Enter a model used by the Dutch, wherein a whole postcode will win each month’s lottery. The winnings are divided up between all residents within that postcode, meaning all winners receive around $13,000. So everyone in the community can be that much better off.

So how can these two ideas be combined? Well theoretically, the 40% of winnings taken by the government should be used to benefit its citizens, correct? What if these citizens received the winnings themselves? Could this allow the government to decrease (or eliminate) the amount of taxes taken out of the savings’ winnings?

As an explanation, people would be able to open bank accounts, knowing the interest they earned would be directed toward a pool of money. This money would then be doled out in a monthly lottery but, rather than have one individual win the full amount, a whole postal code could win it. Of course, this probably means winnings will be in the $10,000 range rather than the $1,000,000 range, but it also means 40% wouldn’t be taken out as taxes, since these would constitute a form of payment to citizens regardless.

The devil, as always, is in the details. Would the bank accounts still be private or state owned? And exact amounts of earnings, winnings and (eventual) tax payments would have to be calculated. But if it encourages people to save and not to spend their own earnings on lottery tickets, might it not be worth checking out?

How Movie Studios Shoot Themselves in the Foot

In 1975, Sony released Betamax, a video cassette recording device that could be attached to a television set and could record television programs onto its Betamax cassettes.

In 1976 Walt Disney and Universal Studios sued Sony for copyright infringement. They argued that these video cassette recorders (VCRs) could be used to copy and distribute their movies. They also argued that most people would record movies for later viewing and, when this viewing occurred, they would skip over the commercials, thereby depriving the studios of their source of revenue. The case dragged on, through various courts, until 1984, at which point the supreme court ruled in favor of Sony.

Interestingly, the movie studios failed to realize that in a few short years a market for videotapes of each of their movies would provide huge revenue streams. Needless to say, had the court ruled in their favor, movie videotapes, and therefore companies such as Blockbuster and Hollywood videos, would not have existed for many years to come, and the whole VCR market would have been pushed back by years.

Fast forward to 2004, and MGM, along with 27 other entertainment studios, is suing Grokster (remember them?) over copyright infringement for their P2P software. Much like the Betamax case, Grokster argued that their product could be used legitimately or illegitimately and, just like Sony Betamax, they were not liable for what their users chose to do. More to the point, the studios should have noticed the parallels and realized the potential for future profits in this new medium.

Unlike the Betamax case, however, the courts ruled in favor of the studios in 2005. Now, half a decade later, we are at much the same point as we were then (except other companies have taken Grokster’s position). MGM could have tried selling movies online, encoding them, providing a monthly access fee, advertising the fact that movies available through their websites were legitimate and virus-free, among many other revenue generating schemes.

Instead they chose to set back the online movie industry by years.

What Porn Can Teach Us

The movie industry is finding itself at a crossroads. This is a multimillion dollar industry staring nervously at the music industry, the file sharing that swept it up, and the industry’s abysmal response to it all. Now Hollywood is wondering what will happen to them. Will they lose returns because of illegal sharing? Will this mean they won’t be able to afford to make new movies? Will all our actors be out of work?

We think it would help if these Hollywood execs, rather than looking at the music industry, followed millions of internet users and looked at the porn industry. This is an industry that, not many years ago, had movie directors, released movies, had well-known actors and actresses, and could be a lucrative career for many. These days, however, there are countless online providers of free or cheap videos and websites. Amateurs are quite literally posting videos from their bedrooms and competing with the professionals.

So what has happened? There are still plenty of sites that make much money (otherwise you wouldn’t be bombarded with spam about it), but they do so by differentiating themselves. Whether it be a specific niche (we won’t get into specifics) or a performer who has created a name for her/himself, certain people have found ways of standing out by providing the customer with what they want.

What does this mean for the movie industry? Hollywood will usually say that without their big budgets (and therefore their grasp on the industry) expensive movies like The Matrix would never have been made. We believe this will be less and less true as time passes. With the equipment that can be bought on credit card advances, people are increasingly able to film and edit video that looks more and more professional. So special effects will be more and more mainstream. Of course, hiring big name actors might become harder, which would mean The Wachowski brothers might have had to hire someone other than Keanu Reeves to play Neo.

On the other hand, actors who differentiate themselves will still be in very high demand. Likewise, freelancers who have real talent will find funding for their movies. Movies will be more niched, more targeted and provide more of what customers want, and an industry that once had extremely high barriers to entry will be giving everyone a shot at bat. And those who are able to keep with the times will benefit enormously. Much like has happened with the Porn industry.

