“Oh man, you gotta see this video…”

Everyone loves YouTube, or at least the numbers suggest so; the total number of siteviews they’ve racked up must number in the low trillions, the most popular video on the site (of course it’s still Gangnam Style) has over one billion views, and YouTube has indeed become so ubiquitous that if a video of something cannot be found there then it probably doesn’t exist.

Indeed, YouTube’s ubiquity is perhaps the most surprising, or at least interesting thing about it; YouTube is certainly not the only and wasn’t even the first large-scale video hosting site, being launched in 2005, a year after Vimeo (the only other such site I am familiar with) and well after several others had made efforts at video-sharing. It was the brainchild of three early employees of PayPal, Chad Hurley, Jawed Karim and Steve Chen. A commonly reported story (that is frequently claimed to be not true), the three had recorded video at a dinner party but were having difficulty sharing it online, so being reasonably gifted programmers decided to build the service themselves. What actually happened has never really been confirmed, but the first video (showing Karim at San Diego zoo; yes, perhaps it wasn’t the most auspicious start) went up in April 2005, of course, is history.

To some, YouTube’s meteoric rise might be considered surprising, or simply the result of good fortune favouring them over some other site. Indeed, given that Apple computers used not to be able to display videos using the Adobe Flash video format used by the site, it’s remarkable (and a testament to Microsoft’s dominance of the PC market for so many years) that the site was able to take off as it did. However, if one looks closely then it isn’t hard to identify the hallmarks of a business model that was born to succeed online, and bears striking hallmarks to the story of Facebook; something that started purely as a cool idea for a website, and considered monetisation something of a secondary priority to be dealt with when it came along. The audience was the first priority, and everything was geared to maximising the ability of users to both share and view content freely. Videos didn’t (and still don’t) have to be passed or inspected before being uploaded to the site (although anything flagged by users as inappropriate will be watched and taken down if the moderators see fit to do so), there is no limit on the amount that can be watched or uploaded by a user and there is never any need to pay for anything. YouTube understands the most important thing about the internet; it is a place with an almost infinite supply of stuff and a finite amount of users willing to surf around and look for it. This makes the value of content to a user very low, so everything must be done to attract ‘customers’ before one can worry about such pesky things as money. YouTube is a place of non-regulation, of freedom; no wonder the internet loves it.

The proof of the pudding is, of course, in the money; even as early as November 2005 Sequoia Capital had enough faith in the company (along with superhuman levels of optimism and sheer balls) to invest over $11 million in the company. Less than a year later, YouTube was bought by Google, the past masters at knowing how the internet works- for $1.65 billion. Given that people estimate that Sequoia’s comparatively meagre investment in the company netted them a 30% share in the company by April 2006, this suggests the company’s value increased over 40 times in six months. That ballsy investment has proved a very, very profitable one, but some would argue that even this massive (and very quickly made) whack of cash hasn’t proved worth it in the long run. After all, less than two years after he was offered $500 000 for Facebook, Mark Zuckerberg’s company was worth several billion and still rising (it’s currently valued at $11 billion, after that messy stock market flotation), and YouTube is now, if anything, even bigger.

It’s actually quite hard to visualise just how big a thing YouTube has now managed to be come, but I’ll try; every second, roughly one hour of footage is uploaded to the site, or to put it another way, you would have to watch continually for the next three and a half millennia just to get through the stuff published this year. Even watching just the ones involving cats would be a full-time job. I occasionally visit one channel with more than one and a half thousand videos published by just one guy, each of which is around 20 minutes long, and there are in the region of several thousand people across the world who are able to make a living through nothing more than sitting in front of a camera and showing their antics to the world.

Precisely because of this, the very concept of YouTube has not infrequently come under fire. In much the same way as social networking sites, the free and open nature of YouTube means everything is on show for the whole world to see, so that video you of your mate doing this hilarious thing while drunk one time could, at best, make him the butt of a few jokes among your mates or, at worst, subject him to large-scale public ridicule. For every TomSka, beloved by his followers and able to live off YouTube-related income, there is a Star Wars kid, who (after having the titular video put online without his permission) was forced to seek psychiatric help for the bullying and ridicule he became the victim of and launched a high-profile lawsuit against his antagonists. Like so many things, YouTube is neither beneficial nor detrimental to humanity as a whole on its own; it is merely a tool of our modern world, and to what degree of awesomeness or depravity we exploit it is down purely to us.

