Book Review: Harry Potter and the Methods of Rationality

Harry Potter and the Methods of Rationality is a Harry Potter fanfic written by Eliezer Yudkowsky (which you can find here). Yudkowsky is the creator of LessWrong which I often use as a shorthand for the entire Rationality space. I wasn’t around at the time, but I eventually found Scott Alexander’s work at Slate Star Codex, who is linked in the sidebar and is one of the inspirations for this blog. Through SSC, I found writings by Yudkowsky, mostly about artificial intelligence. Last year I tried to read the essays known as “The Sequences” or Rationality: A-Z at LessWrong. I read the first couple of books, but they’re pretty dense and my interest dropped off.

HPMOR, unlike The Sequences, is fiction, and I found it incredibly easy to read. I assume the project began as a way to teach rationality through a common pop culture phenomenon, and it’s pretty solid at doing that. Concepts like Bayesian updating and evolutionary biology are well explained, but are done so partially as a critique of the Harry Potter universe.

The general premise is that Harry Potter’s Aunt Petunia marries an Oxford professor instead of Vernon Dursley. Thus, Harry is raised with extensive training on the scientific method by his adoptive parents, as well as the latest understanding of probability, physics, biology, chemistry, etc. He comes to Hogwarts armed with the scientific method and sets about trying to understand how magic works.

The Harry Potter universe is an excellent substrate in which to do this, because its world is so creative, popular, and complete. But J.K. Rowling’s world also has glaring problems which can be explored in ways that teach social and physical science, and even philosophy. The wizarding government apparently sends people to Azkaban where they are not only kept separate from other people (as we do in our world with regular prisons), but they are also psychologically tortured in the most horrifying way, with their good memories drained by beings of pure evil. They also apparently have no trials, as Hagrid is sent to be tortured in the second book with no oversight. Additionally, wizards have magical healing capabilities and can magically create copies of food, yet muggles in the non-wizarding world die of malaria, tuberculosis, and starvation all the time, and this is never mentioned in the original source material.

A lot of science fiction has similar problems; in The Matrix, the machines get energy from human beings’ thermal energy, but instead of just putting people in comas, they create a massively complex neural interactive computer simulation. This creates both the ranks from which their enemies recruit and uses tons of additional energy. To be sure, science fiction isn’t necessarily made worse because of these internally inconsistencies, but good science fiction should explore these ideas instead of paper over them with hand-waving.

The writing of HPMOR is delightful. A fanfic that explores Bayesian probability in the Harry Potter universe shouldn’t be this well written, but it really is. It’s creative, funny, intense, emotional, and continually pushed me to want more. The actual size of the six books in the series is gargantuan, somewhere over half a million words, or something like the first four actual Harry Potter books combined. If you read just the first “book”, I think you’ll get a general idea and know if you find it interesting yourself. I couldn’t put it down. It makes me wonder in particular about Eliezer Yudkowsky; I had previously thought of him as an AI alignment research person, so it would appear he is somewhat of a polymath who can both write incredibly amazing and addictive fan fiction and be a leading advocate/researcher for AI alignment.

The exploration of magic is the inspiration for the story, but that’s not where it stops. The plot itself is highly compelling and different enough from the actual book(s) that I wasn’t sure exactly where it was going. It also does a nice job of rebuilding the Harry Potter world in a somewhat internally consistent way after all the criticisms. Yudkowsky comes up with a lot of original ideas here that fit into the pre-existing universe really well. There are also a lot of influences from Ender’s Game, which makes a lot of sense given that is also a story of a young child genius using logic and game theory to make it through a school.

This story also makes me think about intellectual property and copyright lengths again. HPMOR is perhaps the best example I’ve ever seen of someone creating an incredible story in a world that they didn’t have IP rights to, and it makes me wonder how many more stories like this could exist if copyright lengths were shorter. Harry Potter was such a huge phenomenon that it really required the modern world to have that huge impact, like Star Wars or Marvel movies. But were copyrights to only last 30 years, we might be able to see amazing works like HPMOR used to build careers on great franchises in the public domain while those cool franchises were still relevant!

In short, I strongly recommend this fan fiction under the condition that you enjoy Harry Potter. Otherwise, a lot of setting and characters may not make sense and I’m sure all of the jokes will fall flat. Other than that, if you’re already reading this blog, you have some vague enjoyment of rationality, empiricism, systematized thinking, etc and this story is educational, creative, and addictive.

Links 2019-03-07

First links post in a while because I have some housekeeping. After trying to have comments just on reddit, I’ve realized it makes way more sense to just have comments right below the articles again. I really don’t like the WordPress default comment system so I’ve opted instead for Disqus. These have been implemented for a while, but I wanted to bring your attention to them.

I’ve also finally updated the site to default to https. Kind of an embarrassment for a site promoting encryption to not have https defaulted, but this blog is a volunteer project done for personal interest (and personal expense!).

I’ve removed Greg Mankiw’s blog from the sidebar because I realized I wasn’t reading it much anymore and it doesn’t talk about too much interesting econ stuff very often. I also removed Jeffrey Tucker’s blog beautiful anarchy, because I don’t think he posts there anymore now that he’s running aier.org.

I’ve added gwern.net because this past year I’ve realized how much more I’ve been going to his site even though I’ve known about it for a long time. Gwern is a rationalist independent researcher. He doesn’t really write blogs so much as essays on a topic. I recommend his site wholeheartedly. Seriously, his site is the first link on this post for a reason. If you are overwhelmed by the amount of content, see if anything in his “Most Popular” or “Notable” categories jump out at you and start there. I personally found “Embryo Selection For Intelligence” to be quite engrossing.

Slate Star Codex has had some good posts about the importance of OpenAI’s GPT-2. First some background on GPT-2. Next, GPT-2 seems to have learned things haphazardly, in almost a human-like way, to attain its goals of creating good responses to prompts. It connects things in a stream of consciousness reminiscent of a child’s thoughts. As Scott says, simply pattern matching at a high level is literally what humans do.

Also on AI, I found an amazing 2018 AI Alignment Literature Review and Charity Comparison by LessWrong user Larks. It’s a very impressive in depth look at groups concerned about the AI alignment problem.

From Vox: “The case that AI threatens humanity, explained in 500 words”.

Noah Smith writes A Proposal for an Alternative Green New Deal. It makes vastly more sense than the vague, progressive wishlist discussed by current Democratic members of Congress. However, even Smith’s suggestions seem pretty poorly thought out to me; he endorses massive subsidies to green technology, on the order of $30 billion a year, without addressing how the state will know where to invest the money. As I recall, the government isn’t a great central planner. He also just kind of tosses in there universal health insurance, apparently paid for by the government, which sounds like Medicare for all. That seems to both massively politically complicate anything actually trying to fix climate change, and also destroy the entire federal budget, which I think is a national security problem.

Related, on a more nuanced note, John Cochrane discusses a letter signed by many economists endorsing a carbon tax, which seems much more precise and useful to people concerned about climate change. To make it politically palatable, they suggest making a carbon dividend paid to all taxpayers out of this tax. Noah Smith also endorsed this approach as just one piece of his Green New Deal. On brand, The Economist endorses carbon taxes as well.

