Economics, Law and Ethics
All recordings are available on Moodle.
Introduction
Good software engineering and computer security is not just about writing code and programming. However, the programmers are also (mostly) humans, and they are the ones making decisions on every step of the process. They are make decisions not just aimed at producing efficient fast-running programs, but also shaped by economic incentives, legal requirements/restrictions, and ethical considerations.
Individuals and firms react to the incentives of the decision environment they are facing. Their goal is to optimise their objective function in order to achieve what they want. Economics typically assumes agents are profit maximising selfish agents, and studies what decisions they take individually, and what type of behaviour emerges on the aggregate. Often individual decisions do not jointly realise a socially optimally outcome. Economics studies topics such as resource allocation, networks, markets, blockchains.
How do we address such suboptimal social outcomes? The second part of the course deals with how the law puts restrictions on the decision environment of individuals and markets. Within the restricted environment, individuals freely optimise their objective functions, hopefully choosing behaviours that lead to socially optimal outcomes. Taking law into account allows us to think of the internet as a public good that everyone can use, how we can become liable for things we do online, why we should make only the promises we intend to keep as well as regulatory responses to deviant behaviour (cybercrime, scams, hate-speech).
Ethics, apart from being a requirement for professional accreditation of your degree, inform us about what other aspects are part of people’s objective functions. If consumers and producers want to follow their moral compasses, then they may behave differently, especially when approaching grey areas not explicitly addressed by the law.
In terms of syllabus structure, this course prepares you to study security, systems, business and e-commerce in Part 2. An overview of each lecture is provided below. If you would like to go beyond the standard material, some suggested readings are provided, although I encourage you to also delve into areas that you find particularly interesting. I have also provided links to prior Tripos questions that relevant to each lecture (please note that some questions relate to multiple topics). The solution notes for the questions are available here.
I would also like to acknowledge Professor Ross Anderson who designed and previously lectured this course.
Lecture 1: Classical economics (7 November 2024)
I will begin by providing an overview of the classical view of economics: that under certain assumptions, markets provide an optimal way of allocating resources. This view had its roots in Adam Smith's Wealth of Nations and was further developed by writers such as Ricardo and Jevons to explain forces driving the industrial revolution. We will then look at the limits of classical economic models, from externalities to the fact that efficiency, welfare and justice are not always the same thing.
Suggested additional readings. There is a huge literature on basic economics. Cambridge economics students cut their teeth on Varian's textbook, 'Intermediate Microeconomics', of which your college library should have many copies. You might look at chapters 1-6 and 14-16 to begin with. For the perspective of a Keynesian economist who advised President Kennedy, try JK Galbraith's 'History of Economics'; for a more modern text that covers technology and sustainability as well as the classical basics, see the core econ textbook (especially chapters 8 and 11).
With the Brexit vote, the Trump election and the growth of anti-globalisation protests, trade has become a controversial topic; the forced liberalisation of India's trade in 1991 provides some useful data on the value of free trade. Another topical issue is the Great Recession since the crash of 2008. The best survey of the effects of credit crunches historically has been written by Reinhart and Rogoff. The Great Recession has also been blamed on globalisation, and on the Internet disrupting one business sector after another; Andrew Odlyzko studies technology business cycles and discusses interesting parallels between recent events and the railway manias of early Victorian England.
Of enduring interest to computer scientists are some more modern criticisms of the classical approach that fall within the realm of microeconomics rather than macroeconomics.
Prior tripos questions: 2021p7q2b; 2020p7q3; 2007p3q1
Lecture 2: Information economics (12 November 2024)
Information goods and services markets tend to be characterised by high fixed costs, low marginal costs and increasing returns to scale, together with lock-in effects, all of which tend to lead to monopoly or oligopoly. In many markets, there are also network effects: the more people use a given service, the more value it is to each user. While products may take a long time to reach critical mass, once they do, they take off very rapidly (as happened with faxes in 1985-88, email in the late 1990s and social media in the late 2000s). Network effects can reinforce a tendency to monopoly.
