IU Research & Creative Activity Magazine

VOLUME XXXII

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NO. 2

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SPRING 2010

MONEY

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EDITOR’S NOTES

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VOLUME XXXII • NO. 2 • SPRING 2010 EditoR Lauren J. Bryant a r t DIR E C TO R Kelly Carnahan Advisory Board John Carini Associate Professor of Physics IU Bloomington Yaobin Chen Professor of Electrical and Computer Engineering IUPUI Claude Cookman Associate Professor of Journalism IU Bloomington Deborah Finkel Professor of Psychology IU Southeast Kirsten Grønbjerg Efroymson Chair in Philanthropy Professor of Public and Environmental Affairs IU Bloomington Michael Kowolik Associate Dean for Graduate Education IU School of Dentistry Shanker Krishnan Associate Professor of Marketing IU Bloomington Arthur Liou Associate Professor of Fine Arts IU Bloomington Portia Maultsby Professor of Folklore and Ethnomusicology IU Bloomington Eric Schoch Science Writer, Office of Public and Media Relations IU School of Medicine Published by the Office of the Vice Provost for Research Sarita Soni Vice Provost for Research Indiana University

[ F r o n t c o v e r] The Great Seal of The New World Order, by Max Heller.

Heller’s work appeared in the February 2010 exhibit Forgotten and Future Landscapes, sponsored by the IU School of Fine Arts Gallery, Your Art Here, and Indiana University’s ArtsWeek. Image courtesy of the artist and SoFA Gallery. [ I n s i d e f r o n t c o v e r] Portion of a design drawing for the 2010 Lincoln penny by Lyndall Bass. Image courtesy of Lyndall Bass and the College of Arts and Sciences at IU Bloomington. [o p p o s i t e p a g e , t o p ]

Photo by Ann Schertz

very month or so, two or three women and I gather with female inmates at the county jail to share writing. We’re not allowed to use ballpoint pens, though, because some women removed the ink tubes and snuck them out to use for tattoos.

We’re no longer allowed to bring in chips or pretzels or cut-up fruit, either, because the women hid snacks in their underwear to use for barter. We are allowed to bring 98-cent composition notebooks, in which we write with stubby pencils. The notebooks are too big to hide during the pat down, and the pencils too dull to do harm.

It is easy to fault the women for these constraints. After all, they are the “criminals” who have landed themselves in jail.

But as I dole out notebooks and apologize for no refreshments, I think about the inescapable power of exchange.

Whether the “currency” is a $100 Franklin or a handful of overripe fruit, money is power. We humans are hard-wired to barter and trade, but recently, researchers have been looking at why and how we choose our material gains and losses. Why would an inmate choose to barter a thin cylinder of ink when the consequence may be days of lockdown?

Research into such questions falls under the rubrics of behavioral economics or economic psychology, and it draws the attention of various researchers. In 2009, IU’s own Elinor Ostrom, Arthur F. Bentley Professor of political science, won the Nobel award in economic sciences for her research demonstrating that contrary to common wisdom, people often do learn to organize, cooperate, and successfully share resources.

Such explorations offer us glimpses into the irrationality of Homo economicus.

An old friend turned international investor says money is not about greed, but envy. Greed, he says, is about getting—we hunger for something, we get it, we are satiated. But envy is about wanting—about the maddening yearning and craving for something we do not, perhaps can not, have.

Envy and power are surely at work in the exchanges at the county jail, but perhaps something else, too. At Christmas time last year, we were allowed to bring each woman two cookies. Without thinking, I wrapped the cookie pairs and tied them with bits of red ribbon. After the treats were gone, one woman asked, Are we allowed to take the ribbon?

Three inches of red was suddenly pure gold. Why? For bargaining power? To brighten the end of braided hair? To pass along as a gift to an inmate-friend?

I left that day wondering, What would an economy of red ribbons look like? —LB

Research & Creative Activity is published by the Office of the Vice Provost for Research. It is intended to stimulate greater awareness of and appreciation for the diverse scholarly and creative activities conducted across the campuses of Indiana University. For permission to reprint material from the magazine or for inquiries regarding its content, please contact the Editor, Research & Creative Activity, Office of the Vice Provost for Research, Indiana University, Franklin Hall 116, 601 E. Kirkwood Ave., Bloomington, IN 47405-7000; phone (812) 855-4152; e-mail rcapub@indiana.edu. Research & Creative Activity is a member of the University Research Magazine Association (www.urma.org). All contents Copyright © 2010 The Trustees of Indiana University. Visit research.iu.edu/magazine to read R&CA online.

TABLE OF CONTENTS 2 Abstracts Blocking TB | Social networking, microbial style Making telematic music and intermedia art Cloud computing for life | Green mechanics Hands-on sculpture | The ‘why’ of photojournalism | Minding the (other) gap

6 WORKING TOGETHER: A Q&A WITH ELINOR OSTROM

10 THE MIGRATION OF GENEROsiTY

by Keith Roach

14 ECON 101, AND THEN SOME

by Debra Kent

26 SPEND IT WELL

by Lauren J. Bryant

29 KEEPING UP WITH E-COMMERCE

by Jeremy Shere

32 Play money

by Jeremy Shere

35 Two sides of the same coin

by Elizabeth Rosdeitcher

37 PENNY WISE

17 SHOWING THE MONEY

by John Schwarb

20 ONCE AND FUTURE TAXES

by Elisabeth Andrews

23 INSIDE INSIDER TRADING

by Elisabeth Andrews

39 The $ound of music

by Karen Garinger

42 AnGEL LEARNING

by Steve Kaelble

45 SECOnd look

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ABSTRACTS

Social networking, microbial style

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ndiana University School of Medicine researchers have identified a mechanism used by the tuberculosis bacterium to evade the body’s immune system and have identified a compound that blocks the bacterium’s ability to survive in the host, which could lead to new drugs to treat tuberculosis.

About one-third of the world’s population is infected with TB, which causes nearly 2 million deaths annually, according to the Centers for Disease Control and Prevention.

Although medicines to treat TB are available, they must be taken for at least six months to fully eliminate all TB bacteria from the body.

People who do not follow the lengthy treatment regimen can become infectious with a more virulent form of the disease that is resistant to standard medicines.

In an online early edition of the Proceedings of the National Academy of Sciences, Zhong-Yin Zhang, Robert A. Harris Professor and chairman of the Department of Biochemistry and Molecular Biology at the IU School of Medicine, and colleagues revealed the biochemical processes that TB bacteria employ to subvert macrophages —key infection-fighting cells in the immune system. They also described a compound they have synthesized, called I-A09, that blocked the TB bacterium’s activity in laboratory tests.

According to Zhang, the synthesized compound is a proof of concept that a smallmolecule drug targeted against an essential virulent factor of the TB bacterium can be an effective strategy. If it can be developed into an approved drug, the result could significantly shorten TB treatment times.

The focus of the research was TB actions inside macrophages. The tools of macrophage cells include production of special proteins called cytokines to attack foreign invaders.

Infected macrophages can also initiate a self-destruction mechanism called apoptosis, which signals other immune system cells to mount a defense against the infection.

TB bacteria are able to disable macrophage defenses by secreting virulent factors into the host. The IU team found that the actions of a particular virulent factor — a protein phosphatase enzyme called mPTPB — blocked both production of the infection-fighting cytokines and the macrophage’s self-destruct system.

Using combinatorial chemical synthesis and high-throughput screening, the researchers developed the I-A09 compound, which successfully blocked the action of mPTPB. Currently, Zhang says, the IU team is pursuing more potent forms of the I-A09 compound for possible future clinical testing.

bacterial species that depends on cooperation to survive is discriminating when it comes to the company it keeps. Scientists from Indiana University Bloomington and the Netherlands’ Centre for Terrestrial Ecology have learned Myxococcus xanthus cells are able to recognize genetic differences in one another that are so subtle, even the scientists studying them must go to great lengths to tell them apart.

The scientists’ report, which appeared in Current Biology in late 2009, also provides further evidence that cooperation in nature is not always about peace and harmony.

Rather, cooperation may be more of a grudging necessity, in which partners continually compete and undermine one another in a bid for evolutionary dominance.

“In some social microbes, cooperation is something that happens primarily among identical or very similar cells, as a way of competing against relatively unrelated individuals in other cooperative units,” says Gregory Velicer, associate professor of biology at IU Bloomington, who led the research.

“Unlike humans, who are more likely to cooperate with unrelated individuals as well as with close kin, in the bacteria we study, cooperation appears to be highly restricted.”

Myxococcus xanthus is a predatory bacterium that swarms through soil, killing and eating other microbes by secreting toxic and digestive compounds. When food runs out, cells aggregate and exchange chemical signals to form cooperative, multicellular “fruiting bodies.” Some of the cells create the fruiting body’s structure, while other cells become hardy spores for the purpose of surviving difficult conditions.

Previous experiments by Velicer and doctoral student Francesca Fiegna showed that when different Myxococcus strains were mixed together, the number of spores produced was much reduced. This indicated that this social bacterium had diverged into socially conflicting types. Michiel Vos, a Ph.D. student with Velicer at the Max Planck Institute for Developmental Biology in Tübingen, Germany, set out to find whether Myxococcus bacteria sharing the same centimeter-scale soil patch were still capable of efficiently forming fruiting bodies together, or whether these close neighbors would engage in social conflict.

As part of the experimental design for the Current Biology study, Velicer and Vos paired Myxococcus strains isolated from soil samples taken just centimeters apart to see whether the bacteria would behave cooperatively or competitively.

The scientists found that some pairs of

Photo by Supriya Kadam and Juergen Berger, Max Planck Institute

Blocking TB

strains, inhabiting the same patch of soil and almost identical genetically, nevertheless diverged enough to inhibit each other’s ability to make spores. In general, however, the scientists found competition was less intense among centimeter-scale pairings than for pairings of more distantly related bacteria isolated from distant locations. These results indicate that social divergence can evolve rapidly within populations, but this divergence can be augmented by geographic isolation.