Bitcoin Hivemind developer Paul Sztorc writes about Bitcoin’s future security budget. It’s a really good technical discussion of how Bitcoin can be funded in the future, and why we need sidechains to help pay for the cost of keeping Bitcoin secure.

Bruce Schneier writes about the need for Public Interest Cybersecurity, envisioning it as a parallel to public interest legal work. It’s an interesting take, and I’m not sure how I feel about it. On the one hand, he’s right that lawmakers know little about the technologies they are supposed to regulated, but that’s also true of literally every industry. Sure it would be great if we had more things like the EFF, but I’m have to ask 80,000 Hours if they thought people going into charity work should work for the EFF or AI Alignment research or other existential risk. I’m also not sure I agree that there aren’t enough incentives to invent new security protocols. Google is taking security very seriously on their own, but so are tons of Bitcoin and cryptocurrency developers who are constantly seeking ways to make their projects more secure and do more creative things with crypto.

The U.S. trade deficit hit a 10 year high. Here is the actual Bloomberg article. This is silly political bickering, so I won’t spend much time on it, but it reflects just how the president fails to grasp very simple economics. The trade deficit doesn’t mean anything by itself, it’s just a measure of the goods traded, and it’s not even very good at that (goods designed here but manufactured in another country see their whole value “subtracted” in the trade deficit despite American labor inputs). The drivers of the trade deficit are things like relative values of currencies and national savings rates, not the levels of tariffs. Meanwhile, Trump’s tax cuts have spurred U.S. growth while the rest of the world has been sluggish, leading to higher trade deficits because Americans are relatively more wealthy. This flurry of economic activity prompted the Fed to raise rates to stave off inflation, which also drives up the trade deficit, and so Trump has taken the horrible tact of trying to publicly attack the Fed to lower rates, which is terrible for any sort of responsible Fed policy. The whole thing is a ridiculous mess which could have been avoided if Trump had any semblance of economic knowledge.

The Fifth Column podcast is a highly entertaining libertarian politics podcast. Episode 132 is a little different as Michael Moynihan takes the opportunity to interview Mark Weisbrot, Co-Director of the Center for Economic and Policy Research, a left-wing think tank, on the Maduro government in Venezuela. I have a lot of thoughts on this interview, but my foremost is whether Weisbrot counts as an actual representative voice of the Left. I think one of the worst things social media does is to hold up the most controversial person on one side because they generate the most clicks and buzz and force both sides to jump in and flame each other. In an hour long interview, Weisbrot takes, as far as I can tell, no opportunity to criticize the Maduro regime, nor offers any way in which they could have improved their policies. He accepts and touts statistics that support his view, and dismisses, minimizes, or ignores stats that counter him–even if they are all from the same source! Even though he’s a big deal at a left-wing think tank, I have to point out that most left-leaning academics don’t need to be in think tanks because most university politics skew left. This might explain how someone with this level of willful ignoranceg could hold such a key position. I think the interview is worth listening to if you would like to see the extent of what humans can do to put up mental barriers to seeing their own logical inconsistencies and motivated reasoning. Nonetheless, I feel bad about linking to this interview as I think it unfairly represents actual socialists who would like to nationalize all industries and seize the means of production.

2019 Predictions

I’ve made predictions for the past several years, and here are my predictions for 2019, a bit late. I’ve noticed that when discussing politics or difficult subjects with other people with whom I have strong differences, a possible avenue of understanding is to make a prediction about the world with odds. Most people don’t accept these bets or predictions, which I think are one of the best ways to test different models of the world against each other. Nonetheless, I think it’s personally beneficial to list predictions and accompanying odds each year to see test my model of the world.

  1. Trump Approval Rating end of year <50% (Gallup): 95%
  2. Trump Approval Rating end of year <45% (Gallup): 90%
  3. Trump Approval Rating end of year < 40% (Gallup): 70%
  4. US will not get involved in any new major war with death toll of > 100 US soldiers: 60%
  5. No single terrorist attack in the USA will kill > 100 people: 95%
  6. The UK will not leave the EU this year: 80%
  7. North Korea will still be controlled by the Kim dynasty: 95%
  8. North Korea will not conduct a nuclear test this year: 60%
  9. North Korea will not conduct a missile test this year: 60%
  10. North Korea will not agree to give up nuclear weapons entirely, contingent on US troops staying in the Korean peninsula: 99%.
  11. North Korea will not agree to give up nuclear weapons as a result of any negotiations: 90%
  12. Yemeni civil war will still be happening: 70%
  13. S&P 500 2019 >10% growth (from 2506 on Jan 1): 60%
  14. S&P 500 will be between 2400 and 3100: 80% (80% confidence interval)
  15. Unemployment rate December 2019 < 6%: 80%
  16. Unemployment rate December 2019 < 5%: 70%
  17. WTI Crude Oil price up by 10% (from $45.41): 70%
  18. Price of Bitcoin in dollars up over the year (Coinbase – 3823 Jan 1): 70%
  19. Price of Bitcoin < $8,000 (does not double): 60%
  20. Price of Bitcoin > $1900 (does not lose half value): 70%
  21. Price of Bitcoin < $12,000 (does not triple): 70%
  22. Drivechain opcodes not soft-forked into Bitcoin: 80%
  23. No drivechains soft-forked into existence: 99%
  24. US government does not make Bitcoin ownership or exchange illegal: 95%
  25. Self-driving cars will not be available this year for general purchase: 95%
  26. Self-driving cars will not be available this year to purchase / legally operate for < $100k: 99%
  27. I will not be able to buy trips on self-driving cars from Uber/Lyft/Waymo in a location I am living: 95%
  28. I will not be able to order groceries on self-driving cars in a location I am living: 90%
  29. I will not be able to buy a trip on a self-driving car from Uber/Lyft/Waymo without a backup employee in the car anywhere in the US: 80%
  30. The artificial general intelligence alignment problem will not be seen as the most important problem facing humanity: 99%
  31. Humans will not be in lunar orbit in 2018: 99%
  32. SpaceX Falcon Heavy rocket will launch again this year: 90%
  33. SpaceX will bring humans to low earth orbit: 60%
  34. SpaceX will test the “Starship” mock up this year: 70%
  35. Mexican government does not pay for wall: 99% (lol)
  36. Border wall construction not complete by end of 2018: 99%
  37. National Debt increases by >$1 trillion (from
    $21,943,897,000,000): 90%
  38. There will not be a significant decrease in trade barriers between US and China from pre-2017 tariff levels: 90%
  39. Democratic RCP front runner will not be Bernie Sanders: 80%
  40. Democratic RCP front runner will not be Kamala Harris: 80%
  41. Democratic RCP front runner will not be Beto O’Rourke: 80%
  42. Trump not removed from office or resign: 95%
  43. Trump not impeached: 70%
  44. No CRISPR edited babies will be born: 80%
  45. No full year US government budget will be passed (only several months spending): 90%
  46. Some tariffs raised: 90%
  47. Trump administration does not file a lawsuit against any news organization for defamation: 90%

I’d like to comment on every prediction, but I’m afraid it would take too much time. The predictions I find most interesting are whether the UK will leave the EU. I’m going by what predictions markets say, but I’m not really sure it will play out with only a few weeks to go and no deal. I’m also quite interested in the Democratic Presidential primary race, but I’m afraid the nomination will be trending towards someone pretty left wing. I’m also interested in whether Trump will be removed from office. I put the chances of Trump being impeached at 30% to stay in line with prediction markets, but my gut is that I should put that chance even lower.