Sorry about that, wasn’t really a conclusion was it?

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The Prisoner’s Dilemma

It’s a classic thought experiment, mathematical problem and a cause of much philosophical debate. Over the years it has found its way into every sphere of existence from serious lecturing to game shows to, on numerous occasions, real life. It has been argued as being the basis for all religion, and its place in our society. And to think that it, in its purest form, is nothing more than a story about two men in a jail- the prisoner’s dilemma.

The classic example of the dilemma goes roughly as follows; two convicts suspected of a crime are kept in single custody, separated from one another and unable to converse. Both are in fact guilty of the crime, but the police only have evidence to convict them for a small charge, worth a few months in jail if neither of them confess (the ‘cooperation’ option). However, if they ‘rat out’ on their partner, they should be able to get themselves charged with only a minor offence for complicity, worth a small fine, whilst their partner will get a couple of years behind bars. But, if both tell on one another, revealing their partnership in the crime, both can expect a sentence of around a year.

The puzzle comes under the title (in mathematics) of game theory, and was first formally quantified in the 1950s, although the vague principle was understood for years before that. The real interest of the puzzle comes in the strange self-conflicting logic of the situation; in all cases, the prisoner gets a reduced punishment if they rat out on their partner (a fine versus a prison sentence if their partner doesn’t tell on them, and one year rather than two if they do), but the consequence for both following the ‘logical’ path is a worse punishment if neither of them did. Basically, if one of them is a dick then they win, but if both of them are dicks then they both lose.

The basic principle of this can be applied to hundreds of situations; the current debate concerning climate change is one example. Climate change is a Bad Thing that looks set to cause untold trillions of dollars in damage over the coming years, and nobody actively wants to screw over the environment; however, solving the problem now is very expensive for any country, and everyone wants it to be somebody else’s problem. Therefore, the ‘cooperate’ situation is for everyone to introduce expensive measures to combat climate change, but the ‘being a dick’ situation is to let everyone else do that whilst you don’t bother and reap the benefits of both the mostly being fixed environment, and the relative economic boom you are experiencing whilst all the business rushes to invest in a country with less taxes being demanded. However, what we are stuck with now is the ‘everyone being a dick’ scenario where nobody wants to make a massive investment in sustainable energy and such for fear of nobody else doing it, and look what it’s doing to the planet.

But I digress; the point is that it is the logical ‘best’ thing to take the ‘cooperate’ option, but that it seems to make logical sense not to do so, and 90% of the moral and religious arguments made over the past couple of millennia can be reduced down to trying to make people pick the ‘cooperate’ option in all situations. That they don’t can be clearly evidenced by the fact that we still need armies for defensive purposes (it would be cheaper for us not to, but we can’t risk the consequences of someone raising an army to royally screw everyone over) and the ‘mutually assured destruction’ situation that developed between the American and Soviet nuclear arsenals during the Cold War.

Part of the problem with the prisoner’s dilemma situation concerns what is also called the ‘iterative prisoner’s dilemma’- aka, when the situation gets repeated over and over again. The reason this becomes a problem is because people can quickly learn what kind of behaviour you are likely to adopt, meaning that if you constantly take the ‘nice’ option people will learn that you can be easily be beaten by repeatedly taking the ‘arsehole’ option, meaning that the ‘cooperate’ option becomes the less attractive, logical one (even if it is the nice option). All this changes, however, if you then find yourself able to retaliate, making the whole business turn back into the giant pissing contest of ‘dick on the other guy’ we were trying to avoid. A huge amount of research and experimentation has been done into the ‘best’ strategy for an iterative prisoner’s dilemma, and they have found that a broadly ‘nice’, non-envious strategy, able to retaliate against an aggressive opponent but quick to forgive, is most usually the best; but since, in the real world, each successive policy change takes a large amount of resources, this is frequently difficult to implement. It is also a lot harder to model ‘successful’ strategies in continuous, rather than discrete, iterative prisoner’s dilemmas (is it dilemmas, or dilemmae?), such as feature most regularly in the real world.