Another set of experiments revealed that different strains actively avoid each other prior to the starvation-induced fruiting body formation. Velicer and Vos argue that this type of exclusion within diverse populations — in which the probability of social conflict among neighbors is high — may serve to direct the benefits of cooperation to close kin only.

Velicer says he plans to conduct an exhaustive search for specific genetic differences that lead to antagonism and social exclusion in pairing of closely related strains. A long-term goal, he explains, is to understand how new species of social bacteria might evolve sympatrically, that is, in the same or overlapping geographical areas shared with a parental species.

“If strong social incompatibilities evolve rapidly, that has implications for understanding how interacting strains diverge over long periods of time,” says Velicer, whose lab pursues a wide range of questions about the ecology and evolution of social behavior using the Myxococcus xanthus as its model species.

The study was funded with grants from the National Institutes of Health, the Max Planck Society, the Deutsche Forschungsgemeinschaft, and the Netherlands Organisation for Scientific Research.

Making telematic music and intermedia art

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Photos by Jammy Straub, courtesy of Scott Deal, IUPUI

cott Deal (at right), professor of music and director of the Donald Tavel Arts Technology Research Center at Indiana University – Purdue University Indianapolis, is also a member of Big Robot, a three-person group that combines live music with computers and interactive media. (The other Big Robot members are Michael Drews and Jordan Munson, who teach with Deal in IUPUI’s Department of Musical and Arts Technology.) In late April, Big Robot and many other performers are taking part in the Intermedia Festival, organized by the Donald Tavel Arts Technology Research Center.

The festival features artists and musicians from around the world as well as students and faculty from informatics and computing courses at IU Bloomington, Florida State University, University of Calgary, University of Cincinnati, and Butler University. Many festival artists will participate virtually through high-fidelity conferencing software developed in the Telematic Lab at the Donald Tavel center. Deal is founder of the Telematic Collective, an Internet performance group that has performed at conferences such as Supercomputing Global and SIGGRAPH. The Intermedia Festival is coordinated by IUPUI and the Indianapolis Public Library and will also feature Dance Kaleidoscope. The festival is funded by grants from IU’s New Frontiers in Arts and Humanities program and by a grant from the Multidisciplinary Undergraduate Research Institute at IUPUI. For more information, see http://music.iupui.edu/intermedia/about/.

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ith its access to nearly unlimited resources, “cloud computing” is a greater phenomenon than the advent of personal computing, according to Eric Schmidt, CEO of Google Inc. Now, researchers from the Pervasive Technology Institute Digital Science Center at Indiana University Bloomington are tapping that potential to use cloud computing to support life sciences research. The project is supported by a $1.5 million grant from the National Institutes of Health and takes advantage of an earlier National Science Foundation grant to IU to construct the experimental supercomputing network called FutureGrid.

“Cloud computing approaches are likely to change the nature of our national research computing infrastructure,” says Geoffrey Fox, director of the Digital Science Center and associate dean of research and graduate studies in the IU School of Informatics and Computing. “These technologies hold significant promise in the life sciences and medical sciences as they offer the potential for greater computational power and faster speeds at a lower cost, and in a way that is easier for scientists to use than traditional grid computing approaches.”

Technological advances have made medical and biological research increasingly data-rich. Processing extremely large sets of digital data that result from gene sequencing and other medical research technologies is a significant challenge that generally cannot be met by a single facility or supercomputer.

Cloud computing allows researchers to make use the Internet and Web 2.0 to employ a “cloud” of hardware and software resources, in essence, creating virtual supercomputers with enormous computational power. By pooling distributed computational resources and using Web interfaces, users avoid the need for their institutions to own and maintain expensive computational equipment.

To overcome medical computing obstacles such as long computation time and large memory requirements, the IU research team is developing a software infrastructure that makes use of FutureGrid, an experimental high-performance “cloud test-bed,” and TeraGrid, a national network of high-performance computing resources. The project will also harness commercial cloud computing infrastructure such as Amazon Web Services, Microsoft Azure, and other open source

software. “This research is potentially pathbreaking,” says Peter Cherbas, professor of biology at IU Bloomington and director of the IU Center for Genomics and Bioinformatics.

Cherbas and other researchers from the center are contributing partners in the cloud computing research effort. “Contemporary DNA sequencing machines are churning out data at rates that would have been unimaginable to biologists just a few years ago. To turn these data into some kind of understanding will demand good tools for using the cloud, and those tools will impact genomics projects worldwide.”

Cloud technologies will also be applied to gene family clustering and the visualization of their structure in three dimensions. The overall goal is to provide a suite of services that will allow the simultaneous processing in the cloud of many millions of gene samples.

Thanks to new sequencing technology, the size of the gene samples processed is expected to be one to two orders of magnitude larger than allowed by current computational capabilities.

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Green mechanics ybrid vehicles are hot right now, but who will repair these hightech automobiles if and when they break down? The technical wizardry needed to repair a “green” generation of cars and trucks that run on hybrid batteries or fuel cells will be a precious commodity in the automotive industry.

Kizhanipuram Vinodgopal (right), an Indiana University Northwest professor of chemistry, is utilizing federal stimulus dollars from the U.S. Department of Energy (DOE) to develop curricula for teaching new green skills to automotive technicians. At the same time, the Indiana Advanced Electric Vehicle Training and Education Consortium (IAEVTEC) is helping to develop teaching protocols for the next generation of electrochemical engineers and researchers.

“The first batteries, lead acid batteries, were built in the state of Indiana,” says Vinodgopal, who is a member of the IAEVTEC. “At one point, we were probably producing a hundred thousand batteries per day at the AC Delco and Delphi plants. Most of the new battery developments have occurred in Japan and elsewhere.”

With $6.1 million in stimulus money from the DOE, the consortium aims to develop curricula that will boost the state’s research-anddevelopment capability with regard to next-generation battery technology and fuel cells. Purdue University is the project leader. Other participating institutions include Purdue Calumet, the University of Notre Dame, IU Northwest, IUPUI’s Richard G. Lugar Center for Renewable Energy, and Ivy Tech Community College.

“The consortium is designed to develop the workforce needed to keep Indiana’s lead in battery technology,” Vinodgopal explains.

“What IU Northwest and Purdue Calumet bring to the table is excellence in electrochemistry, which is essentially the basis of all batteries and fuel cells.”

One goal for the auto industry, according to Vinodgopal, is the creation of more powerful batteries than those currently available in today’s hybrids. More power can mean a longer-lasting battery, which would positively affect both the cost and performance of hybrid or electric vehicles.

“The big thing in terms of automobiles is plug-in hybrids,” Vinodgopal says. “For example, the Toyota Prius, which is a hybrid, uses

Photo courtesy of the Indiana University Northwest

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nickel-cadmium batteries. They don’t have the power density you would like — that is, how much energy you can get per gram. So the objective is to switch to lithium-ion batteries, which is what you use in your cell phones, laptops, etc.”

Fuel cells, meanwhile, differ from batteries in that the fuel is placed directly into an electrochemical cell that oxidizes the material to produce energy that powers the drive train. IAEVTEC aims to develop curricula that will allow auto technicians to learn this emerging technology, Vinodgopal says. Another significant aim for the DOE’s investment in this type of research, he adds, is the electrification of heavy trucks that now contribute substantially to fuel consumption and carbon emissions.

Vinodgopal is excited about the role that faculty from IU Northwest and Purdue Calumet are playing in making contributions to critical research on issues of national and global importance.

“The IAEVTEC is a major industrial-academic effort to create the workforce that is needed for this new technology,” he says. “It’s pretty much certain that, within the next 10 to 20 years, you’re going to see a significant electrification of cars, both in the drive train and in terms of fuel sources. So preparation will be very important.”

Hands-on sculpture

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ichard Elaver, an assistant professor in the Department of Visual Communication and Design at Indiana University–Purdue University Fort Wayne, has received an IU New Frontiers in Arts and Humanities grant for his project Tendrils: modular organic systems. Elaver uses 3-D modeling software and rapid-prototyping technology to create modular parts that exhibit visitors can use to construct sculptural objects. He refers to the project as “organic Legos, where the individual pieces do not connect in linear ways through pre-set angles, but in organic patterns that embrace organized chaos.” According to Elaver, the system is the art. “Forms in nature are the inspiration for this work,” he says, “the structure of trees and plants, the graceful transitions from branch to bud, the subtle contrast between leaves and flowers. ... This body of work builds awareness of our relationship to the natural environment, drawing attention to the similarities connecting our own capillaries to the canopies of trees, the same type of bifurcating structures behind dendrites and tributaries.” Images courtesy of the artist.

e’ve all seen them, the khaki-clad photographers swathed in black bags, multiple cameras banging against their chests like oversized necklaces, snapping rapidfire images with an impossibly long lens. The ‘what’ and ‘how’ of photojournalists’ work has been well explored, but why do they do what they do? A new book by Claude Cookman, associate professor of journalism at Indiana University’s School of Journalism in Bloomington, examines what drives the people who click the shutter.

From the midpoint of the 19th century, when Mathew Brady’s Civil War images first captured the fascination of a nation, through the constantly changing digital technologies of today, four major forces have driven photojournalism, says Cookman: the desire to witness and record history, the desire to expose social problems, the desire to capture the human condition, and the evolution of photographic technology.

“To see photojournalism as merely the recording of daily events misses its essence.

Recognizing motivation is essential to understanding the flood of images produced each day by newspaper, agency, and freelance photojournalists,” says Cookman, who shared in the 1976 Pulitzer Prize for feature photography that was awarded to the combined photographic staffs of The Courier-Journal and The Louisville Times.

In his new book American Photojournalism: Motivations and Meanings (Northwestern University Press), Cookman describes how photojournalists have seen themselves as witnesses of history — often with the power to advance social justice — who also see their subjects from a humanist perspective. “Many photographers believe they can make the world better by exposing its problems,” he says.

