Substance abuse and promiscuity:

“The use of drugs such as cannabis and the drinking of alcohol, sex and other obnoxious misconduct are now becoming common within the pirates, causing social problems,” said Sheikh Ahmed, a mosque leader in the town of Galkayo.

Price inflation for consumer goods:

The price of clothes, shoes and cosmetics is climbing, said Anshur Kamil, a businessman.

The pirates pay in dollars and don’t bother to haggle, said Khadra Abdullahi, a shop owner in Bossaso, a coastal town on the northern edge of Somalia across the Gulf of Aden from Yemen. “Sometimes they leave change behind, which shows that money is nothing to them.”

The closer to the pirate dens one gets, the higher the prices go. In the nearby town of Eyl, a cup of tea costs three times as much as in Bossaso. In Eyl, pirates pay $5 for a shoeshine, compared with 50 cents in Bossaso, said Hashim Salad, a store owner.

Marriage:

Marriage has also been affected by pirates with pockets full of cash. Thousands of dollars are paid to brides’ families as a dowry. “Pirates do not waste time to woo women, but instead pay them a lot,” said Sahro Mohamed. “They did this to several girls I know.”

None of this is terribly surprising, however. First, you have the introduction of massive sums of money into a perpetually poor and destitute area. Many of the actions of the pirates (rampant drug and alcohol use, profligate spending, the conspicuous use of money and consumption to signal their status) falls in line with what we would expect in such a situation (in fact, it sounds like the story arc of most Behind the Music episodes). Second, the difference in cost for goods is also predictable. Corporations do this all the time–trying to suss out which consumers are willing and able to pay a higher price for similar goods is a common practice, and explains why many firms have both branded and generic versions of the same product.

It is a lucrative business that has drawn financiers from the Somali diaspora and other nations—and now the gangs in Haradheere have set up an exchange to manage their investments.

[...] “Four months ago, during the monsoon rains, we decided to set up this stock exchange. We started with 15 ‘maritime companies’ and now we are hosting 72. Ten of them have so far been successful at hijacking,” Mohammed said. “The shares are open to all and everybody can take part, whether personally at sea or on land by providing cash, weapons or useful materials … we’ve made piracy a community activity.”
[...] “The district gets a percentage of every ransom from ships that have been released, and that goes on public infrastructure, including our hospital and our public schools.”

One commenter noted that the enterprise could not last without formal legal structures to provide proper oversight.  Chirol responded that “those structures essentially exist in Somalia, they are just “informal” according to us since they are illegal by our standards and not government run. But such mechanisms do exist.”

My question is, do they really exist? Theoretically, you have repeated interactions which discourage cheating in the short run as well as a community that could possibly impose reputational costs on particular actors, but these are not efficient mechanisms for compliance and trust. Whose is responsible for monitoring? Who pays those costs? If it is individual actors the transaction costs are sure to be quite high and, moreover, inefficient and ineffective. You need a (presumably) neutral body that can write, monitor, and enforce rules and regulations that act as the foundation for the entire investment process. The pirates themselves are not exactly a neutral party, and as they are effectively running the exchange it should create all kinds of perverse incentives and issues in the long run. In either case, it is a fascinating development.

Piracy indicates that something is sufficiently valuable enough that it’s worth stealing. It’s worth making an illegal copy and spreading without compensating the creator.

Do you want the most accurate, unbiased, unmanipulated measure of how popular and valuable something is? Go hit up a site like The Pirate Bay or Demonoid or any of the other file sharing services and see if someone is stealing it.

Now, I think this is an interesting observation, as well as a logical one.  It seems intuitive that someone must value a product in order to go to the trouble of illegally copying and distributing it.  This act takes time as well as incurs particular risks if one is caught.  Similarly, for someone to illegally download a product they too incur some level of risk and therefore must believe the product to be worth the risk they are taking on.

However, I would have to disagree with Christopher that using file sharing services as an index for how valuable something is constitutes the optimal way to measure value.  In most cases (and I stress most, leaving room for a few exceptions), the market price of a product can indicate three things: level of demand, level of supply, and/or price of inputs for that product.