To many, the prisoner’s dilemma is a somewhat depressing prospect. Present in almost all walks of life, there are countless examples of people picking the options that seem logical but work out negatively in the long run, simply because they haven’t realised the game theory of the situation. It is a puzzle that appears to show the logical benefit of selfishness, whilst simultaneously demonstrating its destructiveness and thus human nature’s natural predisposition to pursuing the ‘destructive’ option. But to me, it’s quite a comforting idea; not only does it show that ‘logic’ is not always as straightforward as it seems, justifying the fact that one viewpoint that seems blatantly, logically obvious to one person may not be the definitive correct one, but it also reveals to us the mathematics of kindness, and that the best way to play a game is the nice way.

Oh, and for a possibly unique, eminently successful and undoubtedly hilarious solution to the prisoner’s dilemma, I refer you here. It’s not a general solution, but it’s still a pretty cool one 🙂

OK, this WILL be the last money post…

First up, an apology for lateness- I know I said that this post would be up on Saturday, but had forgotten at the time that I would be spending my Saturday doing an 80km hike (18 and a half hours, if you want to know- it hurt). My feet have thankfully recovered since then, and since I really CBA to do a Six Nations Post given that there was only one game at the weekend (France-Ireland), it was a draw (17 all) and I only saw the last half hour, I thought I would give it a miss and concentrate on wrapping up my recurrent theme of money.

To quickly summarise what we’ve covered so far:
1) Money is an arbitrary human situation to give us a reference point for relative value
2) The economic system is based upon the world’s value being increased by doing work on raw materials, and people making money from it by the difference between the value the workers increase the raw materials by, and the amount they get paid [This differential is partly a necessary artificial creation, and is partly due to the price of labour being effected by the workforce’s size and attitudes itself- see point 4]
3) The process of people buying stuff in an economy almost invariably leads to inflation. A low level of inflation is indicative of this- a high level indicates an economy getting desperate, and a negative level a stagnant one
4) The process of value increase and inflation is necessary to balance out the human race’s resource consumption (for living resources we have reproduction- for finite ones, economics)
5) The fundamental rule of economics- when supply goes up, or demand goes down, the price drops.

I want to proceed from point 3, with a quick (and possibly overly simple and completely unnecessary) detour into exactly why economists and politicians want people buying more stuff. The explanation is simple really- every time something is bought, a process of value-increasing is completed. The money you pay for anything will always be greater than the total cost of supplying, making, processing and serving it (serving here meaning everything from customer support and IT to the bloke behind the counter taking your money), so when stuff is bought the company who made it makes a profit. This is the bottom line that demonstrates the process of value-increase and provides the money for more of it. Thus, people buying things means, in the long run, that the value of the economy as a whole gets increased. This is what causes economic growth, and thus growth is vital for our way of existence.

This is the classical way that businesses, and economies, make money- people buyin’ stuffs. There is a fairly well-accepted model for the stages industry goes through to make money in this way. Primary industry concerns the acquisition of raw materials (so farming, logging or mining), secondary is manufacturing, tertiary is the service industry (so selling things to you) and quaternary is basically R&D- the development of new products to push companies forward. In addition to this, modern-day business has a huge sector dedicated to helping the business function properly- this is why you have the IT, HR and customer services departments, whose aim is to ensure that other companies do not get the edge on theirs in competency.