Grading 2018 Predictions

I make predictions at the beginning of every year, and at the end of the year, I grade them. Science and the gathering of knowledge requires making predictions to test your models and see how they work in the real world. Most pundits on TV make predictions without weights attached to them. I’ve placed levels of confidence for each prediction with the odds I would bet on those outcomes in the vein of Bryan Caplan. I’ve created a chart at the end to show my calibration versus perfect calibration.

Predictions for 2018:

World Events

  1. Trump Approval Rating end of year <50% (Gallup): 95%
  2. Trump Approval Rating end of year <45% (Gallup): 90%
  3. Trump Approval Rating end of year < 40% (Gallup): 80%
  4. US will not get involved in any new major war with death toll of > 100 US soldiers: 60%
  5. No single terrorist attack in the USA will kill > 100 people: 95%
  6. The UK will not fully leave the EU this year: 99%
  7. No country will leave the Euro (adopt another currency as their national currency): 80%
  8. North Korea will still be controlled by the Kim dynasty: 95%
  9. North Korea will conduct a nuclear test this year: 70%
  10. North Korea will conduct a missile test this year: 95%
  11. Yemeni civil war will still be happening: 70%
  12. S&P 500 2018 >10% growth: 60%
  13. S&P 500 will be between 2500 and 3200: 80% (80% confidence interval)
  14. Unemployment rate December 2018 < 6%: 80%
  15. Unemployment rate December 2018 < 5%: 60%
  16. WTI Crude Oil price up by 10%: 60%
  17. Price of Bitcoin > $10,000: 70%
  18. Price of Bitcoin < $30,000: 60%
  19. Price of Bitcoin < $100,000: 70%
  20. Lightning Network available (I can complete a transaction on LN): 80%
  21. Drivechain development “complete”: 70%
  22. Drivechain opcodes not soft-forked into Bitcoin: 70%
  23. No drivechains soft-forked into existence: 95%
  24. US government does not make Bitcoin ownership or exchange illegal: 90%
  25. Self-driving cars will not be available this year for general purchase: 95%
  26. Self-driving cars will not be available this year to purchase / legally operate for < $100k: 99%
  27. I will not be able to buy trips on self-driving cars from Uber/Lyft in a location I am living: 95%
  28. I will not be able to buy a trip on a self-driving car from Uber/Lyft without a backup employee in the car anywhere in the US: 90%
  29. Humans will not be in lunar orbit in 2018: 95%
  30. SpaceX Falcon Heavy rocket will attempt to launch this year (can fail on launch): 95%
  31. SpaceX will not bring humans to low earth orbit: 60%
  32. No SpaceX rockets explode without launching their payload to orbit: 60%
  33. Mexican government does not pay for wall: 99%
  34. Border wall construction not complete by end of 2018: 99%
  35. Some increased spending on immigration through expanding CBP, ICE, or the border fence: 80% (oh yeah)
  36. No full year US government budget will be passed (only several months spending): 90%
  37. US National Debt to increase by more than 2017 increase (~$500B): 70%
  38. Increase in spending or action on Drug War (e.g. raiding marijuana dispensaries, increased spending on DEA, etc): 70%
  39. Some tariffs raised: 90% (a lot on China)
  40. The US will not significantly change its relationship to NAFTA: 70%
  41. Federal government institutes some interference with state level legal marijuana: 70% (hard to say)
  42. Trump administration does not file a lawsuit against any news organization for defamation: 90%
  43. Mexican government does not pay for wall 99% (repeat)
  44. Trump not removed from office (also no Trump resignation): 95%
  45. Democrats do not win control of Senate: 60%
  46. Democrats win control of House: 60%

Postlibertarian

  1. postlibertarian.com to have 10 new posts by July 1, 2018: 80%
  2. postlibertarian.com to have 20 new posts this year: 80%
  3. Postlibertarian to have more hits than last year: 70%
  • Of items I marked as 60% confident, 7 were correct out of 9.
  • Of items I marked as 70% confident, 7 were correct out of 11.
  • Of items I marked as 80% confident, 7 were correct out of 8.
  • Of items I marked as 90% confident, 6 were correct out of 6.
  • Of items I marked as 95% confident, 9 were correct out of 10.
  • Of items I marked as 99% confident, 4 were correct out of 4.

It appears I was pretty underconfident on my 60% predictions. Interestingly, that’s also where I did worst last year. There were only 9 total predictions at 60% confidence, so the ideal would have been to have 5 of those correct. Of those, I likely should have been more confident on SpaceX missing its then current estimate of launching a crewed mission by the end of 2018. Indeed, I’m not sure what I’d predict their chances are of launching a crewed flight in 2019, as I couldn’t imagine it being higher than 70% right now, but we’ll see. My bitcoin price predictions were again somewhat laughable as they were last year.

I suspect I have a systemic calibration issue with 60% confidence level predictions. Over the past two years I’ve been 17/22 or 77.3%. which is distinctly higher than my 70% confidence predictions. Still, that’s not a huge sample size, but I’m not sure exactly how I can be relatively correct or even slightly overconfident in my 70% predictions, but be *more often correct* about my 60% predictions which I don’t claim to know as much about.

I hope to post my 2019 predictions soon, but unfortunately my day job has had to take priority early this year. If you’d like to combat the opportunity cost of me working on this blog instead of real paying work, feel free to send me some Bitcoin at the address in the sidebar (
13bhBWyRDAePCNEejZoxCqeFvdXyiFQfYc ), or if Bitcoin is too annoying, just share your favorite of my blog posts from last year with your friends on or off the internet. Thanks!

Public Domain Days Should Be Better

For the first time in 21 years, on January 1st works entered the public domain as their copyrights expired. This is both a major victory and a crushing defeat for IP freedom, depending on your expectations. Copyright terms have been continually expanded for decades, and so many people expected 2018 to see a battle as Congress tried to extend copyright terms yet again.

This failed to materialize. Timothy B. Lee at Ars Technica says that the mere threat of internet activism made this a battle the entertainment industry could not win:

“There’s now a well-organized, grassroots lobby against copyright expansion,” Grimmelmann tells Ars. “There are large business interests now on the anti-expansion side. Also a wide popular movement that they can tie it into.”

The rise of the Internet and its remix culture means that a lot of people now benefit from a growing public domain in ways that weren’t true in 1998. That includes big companies like Google, but it also includes grassroots communities like Wikipedia editors and Reddit users. This emerging copyright reform coalition flexed its lobbying muscles in 2012 when it overwhelmingly defeated an Internet filtering bill called the Stop Online Piracy Act.

So that’s pretty awesome. However, we should note that the current copyright length of 95 years is still a horrific travesty. I’ve written about this before, so I will quickly summarize some points and add a couple additional ones. First, copyright is not like other forms of property; it’s an agreement between artists and the state to provide monopoly control over a work of art for a specific period of time in order to provide an incentive for creative works. The law should find an optimum between allowing people to build upon works creatively and rewarding artists for their creations, but because the benefits of copyrights and concentrated and the costs of long copyright terms are diffuse and hidden, we now have very long copyright lengths.