The strategies used by monopolies to maximise their revenue are important, both as a practical foundation for later work on e-commerce and as a theoretical underpinning for understanding regulation (and the antitrust cases that successful tech companies often attract). Monopoly strategies include market segmentation, price differentiation and bundling. The social and other costs of increasing levels of monopoly are becoming ever clearer, while the possible public policy responses are a work in progress, and the leading edge of the debate may be here or here. See this special section in The Economist for a broad overview.
Suggested additional readings. The classic reference on all this is Shapiro and Varian's 'Information Rules'. Varian's textbook also has some useful material, especially in chapters 32-36. As for online resources, there are many, from Wikipedia through the 2014 Nobel lecture by Jean Tirole. The most relevant chapters of Core Econ are 16 and 21, and there's an up-to-date survey in Joseph Stiglitz' The Revolution of Information Economics: The Past and the Future. Andrew Odlyzko has an interesting paper on price discrimination and the erosion of privacy.
Prior tripos questions: 2023p7q4; 2022p7q2; 2016p4q7; 2009p3q5; 2008p6q1
Lecture 3: Market failure and behavioural economics (14 November 2024)
We will look at a number of other ways in which information goods and services markets can deviate from the classical ideal. These include asymmetric information, where one party to a contract knows more than the other. For example, people applying for health insurance typically know more about their health than the insurance company does, which leads to adverse selection effects: sick people buy more cover. (Attitudes to risk in general are highly perverse; see for example John Adams on Cars, Cholera and Cows.)
Clickbait feeds on human irrationally. The public misperception of risk is a particular problem: people worry too much about terrorism, for example, and about child safety, while less personal hazards from cyber-crime to global warming get discounted. There is now a thriving field of 'behavioural economics' at the boundary between economics and psychology that seeks to explain systematically irrational behaviour in terms of the perceptions and biases that we acquired in the course of our evolutionary history. Policymakers have learned in the past decade to make choices easy, attractive, social and timely — just as firms try to make the easy choice the most profitable one.
Suggested additional readings. Matt Stoller provides an overview of the price-fixing economy. You may also be interested in reading more about RealPage. Advertisers have used behavioural techniques for years, and they shade over to hustlers, fraudsters and demagogues. Collier shows how the UK Government has used targeted advertising to target vulnerable refugees with threatening fear-based messages. Our innate biases are modulated by culture, and can be transmitted or even amplified by carelessly designed systems. Calıskan shows how machine translation systems inhale sexism, racism and homophobia along with their training data. There's also a nice talk, Phishing for Phools, on the abuses of behavioural techniques in marketing by the Nobel prizewinner George Akerlof; the most thorough introduction may be Thinking, Fast and Slow by Danny Kahneman while the history of the subject is in Misbehaving by Richard Thaler.
Prior tripos questions: 2024p7q4; 2022p7q3; 2021p7q3b; 2020p7q2; 2018p7q2; 2012p4q7; 2007p3q1
Lecture 4: Auction theory and Game theory (19 November 2024)
Auctions drive much of the Internet, from the ad auctions that power Google and Facebook to the more obvious offerings such as eBay. They have been around since at least the times of ancient Greece, and are the traditional way of selling art, livestock and much else (for the Dutch flower auctions, see here). Much of the dotcom boom was based on the premise that online auctions would become the dominant means of doing business in many sectors. eBay duly grew from nothing to blue-chip status in a few years; Google took over the ad market; and the UK government made billions from auctioning off spectrum for third-generation mobile phones. Spectrum auctions have continued worldwide, becoming ever more complex; they are an example of combinatorial auctions, a problem that is not only NP-complete but applicable in many areas of practical interest.
A surprising number of things can go wrong. The British government's success was not replicated everywhere else; in a number of countries, phone companies managed to rig the auctions and get bandwidth cheaply. Often this didn't require any overt criminal behaviour; the rules of the auctions were such that players could signal to each other, during the bidding process, which blocks they were interested in. The resulting tacit collusion meant that the taxpayers in many places got much less than expected. (See Paul Klemperer's 'What Really Matters in Auction Design' for the practicalities, his 'Guide to the Literature' for the Revenue Equivalence Theorem, and 'Why Every Economist Should Learn Some Auction Theory' for its applications.)