Let’s start with the basics. A patent is granted to an inventor wherein, in exchange for his revealing the secrets of his invention, he has a 20 year monopoly over the technology. This means that others can build on his invention and invent their own products in the meantime. This encourages innovation and also means that others don’t have to wait 20 years before inventing new products.

Recently, however, this hasn’t been the case. When the total profits from patents are around $4 Billion, but the associated litigation costs are $14 Billion, it is hard to argue that they are helping the economy in any sense. What is going on here?

First of all, the patent office in the United States is falling very much behind in its approval of patents, with a 700,000 patent backlog and a waiting period of three years.

Secondly, the so-called “patent trolls” are buying up patents and using them as lottery tickets. In other words, they are not creating anything but just suing any company they can for infringing upon their patents. Whether they are right or wrong often doesn’t matter, since the other party will usually prefer to settle, rather than fight the case. Needless to say, lawyers on both sides of the case will pick up a percentage of every IP lawsuit they can bring about.

This has the opposite effect of what patents were originally supposed to do: It stifles innovation. Entrepreneurs and small businesses are regularly finding themselves sued for one reason or another, and are therefore often scared to forge ahead in new industries and markets.

Recently, the America Invents Act was passed. This has been touted by politicians (who were quick to pass it) as, well, the “America Invents Act” (some marketing firm might have helped). It is a step in the right direction, in that patent protection is granted from the moment it is filed, rather than issued and, secondly, the patent office itself will have more control over its budget. But will this really stop any of the associated litigation? We doubt it.

So what is the solution? Mark Cuban has mentioned that we should get rid of patents completely, at least in software and processes. According to him most inventors don’t invent for the patent, but to get a new business up and running, so that new patents merely get in the way of innovation. According to him, software should be copyrightable, while if you’re creating a new process “… use it. The benefit is from creating the idea and using it in a business to your advantage. Afraid that some big company might steal the idea? That is life. When you run with the elephants there are the quick and the dead.”

And we are inclined to agree. Business ideas are just too abstract to merit patents, and big companies (remember when Google bought up Motorola for its patents back in August last year?) are finding it much too easy to buy up more and more of these in order to stifle future innovation by suing more small businesses. So when it comes to online businesses, Enough with the Patents.

Those of you who travel in the US have now become accustomed to a steady decline in airline service. Expectations are so low that we barely notice things that would shock many in other countries (and we are often only reminded when we go abroad on another airline). One inconvenience we have been loth to put up with, however, is checking our luggage. We all remember a time when this wasn’t necessary, yet now it has become a permanent feature (NB: JetBlue and Southwest are two exceptions, who still don’t charge for checked luggage, bless their hearts). So might it be cheaper to plan ahead and ship the luggage rather than check it? Luckily, our friends at Airfarewatchdog have saved us the effort by compiling a chart of their own, which you can find here.

Of course, it isn’t comprehensive, but by scanning it you can see that, if you have lighter pieces of luggage, it still tends to be worth checking it in. If, however, you have overweight or oddly shaped luggage, it might be worth shipping after all. There are some exceptions, though. Like if you’re flying from Chicago to Orlando you will pretty much always want to ship your luggage.

Curious about whether it is worth shipping your luggage? Check with USPS, Fedex or UPS and compare to what your flight charges you.

By the same token, if there is an entire topic we have not touched upon at all that you would like added, feel free to let us know as well. In fact, if you want to write something yourself and if we like it we will feature it and consider it for inclusion in the book (this is an “if” guys, so no guarantees!).

So, got something to add? Feel free to comment below or to write us at Articles@dumbagent.com.

Also, since the book edition will be coming out, our old book is now discounted and you can buy it right here!

What worries us is when other states start emulating some of California’s models. 10 years ago more than two thirds of all big studio films were filmed in California. Now less than half are. This is because other states have started offering tax incentives and perks for studios to film in their state. The argument is that having a film crew in the area and gaining the publicity will be good for the economy in the long term. Unfortunately hard numbers are difficult to come by, but we’d be surprised to learn that any state has made a profit for this. Having the film crew in the area creates, at best, temp jobs. The publicity is minimal and a crapshoot (New Zealand was helped by Lord of the Rings, Detroit has hardly been helped by the 137 movies filmed there in recent years).

