Economics and Law cst part 1b Ross Anderson, Richard Clayton Why teach you this course?



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Economics and Law CST part 1b

Why teach you this course?

  • Modern systems involve many competing principals!
  • Systems: Internet now so big it’s often more like a market than a deterministic system! Economics used for protocol design, congestion control, and much else
  • Theory: the combinatorial auction is now seen as the archetypal complexity-theory problem
  • Professional: about half of you will eventually go into consultancy, management, …
  • Law: what can make you liable online?
  • Ethics: how to navigate the many grey areas
  • Policy: arguments about copyright, surveillance, privacy…

Aims and Objectives

  • Aims: introduce you to some basic concepts in economics and law
  • Objectives: at the end, you should have a basic appreciation of economic and legal terminology and arguments; understand some of the applications of economic models to systems engineering and their interest to theoretical computer science; and understand the main constraints that markets and legislation place on firms dealing in information goods and services

Outline

  • Game theory: prisoners’ dilemma, iterated games
  • Classical economics with competitive markets
  • Market failures – monopoly, asymmetric information, network effects, lock-in
  • How information markets are different
  • Auction theory and mechanism design
  • Principles of law – contract, tort and other ways you can become liable for things you do online
  • Law and the Internet
  • Policy and ethics

Resources

  • Shapiro and Varian “Information Rules”
  • Varian “Intermediate Microeconomics”
  • Course website, plus as further reading:
    • Adam Smith, “The Wealth of Nations”
    • JK Galbraith, “A History of Economics”
    • Len Fisher, “Rock, Paper, Scissors”
    • William Poundstone, “Prisoners’ Dilemma”
    • Paul Seabright, “The Company of Strangers: A Natural History of Economic Life”
    • Paul Krugman, “The Return of Depression Economics”
    • Glanville Williams, ATH Smith, “Learning the Law”

Studying a humanities subject

  • It’s not like learning to prove theorems or program in Java, which gives a testable skill
  • Wide reading is important – ideas become clearer when approached from several perspectives
  • College libraries are a good place to start
  • Dig into some subproblem that interests you
  • Work out opposing viewpoints: how would a socialist / libertarian / Keynsian / monetarist approach this problem? What decides if people cooperate or compete, what resolves conflict?
  • Write proper essays!

Roadmap

  • Economics as a subject is traditionally made up of macroeconomics, microeconomics and specialised topics
  • ‘Macro’ is about the performance and structure of the global economy or a nation or region. It’s about models of employment, inflation, growth, investment, savings, credit, tax, GNP…
  • We will touch on this only briefly

Roadmap (2)

  • Microeconomics or ‘micro’ is about how individuals and firms react to incentives, how market mechanisms establish prices, and the circumstances in which markets can fail
  • Many topics of interest to computer scientists & engineers include game theory, the economics of information, the economics of dependability, and behavioural economics (economics + psychology)
  • Our tools range from mathematical models to empirical social science

Cooperation or conflict

  • One way of getting what you want is to make it, or make something else of value and trade for it – ‘Economics’
  • Another way is to just take it, whether by force or via the ballot box – ‘Politics’
  • Choices between cooperation and conflict are made at all sorts of levels all the time
  • They can evolve in complex combinations
  • The tool we use to tease them out and analyse them is game theory

Game theory

  • The study of problems of cooperation and conflict among independent decision-makers
  • We focus on games of strategy, rather than chance
  • We abstract to players, choices, payoffs, strategies
  • There are
    • games of perfect information (such as chess)
    • games of imperfect information (which are often more interesting to analyse)

Strategic form

  • Example: matching pennies. Alice and Bob throw H or T. If they’re different, Alice gets Bob’s penny; else he gets hers. The strategic form is
  • Bob
  • Alice
  • This is an example of a zero-sum game: Alice’s gain = Bob’s loss
  • H
  • T
  • H
  • -1, 1
  • 1, -1
  • T
  • 1, -1
  • -1, 1

Dominant strategy equlibrium

  • In the following game, Bob’s better off playing left; similarly Alice is always better off playing bottom
  • Bob
  • Alice
  • A strategy is an algorithm: input state, output play
  • Here, each player’s optimal play is a constant
  • The is called a ‘dominant strategy equilibrium’
  • Left
  • Right
  • Top
  • 1, 2
  • 0, 1
  • Bottom
  • 2, 1
  • 1, 0

Nash equlibrium

  • Consider this game:
  • Bob
  • Alice
  • Each player’s optimal strategy depends on what they think the other will do
  • Two strategies are in Nash equilibrium when A’s choice is optimal given B’s, and vice versa
  • Here there are two: top left and bottom right
  • This game is sometimes called ‘Battle of the sexes’
  • Left
  • Right
  • Top
  • 2, 1
  • 0,0
  • Bottom
  • 0,0
  • 1,2


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