It is important to understand how ad auctions work, and the side-effects they can have. Ads are sold by second-price auctions where the bid price (the cost per click) is multiplied by the ad quality (click-through rate, relevance) so that the ad platform can maximise its revenue. Here's a simple description from Bing and a more rigorous treatment from Google's Chief Economist (with a video). Now weighting bids for search ads by quality may seem innocuous, but with social media this approach can end up weighting ad bids by virality. A former Facebook insider reported, for example, that Trump paid less for ads than Clinton in the 2016 election campaign as his ads were more engaging as clickbait. More generally, ad auction mechanisms that favour clickbait can drive polarisation by rewarding extremes in ways that troll farmers can monetise.
Game theory deals with such fundamental issues as whether people cooperate or fight to achieve their goals. One of the classic puzzles in game theory is the Prisoner's dilemma. Two crooks are arrested and questioned separately about a robbery. The police tell each of them that if he confesses, he will go free while his partner will get 10 years for the robbery. If he keeps quiet and his partner confesses, it will be the other way around. If both confess, they will get five years; while if neither confesses, they will get a year each for possessing a firearm. Here, the optimal strategy from the prisoners' collective viewpoint is for both to keep quiet, but if they cannot both trust the other then the optimal strategy for each individual is to confess.
This is typical of many problems encountered in real life. Resolving them is easier where the games are not isolated, but are part of a series. Then one might, for example, have a strategy of tit for tat – if you cooperate with me this round, I'll return the favour next time; but if you stab me in the back, I'll retaliate. Being able to reason about strategies in a quantitative way is important not just in economics, but also in fields such as evolutionary biology where game theory provides elegant models of much social behaviour in animals.
At the level of routine economic analysis, we get useful tools for understanding monopoly and oligopoly behaviour. For example, suppose that it costs $250 to fly a passenger from Boston to London, and only two airlines compete on the route. How will they set prices? Will they collude and charge $500 each, making a healthy profit, or will they compete for market share and charge $300 or even $255? What sort of strategies are available, and what sort of equilibria might emerge? Given the small number of firms in the typical IT market sector, such issues matter.
At this stage, I suggest you read Ross Anderson’s Economics chapter, from the third edition of his Security Engineering book. Ross Anderson developed much of the course material for Economics, Law and Ethics, and this chapter provides a good overview of the lectures covered so far, including auctions and game theory.
Suggested additional readings. There are many relevant books and web pages, such as the Stanford Encyclopaedia of Philosophy and chapter 4 of Core Econ. And with the Brexit negotiations showing the difficulty of reaching a deal between two sides that are themselves divided, see the theory of two-level games which models just that. Of particular interest to computer scientists is the work on the evolution of cooperation by Bob Axelrod, who initiated regular tournaments of iterated prisoner's dilemma that also led to the development of genetic programming ideas. Finally, we also see game theory in game shows; there's some fun here.
Prior tripos questions: 2023p7q4; 2019p7q2; 2011p4q7; 2010p4q8
Lecture 5: Principles of law (21 November 2024)
There will be two talks on legal topics. The first, will cover the basics. As the syllabus puts it, these are: criminal and civil law, contract law, choice of law and jurisdiction, arbitration, tort, negligence, defamation, and intellectual property. The gloss on that is: what do you have to do online in order to incur liability, or to impose it on someone else; and where can you be pursued, or pursue them, through the courts once you have done so?
Intellectual property is sometimes touted as the foundation of prosperity in the information age, but has long been controversial. Powerful lobby groups, such as Hollywood and the music industry, have pushed for increased legal protection in ways that have brought them into conflict with the computer industry and with digital-rights groups. And some of the lab's most successful startups, from RealVNC to Xensource, have made versions of their products available as free software. Free products such as Linux, Apache and gcc are shared infrastructure on which everybody builds and to which many contribute. Meanwhile, as critical components of most services move to the cloud, firms are less dependent on controlling the rights in their own freestanding software components.