In the meantime, however, California is still messing up its own recovery. It has ranked 50th out of 50 states in terms of business climate. An example of this is Ms. Dashtaki, a Zoroastrian immigrant from Iran who came to the state in 1984. She is also an entrepreneur, making yogurt in the traditional “old country” way. As The Economist reports, she then received a letter from the “milk and dairy food safety branch” of the California Department of Food and Agriculture (CDFA) and was told to shut her business down. What ensued was a path down legalese to follow laws regulating yogurt that hadn’t been changed since 1947. For example, her milk needs to be pasteurized before she can use it, but she uses pasteurized milk, so was hoping for a waiver, but was told that wasn’t possible. So she was told to buy: “a “pasteuriser with a recorder”, a “culture tank”, and a “filler”, which apparently also required a “mechanical capper” to screw lids on jars.”. She pointed out this would change the taste of the yogurt substantially, but it didn’t matter. What did matter, however, was that the code doesn’t allow milk to be pasteurized a second time, so now she was at an impasse. Like any decent entrepreneur, she is contemplating leaving the state. We can’t blame her.

These two policies (along with our other article on Direct Democracy- link above) illustrate some of the main problems with California. But, lest this seem like a California-bashing session, we should mention what they have gotten right. As a response to gerrymandering, California has decided to redraw its election boundaries. While many might be cynical about how this can be done, we are happy to see that it has been accomplished by an independent commission who has access to no political information. Other initiatives, such as the Think Long Committee and a council of independent experts to review all initiatives, are also steps in the right direction, although the sharp partisan jabs created by direct democracy and gerrymandering are the main aspects that need to be fixed. Gerrymandering is a consequence of the “winner takes all” form of politics in the US (as opposed to proportional representation), and has existed since Elbridge Gerry gave it its name in the late 1700′s. If California’s initiatives put an end to this, and are thus emulated throughout the country, it could be momentous indeed.

And if you buy books via our store, you pay the same price as always but we receive a commission from Amazon, so you can help us with our expenses (like Becky’s caviar dinners and private helicopter).

We have also written book reviews for many of these books, which you can find here:

Macrowikinomics book review.
The Upside of Irrationality book review.
The Rational Optimist book review.
The Checklist Manifesto and Work the System book reviews.
SuperFreakonomics book review.
Nudge book review.

If you have any other suggestions for books that make you smarter, feel free to let us know in the comments or by sending us an email!

When you shop at the Dumbagent store, you will
A) make the recipient’s holiday special by sending them something with “Dumb Agent” written on it (and nothing says Season’s Greetings like Dumb Agent), and you will
B) make us very happy by supporting us through these cold cold holidays. Especially intern Tiny Tim Cratchit, who’s been very sickly as of late.

So if there’s someone you never know what to buy for, buying them DumbAgent products is a good excuse for saying “Aren’t you happy to be supporting that blog?”

Find what you like and order it right here:

Or, if you hate gift giving like Tiny Tim’s supervisor Ebenezer, here is an article that pretty much corroborates what you always suspected.

Supervisor Scrooge

But what happened? Why has a panel of academics been appointed to lead Italy, and what on earth is a “technical government”?

A “Governo Tecnico” arises during times of government crisis: sitting parliament decides to step back and give confidence to a temporary government made up of “technical experts” from outside the political arena. This temporary government must exercise its best judgment, free of political bias, to direct the country back to stability until the next general election, when a new political entity will be elected by the populace. This has also been called the “government of national responsibility”.

And herein lies the proof of Churchill’s statement about democracy being the worst form of government except for all the others.

Should not every government be exactly this type of government? Chosen from amongst the people best qualified to lead in their given roles, as judged by previous experience and outcomes, and making decisions based on their knowledge and best intentions for the good of the nation as a whole and in the long-run, rather than political affiliation.

Clearly Italy must justify why its people should accept to be led by a non-elected government, and this justification highlights exactly what the problem with elected government is: career politicians.

From the moment that we accept a “technical government” as an “other”, not the standard of government in general, then we accept that the role of government is to fulfill political bias. That we should elect politicians based on political affiliation, preferred sound-bytes, great hair we don’t mind looking at for the next few years; basically anything but their capability of making decisions for a positive outcome.

Maybe we should think once again as to how and why we select our national leaders.

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When most people think about inflation, they think about commodities such as gold and gas going up in price and currencies eroding in value.