It’s excellent that we won’t be getting longer copyright terms this year, but they should be much shorter. The fact remains that works that will expire between now and 2038 should never have had their copyrights extended. In fact, there is no argument that currently copyrighted works should ever be extended! They are already invented, meaning the copyright law has done its job. Copyright extensions should only work prospectively, encouraging new works that wouldn’t be created otherwise. Does current copyright length optimize for both creating works and allowing new works to build off of old ones? It’s unlikely.

One reason the copyright trade-off seems far too protective is that artists are simply not planning 95 years in the future. I don’t have hard evidence on this, but that may be because psychologists have never bothered to check whether humans plan 100 years in the future because it’s such a ridiculous proposition that no one would take their experiment seriously. There are for example, plenty of articles wondering why humans don’t do things that would obviously benefit them, like evacuating from a flood zone when a hurricane is coming. Moreover, even if you “took humans out of the equation” and had a systematic, long term time horizon corporation investing in creative works with a discount rate of 5%, cutting the length of copyright from 95 years to 50 years keeps over 92% of the net present value. In other words, even if you had a long term planning vehicle that avoided human psychological pitfalls, the vast majority of works would still be created today.

Finally, because the length of copyrights is so long, we are creating orphaned works (see the Center for the Public Domain). It would be nice in theory that artists’ estates are collecting royalties for 95 years. But in reality, only artists who were quite successful during their lifetime could afford to set up an estate who could license out their works. Many works are just so old that we have no idea who owns the copyright, and it’s literally impossible to license them if we wanted to. This problem will only get worse as more and more copyrighted works come from after 1976 when all creative works automatically received a copyright without any registration. One result of this policy is that some works will be lost forever; the physical media upon which the works were originally recorded like paper and film are literally disintegrating. People today have no incentive to digitize works as copyright claims could appear making their work unprofitable. Our current policy helps a few highly successful copyright holders while making it too expensive to bother preserving or remaking the work of all others, not to mention the hidden cost of lost derivative works.

So absolutely, let’s celebrate that we finally have a Public Domain Day for the first time in 20 years, but let’s not overlook the problems that still exist.

Martian Constitution Brainstorming

This post started out as an attempt to draft an actual constitution for a Martian colony. It quickly became apparent that such a project was pretty difficult and relied on too many variables. Consequently, it’s apparent that before writing a constitution, we have to discuss all the decisions and challenges surrounding what sort of constitution should exist in the first place. Elon Musk talked a while back about possible governing mechanisms and it seemed to me that he had evidently not thought about it very hard.

Any discussion of Martian law isn’t complete without starting with the similar governing international treaties we have right now.  This Cato Institute piece by Edward Hudgins from 20 years ago is actually a good place to look. I’ll be summarizing his discussion here.

The Antarctic Treaty was signed by most large countries in the world and leaves Antarctica for scientific research and ecological preservation. Economic activity is essentially banned. Hudgins states: “This clearly is not the model for Mars.” Next is the UN Convention on Law of the Sea, which the US has never signed, although it largely agrees with the treaty as codification of maritime law. Hudgins opposes it citing provisions that could be used to “tax” economic activity in the open ocean and redistributed to inland countries. Practically speaking, I couldn’t find any evidence of such a thing happening, but I’m not familiar with fishing in international waters, and I’m sure someone else who knew more could properly complain about it, as one can about all human governance systems. I would state that this treaty doesn’t seem like a good model for Martian colonies either.

Hudgins next discusses the INTELSAT agreement, but that was privatized into the Intelsat corporation in 2001. Apparently it was an attempt to have an intergovernmental organization that provided communications between countries. I don’t have enough information to see whether it was better or worse one way or the other, but I find it telling that it was privatized and has remained so.

I should note that I’m not the only one that has been thinking about governance on Mars. There was a short-lived (as far as I can tell) conference called the International Extraterrestrial Liberty Conference, mentioned in this BBC article. Scientists and philosophers brainstormed about potential constitutions on Mars as well as legal and economic problems we might see. The astrobiologist mentioned in the article, Charles Cockell, actually has two books published, alluded to in the 2014 BBC article: Dissent, Revolution and Liberty Beyond Earth, and its follow up Human Governance Beyond Earth. Both are over $100 and I run this blog as a fun hobby, so I will not be buying them. Maybe Dr. Cockell has figured out all the problems with human space exploration himself, but I doubt it.

Next, take a look at James P. Howard’s presentation on the topic. Howard has an interesting background of computational statistics and public policy,  but I don’t believe Martian law is his main subject matter (he also publicly admits to supporting the Ex-Im Bank??). Nonetheless, his was one of the easier discussions of Martian law I could find. He discusses the history of law in areas of colonization and establishing of states. We can expect that Mars, like past colonization in the New World, will have some sort of government pretty quickly, and it will have some democratic components. Howard also points out that we are unlikely to see a “global” Martian government, especially right away. Colonies will be small, sent by nation-states or companies, and they will be separate. Local self-government will be the most important form, as governance from Earth seems too remote.

A major takeaway from looking into this was that there is little research available in this area, yet plans are being made to go to Mars in a very short period of time. There should be work done on the relevant questions prior to going, but many remain unanswered.  Meanwhile Elon Musk is tweeting that his Martian colony will be run by direct democracy, but what about its relationship with SpaceX, the U.S. company? Will it be subsidized? Will it receive free shipments of goods? If it doesn’t, is anyone able to be sued? What about its relationship to the United States? Will there be courts? Will there be a police force? How many people will be transported there before some of these governmental structures are in place? Some institutional structures should be predetermined, but which ones? What will be done on the fly by colonists who are also trying not die from all the lack of air, water, food, and radiation shielding on Mars?

There needs to be a comprehensive research project at SpaceX looking into what sort of legal system will exist on the Martian surface, and what can be planned out. All of these questions are also intertwined. If the colony is reliant on Earth corporations for shipments of goods, then the company has de facto veto power on any legal changes the colonists propose. Protections of colonist rights ought to be written down prior to any life or death crisis arising. Colonists will be presumably given all sorts of training in terms of physics, chemistry, rocketry, healthcare, etc. In a group any larger than a dozen or so, there will soon be the need for law, and I don’t think current efforts have begun to tackle it.

I wanted to go into a deep discussion of the minutiae of different governing and voting systems in order to tinker and figure out which system is the “best”. It’s quite possible that eventually the Martian surface will house many different colonies that can experiment in governance, but right now the concern isn’t that a Martian local government won’t have planned for an efficient voting system, but rather that there won’t be any good planning for governance at all.

Bitcoin and Energy: Everything is Actually OK

I found many arguments that Bitcoin wastes energy to be lacking, so I decided to write up this post. However, it’s gotten pretty technical, so be warned.

TL;DR:

  • Bitcoin is an economic activity like any other, and thus it has associated input costs that are paid for by its users. Its costs just happen to be very clear and singular (electricity)
  • I go over several technical ways we could change the Bitcoin protocol to achieve Pareto improvements and why I don’t think they would work, or work only marginally.
  • I discuss how Bitcoin counterintuitively may help renewable energy rather than just rack up carbon emissions.