Basic Supply-Demand Curve: via www.mikeonads.com

When price rises either demand has increased, supply has decreased, or the cost of inputs has increased. If consumers keep consuming the product at the higher price it indicates that they place a higher marginal utility on that product (fancy way of saying they value or like it more). If consumers are not willing to pay the higher cost the market will correct itself–as demand drops, supply increases, etc.–leading to a lower price for the product.

With piracy, we lose the power of the price signal. ‘Producers’ in this scenario essentially have no production costs, as it is incredibly easy to produce and distribute pirated products electronically. They also have no concerns for inventory, since ‘digital shelf space’ is infinite. Additionally, consumers bear no immediate costs for consuming the product. That is the whole point of illegal file sharing–one does not have to pay for what one consumes. Without any kind of feedback besides pure demand, it is hard to gauge how valuable something is since consumers are not being asked to sacrifice anything of value for the product.

However, there is one possible bit of cost that we could incorporate–risk. Copyright infringement is illegal (well, most places) and, if caught, one could face stiff fines and penalties for either ‘producing’ or ‘consuming’ illegal content. We woul need to incorporate a measure of risk that takes into account the severity of the possible penalties and multiply that times the likelihood that one would be caught and that the harshest penalty would be applied. Say, for example, R=P x L where R equals the total risk assumed, P equals penalties, and L equals the likelihood of being penalized. This measure could denote the actual ‘price’ that people are willing to pay to either distribute and consume specific illegal products.

I think if we look at it this way we would find that the value of these goods (in most cases) is far less than Christopher thinks they are, as the probability of being caught is quite low for most participants in this type of economy. If that is the case, the rate of piracy would not necessarily indicate that consumers value the product more, but actually that they value it less since R would likely be less than the market price ($). I think there is a philosophical dimension to piracy that Christopher does not incorporate into his theory (more on this below).

Christopher makes another point with regards to marketing:

Unlike commercial markets where marketers spend time, energy, and money to get you to buy things, no commercial marketer actively goes out and tells people to steal their products and not pay them. That’s completely irrational.

Give away for non-monetary currency, sure, through inbound links or reputation, through legitimate venues like your web site or iTunes, but no one wants to confer any level of legitimacy on pirate markets. Thus, when you see something in a pirate market that is actively being traded (meaning someone right now is seeding or leeching, uploading or downloading), it’s a good indicator to me that there’s value being exchanged, even if the creator isn’t getting compensated.

This is true in most cases, except that whether you pay for a product or not you have still been exposed to the barrage of marketing activities that promote the product.

[Updated] Finally, piracy as a signal runs into problems due to the philosophical/psychological dimensions to the practice.  My friend Peter Howard emailed me to discuss the post and lays out some of the basic logic that I was alluding to above regarding philosophical/psychological factors to piracy:

On piracy–there is also a social/normative component, in that people want to identify as Pirates because Pirates are cool.

Sometimes you’ll have folks who want something but don’t want to pay, and there’s an economic signal there. But, you will also have an identification element at work–I’m a Pirate, i don’t pay for anything (even if the cost is negligible), mainly for the self image of romantic hero bucking the system, rebeling against the Man. Pirates are, after all, cool. They even have a major political party in Europe that won seats in the EU parliament.

I agree with Peter, and this fact further complicates using piracy as a signal of value.  Furthermore, we know from experimental work that simply making something free can alter how the item is perceived and, consequently, consumed.

[BTW, Peter and Patrick Thaddeus Jackson are supervising some really sharp undergrads who are doing some independent Piracy research this summer, and this identification element becomes a strong running theme for them, as the modern notion of piracy contains a romantic and heroic element to it. They have a great blog on the project: http://roguishcommonwealth.blogspot.com]

Overall I think the idea is very interesting and we likely can extract some additional measure of value from file sharing sites. But piracy is just one input among many that we could use to devise a more complete index for value.

(via chrisbrogan)