“We’re seeing this with the recent earthquake in Haiti,” he adds. “The photojournalists are playing their role to try to help people understand this huge natural catastrophe and what we as citizens of the world can do to help. To make that happen, they have to show the Haitian people as humans with dignity, just like us.

“Most photographers work out of a tradition of photographic humanism, where they’re trying to help viewers understand people who are different,” Cookman continues. This is evident, he points out, in the images of newspaper reporter Jacob Riis, who taught himself photography to document the deplorable conditions of people living in New York’s Lower East Side in the 1880s and 1890s. Cookman also points to the work of Louis Hine, whose images exposed the use of child labor in cotton mills, and Dorothea Lange’s iconic image of “Migrant Mother” Florence Thompson during the Great Depression.

Throughout his career, Cookman has focused on the history of photography. His earlier book, A Voice is Born, detailed the early years of the National Press Photographers Association, and he has written extensively about the “father of modern photojournalism,” Henri Cartier-Bresson. A native of Anderson, Ind., Cookman was a picture editor at the Associated Press in New York, The Louisville Times, and The Miami Herald before coming to IU in 1990.

In American Photojournalism, Cookman also explores the rapid technological transfor-

mation of photojournalism. In the case of the earthquake in Haiti, he says, “If it had happened 20 years ago, the photographers would have been scrambling to try to find someone who could carry their film back to the United States to be processed. Now they can take the picture, plug it into their laptop, edit it, and use their cell phone to transmit it to their publication.”

Despite the widespread imagery made possible through technology, Cookman believes there always will be a role for professional photojournalists. “Publications, even when they go to being completely available on the Web, are always going to want pictures of events that people may not necessarily think of photographing. They’re going to want pictures that convey a narrative. It’s not just about the technical quality, it’s the vision.”

“For the white-black Grade 4 reading gap to close at the top end, it will take about 100 years. A gap that is closing that slowly is not really closing. ... There is an excellence gap (in K-12 education), and it’s a lot bigger than most people have ever, ever realized.”

— Jonathan Plucker, director of the Indiana University Center for Evaluation and Education Policy, speaking during a news conference at the National Press Club in Washington, D.C. Plucker is lead author of Mind the (Other) Gap!: The Growing Excellence Gap in K-12 Education, a comprehensive study of student achievement test results from every state recently released by CEEP, a center of the Indiana University School of Education in Bloomington.

Photo by Chuck Carney, courtesy of IU School of Education

Minding the (other) gap

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Image courtesy of Claude Cookman

The ‘why’ of photojournalism

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Working Together A Q&A with Elinor Ostrom co-winner of the 2009 Nobel Memorial Prize in Economic Sciences

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n October 2009, Elinor Ostrom received The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. Ostrom is the Arthur F. Bentley Professor of political science in the College of Arts and Sciences at Indiana University Bloomington and a founding director of the IU Workshop in Political Theory and Policy Analysis. She shares the award with Oliver Williamson, Edgar F. Kaiser Professor Emeritus of business and of economics and law at University of California Berkeley. Ostrom received her award “for her analysis of economic governance, especially the commons,” according to the Nobel Prize Foundation.

She is the first woman to receive the economics prize.

Ostrom began her career at IU Bloomington in 1965 and co-founded the Workshop in 1973 with her husband, Vincent Ostrom, the Arthur F. Bentley Professor Emeritus of political science. She is a member of the American Academy of Arts and Sciences, the National Academy of Sciences, the American Philosophical Society, and a recipient of many other awards. Her books include Governing the Commons, Understanding Institutional Diversity, and the forthcoming Working Together: Collective Action, the Commons, and Multiple Methods in Practice (with Amy Poteete and Marco Janssen).

In early 2010, Ostrom shared some thoughts with Research & Creative Activity about climate change, trust, and how to solve the “refrigerator problem.”

Photo by Chris Meyer, courtesy of Indiana University

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R &C A : You have a strong belief in ability of the average person to figure things out, but the political and economic questions of our day seem hopelessly complex. How is it possible for an average person to figure out or understand enough to take on such tough issues?

O s t r om : I don’t expect that the average person is going to be able to figure out how to get global leaders to agree on an issue such as climate change. But let’s take the example of the ‘refrigerator problem’ in an office where a refrigerator must be shared. Here at the Workshop, we have a kitchen, and we have had refrigerator problems. There’s a sign in our kitchen now that says, ‘Help us with our commons.’ We ask everyone to pitch in. We talk about it from time to time in staff meetings.

We have a number of little routine ways that we all share, and it works pretty well.

Now, apply that to a neighborhood. If you’ve got a problem of, say, a neighborhood park not being well taken care of, and you have a way of meeting in the neighborhood face-to-face, people can figure things out. You might say, ‘OK, let’s go to the City Hall and discuss this. If they’ll help us out, then we’ll create a pickup crew. If we split it, and each of us does a pickup once a week or so, then we can make it work.’

We should not just ask the city to do everything. There are things they can do, and things we can do. For those problems that we can see and interact with, I’m arguing that public policy has frequently taken away the presumption of respect.

Then, broaden it out to watching what farmers do with irrigation systems. Sometimes they’ve got really difficult problems. I’ve seen farmers who have dug through a hill. That’s a pretty substantial engineering task, and the farmers have done it themselves.

When we get to the global level, what I argue is, if we wait around for global leaders and that’s all we do, we’re sunk. I’m currently trying to write several things about that. There’s a lot we can do. For example, here at the Workshop, we’re looking at different ways we can reduce overuse of our heating system.

There is a sense that what we do as individuals has one big cost to the globe. But my argument is, there are externalities (or, consequences) at multiple scales. If you bike to work, you are healthier. You’re not making a huge difference to the atmosphere, but you may be making a huge difference in your health. We need to be thinking about the positive externalities. ‘Think globally, act locally’ is not just a slogan. We can, and we must! Because up at the global level, they’re not doing anything!

Look at all that time spent [at the U.N. Climate Change Convention] in Copenhagen, and they still didn’t agree. I was disappointed. I think everyone was. I wasn’t surprised, but I was disappointed. I had hope.

What other things can we do to have an impact on climate change? What difference do our small-scale actions really make?

I don’t want to say to others, ‘You should do it,’ when I’m not

willing to do anything. You get benefits from things like composting, because you can have a better garden. Find a neighbor and figure out how to expand things, get the whole neighborhood to recycle. Then maybe you can get the city to do a little bit more, and instead of putting things in the dump, help the city by recycling.

The important question is, How do we get these positive externalities recognized and taken into account?

What should have happened at Copenhagen? What is the role of large-scale governance in this case?

For any approach taken to the global climate, there will be arguments. I don’t know if the best thing is a cap, but it might be. The problem is, if you cap, then those who’ve been big emitters can continue being big emitters for a while, and that isn’t fair to some who haven’t done anything. Getting efficiency, fairness, enforceability—all those things—into one agreement is very, very hard. This is one of the toughest problems we’ve ever faced. I’m very anxious, however, about just sitting around.

Let’s go back to the average citizen. What about competition and self-interest? How does cooperation around common resources win out over ‘not in my backyard’?

It doesn’t, automatically. It takes people recognizing, ‘OK, folks, we really do have a joint problem. We can just let a mess be a mess, but it’s unhealthy for all of us.’ It takes communication. That’s where our experiments [at the Workshop] have given us a strong foundation. If we have an experiment that involves a common-pool resource or public good but there is no communication, then people do not cooperate. There must be some way of people communicating. Face-to-face is better than electronic, but sometimes chat rooms work. There has to be some recognition of ‘we’re in this together.’ This is now sustained by a large number of experiments. Developing a sense of togetherness, norms, responsibilities — humans can do that.

Humans can also be very selfish, and in a competitive market where the good is absolutely private, cooperation means creating a cartel. And that’s not good.

You used the word ‘trust’ repeatedly in your Nobel Memorial Prize lecture. Are you hopeful about the persistence of trust in our world?

Yes! Yes. In small to medium-size groups, it’s really important.

In the lab, the face-to-face communication builds trust, agreements, coordination. Without it, you don’t go anywhere.

How much trust is sufficient?

It depends on the scale. If you’re asking me for a dime because other people are putting in a dime, that does not take a lot of trust. But if you ask me to put in half my annual income? It’s a question of scale.

You ended your Nobel Memorial Prize presentation with

What does forest governance mean?

Forest governance means people have made some decisions about who can use the forest, when they can use it, how they can use it, etc. It may be a government who decides, but it might be a local group or an NGO (nongovernmental organization). All of those may involve some kind of governance.

All of them succeed, and all of them fail. There is no one kind of governance that is always successful. What we are finding is that one of the really big factors affecting long-term performance is when the users themselves take on some responsibility for monitoring.

This is totally unexpected in light of the ‘tragedy of commons’ theory of earlier times, but we have very strong evidence now, and we’re talking about large studies.

I don’t refute the ‘tragedy of the commons’ in all cases, though. There are places where the tragedy occurs, such as when the locals don’t monitor things, and the government has hardly any staff. Again, it goes back to trust.

In your view, are there resources today that should properly be held in common that are not?

Well, not resources, but I’m very concerned that metropolitan areas have moved to metro-wide or very large-scale, especially in education. That is not a common pool resource but it is a public good, and I am very concerned about it. In an awful lot of cases now, the wealthy pull their kids out of schools, and those kids get private education in small classrooms, so we’re getting segregated by wealth. That’s not good. When you see some kid who’s attacked others, look at the size of the high school or school they’re talking about.

It’s not that smaller scale is good for everything. In some cases, schools can go together as a network and order and organize more efficiently. The point is, there are all sorts of ways of organizing at multiple scales, not only big or only small. It goes back to polycentricity. [The title of Ostrom’s Nobel Lecture was “Beyond Markets and States: Polycentric Governance in Complex Economic Systems”.]

You have a new book coming out in 2010 called Working Together. What’s that about?

Yes, yes! It’s about working together! One of the real problems in working across disciplines is that we are really speaking multiple languages. Right now in the social sciences, unfortunately, we have this ‘my method is better than yours, my discipline is better than yours’ mentality, which is destructive.