Economically Efficient

I’m defining “wasteful” as economically inefficient.

First, why I think referring to Bitcoin’s energy consumption in terms of economic efficiency makes sense.

Bitcoin mining is economic activity. It provides the service of securing and running the Bitcoin network. Like all economic services, there are costs associated with providing it. Reddit is a website that provides the service of an online forum and discussion, and it has associated costs. Some people don’t use Reddit or find that Reddit is a time sink, they might say that Reddit is “wasteful”, after all, they don’t use it, and they could think of better things to do with the resources. In another example, some people might be uninterested in baseball and thus believe that the New York Yankees are a waste of resources. They use space for their stadium, training facilities, and offices, they use energy to run those facilities, and they use advertising space to promote their organization where more useful things could be advertised, like charity. I think this usage of “wasteful” is fine for both Bitcoin and the New York Yankees, but this seems to be more an argument about preferences or about Bitcoin being a bad thing that exists in the world regardless of its resource use.  There’s nothing really economically inefficient with Reddit’s existence or the existence of the Yankees; people want the services those organizations provide, they provide them, and they fund it through ads on a website or ticket sales to baseball games.

Bitcoin mining provides something that literally didn’t exist before 2009; the ability to send digital value across the internet with no third parties, or at least no specific third parties. This is technically impressive and apparently highly valuable. To do this, the Bitcoin network had to solve all the problems normally solved by the banking and payment system, including how to prove authentication when sending money, how to check you actually have the money you are sending, how to avoid double spending, how to achieve consensus on the current state of the network and transactions, and how to survive malicious attacks on the network, all without state support, or in fact any third party of any kind. This is remarkable, and to provide this difficult service securely, the network relies on Proof-of-work by miners. Just like the New York Yankees, Bitcoin’s services aren’t used by everyone, yet they still have costs associated with with providing their services, used by many around the world. This work done by miners isn’t wasted any more than the Yankees’ investment in staff, facilities, or their brand.

So how do Bitcoin “consumers” pay for their service? Each transaction has a fee associated with it, which is given as a reward to miners for including the transaction into the next “block” or batch of transactions. Additionally, the protocol slowly adds new Bitcoin into the system by including a block reward for the miner who finds that block. Thus each block has a reward for the miner, which is what Bitcoin users are “paying” to miners to keep the network safe.

In fact, this is where articles that discuss how much energy Bitcoin is using come from: they are taking the current market value of the block reward (12.5 Bitcoin @ $5000/Bitcoin today) and multiplying that out for a year. One block every 10 minutes and 525,960 minutes in a year means 52,596 blocks worth a total block reward of $3.3 billion a year and probably more with transaction fees. Bitcoin mining is competitive; you only get the block reward if you solve the hashing problem first. Consequently, margins are tight. That means there are big incentives to only use the most efficient hardware (efficient in terms of hashes/kilowatt hour) and the cheapest electricity. Depending on your estimate of what miners are paying for electricity, you can divide 8 cents a kilowatt hour or whatever into the ~$3.5 billion to get a these massive energy estimates. Of course, we should note we don’t really know what percent of earnings goes into R&D for ASIC design and manufacturing costs, rent, etc.

But in my view, it doesn’t really matter; all of these costs are paid for by Bitcoin users in order to use the network. The energy input into the Bitcoin network is determined by the block reward and price of Bitcoin; if Bitcoin and Bitcoin transactions are in demand, the block reward is higher, and miners spend more resources on energy and chip manufacturing. If the demand is lower, they spend less. It’s analogous to people who pay to go to Yankees games; if the demand is higher and fans are willing to pay more for tickets, the Yankees can spend that on advertising, improving the stadium, or getting better players, etc.

Technical Improvement Proposals

Next, technical counterarguments would demonstrate that this ability to send value across the internet with no third party can be done for cheaper than is currently available with Bitcoin. I will now go over the best arguments I know of.

No Block Reward

Currently, miners complete work through hashing to solve a difficult problem. The problem can only be completed with brute force, meaning you just need to run as many hashes as possible to solve the problem. The way this is done today is with specialized hardware and electricity as noted above. However, it is a protocol design that Bitcoins are added to the network with each block that is mined (and this is a pretty useful idea for bootstrapping a digital currency when none existed). We can quickly imagine a cryptocurrency that is identical to Bitcoin except no new coins are added, the ~17 million that currently exist are the grand total. Each block only gets transaction fees rewarded to the miners.

It seems in this case that we have recreated all the value of the Bitcoin network for users, but have reduced the input of electricity on the cost side. Ignoring the usefulness of the block reward for bootstrapping Bitcoin, isn’t this an efficiency gain?

It depends on how liquid and efficient the Bitcoin/dollar exchange market is. If Bitcoin was unexpectedly changed so that no more coins were created, the market cap of Bitcoin (total units of account * exchange rate per unit) would soar, by the net present value of all future coins that are no longer going to be produced. It’s hard to say exactly what that is, but it’s about 3.6 million coins, with the majority produced in the next 10 years. The value would be at least a few billion dollars, maybe as high as $10 billion depending on the discount rate. The current market cap is about $87 billion so that’s not a huge percent increase in price, but it’d be notable. That means if transaction fees in Bitcoin remained constant, in dollars they’d increase by a similar amount forever, unlike the fixed block reward which decreases over time.

In an efficient market, we’d expect this increase in transaction costs due to the higher market price of Bitcoin to exactly offset the reduction in block reward. In other words, current Bitcoin holders are “paying” for the block reward though a reduction in net present value of Bitcoins they hold today. Simply removing the block reward doesn’t change that, it just moves value around.

However, markets may not be that efficient. Dollar/Bitcoin exchanges seem relatively liquid, but they are certainly less liquid than traditional stocks. Additionally, I’m not sure you can borrow money from an exchange to invest in Bitcoin, which is also a sign of an underdeveloped market. So we can imagine a hypothetical world where the Bitcoin protocol originally had much smaller block rewards or had reduced its block reward more quickly. In this world, it’s possible we could achieve a net decrease in total energy expended even with a likely higher price. However, I’m not sure we could know which direction the market inefficiencies would go; perhaps the price of Bitcoin would “stick” higher, meaning higher priced transactions outweigh the reduced block reward.

A final point to be made for this counterargument; transaction costs don’t have to remain constant in Bitcoin terms in this hypothetical. If Bitcoin prices go up, transaction costs might remain the same in constant dollars since users will probably continue to demand transaction space on the blockchain at the same level as before. We do however, have empirical evidence that transaction fees in dollars have correlated with the dollar/Bitcoin exchange rate, and even perhaps in pure Bitcoin terms.

If this argument is true (and so far I don’t believe it is), it should also be noted that it would imply Bitcoin will get more efficient over time as it moves towards smaller block rewards.

Inefficiencies Due to Fixed Bitcoin Protocol Constants (Block Size)

In a theoretical free and efficient market, consumers demand goods with downsloping demand curves, producers supply the good with upward sloping supply curves. Where the curves meet, there is a market clearing price and quantity. In Bitcoin, consumers demand transactions (or transaction space) on the blockchain, but producers don’t produce blockchain space; they produce hashrate, or perhaps “security”. The transaction space is fixed by protocol.