However, in the last 400 years or so, with the advent of more organised, larger-scale and less geographically restricted business (think the East India Company or modern-day multinationals), a new form of business has risen up- that of the stock market. The idea is fairly simple- instead of companies building and saving up their profit over time in an effort to gain money and grow slowly, they persuade other people to give them money in exchange for a slice of the profits, as a way of picking up some fast cash. This as a concept at first seems rather flawed, as it basically involves gambling on the individual skill and potential success of both business and businessman, but it is often a far more preferential strategy. For smaller businesses, accruing some serious cash, or getting past the point where meeting rent is a struggle, could take several years that the owner does not want to spend tearing his hair out, so a quicker way of making cash is highly preferable (although on a smaller scale all dealings will be private, rather than in the madness of the stock market, and are more likely to be in the form of loans to ensure ownership of the business). On a larger scale, dealing with all the attempts to buy and sell bits of the company gets far too complicated to deal with privately, so larger companies who want to trade themselves on a larger scale will ‘float’ themselves on the stock market- basically this means dividing their company up into several million tiny bits and waiting for people to buy them. From hereon in, the bits of the company itself behave like any other commodity- as the price fluctuates up and down (supply and demand again), professional stockbrokers will buy and sell them in an effort to make money. As a company becomes more valuable, its shares go up in value and people buy them, hoping they will continue to go up. As the price falls, people sell them in an effort to make a profit, or at least minimise the loss. This fluctuation can happen rapidly, over the course of mere hours, which is why pictures of stock exchanges seemingly all consist of men in suits screaming into phones- the stock market changes very, very fast.

However, the stock market itself presents a huge problem to an economy- while the investment of large amounts of money in companies is undoubtedly vital to the proper functioning of an economy, this can all go rapidly wrong. The problem is that because buying shares in a company involves giving that company money, it makes the company more valuable and so its shares more valuable. Thus, people buy more shares in it because they see the price rising- you see the problem. At its worst, this leads to people investing in a company solely because other people have invested in the company, meaning that the value of the shares is artificially high based solely on investment and speculation- nothing concrete. The problem arises when everyone suddenly decides to start selling their (now very valuable) shares- this pulls the invested money, now the backbone of the company’s high share price, out of the company, and the price begins to fall. Suddenly, all the investors (sensing the price is about to drop) sell all their shares too (incidentally, they don’t actually sell them to anyone- the rules of the stock market say the company have to buy them back at the appropriate price) and suddenly, all the money is gone, with nothing real for the company to trade to make them money the old-fashioned way (or at least not enough to justify their high share price). Suddenly, the company has had all its investment taken away and is facing the prospect of having to pay back dozens of aggressive investors, and has no cash left.

This story has repeated itself several times over the years- it is known as an economic ‘bubble’. It first occurred on any significant scale in the ‘South Sea Bubble’ in 1720, which disgraced an entire British government, collapsed a company and sent the economy into chaos (although the speculation and willingness to buy everything just before the bubble burst led to pleas for investment in square cannonballs and ‘a company for carrying out an undertaking of great advantage, but nobody to know what it is’. Genuinely). The largest ever such collapsed was the American Wall Street Crash of 1929, which (among other things), condemned a large chunk of the richest nation on earth to living in slums, provoked massive rioting, bankrupted large swathes of Europe as well (and was arguably responsible for the rise of the Nazis), lead the Democrats to control both the White House and Congress and let Franklin D. Roosevelt show the American government that a little liberal socialism now and again can work wonders, advice that they have so far steadfastly ignored for the last 80 years. So yeah- bad thing.

This is the (now muchly belated) point I was trying to make whence I first started out upon this trilogy- the Stock Market is a mental place. While investment is part of the economy we now live in, the way the stock exchange handles it does, in my opinion, far more harm than good (I know I promised to try and keep my Views out of this blog, but this is just an analysis so bear with me). The stock market does not exist for the good of the companies being invested in, it exists for the good of the stockbrokers themselves- basically, professional gamblers, betting on the economy which controls the well-being of thousands with one aim and one aim only in mind: to get rich as quickly, easily and with the least hassle possible. Don’t get me wrong- I’m sure the majority of them are just as nice, normal people as the rest of us, but as for their trade… its not one I’m a fan of.

I’m not sure I support the Occupy movements, leftie though I may be, and I certainly don’t advocate the overthrow of the entire capitalist system. But, to all those who think they are just a bunch of stupid hippies, just look at the suicide rates for 1930 and ask yourself this- do you want to live in a world where the actions of so few can ruin the lives of so many?