The book’s subtitle is Collective Action, the Commons, and Multiple Methods in Practice. The other authors have been here as post-docs, so it’s an IU product, even though Amy (Poteete) is in Montreal now and Marco (Janssen) is in Arizona. We worked together, but we brought different skills. The book is about how you can look at theory using lots of different methods such as in-depth case studies, meta-analysis, large-N field studies like IFRI, experiments and modeling, and agent-based modeling.

We start off with where theory was in the 1970s and end with a look at where we are now. We’re trying to illustrate the ability to go back and forth, people working together and multiple methods working together. We learn X from fieldwork, then we go back to the lab where we design a new instrument for the field.

We don’t have a perfect final theory, but we have moved along quite a bit.

Do you think your receipt of a Nobel award in economic sciences makes a statement about cross-disciplinary work?

Well, I don’t know the logic of the selection committee. You can never know what arguments they had. But the award is in economic sciences. They didn’t choose the typical mathematical modeler. It’s not that I’m against mathematical models, I do game theory! But it’s the working together with other things.

Back to the average person one more time. You seem to have an endless faith in ability of people to do the right thing. Do you ever get depressed about the future?

No, I don’t have an endless faith! No! People make bad errors.

But it also depends on what you mean by people. People are one thing, institutions are something else. I get very depressed about politicians, and their interest in finding ways of getting big business and others to contribute to campaigns. We can have some very, very, very perverse things happening. In the wrong kind of institutional setting, people can be very selfish.

They can harm us all. Just think about warfare, think about what has gone on in places like Darfur.

What are your thoughts about governance in Haiti in the aftermath of the January 2010 earthquake there?

It’s a terrible tragedy, but I understand there is a lot of selforganizing on the streets, just like in New Orleans after Katrina. There is a lot of collective action going on, which made a huge difference in New Orleans. We cannot criticize Haiti at all after the disastrous job we did in New Orleans.

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a reference to ‘a lot of work yet to be done.’ You and the Workshop have been active recently in the International Forestry Resources and Institutions program. Tell us more about that.

The IFRI study started in 1992. We’re now working in Uganda, Kenya, Tanzania, Guatemala, Mexico, Bolivia, Colombia, Nepal, India, and Thailand. We also have a new center in Ethiopia and a new one in China.

The effort is to cross disciplines so that we are doing careful research on both the social and the ecological aspects of how governance affects forests. We had an ecologist design how to take a random sample of the plots, so we go in and measure the trees and all the rest. And then we talk with people to try to find out the ways they are relating. We are studying some government forests, some private, some community forests, and some that appear to have no kind of governance.

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ollowing the massive earthquake that struck Haiti on January 12, 2010, Americans made charitable donations in record amounts — more than $500 million in just two weeks, according to estimates. But perhaps more noteworthy than this total was the form many of the donations took: text messages.

By texting the word “Haiti” to the appropriate number, cellphone users donated $10 per text to the American Red Cross, totaling more than $20 million in five days. Haitian-born musician Wyclef Jean raised millions more for his Yéle Haiti charity through $5 text donations.

Each gift was added to the donor’s cell-phone bill, which meant that no checks had to be written. No envelopes had to be stamped and sealed. No Web site had to be visited, no account created, no credit card information typed in. With just a few taps of a finger, any cell-phone owner could support relief efforts thousands of miles away. It was possibly the easiest fundraising campaign in history.

The growing importance of technology, including mobile

ways. “Generosity is a part of every culture that we know about, every religion, every part of the world,” says Osili, who is also an associate professor of philanthropic studies at the Center on Philanthropy and an associate professor of economics at Indiana University – Purdue University Indianapolis.

Say a student needs to pay for college. In the United States, where there’s a strong, established philanthropic sector, that student might apply for scholarships through organizations such as UNCF (United Negro College Fund) or the Bill and Melinda Gates Foundation.

In a developing country such as Nigeria, where formal philanthropic organizations have traditionally been few and far between, the student would likely seek support from family members, friends, and neighbors — a type of support known as informal philanthropy.

“Where the state isn’t playing a role, and there isn’t an established nonprofit sector, informal philanthropy often fills the gap” in meeting people’s needs, Osili says. Formal philanthropy is easier to measure, but “especially in developing

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phones, in giving during large-scale humanitarian disasters has caught the interest of Una Osili, director of research at the Center on Philanthropy at Indiana University. Osili and her colleagues are studying responses to large-scale natural disasters — such as the Haitian earthquake and the 2004 Indian Ocean tsunami — because they provide unique insight into how giving changes over time and across countries.

After the 2004 tsunami, for example, about 30 percent of U.S. households donated an average of about $130 to relief efforts. But in the Netherlands, approximately 70 percent of households gave, averaging about €39 (~$53 at current exchange rates). These numbers highlight a significant difference in international giving between the two countries: nearly 6 percent of U.S. households give to international causes, compared to approximately 58 percent of Dutch households.

Osili examined these differences using a cross-country survey of international giving, part of her research into the world’s many cultures of philanthropy and how they’re changing.

Through her own research and other joint research conducted at the Center on Philanthropy (see sidebar), Osili and her colleagues generate knowledge that researchers and nonprofit professionals use to strengthen the philanthropic sector domestically — where charitable giving totaled more than $307 billion in 2008 — and worldwide.

Formal vs. Informal Philanthropy exists worldwide, and it’s expressed in many

countries, informal transactions are important and should not be ignored.”

Osili began studying informal and formal philanthropy when she was a doctoral student in economics at Northwestern University. (She earned a bachelor’s degree in economics from Harvard University.) In her Ph.D. dissertation, she examined remittances, the funds that immigrants send back to their home countries to support family members, pay for people’s education and health care, fund community projects, and invest in businesses, land, or stocks.

At a community organization meeting for immigrants in Chicago, she witnessed informal philanthropy in action. “One man came up and told a story of how his house had burned down recently. People started writing checks, and right there, he got $15,000. He could have gone to the American Red Cross or other local nonprofits, but he had a community of friends and family who rallied to help him.”

Worldwide, immigrants remit an estimated $300 billion each year. At least half of all remittances come from immigrants living in the United States, where formal philanthropy is the norm.

“For immigrants, the question is really, how do they transition between informal and formal philanthropy?” Osili says.

Using data from the Center on Philanthropy Panel Study (COPPS), which tracks the giving behaviors of U.S. households over time, Osili has followed the changes in giving by immigrants and by their children. After controlling for factors such

Photo by Ann Schertz

Indiana University

Responses to large-scale natural disasters — such as the Haitian earthquake and the 2004 Indian Ocean tsunami — provide unique insight into how giving changes over time and across countries. ... [For example], nearly 6 percent of U.S. households give to international causes, compared to approximately 58 percent of Dutch households.

Research & Creative Activity | S P R I N G 2 0 1 0

by Keith Roach

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Photo courtesy of the IUPUI Office of Communications and Marketing

Una Osili is the director of research and an associate professor of philanthropic studies at the Indiana University Center on Philanthropy.

She is also an associate professor of economics at Indiana University – Purdue University Indianapolis.

as education and income, she found that immigrants and native-born Americans are equally likely to give, and they give similar amounts. But immigrants are more likely to give informally and are less likely to volunteer.

As immigrants acclimate to American culture, learn to speak English better, expand their social networks, and learn about nonprofit organizations, their giving and volunteering change to more closely resemble that of native-born Americans, but their informal giving remains relatively consistent.

Children of immigrants are virtually identical to non-immigrants in their giving and volunteering.

gu, Nigeria, when she was just 6 months old.

She grew up during two very different periods in Nigerian history: the oil boom of the 1970s, when the country had more money than it could spend, and the downturn of the 1980s, when oil prices fell and the government slashed funding for education, health care, and other services.

The country’s dramatic change “raised a lot of questions about how good economic policymaking can help countries navigate ups and downs, especially when they depend on natural resources,” Osili says. “It emphasized the need to create more human capital and a diversified economy.”

Osili’s father is the product of such an investment. A pharmacologist at the University of Nigeria, he was raised in part by an uncle who paid his primary-school fees. He later received a scholarship to a government-run secondary school and more scholarships to attend Cornell University. At Cornell, he met Osili’s mother, who is now a historian specializing in West Africa.

Osili’s parents returned to Nigeria “to give back to a society that had invested a lot in [my father],” Osili says. “As someone who was educated and had some resources, he was looked to very often to lend a helping hand.” And help he did. Among other things, he paid school fees for 10 of his nieces and nephews and put at least five of them through college.

International/Internet While Osili was wrapping up her dissertation in the late 1990s, Americans remained skeptical of international giving.

Traditionally, Americans have been much more comfortable volunteering at their place of worship or donating to the local community kitchen than sending money to an international organization to help people they have little chance of meeting, in a country they might not even be able to locate on a map. The United States lags far behind countries such as the

Indiana University

The United States lags far behind ... in the percentage of citizens who support international causes. But international giving is experiencing a transformation, Osili says. In fact, it’s the nation’s fastest-growing subsector of philanthropy.

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These findings are valuable to U.S. nonprofits seeking to connect with the country’s growing immigrant population.

Other research Osili has conducted may also be useful to lawmakers, particularly in upcoming debates about immigration policy. Her study found that, contrary to what some people believe, immigrants are not any more likely than U.S. citizens to receive government benefits.

International influence Osili’s research interests have been shaped by her own international experiences. Born in New York to a Nigerian father and American mother, Osili moved with her parents to Enu-

Netherlands — which Osili says has stronger, longer-held ties to other parts of the world — in the percentage of citizens who support international causes.

But international giving is experiencing a transformation, Osili says. In fact, it’s the nation’s fastest-growing subsector of philanthropy.

She references COPPS data showing an increase in Americans’ long-term international giving even after the Indian Ocean tsunami. COPPS data also show that people with higher levels of education and people who live in communities with a larger percentage of foreign-born residents are more likely to give to international causes.

Strengthening the safety net Each year, more and more nongovernmental organizations (NGOs) fight for causes large and small all over the world.