Suggested additional readings. There are often fascinating IP issues raised by technological progress, and they can derail major projects; see for an example the case of Google Books. The music and film industries have lobbied hard for tougher copyright laws but it's not clear that that's done them any good. On the other hand, as we get software in everything, classical property rights are being eroded. In 2018, the US Copyright Office changed the rules to allow people to break DRM to fix stuff (though selling tools to do that remains illegal). And while some tech firms invest heavily in patents, Microsoft has just open-sourced its entire patient portfolio. So if you're planning on starting a business, you may want to think hard about your IP strategy.
Prior tripos questions: 2024p7q3a; 2021p7q3a; 2016p4q7; 2006p4q1
Lecture 6: Law and the Internet (26 November 2024)
The second talk relating to law, by Richard Clayton, looks at more technology-specific aspects of law and regulation. A number of EU directives affect how you can do business on the net, covering subjects that range from distance selling, electronic commerce, data protection and electronic signatures to copyright; most will persist after Brexit, as UK firms won't otherwise be allowed to sell in Europe. There are also specific UK laws, such as the Investigatory Powers Act, that you might have to watch out for.
Prior tripos questions: 2022p7q3; 2021p7q3d; 2021p7q2a; 2020p7q2c; 2019p7q3; 2017p4q7; 2014p4q7; 2013p4q7
Lecture 7: Philosophies of Ethics (28 November 2024)
In this lecture, we will explore some foundational aspects of the ethics of AI. We begin with an overview of the philosophical sub-discpline of ethics and how it relates to other domains of normativity. We will look at personal ethics vs ethics associated with particular roles as well as the arguments against the value-free ideal of science and technology.Suggested additional readings. Much has been written on ethics in the last few thousand years, yet interesting new debates are opening up in topics from neuroethics to policy. Behavioural psychologists are exploring the evolutionary roots of morality; here is a video by Jonathan Haidt on the topic, suggesting an evolutionary basis for liberal and conservative mindsets. Finally, if your third-year project involves collecting data from human subjects, you had better think about how you do an ethical assessment and get approval for it if necessary.
Prior tripos questions: 2024p7q3b; 2023p7q3; 2022p7q3; 2021p7q3c; 2017p4q7; 2015p4q7
Lecture 8: Contemporary ethical issues (3 December 2024)
The final lecture considers the responsibilities of professional software developers, in relation to broader stakeholders: system users, those indirectly impacted by system operation, and others involved in the construction of systems. Individual responsibility is often negotiated within specific kinds of business model, that are in tension with changing policy and political environments. Recent responses to the ubiquity of social media platforms, and disruption resulting from new AI technologies, will be discussed with reference to inclusive and global perspectives.Suggested additional readings. A general introduction to contemporary issues from a computer science perspective is provided in Alan Blackwell's Moral Codes: Designing Alternatives to AI (available open access). See in particular Chapter 5: A meaningful conversation with the Internet, and Chapter 13: Making code less WEIRD. For a discussion of how university teaching and study undermines professional responsibility, consider how software architects might resemble the "professional buck-passers" described in Oliver Wainwright's lessons from the Grenfell enquiry. A powerful call for the professional responsibility of software product designers is in Michael Monteiro's book Ruined by Design. For the ethics of the software industry as a whole, Shoshanna Zuboff's The Age of Surveillance Capitalism is a comprehensive work. Further analysis of challenges resulting from AI developments can be found in The Costs of Connection by Couldry and Mejias, Atlas of AI by Kate Crawford, and Race After Technology by Ruha Benjamin. A statement by the DAIR Institute in response to the AI "existential risk" issue explains priorities for regulatory attention. Finally, ethical issues arising during your degree can be explored in the Research Ethics guidance provided by the Cambridge School of Technology.
Prior tripos questions: 2024p7q3c; 2024p7q4c; 2021p7q2; 2014p4q7
Problems for supervisions
Supervision material is available here.