This means that total transaction fees could theoretically be lower if the fixed transaction space (i.e. block size) was changed. This would be determined by the slope of the demand curve for Bitcoin transactions. A shallower slope would mean shifting the supply curve to the right will increase the value of total transaction fees, even if each individual fee drops. A steeper one would mean total transaction fees could drop. It’s been pretty common for Bitcoin blocks to be less than the maximum for the past year, so I’m skeptical that a larger block size would lead to a drop in total transaction fees, and I suspect even if it there was a drop, I don’t think it would be massive in magnitude. Nonetheless, I think this is an argument that Bitcoin could achieve the same ends and be slightly less wasteful, but it needs more empirical evidence.

Proof-of-Stake

This section is a reiteration of Paul Sztorc’s “Nothing is Cheaper Than Proof of Work”.

Suppose instead of hashing and Proof of Work, new transaction fees went to current holders of Bitcoin. This “Proof-of-Stake” would demonstrate commitment to the blockchain’s success not through investment of mining hardware but rather direct demonstration of stake in the blockchain through ownership of the currency.

Firstly, I still have some doubts that this allocation of new currency can actually be done without any actual work. Casper (Ethereum’s proposed Proof of Stake system) requires some calculation as to which random number to pick, which determines which staked coins get the transaction fees. It would be highly valuable to affect that calculation, and it seems optimistic to suggest there will be no way to influence it. But Ethereum isn’t my specialty, so I’ll concede it’s actually possible despite it not existing today.

In Bitcoin, miners spend the equivalent of the block reward and transaction fees every 10 minutes in order to compete and be in the best position to obtain that reward. In Proof-of-Stake, Validators still have to deposit coins to be staked. They risk these coins, because if they misbehave and disagree with other Validators, they can lose them. The amount deposited determines likelihood of receiving the transaction fees, and so these are just a form of “bonds”. Returns to bonds are analogous to returns to mining resources. Value locked up in bonds could have been used in other more productive parts of the economy. The opportunity cost isn’t as externally obvious as the electricity used in Bitcoin mining, but it is nonetheless there and it is identical. Locking up value in validation bonds isn’t a permanent thing, whereas investing time, money, ASICs, R&D, and electricity in Bitcoin mining cements that value into silicon and heat which can only be used for one thing. Thus the returns to mining are going to be higher on a per percentage basis to account for the increased risk.

We already pointed out that the cost of Bitcoin mining is a consequence of the block reward. The block reward if Bitcoin switched to a Proof-of-Stake system would still be the same. But because buying validation bonds isn’t as risky as tying up resources permanently into silicon and electricity, there will be significantly more resources tied up in Proof-of-Stake for any given level of block reward/transaction fees (because the market will keep putting more until the rate of return reaches the market rate for the given risk level). There is thus no free lunch with Proof-of-Stake; users of Bitcoin are auctioning off a block reward/block transaction fees worth of value every 10 minutes, and so a competitive market will form to always provide that value at that opportunity cost, whether that cost is through validation bonds or mining.

My view here is agnostic on whether PoS is a “better” system than PoW, just that PoS doesn’t eliminate the mining cost from the system.

“Useful Work”

What if you used Bitcoin mining to do “useful work”? One counterpoint is that mining is already useful work, since Bitcoin users are paying billions of dollars for it a year. Another is that using Bitcoin for some useful work wouldn’t change anything if miners can capture the benefit of the useful work. For example, using mining rigs for heating in the winter allows you to profit more. But this is equivalent to an increase in mining ASIC efficiency which happens all the time. The network uses this extra efficiency to increase the hashrate, the difficulty level adjusts (the network aims to always have a new block average every 10 minutes) and we are back to where we were, same energy used, but now with a higher hashrate.

However, what about useful work that was a positive externality? For example, finding prime numbers? Assuming away all the difficulties with this specific example, like how hashes are much easier to check than prime numbers, if the work resulted in a true positive externality public good, like information becoming public, then that has to be an efficiency gain.

It should be noted that the work can’t be too useful because if it’s profitable enough where any single individual could benefit given the cost to mine, then lots of people would start mining for the benefit of the work itself.  In which case, this would be treated again like an increase in efficiency with the difficulty level increasing significantly until the marginal cost of mining again equaled the total marginal revenue of both block reward/transaction costs and the public good. But assuming it’s not usually profitable, the benefits could be so spread out across society that there is no way for an individual to benefit, yet there benefit at the societal level. I just don’t see “finding prime numbers” as fulfilling that value, but I’m open to other suggestions. Given the current value of mining is over $3.5 billion a year, I think the useful work would have to have a value that’s a significant fraction of that to matter in terms of efficiency gain.

Carbon Emissions, Regulatory Arbitrage, and Renewal Energy

Bitcoin mining is location independent. That means it will only be undertaken in locations where the input values are cheapest in the world. We don’t actually know where Bitcoin mining is done, but we have some guesses based on information in blocks mined by companies and where the coins are deposited (see this article). The majority is certainly in China due to proximity of the world’s computer manufacturing base there. Miners in other countries would have to wait for mining material to be shipped to them, which could be out of date by the time it gets there. Eventually, we would expect diminishing returns to slow the rate of improvements in ASICs, which would allow non-Chinese miners to utilize mining equipment before it becomes antiquated. That means they could use their locally low price of electricity to their advantage.

That also means that the Bitcoin network could be optimizing for polluting energy, like fossil fuels that are incorrectly priced (i.e. lack of carbon tax). A country that creates a carbon tax would make fossil fuel energy more expensive, and Bitcoin miners there unprofitable, so they might switch to a country without a carbon tax, thus polluting more. This is a regulatory arbitrage and is an efficiency loss.

However, there are caveats to this argument. One is that many countries, including the ones with the most Bitcoin miners, China and the U.S., never had carbon taxes. Bitcoin blew up there because of their technical advancement and network effects of their tech economies (hardware and software respectively). If they were to implement carbon taxes, and miners then left, that would be an inefficiency brought about by Bitcoin.

Another caveat is that Bitcoin is highly efficient in finding the cheapest energy sources. Many renewable sources of energy are very cheap on a per kilowatt hour basis, and so Bitcoin has actually acted as an incentive for expanding renewable energy (see Morocco).

Bitcoin’s monetary existence, unstable though it is, provides a floor underneath which states can no longer mismanage their currency, or else those states risk their population turning to Bitcoin instead. Similarly, Bitcoin mining’s existence means that there is a floor under which local energy prices won’t be able to drop. This is good, as locally cheap (not globally cheap!) energy means that demand is lower relative to supply in a given area, but it’s too expensive to build transmission lines to other areas where energy is more in need. Compared to a world without Bitcoin mining, mining creates value from cheap local energy which can then be transported digitally. The beneficiaries are the users of Bitcoin who get a payment network that literally didn’t exist before. It is paid for with locally cheap energy around the world that had excess supply. There are also secondary effects as users and miners are better off and the wealth effect on their behavior will be to increase some spending, some of which should enrich people who live in already energy expensive areas. This means some people in expensive energy areas will see a cheaper relative cost of energy.