“In Nigeria in the last 10 years, there has been an explosion of groups that address everything from HIV/AIDS to child abuse to support for widows,” Osili says. “Historically, most of those things would be handled by family, friends, and community members. We’re realizing that as countries become more urbanized and more developed, those networks of friends and family become more tenuous, so the informal safety net may not be as strong as it used to be. It’s really exciting to see organizations rise to meet those challenges.”

Osili hopes to see more among NGOs and governments of both developed and developing countries reduce barriers to philanthropy — like customs and transaction costs — and encourage international giving to effective nonprofit organizations.

“Poor and rich countries’ governments can work together to harness the power of this private action for public good,” she says. “There’s a role for government in making sure that the sector grows, especially in developing countries, in a way that’s transparent and accountable to donors.”

Above all, Osili says, people need to remember the effect that even a small amount of money can have, from microloans through organizations such as Kiva and Grameen Bank that help alleviate poverty, to a $10 text message for earthquake relief, to a $20 donation that pays for a year of school for a child.

“Especially in poor countries, $100 can go a long way,” she says. “Providing those resources to the right person can change that person’s experience but also the experiences of hundreds of children. That may be how you change the world.”

Keith Roach is a writer-editor for IU Creative Services and a freelance writer in Bloomington, Ind.

Charity Cases

U

na Osili guides the Center on Philanthropy’s robust research program, which generates new knowledge about the philanthropic sector and equips nonprofit professionals with information.

The Indiana University center’s programs and research projects include: The Center on Philanthropy Panel Study (COPPS) The center’s signature research project, COPPS tracks the giving behaviors of 7,400 U.S. households over time and across generations, enabling researchers to see how giving changes throughout people’s lives and in response to shifts in public policy, the economy, and other factors.

Giving USA This macro-level annual report highlights trends and priorities of the U.S. charitable-giving sector, including how many people, corporations, and foundations give; how much they give; and to which philanthropic subsectors.

The center researches and writes Giving USA for the Giving USA Foundation. The report has served as a model for national studies in countries such as the Netherlands, South Korea, and Australia.

Bank of America Study of High Net-Worth Philanthropy The center has teamed with Bank of America to release two reports about an important but not-well-understood group of donors: people with incomes greater than $200,000 and/or net worth of at least $1 million.

Women’s Philanthropy Institute (WPI) WPI’s research on women’s philanthropy, including gender differences in how and why men and women give, is shedding new light on charitable giving.

Lake Institute on Faith & Giving Focusing on the relationship between money, spirituality, and philanthropic giving, the Lake Institute helps donors consider how their faith affects their giving and prepares clergy and laypeople to discuss money in spiritual terms.

Global partnerships The center partners with academic centers in more than a dozen countries, including the United Kingdom, China, Egypt, Israel, Indonesia, and Kenya.

For more on these programs and the Center on Philanthropy at Indiana University, visit www.philanthropy.iupui.edu/.

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More awareness yields more international giving. And better technology yields more awareness.

The Internet “can bring even faraway causes to your living room,” Osili says. People can access news originating from practically anywhere in the world, from reading tweets about protests in Iran to watching YouTube videos of the recovery efforts in Port-au-Prince. They can also learn about even the smallest of international charities, donate online, and interact with the beneficiaries of their gifts like never before, as with a Kenyan nonprofit organization that enables the children it supports to send text messages thanking donors.

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Indiana University

From bias to bubbles and beyond, economics professor Eric

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Leeper discusses why we may never understand today’s economic crisis, and what we need to know before it gets worse.

models, but nobody is getting the answer.” He acknowledges the irony in his present position. “Even though I was motivated by an interest in politics, what I’m seeing is that politics corrupts research.”

Economists struggle with another reality of their field, too—a lack of hard data. “One of the problems in economics is that we don’t have controlled experiments,” explains Leeper.

“We don’t get to re-run 2008 and 2009 under a different set of policies. It’s much harder to figure what effects alternative policies might have had when you cannot control the experiment.”

Still, as an economist, Leeper is sure of some things. Here’s what he thinks: Moral hazard is hazardous to our economic health.

The concept of “moral hazard” in economics is defined as “the lack of any incentive to guard against a risk when you are protected against it.” A teenager who promises to pay for his cell phone is less likely to save his allowance if he knows his parents will cover his expenses in a pinch. The same holds for big banks. “If Citicorp places a bet and it’s profitable, Citicorp reaps the benefits. But if they lose the bet, we bail them out. Because they know we’re going to bail them out, it encourages them to take more risks than they normally would,” Leeper says.

Regulation can help. A lot. “Congress passed legislation prohibiting agencies from regulating the exotic financial instruments that are playing a role in the financial crisis,” Leeper says. “If the Fed Chairman Alan Greenspan had said to Congress, ‘We need to do something about this. You need to give us regulatory power,’ things would have played out differently.

But Greenspan thought the markets would regulate themselves. A lot of times markets do that, but not when the risk is asymmetric. There is a clear role for the government to step in and restrict the kinds of risks banks can take on.”

Instead, banks were allowed to repackage mortgages into complex instruments that were resold. The actual riskiness of these instruments was difficult to assess and impossible to price. “Normally, a high-risk asset would sell for less than an identical low-risk asset to compensate the buyer for taking on the additional risk,” Leeper says. Because the complex instruments were systematically assessed as less risky than they actually were, they were sold at too high a price, which then

Econ 101, and then some

by Debra Kent

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Photo by Ann Schertz

E

ric Leeper studied economics in high school but never dreamed he would someday teach the subject. He aspired to a career in politics and only signed up for economics because he had a “naive notion” that effective political leaders had some understanding of the economy.

Then he enrolled in economics courses at George Mason University (his Ph.D. is from University of Minnesota) and decided that if he really wanted to change the world, economics was the way to go.

“Macroeconomics courses in those days were taught from a very static Keynesian perspective,” Leeper explains, “and it made you feel extremely powerful because you could increase government spending, shift the curve, and only good things would happen. GDP would go up, employment would rise. I thought, Wow, this is what I want to do.”

Today, Eric Leeper is a professor of economics in the College of Arts and Sciences’ Department of Economics at Indiana University Bloomington. He is also an external advisor to the Swedish central bank, consulting with other central banks and ministries of finance. While he now understands that the world is not a static Keynesian place, he is also steadfast in his belief that good economists are as necessary as wise political leaders, particularly in today’s complicated economic climate.

There’s just one problem. Asked to pinpoint a solution to the current fiscal crisis, Leeper confesses to being confused.

“We haven’t done the right kind of research to answer the question,” he says.

He faults political bias. “Many people come to this kind of work with very strong prior beliefs and no amount of evidence can persuade them otherwise, so we haven’t made much headway in answering the pertinent questions.”

In other words, if a researcher goes into his or her work believing that government is evil, “then lo and behold, their findings always confirm that view,” Leeper says. “At the opposite extreme, there’s the view that government is essential to making a free market economy work, without any compelling evidence or logic behind the argument.”

So what’s the truth? What should the government be doing? “We don’t know,” Leeper says. “We can torture the data to get whatever conclusions we want, and we can write theoretical

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Indiana University 16

encouraged banks to create and sell more of them. “Ideally, regulators assess the riskiness of the assets independently,” says Leeper, “but in the regulatory environment of the 2000s, that didn’t happen.”

Leeper is disappointed that the administration isn’t pushing harder for regulatory reform and believes that the focus on credit cards is misguided. As long as credit card companies are being honest, albeit in fine print, consumers can fend for themselves. More important, he says, is monitoring lenders’ balance sheets for risky practices.

Yes, there was a bubble. An asset-pricing bubble arises when an asset’s selling price exceeds the expected stream of payoffs from the asset or its fundamental value. In the housing market, prices rose primarily because people expected prices would rise more in the future, enabling homeowners to borrow against the expected future values of their homes.

This works fine as long as everyone continues to expect house prices to rise. But “it’s like musical chairs with more than one chair missing,” says Leeper. “Once the music stops and the optimism about future prices evaporates, everything comes tumbling down. Homeowners are left holding debts that are no longer supported by the anticipated value of their homes.”

The bubble was bound to burst. The housing bubble was buoyed by the U.S. government’s role in nurturing the American dream of home-ownership, complete with its own Web site: makinghomeaffordable.gov. Once again, moral hazard played a role. The government created agencies like Freddie Mac and Fannie Mae to make it affordable for people to own houses, creating “a huge distortion in the economy,” Leeper says. “Freddie and Fannie offer mortgages at below-market interest rates, which prevents the prices of those mortgages from accurately reflecting their riskiness.” This can happen because — implicitly in the past and now explicitly — the U.S. Treasury stands ready to step in and “insure” the mortgages.

Stimulus is a good idea that requires patience.

Although Leeper is not confident that the U.S. government’s economic stimulus package will do everything the administration claims, he does believe that stimulus funding is appropriate. “In a situation like this, politically, there really is a need to do something, and that was one of the least harmful things they could have done,” he says, noting that there was more emphasis on infrastructure spending in the 2009 stimulus bill than there has been in government spending programs in the last 30 years. But anyone hoping for immediate gratification will be disappointed, he cautions, because building infrastructure takes a long time. “The real stimulus will come years down the road. The full benefits won’t occur until 2011, 2012, 2013.”

We ignore the lessons of history at our peril. When Leeper worked at the Federal Reserve Board, he often heard fellow economists claim that current circumstances were “unprecedented.” But Leeper believes the current U.S. financial crisis isn’t very different from financial crises in other coun-

tries that have taken place over hundreds of years. “We can learn from solutions applied in the past,” he says.

For example, Latin American economies have been hurt over the years by profligate fiscal policies that produced excessive monetary expansions and high inflation. By studying Latin America, we can learn “how truly awful things can be when you don’t have a responsible fiscal policy,” says Leeper. Latin America has experienced hyperinflations, ping-ponging between miserably slow and highly volatile growth. Out of these fiscal crises came policy reforms that set limits on the size of fiscal deficits and enforced the independence of central banks.

