delivered).

The professor told us to read the first several chapters of Myerson’s Game Theory, which I am working through now. In the middle of class, our professor made a comment to the effect of “make sure to read the section on common knowledge, which is important and I cannot explain any better than the author does”. It is indeed a fine section, and features a great fable that is worth thinking through. So I am going to shamelessly rip it off (my apologies for the sexist overtones):

This story concerns a village of 100 married couples, who were all perfect logicians but had somewhat peculiar social customs. Every evening the men of the village would have a meeting, in a great circle around a a campfire, and each would talk about his wife. If when the meeting began a man had any reason to hope that his wife had always been faithful to him, then he would praise her virtue to all the assembled men. On the other hand, if at any time before the current meeting he had ever gotten proof that his wife had been unfaithful, then he would moan and wail and invoke the terrible curse of the (male) gods on her. Furthermore, if a wife was ever unfaithful, then she and her lover would immediately inform all the other men in the village except her husband. All of these traditions were common knowledge among the people of this village.

In fact, every wife had been unfaithful to her husband. Thus every husband knew of every infidelity except for that of his own wife, whom he praised every evening.

This situation endured for many years, until a traveling holy man visited the village. After sitting through a session around the campfire and hearing every man praise his wife, the holy man stood up in the center of the circle of the husbands and said in a loud voice “A wife in this village has been unfaithful.” For ninety-nine evenings thereafter, the husbands continued to meet and praise their wives, but on the hundredth evening they all moaned and wailed and invoked the terrible curse.

To understand what happened in this fable, notice first that, if there had been only one unfaithful wife, her husband would have moaned and wailed on the first evening after the holy man’s visit, because (knowing of no other infidelities and knowing that he would have known of them if they existed) he would have known immediately that the unfaithful wife was his. Furthermore, one can show by induction that, for any integer k between 1 and 100, if there were exactly k unfaithful wives, then all husbands would praise their wives for k-1 evenings after the holy man’s visit and then, on the kth evening, the k husbands of unfaithful wives would moan and wail. Thus, on the hundredth evening, after 99 more evenings of praise, every husband knew that there must be 100 unfaithful wives, including his own.

Now let us ask, What did this holy man tell the husbands that they did not already know? Every husband already knew of 99 unfaithful wives, sot hat was not news to anyone. But the holy man’s statement also made it common knowledge among the men that there was an unfaithful wife, since it was common knowledge that he announced this to all the men…Thus the lesson to be drawn from this fable is that the consequences that follow if a a fact is common knowledge can be very different from the consequences that would follow if (for example) it were merely known that everyone knew that everyone knew it.

Even if it takes up all my time, who can pass that up.

(I should note that most of the book is written in set theory rather than anecdotes. It is a fabulous introduction to game theory, but for the most part a technical one.)

Last weekÂ’s blackout seems to have inspired more serious discussion of how America should structure its energy industry than the entire California electrical crisis did. I am not too sure why that is, and much of the discussions application to the events at hand was certainly premature, but I am still grateful for it. There seem to be too central questions in this discussion: should electrical grids be managed at the federal or state levels, and should they be organized into regulated monopolies or competitive markets.
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This fall looks like it will be chock-full of good movies, so I went on a trailer-watching binge.;

Millennium Actress is suppose to be cool and anime. No trailer, but I’ll probably check it out on word of mouth. It opens on September 12, which means I can probably see it in Chapel Hill before the end of September.

A week later Anything Else is released. This is a new Woody Allen movie. There was a time when the opening of a new movie by Woody was the highlight of every winter for me. But in recent years his movies have been increasingly disappointing (and have been released in the summer). What disappoints me isn’t even so much that the movies are not that good, it’s that he doesn’t seem to be putting much effort into them. The Allen cannon is full of ambitious disappointments, but in movies like Hollywood Ending he doesn’t even seem to be trying. They still come out every year, always have great casts, and you get that magical moment when the credits come up in his trademark Windsor font over some great classic jazz. So I’ll keep going for another few years. But I have high hopes for this one. It has Christina Ricci, of whom I have always been fond. And although Woody himself is excised from the trailer (and in fact barely mentioned), it looks to be a touching and fun movie.