As the speed of inflation picks up, the risk of hyperinflation occurs, with prices in supermarkets changing in front of your eyes as you shop and rotating strike cycles for workers struggling to keep up with those price increases. As workers salaries are raised by paralyzed goods producers, producer margins are squeezed, forcing producers to increase prices, and so it goes, a classic textbook economics case that that has been demonstrated, particularly in the 70s, and well studied. Recent world wide unrest is thought to be at least in part related to the inflationary commodity spikes, by analysts and economists of various stripes (i.e., it’s not meaningfully in dispute), although the Fed insists that such inflationary pressures are “transitory”.

But there’s a different way to think about inflation, and the best analogy is all around us, and it obeys well understood (or at least better understood) laws — it’s our inflationary universe. It may seem a stretch (pun intended), but it’s a great analogy. Once viewed in those terms, bubbles do in fact become more predictable.

How does the inflationary universe work? It’s expanding in all direction but, most of it,quantum foam aside, is completely empty. The interesting stuff tends to happen around sources of mass and energy, and the larger the object, the more interesting stuff happens around it, as it actually causes smaller objects, and space itself, to warp around it.

Back to the world economy. On a macro level, it’s been growing since at least the Sumerians, and just as space warps itself around sources of mass and energy, the economy warps around sources of money. This is perfectly normal, of course: a Walmart feeds over a million workers, numerous small businesses, a large range of medium size businesses, and finally dozens of large businesses (e.g. a Sony or a Kellogg). And, just like the physical universe has “unusual” objects where the laws of nature themselves get warped, such as black holes, or perhaps the even more exotic worm holes, so does the economy — the unusual objects in this case are governments with “fiat currencies”: http://en.wikipedia.org/wiki/Fiat_money.

To create warps in the economy, such governments can go way beyond printing money. They can create incentives and regulations that then rapidly attract (or divert) smaller entities (i.e. people, small businesses, large businesses and even giants). But there’s a price to be paid: this mass of people and companies, instead of being distributed “evenly”, or among naturally occurring gravity wells, streams quicker and quicker towards the source of “free lunch”, or, as another common phrase would put it, OPM or Other People’s Money. Eventually, unless the incentive is eliminated or reduced, a bubble is formed. And, since even governments must obey physical laws, the free lunch eventually ends, and poof, supernova, or worse, everything gets sucked into a black hole.

OK, so far we have a fancy analogy, what are some real world examples?
Here’s a quick list:

1. Housing bubble. Started forming on a combination of artificially low
interest rates and pressure and incentives to lenders to issue
unprofitable loans. The housing deduction in the US is a major
distortion of the market.

2. Student loans. Government mandates and participation in the market
distort the real value of loans. When you open a business and borrow
money from a bank, the rate you get (if you get the money at all) is
based on the risk of your business actually generating sufficient money
to pay it back. How can a degree in English Literature, with an average
starting salary of $30K, be worth the same, to the bank, as a degree in
mechanical engineering which might result in a starting salary of $100K?
The availability of loans, out of proportion to ability to pay,
continues to direct students to more expensive schools and academic
pursuits with dubious employment opportunities, instead of saving $100K
or more by going to a local community college

3. Medical costs. The government ostensibly tries to contain costs by
regulating prices, or at least the rate of price increases. But since
buyers are divorced from the financial impact of their choices, costs
continue to go up.

Numerous other examples abound. Bubbles (and the business cycle) cannot be wished out of existence, or repealed. Fear and greed drive the markets, and speculative excess (early notable example being the Tulip Mania during the Dutch Golden Age) will occur even without fiat currencies. But markets work. When people talk about “free markets failing” in 2007, they didn’t — what failed was the set of economy warping incentives and regulations and the Fed, which inflated the bubble. We continue to be in the “try to tear the Band-aid off slowly” phase now. It’s not going too well, because we have not let markets work.

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Arthur is a a venture investor, inventor and alchemist. His early stage investment fund, @venture.us, turns ideas jotted down on napkins into gold, and he is building his latest company, Surre.al to give the entire world rose colored glasses.

He hails from suburban New Jersey, where he arrived by way of lucky marriage, Brooklyn, Haifa and Tiraspol, Moldova, which he is quite confident he does not remember. His solid credentials as a card carrying member of the Bourgeois class are cemented by his personal twitter handle, @iamthepoint99pct and his obsession with words and ideas is best exemplified by his Halfbakery account http://www.halfbakery.com/user/theircompetitor, where he is nearing 300 posted inventions.