Leeper also recommends heeding positive examples from countries such as Australia, Sweden, Norway, and New Zealand, which all have tight fiscal rules and targeted levels of debt. “The fiscal rules require these governments to run surpluses, not deficits,” he says. “These governments have established sovereign wealth funds to sock away resources today to finance the aging populations of tomorrow.”

As Americans age, the economy will worsen. More retirees mean less tax revenue coupled with more government spending on Social Security, Medicare, and Medicaid. And that spending will lead to larger government fiscal deficits and more government borrowing. Over the next 50 years, the Congressional Budget Office’s accounting projections say that the debt-to-GDP ratio will grow exponentially — by 300 to 400 percent. “If we’re pushing more debt into the future with the stimulus package,” Leeper says, “that’s going to exacerbate the problems we’re already facing due to demographic shifts.”

And the more debt we run up now, the worse it’s going to get. Not that most of us really grasp that; politics prevent it, says Leeper. “Do you think the politicians are going to tell us that they’re planning to renege on Social Security or raise taxes or get rid of the Fed’s independence so they’ll have to generate inflation? They don’t tell us about any of that, and we don’t force them to talk about these issues.”

As Leeper talks, it’s clear he has left naïveté behind, especially when he underscores that, as bad as the economy is, it can get worse: “In economies that are close to their fiscal limits — after which they can no longer rely on adjustments in direct taxes and government spending to finance government debt — central banks may lose control of inflation altogether,” he says. “Even if the Fed hawkishly tries to combat inflation by raising interest rates, inflation can continue to rise, driven by fiscal, rather than monetary, policy.

“The more debt we generate now, the closer we’ll get to our fiscal limit and the sooner an adjustment will be necessary,” he continues. “The longer we persist in living the fantasy that government offers a free lunch — that we can get government services without raising the taxes to pay for them — the bigger the adjustment must be. And big adjustments cause big economic disruptions.”

Debra Kent is a freelance writer in Bloomington, Ind.

Showing the Money

by John Schwarb a number greater than one (.5+.4/.75= 1.03), the decision to go for it on fourth down was, indeed, the smart play.

“You can argue that it wasn’t right, but you can’t say it was that bad. You have to put in your own numbers,” Winston says.

“I would love to talk to those commentators, putting in their numbers, and I bet it would show that they thought [Belichick] should go for it.”

Math goes mainstream Since his boyhood days in Livingston, N.J., Winston has always loved math and sports. While in middle school, he made up baseball games using players of the day and dice.

As a high-schooler in 1966, Winston picked up a book that perfectly meshed his passions (which would later become his profession): Percentage Baseball by Earnshaw Cook. The author was no jock but a retired Baltimore metallurgist, and his research debunked some of the foundations of America’s pastime. Cook’s number-crunching showed that teams should never sacrifice, never “platoon” players from game-to-game, and that teams should start relief pitchers.

Not all of Cook’s theories gained a foothold in the big leagues (teams still bunt, and the New York Yankees’ Mariano Rivera won’t be pitching in the first inning anytime soon), but Cook’s work caught the fancy of math-inclined sports fans like Winston and Jeff Sagarin, the Bloomington, Ind.-based sports statistics guru for USA Today and a college classmate of Winston’s at M.I.T. Today’s sports world craves information, whether for the next fantasy-league draft or free-agent signing period. The field

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P

erhaps Bill Belichick had lost his three-time Super Bowl-winning mind. Going for a first down on fourthand-2 from his own 28-yard line with just over two minutes to go, with a six-point lead, on the road?

If you followed the NFL in 2009, you know how that worked out. The New England Patriots failed on a game-icing fourthdown attempt, handing the ball back to the Indianapolis Colts and quarterback Peyton Manning. The New England defense couldn’t stop Manning and Co. on a short field, and the Colts pulled out an improbable win that was widely debated in the sports world.

Conventional sports wisdom says the Patriots’ coach should have called for a punt, forcing the Colts to cover some 70 yards for a winning touchdown. Wayne Winston had an easily explained formula to dispel that conventional thinking.

Winston is the John and Esther Reese Professor of decision sciences at Indiana University’s Kelley School of Business in Bloomington. He figures the controversial play like this: In the past two years in the NFL, pass plays on fourth-and-2 gained at least two yards 45 percent of the time. A Patriots offense led by future Hall-of-Fame quarterback Tom Brady could be expected to convert at an even higher ratio, say 50 percent. The chances of Manning and the Colts scoring a touchdown on the short field could be considered very high, say three out of four times or 75 percent, while scoring a touchdown after a punt would be less likely but not impossible, say 40 percent.

If the sum of the Patriots’ fourth-down conversion percentage (.5) plus the Colts’ long-field touchdown percentage (.4) divided by the short-field touchdown percentage (.75) equaled

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Wayne Winston is is the John and Esther Reese Professor of decision sciences in the Kelley School of Business at Indiana University Bloomington.

Indiana University

that Winston and Sagarin took to as a hobby four decades ago has turned into an industry. Michael Lewis’s 2003 book Moneyball, detailing the Oakland Athletics’ prowess in fielding a winning team on a budget, brought sabermetrics (the analysis of baseball through statistics) into the mainstream. Since then, several baseball teams have added statistical analysts to their payrolls. Dallas Mavericks owner (and IU graduate) Mark Cuban hired Winston.

Last year, Winston published his own sports-math opus, Mathletics: How Gamblers, Managers and Sports Enthusiasts Use Mathematics in Baseball, Basketball and Football (Princeton University Press, 2009). The book is full of complex mathematical formulas, but a sports fan following along may be surprised at where the numbers lead.

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The Sizzle or the steak?

Today’s professional athlete salaries touch a particular nerve among sports fans. There’s relatively little outrage directed at a movie star who gets paid eight figures for a lousy film, but a ballplayer earning a king’s ransom but not producing on the field will hear loud and clear that he is not worth the tens, or hundreds, of millions of dollars he receives.

In 2007, Alex Rodriguez of the New York Yankees signed a 10-year, $275 million contract, his second quarter-billion-dollar contract of the decade. The shortstop nicknamed “A-Rod” became more of a lightning rod, his every error and strikeout magnified. He couldn’t be worth that much money, could he?

Actually, he could, according to Winston. Winston’s book shows that Rodriguez could be a fair value at that seemingly

exorbitant price, provided he maintained a certain level of production. The explanation includes breakdowns of Rodriguez’s player-win points and VORP (value over replacement player) points. In layperson terms, that means a breakdown of a player’s production not through conventional stats such as home runs and batting average, but rather by how positively a player impacts his team’s chances to win a game and how much better the player is over a fictitious “replacement” player.

In 2006 — one of his worst years statistically — Rodriguez’s fair salary would have been $6.6 million (in 2006 dollars), far less than his actual salary. But in 2007 his fair salary computed to $19.3 million, and indeed he was the American League’s Most Valuable Player with 54 home runs, 156 RBI, a .645 slugging percentage, and a 1.067 OPS (on-base percentage plus slugging percentage), all tops in the league.

“If I was a general manager, I could say, ‘I can get this guy for a certain amount of money.’ The book tells how to figure out what his salary should be, and then I can figure out, should I get this guy?” Winston says. “You have to project how the player will improve in the future or get worse based on his age, but it’s a math problem. Baseball has way more math than any other sport. You can really figure out what a guy generates.”

Baseball lends itself to the most in-depth statistical analysis because it’s a game of hitter vs. pitcher, over and over again.

Yet there’s no way to compare a hitter to a pitcher through traditional statistics, since both have their own unique sets.

Wins-created statistics allow for the comparison, which in turn can help set market value and a team executive’s decision: Which is the better buy, the slugger or the ace lefthander? Or,

Looking for the edge In basketball, the depth of statistics is not as great, so Winston and Sagarin use an adjusted plus/minus system to determine player values. Plus/minus stats in hockey, a fixture of that sport for four decades, are grade-school simple: player on the ice gets a +1 when his team scores a goal, and a -1 when his team allows a goal. But that doesn’t take into account the quality (or lack thereof) of teammates or competition.

For basketball, Winston and Sagarin devised an adjusted plus/minus rating system that, for the 2006 –07 season, revealed Kevin Garnett to be the best player in the NBA. He played on a bad Minnesota Timberwolves team that finished 32-50 and failed to make the playoffs, but without him the Timberwolves would have been far worse. His point rating was +19, meaning that over a 48-minute game, he improved his team’s performance by 19 points as compared to an average NBA

going against the norm in running a team. “There were two primary values. First, by the time the playoffs came along and we had played a team four times, Wayne’s analysis could tell us what lineups worked. The second value was that it could identify player performance trends over a period of years. There were specific markers that showed up in Wayne’s system that would deteriorate over time. That was important to us.”

Analysis also helped Cuban find a new coach for the 2008 – 09 season, Rick Carlisle. Previously with the Indiana Pacers and Detroit Pistons, Carlisle turned losing teams around. Bill Parcells was a similar kind of coach in the NFL. “They use guys in the spot where they’re the best and that improves their talent level,” Winston says. “That’s all a coach can do.”

The next frontier In Mathletics, Winston also lands mathematically backed jabs at college basketball’s Ratings Percentage Index, or RPI (“you can win a game and go down, or lose a game and go up”), the NFL’s overtime system (“the coin-flip winning team wins 60 percent of the time; it’s only going to change if the Super Bowl is decided in overtime and the other team doesn’t get the

“I was looking for any edge I could get. No other team was using statistical analysis, and Wayne was the best stats guy I knew,” says Mark Cuban, the Dallas Mavericks’ owner.

“There were specific markers that showed up in Wayne’s system and that would deteriorate over time. That was important to us.” player. His offensive rating was +7, and his defensive rating was a league-best -12 (meaning he prevented 12 points per 48 minutes, hence the minus).

Another measure of Garnett’s greatness that season was revealed in measuring how the team played with him in the lineup and without him. Predictably, without a man who averaged 22.4 points per game and a league-best 12.8 rebounds per game, the team was horrendous. Without Garnett, every Timberwolves player was 14 to 25 points worse.