Final Notes

A couple other arguments that I hear a lot but I don’t consider to be challenges to this view.

  • Bitcoin mining leads to centralization. This is true empirically, but not an argument that it’s wasteful, just that it’s bad for Bitcoin.
  • Bitcoin uses a lot of energy. This is basically the argument I’m opposing and it is very common. I’m not saying Bitcoin doesn’t use a lot of energy, I’m saying it provides a service and has associated costs and expenses.
  • Bitcoin has no use cases. The empirical evidence seems to contradict this, as billions of dollars of Bitcoin transactions happen every day. If you need some more discussion on what Bitcoin is used for, check out my previous post on the subject, or check out this useful page from the EFF on how payment service providers can be used to censor free speech.

Overpopulation on Mars is a Problem Today

This blog is somewhat concerned about machine superintelligence and promotes the idea that we should be researching how to fix the AI goal alignment problem now.

A few years ago, Brian Ng compared concerns about machine superintelligence to worrying about overpopulation on Mars:

If we colonize Mars, there could be too many people there, which would be a serious pressing issue. But there’s no point working on it right now, and that’s why I can’t productively work on not turning AI evil.

I don’t know how seriously anyone took this quote, as it seems like most people would quickly point out that the conditional statement is already almost true; there is no “if” in colonizing Mars, there are people trying to figure out how to get there right now. But the generic version I’ve heard is that worrying about AI is like worrying about overpopulation on Mars, as if overpopulation on Mars would look like overpopulation on Earth. But I don’t see any reason for this to be the case.

Mars isn’t overpopulated at this moment, but we have the technology to send a person to Mars right now. The Falcon Heavy rocket launched a car into near-Martian orbit in February. NASA has already sent a car-sized payload and landed it on Mars in 2012. So why haven’t we sent a human to Mars? Because if there was a human on Mars, Mars would immediately become overpopulated. A person wouldn’t have food or shelter or water if they just showed up on Mars today. A lot of the work being done to set up any kind of human mission to Mars is to solve the problems you think of when you think of overpopulation, like food and shelter.

Of course, that’s simply a critique of a poor analogy, not a response to underlying point. However, the response is just as compelling a point: just because there is a belief that machine superintelligence is far off, it does not follow that there is nothing to be done now. On the contrary, solving the AI Alignment problem must occur prior to the development of Artificial General Intelligence, or there could be very dangerous consequences.  Researching how we might be able to convey to an intelligent agent the complex set of values that cover human beliefs is a daunting task. Working on it now seems like the least that we can do if there is even a small chance of existential risk.

Presidential Power Should Be A Top Election Issue

The midterm elections are a month away, and while I have expressed my feelings on voting and the electoral system generally, I have also made several posts trying to boost specific policy ideas that should be more discussed.  In the same vein, I’ve been thinking about which issues are top priority in this election, and whether any of them are actually as high impact as their popularity warrants.

The recent Brett Kavanaugh confirmation process, which I think everyone agrees was pretty circus-like from start to finish regardless of political inclination, seems to have sparked more voter enthusiasm in the midterms. And while I’ll grant that Supreme Court nominations have grown in importance, it doesn’t follow that SCOTUS nominations should be a major issue in this election. The oldest justices are left-leaning, and so unlikely to retire in the next two years. Perhaps if there is a fear that Justices Ginsberg or Breyer (aged 85 and 80 respectively) will be forced into retirement due to medical problems, then this election would matter. But the chances of that seem less than 50%.

There are other issues, like immigration, that are highly impactful and also well discussed. If there was a decisive turnover from Republicans to Democrats in Congress, we’d expect some of that to be realized in immigration policy, but unfortunately not that much. Even if Democrats took both houses, this election is still largely being discussed in terms of being pro-Trump or anti-Trump.

This is a problem. Only one party can control the Presidency. Moreover, there are competing ideologies within parties, with many fiscal conservatives frustrated with George W. Bush, many neoconservatives frustrated with Trump, and yes, even some liberals frustrated with Obama on foreign policy. So really it should be said that only one ideology gets to control the White House as well. If the Presidency controls so much about policy, then this is disastrous for representative democracy. Depending on how ideological or political people are, the majority of people will not feel represented by the President, even if the President wins a majority of votes (something that has only happened 3 times in the last 8 presidential elections, going back 30 years).

The solution is clear, but we have no incentive to achieve it: Congress should be the most powerful branch of government. Its membership is large so as to draw from a wide range of views and geographical areas. When it acts, it must find compromises and alignments of interests, unlike the President which acts as a single unit. That was the design in the original constitution, and technically, if Congress worked to assert its control, it could retake such a position in government. However, congressmen have little incentive to do so; going on the record for votes and standing on specific principles is politically dangerous. Better instead to move questions of policy to the executive branch, and leave Congress to simply grandstand politically, never having to be tied down to specific votes.

For example: Barack Obama unilaterally decided to grant legal status and eligibility for federal benefits to millions of illegal immigrants in the United States. I happen to think this was a good policy idea, but if the President can decide what laws to enforce and make his own laws with executive orders, then Congress is vestigial. President Trump actually took a pretty constitutional position and decided to end the DACA program and told Congress to pass the DREAM Act (would have crystallized the DACA program into law). He gave them six months, and they did not make the deadline, despite such action being pretty popular. This is unbelievable. Maybe too many people were playing politics. Maybe Donald Trump is incompetent in getting the legislation passed (he torpedoed a bipartisan bill), but that shouldn’t matter. Congress should be able to pass a bill that a majority of legislators agree with, but the will didn’t exist. No one wanted to be on the wrong side of the political divide of the Trump era, and so no bipartisanship could materialize, guaranteeing further partisanship in the future.

This cycle also delegitimizes Congress, making people look more often to the Presidency and to the courts. Congress is fundamentally tied to winning elections, so if people see Congress as unhelpful or unpopular, Senators and Representatives have even less incentive to do anything that might frustrate voters. That in turn also makes the courts increasingly important, which likely fuels additional democratic frustration, as the courts are still fairly removed from direct democratic influence. But if they are viewed as partisan extensions of the presidency, that just makes even more things rely on a single election where only a single ideology can win every four years.

I think there may be a way out of this mess if political parties made the midterms about Congressional vs Presidential Authority. It’s not always been true that Congress can only define itself in relation to the President, but it may be a useful way to couch constitutional authority in political terms. Reducing presidential power would be a concrete way to oppose Donald Trump, and perhaps even reach alleged small-government conservatives.

The Cato Institute lays out a platform for a resurgent Congress to run on: requiring votes on executive rule changes that will impose costs of $100 million on the economy (already introduced as the REINS Act), updating the Administrative Procedures Act to require courts to interpret administrative authority de novo or independent of the agency’s claimed interpretation (I’m horrified this isn’t already done), and require all fees and penalties collected by the government to be appropriated and spent by the Congress (right now, fees and profits are then spent by the collecting agency, with little oversight).