Actually, September 19 is a pretty cool release date. On top of Anything Else, we get a movie called Demonlover, about which all I know is that it is scored by Sonic Youth. And Lost in Translation, which is Sofia Coppola’s new movie. I saw a trailer the other day which looked pretty good, and I have a lot of faith in Coppola after The Virgin Suicides.

The next big day is October 10, on which two major films come out. The first is a new movie by the Coen Brothers, who may have inherited Woody’s place as makers of unpredictable and creative films. They’ve never been quite as prolific and their films aren’t as personal, but each one is still a gem. Its trailer makes Intolerable Cruelty look like it is a lot of fun and filled with great performances. It makes the story look a little trite, but I attribute this to bad trailer-making. If you recall, the trailer for The Big Lebowski looked so much like a lame Fargo knockoff that I almost skipped the film. (They substitute a better trailer on the DVD than the one that was shown widely at the time.)

But even if the Coens don’t have Woody’s one movie a year pace, they have still made six movies in the past ten years, and are in the middle of filming another. By contrast, in that period of time Quentin Tarantino has made two. One of them is obviously the classic Pulp Fiction. The first ‘Volume’ of his new martial arts movie Kill Bill also comes out on October 10. The trailer doesn’t make it look like a movie that is going to win many awards, but it certainly looks like fun.

After that we get into November and December, and start to see the return of the Matrix and Lord of the Rings movies we knew were out there. But there is one more film I hope doesn’t get lost in the shuffle. It is directed by Terry Zwigoff, the man behind the fabulous movies Ghost World and Crumb. And it is called Bad Santa. Apparently it stars Billy Bob Thornton as a conman dressed as Santa Claus. No sign of a trailer, but I have high hopes.

That makes six promising movies over the course of two months. Hopefully I can go to school and find a job in the midst of it all.

I’m feeling the need to rant about two things: the recall and pension reform. I’ll start with the one that is slightly less boring.

I’ve never liked Gray Davis. I didn’t like the way he took the California electrical crisis, which was in large part created by Davis and the California legislature and turned it into the fault of the utility companies who were trying to play by California’s bizarre rules. I did not like the fact that he tried to get federal regulatory agencies to cancel that he signed in good faith. Although I admired his shrewdness in raising money early so he can use it to knock his competition out of a primary and win reelection against a political novice, it made American democracy worse and I do not like him for it. Although he is in good company in turning in a state budget that sidesteps the state’s fiscal issues by raiding every one-time source of revenue available, that doesn’t make it the right thing to do. Now, I realize that being a governor is a difficult job, and there were a lot of interests beyond Davis’s involved in each of these, and I have never followed California politics closely. But I have never found a reason to like Davis.

That being said, if I were a Californian there is no way I would vote to recall him. The precedent of eliminating politicians for being unpopular will only is atrocious, it will only encourage them to spend more time tending their images. I can accept impeachment proceeding for egregious infractions, but public recalls do not server the democratic process.

It goes without saying that the structure of the recall is bizarre. 250 candidates each searching for a plurality (which could be less than 1% of the vote). There is no point in trying to build consensus, because no one needs that many voters. All you have to do is find a constituency and get them to show up. It magnifies all of the normal polarizing effects of mid-term elections.

And then there’s Arnold, whom a number of people are comparing to his Predator co-star Jesse Ventura. As close as I can tell, the similarity stops at their being centrist outsider entertainers-turned-politicians. Jesse made his mark in his election and stood out from the major-party candidates by talking candidly and directly problems facing the state and how he wanted to address them. It made him a marked contrast to his platitude-spewing opponents. Not only is Arnold affiliated with a major party, but he is playing the part of a hand-shaking, baby-kissing, issue-evading politician. Not that one expects him to have a complete platform in 60-day election cycle, but he could still talk about something. He plays a more convincing politician than he does a robot (like of Al Gore in reverse).