Before the 2007 – 08 season, Garnett was traded to the Boston Celtics and in his first year, the team won an NBA championship, making Garnett well-deserving of the highest paycheck in the league, at more than $20 million per season.

Winston and Sagarin worked as consultants for the Dallas Mavericks for nine seasons starting in 2000 – 01, using lineup analysis and player-win shares to determine which players the team should pursue and retain and the best combinations of them to use. In the 10 years before, the Mavericks were perennial losers and never in the playoffs. Since 2000 – 01, the Mavericks have won at least 50 games and qualified for the postseason each year.

“I was looking for any edge I could get. No other team was using statistical analysis, and Wayne was the best stats guy I knew,” says Mark Cuban, the Mavericks’ owner known for

ball”), and the bane of college football fans everywhere, the Bowl Championship Series (“it doesn’t count the scores of the games — that’s stupid”).

Ideally, the next realm of sports math would help find better answers to such systems, in turn allowing winners to be settled more fairly on the field. Every weekend of televised sports fuels discussion and launches spreadsheets among Winston’s students at the Kelley School of Business. Projects last semester included analyzing NFL teams using two-point conversions and when basketball teams should foul at the end of games when leading by three points.

As computer systems become more advanced, Winston says the day will come when high school coaches can type in their basketball lineups and instantly glean the most winning combinations. In football, a system will analyze plays on a point-per-play basis rather than a yardage basis.

Using math to follow the money in sports isn’t for everyone yet, but it is becoming harder to ignore.“Some don’t like it because it gives an unambiguous answer, and people want to have an opinion,” Winston says. “You should be able to look at the game and have your opinion. But the math is one of piece of the equation you should look at.”

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Photo by Ann Schertz, courtesy of the Kelley School of Business at Indiana University

just as important, who isn’t worth what their agent is asking?

“I’m always amused when teams pay players totally out of kilter with what our numbers say they should. It’s usually that they’re paying for the sizzle, not the steak,” says Jeff Sagarin.

“A lot of players’ public images are better than they really are.”

John Schwarb is a freelance journalist. He lives in Indianapolis.

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When it comes to the recession’s impact on state taxes, expert John Mikesell’s advice is, Tighten your belts.

Once and Future Taxes

by Elisabeth Andrews

Indiana University

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hen a recession hits, it’s a double whammy for state and local governments. Demand for social services goes up, while revenue that supports such services goes down. And during our current recession, says John Mikesell, “the declines have been particularly substantial.

So you have the demand for spending rising right when revenue resources are scarce.”

Mikesell is Chancellor’s Professor of public and environmental affairs at the Indiana University School of Public and Environmental Affairs in Bloomington and a nationally recognized expert on retail sales taxes. The author of the standard public finance and budgeting textbook used in graduate public administration programs, Mikesell is currently studying the impact of the present recession on state taxes throughout the country. The outcomes, he says, have been grim.

State budgets rely heavily on taxes from income and sales, the very sources that are hit hardest when the economy is struggling. As states scramble to meet the needs of out-of-work residents and failing businesses, they face budget shortfalls due to the lost tax revenue that otherwise would have been paid by those same citizens and companies.

Many of the effects of the current recession are the same as in earlier ones, but this recession is deeper and longer than any other since the end of World War II. That makes current fiscal impacts both more interesting for research and more difficult for those expecting necessary services from state and local governments.

No bright spots “The major state taxes have all been devastated by the recession,” Mikesell says. “Across the country, there are virtually no bright spots. What we are experiencing in Indiana is more or less what other states are also having to face.”

Local government tax revenues haven’t been hit quite so hard, yet, because of their historic reliance on property taxes, but political decisions have left many municipalities vulnerable at just the wrong time.

“The one reasonably reliable, reasonably stable source that local governments have had is the property tax, but local governments all over the country have been constrained in their authority to use the tax,” Mikesell explains. These constraints usually come from state legislatures and are not driven by any particular party or political philosophy.

“There’s a saying that, ‘Nobody ever lost an election running against the property tax,’” says Mikesell. “Everyone does it: Republicans, Democrats, liberals, conservatives. Even people who support strong, autonomous local government will run against the property tax even though, logically, that is the one thing they should preserve.”

Although property taxes are not the only means for local governments to obtain funding, Mikesell says they are a major and reliable revenue source.

“Local sales tax, local income tax, local property tax, user charges, and transfers from the state or federal government — only one of those sources is reasonably stable,” he says. “Even with foreclosures and all the problems in the property market,

Just say no Local governments in Indiana are not immune to the movement away from property taxation as a foundation for their finances. Recent state legislation placed dramatic restrictions on municipal capacity to levy property taxes, and school districts no longer rely on the property tax for support of their operations (payments by the state have become the source for

John Mikesell is Chancellor’s Professor of public and environmental affairs in the School of Public and Environmental Affairs at IU Bloomington.

this revenue). One of those legislative restrictions, House Bill 1001 passed in 2008, took property tax rate-setting out of the hands of local voters and capped taxes at 1 percent for residential property, 2 percent for commercial property, and 3 percent for industrial property.

Media attention helped win the sympathy of the legislature.

“In many respects, the controls were the product of a revolt by wealthy property owners who knew how to mobilize for political clout,” Mikesell says. The Evansville Courier and Press reported that the caps are likely to cost local governments $465 million in 2010 and $488 million in 2011. “Some cities have felt the pinch pretty severely already,” Mikesell notes.

Property-owner complaints were precipitated by a revaluation of residential property that aligned tax values more closely with actual property values (many high-value properties had been paying artificially low property taxes for years). The newly assessed taxes were made even higher by the fact that non-residential property values were not corrected, and many businesses remained exempt. High-value homes were left with a large share of the tax burden that “produced shocking increases in some property-tax bills,” Mikesell says. “Rather than reform the root causes, the response was strict limits on local use of the tax.”

In another element of the new fiscal arrangements, school budgets are no longer financed through local property taxes but are dependent on the state, whose finances have been severely affected by the recession.

“The problems of the state now immediately translate into fiscal problems for the schools,” Mikesell explains. “They have few options for adjusting to the reduced funds and even fewer

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Failure to thrive?

Local governments without a property tax often face difficult finances. Cities that rely on local sales tax without a property tax to support continuing operations often leave themselves completely susceptible to economic fluctuations. Any time a major retailer shuts down, “it’s a public catastrophe,” Mikesell says.

This kind of economic impact is an important public issue because local governments are responsible for providing critical services, including public safety and education.

“Local government budgets are primarily for wages and salaries. The big cost area is personnel, and where are the big personnel costs for cities? Police and fire, and there aren’t many technological solutions that allow maintenance of service when cuts are made. Some cities are starting to feel the pinch in terms of their ability to deliver services,” Mikesell says.

Municipal fee-for-service strategies have become more common, such as charging residents for trash pickup or for specialized parks and recreation programs, but it’s logistically impossible to have residents purchase the services that police and fire departments provide (to say nothing of the moral and social arguments some may raise against such a system).

“Police and fire departments give a protective blanket to an area,” Mikesell explains. “When a property is on fire, the firefighters come to put the fire out to keep it from spreading.

Police patrols protect everyone because the bad guys don’t give you a list of exactly who should sign up to be protected.”

Because these services must be delivered at the neighborhood level, permitting residents to voluntarily opt-in to police and fire coverage would give everyone an incentive to decline the service and let their neighbors pay.

Billing after the fact is equally problematic. “If the fire department has already put out the fire, why would I voluntarily pay their bill?” Mikesell asks. “Collection rates for emergency ambulance runs, unless covered by insurance, aren’t very high.

The same logic goes for fire runs.”

Because their services are oriented to the community at large, police and fire departments — as well as sanitation, road maintenance, and many of the other responsibilities of local governments — can be reasonably maintained only through tax dollars. A robust property tax makes protecting those services much easier.

Photo by Ann Schertz

property tax continues to be the most stable revenue source overall.”

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that do not mean reduced educational service.”

Overall, though, the state of Indiana has been spared the disasters that many states have had to confront. “Indiana went into the recession having cleaned up some unpaid bills and without the spending increases that had occurred in some other states,” Mikesell says. “When the recession hit, we didn’t have quite the problems or ticking time bombs that some states had. And we had the advantage of a significant rainy-day fund as an important backstop against the greatest disasters.”

Mikesell praises the Indiana government for being “terribly willing to say no,” in contrast to other states that resorted to “various kinds of financial tricks to close gaps in their budgets, like moving paydays around, altering the timing of revenue flows, and delaying projects.”

Despite this careful planning, however, it wasn’t possible for the state of Indiana to overcome the shortfalls caused by the recession. Back in 2008, when Mikesell sat down with the other members of Indiana’s revenue forecast committee to produce

losing about $45.5 million. State funding accounts for approximately 19 percent of IU’s budget, and the cuts are necessitating reductions across all campuses in areas such as administrative services and travel spending. In addition, some positions may be left vacant through the remainder of the budget cycle.

A sliver of a silver lining Amid all the bad news, there is one small but potentially beneficial development in the state’s method of tax collection.

A recent referendum transferred property assessment duties from Indiana’s townships to its counties. This consolidation gives local governments a “better shot at quality and uniformity” in distributing their tax burden across property owners, according to Mikesell.

“Under the old system, some of the townships were assessed by trustees who had other kinds of government functions. Many of them had no particular interest in doing property assessments, so there was considerable variation in

Indiana University

“Unless a hint of economic recovery starts showing up in state revenues, there will be more reductions ahead. It will not be pleasant. There is some evidence of recovery, but not yet enough in state revenues to allow the conclusion that the bad times are behind us.”

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a revenue baseline for 2010 – 11, the depth and persistence of the economic problems ahead were not foreseen. “The big three taxes — individual income, corporate income, and retail sales — have been affected more than we expected,” he says.