We don’t have to limit this approach to libertarian wishlist items. Kevin Kosar in Politico details additional approaches (and adds many more words in National Affairs), including an improvement to the robustness of congressional staffing; the executive has armies of bureaucrats working to provide the best information (and sometimes self-aggrandizing propaganda) to the branch (the Executive Office of the President alone includes some 4000 people). Congress has seen shrinking staffing for its oversight and accountability offices like the GAO. Congress should be the most powerful branch and so it should have access to the data and expert information on how best to oversee the actual implementation of policy the executive branch undertakes. Instead what we often have is Congressional staffers directly trying to research regulatory agencies, who are providing their own oversight information to non-expert politicians who often defer to the self-interested agencies. Kosar’s suggestion of a Congressional Regulation Office is also intriguing.

However, just because there is a way to do this, there is no reason to believe Democrats ever had an intention to follow this path during this midterm election. Nor does it mean Republicans will consider it in 2022 if the tables are reversed. Neither have an incentive to discuss constitutional authority when culture war issues are more likely to encourage their base to turn out. Understanding these public choice incentives doesn’t mean we have to live with them though. There is a nebulous role for real ideas in democracy, and it starts with having a discussion about the state of our politics.

Insider Trading and Crime

I recently rediscovered a short piece I had written about insider trading. It’s not particularly relevant to anything happening today, but insider trading continues to be a crime prosecuted by authorities and here I offer a couple of reasons it should not be.

The standard libertarian counterpoint to insider trading being a crime is to ask who the victim of insider trading is when, for example, an insider sells their stock before it is announced that a publicly traded company has gone bankrupt. The intuitive answer should be the people who bought the stocks from the person with insider information.

But this doesn’t hold up very well. Those people could have bought the stock the day before from someone else. They could have even been indifferent to when they bought the stock. If that’s true, then how could one person selling it be moral and another person selling it be immoral? The people who bought the stock the day before are just as screwed. The people who bought it the day before would be screwed even if there was no insider trading, since the company is bankrupt anyway in this example.

Someone dumping the stock adds information to the market. If insider trading was legal, you’d have investigatory firms that spend lots of money infiltrating into companies, and you’d probably find out about a company having trouble way before they file for bankruptcy. In the long run fewer people might be screwed over.

Yet don’t we prosecute other similar “insider” situations, like a scam where someone sells a lemon car to an unwitting customer?

This seems different. There is a clear victim if someone lies about their car before selling it. The victim of insider trading is hard to find. It’s not the person who bought the stock, since they put in an order without knowing about who was selling or not that day. They could have bought it from anyone, since stocks are commodified. The victim is all stockholders, collectively. Yet the vast majority of the cost borne by stockholders is due to the actual company being bankrupt. In fact, had the insider trading not occurred, everyone who bought stocks that day would have had to pay a bit extra for their stock, losing even more money. Thus, there’s an argument that insider trading is actually beneficial to the theoretical “victims”, a very odd criminal justice situation.

However, a better argument is if the insider trader bought a ton of “put” options at high price from a market maker. The people holding the other end of the options would be screwed and clearly identifiable. I think it would make more sense to punish people who do those trades than public stock trading.

Also, it’s worth noting that there is a similar situation for “lemons”, referring to cars with manufacturing defects. This is an information asymmetry problem regardless of whether selling them is immoral. Even if you’re a nice person and tell everyone who inquires all the problems with your car, they may think you are still hiding something, since everyone has to assume any car may be a lemon. Thus, we need other ways around this market failure. Government is one method, but it’s got its own issues, as it’s not very agile, subject to political graft, etc. A better one is cheap inspections offered by local mechanics, which help fix the problem. Another is companies like CarMax, which have a national corporate reputation that would be damaged if they sold lemons.

The point being that long-run, as I mentioned before, allowing insider trading might actually be beneficial, as information leaks more freely when there are clear incentives to leak it. Going back to the put option example, the holder of the option knows they are exposed, so they are incentivized to sell some underlying stock as soon as they make the deal with the (unknown to them) insider. It’s one level removed from the insider directly trading on the stock price, but there’s still an incentive to reflect the insider knowledge in the stock price. Moreover, options can be traded as well as stocks, so a put option seller could be selling to both insider and non-insiders at any time; that again creates the situation that the “victim” would have likely had very similar things happening to them regardless of the insider trading (assuming a pretty liquid market). Again, the seller of the options is actually better off in the hypothetical world where there is an insider trader if you assume they would be selling these options regardless. The insider drives the price of the options up the more he buys them.

Information is valuable, and I don’t think it’s practical to expect everyone to have perfect information all the time (this is a consequentialist argument). If someone sells you their old crappy car, it doesn’t feel like he’s an outstanding person, but on the other hand, when someone lists something for too cheap on craigslist, it doesn’t seem like buyers should be required to tell them the item has been undervalued. Maybe they know that, but are moving this week, maybe they have two of something and the second one just isn’t worth the effort to talk to lots of buyers. And shouldn’t anyone selling know not to take the first offer?

In some sense, every agent in a trade has access to information the other person doesn’t have; this is the source of consumer surplus. You can buy cold medicine for cheap at a local pharmacy because the pharmacy has no way to price discriminate between rich people who are feeling terrible with a cold and would pay $200 for Sudafed, and someone who is cheap and only buying it just in case for $10. This results in huge consumer surpluses on almost every good, yet no one would seriously argue pharmacies or grocery stores are getting ripped off because they can’t tell how much you’d be willing to pay for every item. Some renters may be ready to do all sorts of bad things to an apartment, while some will leave it in perfect condition. Is this unfair that the landlord doesn’t know what kind of renter their tenant will be? I don’t think so. So then what makes insider trading economically special?

The real question is whether the decriminalization of insider trading creates perverse incentives to waste resources on finding out information. We already spend way too many societal resources on stock trading in my opinion. Reducing the clearing of stock market trades to once a second or once a minute would have minimal impact on long-term knowledge gathering about company performance, yet it would stop incentivizing millions of dollars spent on fractional-second computerized trading. Insider trading means firms could get a new edge by hiring infiltrators and detectives to get information on a company, or even just their financial data. Even though I believe strongly that the information usage of insider trading to make money on the market does not create victims and thus isn’t worth prosecuting, there is a risk that actual actions that insider trading incentivizes are negative.

Companies are free to run their organizations as desired, but as Matt Yglesias points out, right now they outsource enforcement of insider leaking to federal authorities. It might prove cheaper to have the Feds enforce information security than to have each company do so. CEOs might also be incentivized to trade on their knowledge, paying off others, securing information and funneling money through intermediaries, which is all wasteful. Of course, companies would want to avoid this, and so they might come up with good systems to thwart any approaches. However, interests external to the firm, like investment bankers or private equity, would have incentives to buy insider information from detective agencies, leading to an industry that wastes time tracking down these now legal information leakages.

Matt Yglesias notes this would lead to elements of a low-trust environment. I think there is some truth to that, but I think it’s also clear that jail time for insider trading is not a good use of societal resources. I think high fines and attaching names to guilty verdicts should be effective enough. Sending people to jail doesn’t protect anyone since there are no victims. Disincentivizing behavior monetarily and through public shaming should be enough, and I think it’s worth trying. Of course, this isn’t a a vital immediate criminal justice reform needed, but rather should be done as part of a larger rethinking of the criminal justice system as a whole.