When the committee reconvened in December 2009, they had to revise projections downward by about $1.8 billion, or approximately 7 percent. The Indiana state constitution forbids the state from going into debt, so the Hoosier state government had no choice but to start cutting back expenditures.

Mikesell describes Gov. Mitch Daniels’s unpleasant task of determining where those cuts were going to come from: “He rescinded appropriations to general state agencies first, then to state universities, and, most recently, to primary and secondary education. Unless a hint of economic recovery starts showing up in state revenues, there will be more reductions ahead. It will not be pleasant. There is some evidence of recovery, but not yet enough in state revenues to allow the conclusion that the bad times are behind us.”

Indiana University itself is grappling with close to $59 million in budget cuts from this revision, which Gov. Daniels announced in December 2009. “[IU] is vulnerable because we are a nontrivial part of the state budget,” Mikesell explains. “You have to think like a bank robber — they rob banks because that’s where the money is.

When you’re making cuts, you go where the money is.”

As Indiana’s biggest state-funded institution, IU got the largest share of the cuts, with runner-up Purdue University

the quality of assessments being done,” he says.

Assessments done at a larger level increase the chances of a more professionally done job and more consistent valuations.

Indeed, even before the legal change in the system, a number of trustee assessors actually had the county assessor do the valuation work.

Although the change may seem minor, Mikesell reiterates that there is nothing more important for local government budgets than property taxes. Improving the means of determining tax liability can spell only good things for municipalities and may avoid the type of drastic revaluation that led to the present tax caps.

Still, Mikesell is hoping to see even greater changes in the way the government determines what property owners must pay. He says that electing assessors makes it too easy for popularity contests and conflicts of interest to damage this single most important factor in municipal finance.

“Some assessors are capable, diligent, and exactly who ought to be hired for the job, but that is not uniformly the case,” he says. “The ultimate reform, of course, would be to appoint assessors based on their qualifications and evaluate them on the basis of their performance. We wouldn’t dream of having IRS auditors elected!”

Elisabeth Andrews is a freelance writer in Bloomington, Ind.

[ Inside ]

Insider Trading

by Elisabeth Andrews

After conducting a study of CEOs convicted of insider trading, Bhattacharya is more perplexed than ever. His research demonstrated that executives who engaged in insider trading actually had higher salaries than those who did not. The findings overturned his economics-based hypothesis that insider trading was a means for lower-earning CEOs to catch up to their peers.

“It does make me question that basic assumption of ‘money-money-money,’” he says. “But it’s good to keep questioning your assumptions as you grow in your research.”

If pressed, Bhattacharya conjectures that the insider-trading phenomenon comes down to “hubris” among high-ranking executives. “They think they can get away with it,” he says.

Talk is cheap The CEO study was not the first of Bhattacharya’s investigations to overturn commonly held assumptions about insider trading. His 2002 Journal of Finance article, “The World Price of Insider Trading,” written with Cornell University Professor Hazem Daouk, demonstrated that passing a law against insider trading actually did nothing to improve a country’s stock market values.

“That was the biggest research finding of my life,” Bhattacharya says. “Moralists and politicians would say, ‘Oh, insider [ ab o v e ]

Two Dollar Jacket , by Won Park

orudorumagi11.deviantart.com Creative Commons License. Some rights reserved. This work is licensed under Creative Commons Attribution-Noncommercial-No Derivative Works 3.0 License, creativecommons.org/licenses/by-nc-nd/3.0/

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n his Twitter page, where he goes by the username FinanceDarkSide, Utpal Bhattacharya tweets this: “The price of capitalism is eternal vigilance.”

It’s not that Bhattacharya disapproves of capitalism. On the contrary, as an associate professor of finance at the Indiana University Kelley School of Business in Bloomington, Bhattacharya, whose research focuses primarily on insider trading, says, “Market economies, though deeply flawed, are the best system.”

But that system, he says, has a tendency to inspire behavior among the financial elite that is self-destructive and inexplicable. According to Bhattacharya, insider trading (the illegal buying and selling of shares based on company-owned information) is often done for reasons other than money. “Critics ask me, ‘Then why do they do it?’” he says. “But I can’t answer that.”

Bhattacharya explains that the standard economic assumption that all decisions come down to rational, wealth-seeking behavior fails to explain the motivations of rich people who stake their reputations on comparatively small gains. Martha Stewart, for example, was charged in civil court with making a $45,000 profit from insider trading, at a time when her net worth was more than $1 billion.

“If you take the narrow economic view, you should have only poor people committing crimes because the benefit is great and the cost is very low. They don’t have the reputation or the future income to lose,” says Bhattacharya.

So how do you explain white-collar crime?

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Photo courtesy of the Kelley School of Business at IU Bloomington

Indiana University

Utpal Bhattacharya is an associate professor of finance at the Indiana University Kelley School of Business in Bloomington.

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trading is terrible, there should be a law.’ But I wanted a dollars-and-cents answer. Does it matter for shareholders? The finding was that when a country makes insider trading illegal, nothing happens to share prices.”

Bhattacharya looked into the insider-trading laws of all 103 countries that have stock markets (a process that took years of cold calls to national agencies, as no such information had previously been compiled). What he discovered was that while most countries had banned insider trading, very few had prosecuted anyone for it. The markets, he says, made a very clear distinction between “talking the talk and walking the walk.”

“Markets realize that talk is cheap. It’s only when a country prosecutes a person for the first time that share prices go up.

So, it’s not the law, stupid, it’s the enforcement that counts,” he says.

Further analysis revealed that keeping ineffectual laws on the books actually hurts a country’s economy. A second paper, “When No Law is Better Than a Good Law,” also with Daouk, looked at such cases. It was published in the Review of Finance in 2009.

“When a country institutes a law but does not enforce it, share prices actually go down,” Bhattacharya reports. He makes a comparison to gun laws to illustrate how a law without enforcement creates a huge disadvantage.

“If you have a law against guns but you don’t enforce it, good guys will not have guns, bad guys will have guns. So you wind up in a society where a good guy is actually worse off than in the Wild West,” he says. Markets detect this disadvantage, and the result is costly for the country as a whole.

Taking apart Ponzis The lack of alignment between policy and practice also offers insight into another financial crime of interest to Bhattacharya: Ponzi schemes. These large-scale swindles, named after famed fraudster Charles Ponzi, rely on ever-expanding circles of investors to pay off previous investors and maintain an appearance of profitability.

“Traditional economic theory finds it very difficult to explain Ponzi schemes,” Bhattacharya says. Investors often suspect such ventures are not legitimate due to the high rate of return and unusual predictability of profits. It’s also common knowledge that these schemes always collapse eventually, either underneath their own weight or because of detection by governmental authorities. Reason would suggest, then, that people would refuse to participate for fear of being in the last, unprofitable round of investors.

But Bhattacharya says there is “a very rational reason for taking part.” It has to do with the government’s response once the fraud is uncovered. If the government claims that it will never bail out Ponzi victims but eventually does so after a Ponzi scheme explodes, then people are better off participating than not participating. Russia’s response to the $1.5 billion MMM scandal in 1994 was an example of such a situation.

“What exactly does a bailout mean? It means a transfer of money from people who did not take part to people who did take part,” Bhattacharya explains. “This is the calculus: If I do not take part, the government is going to take some of my money to bail out the people who did.” Participating has at least the potential of financial reward, whereas not participating leads to certain financial loss. “Bailouts encourage Ponzi schemes,” Bhattacharya concludes.

His theory garnered a good deal of attention following the uncovering of Bernie Madoff’s investment fraud, landing Bhattacharya an opinion article in The New York Times economics blog. He opined that the government bailouts in 1998–99 would lead to more Madoffs in the future. Other aspects of his research on white-collar crime have frequently been featured in The Economist, the Financial Times, and Money Magazine.

Go-to guy At present, Bhattacharya is among the go-to academics for media covering the case against billionaire Raj Rajaratnam, co-founder of the Galleon Group hedge fund, who is charged with masterminding the largest insider-trading scheme ever brought to court.

“There was a whole network of people involved from the top of the top in a few American companies,” Bhattacharya says of the case. “The quid pro quo was this: ‘Give me information about what your firm’s going to do, and you’ll own a share of my hedge fund, or I will give you cold cash, so we’ll all benefit.’”

The first case to use court-authorized wiretaps, the Galleon case is also unusual because the defense ultimately lost

Photo by Louis Lanzano, Associated Press, reprinted with permission

Money-money-money?

money. Bhattacharya says he’s never seen a conviction based on insider trades that resulted in a financial loss.

Bhattacharya argues that insider trading is not necessarily bad. In fact, it improves what is known as “market efficiency” — the degree to which the market reflects the true value of investments.

“If a CEO trades his own shares, and people see that someone’s buying a lot, they will guess that someone has good news. The price starts reflecting the CEO’s information,” Bhattacharya says. “If, instead, you stop this guy from trading, prices will not reflect the truth.”

Bhattacharya’s first major paper illustrated this principle by examining the Mexican stock market and its failure to respond to news announcements from corporations. In “When an Event Is Not an Event: The Curious Case of an Emerging Market” (Journal of Financial Economics, 2000), he demonstrated that while changes in stock value commensurate with company events were occurring, they took place prior to the public announcements.

“Whether it was firing people, mergers, or acquisitions, the prices would change before the press release. We investigated further and found that insider trading was so rampant that all this information came out before the release, and nothing happened on the day of the release,” Bhattacharya says.

Lord of the Flies vs. 1984 Economic arguments against insider trading are subtle, Bhattacharya says: “Investments are distorted or outsiders who would like to analyze the company are crowded out.” But he is not convinced by these explanations.

“I’ve always had this huge tension in my life regarding insider trading,” he admits. “There are two diametrically opposing points of views, and I sympathize with both of them.

There’s the legal argument that says inside information is property, and some guy is stealing the property, so that’s immoral and unfair. But the contrary argument is that it’s his firm, it’s his information, and he can profit from it. Besides, it makes the market more informationally efficient.

“Insider trading is a very, very narrow thing, but it encapsulates all the tensions of the financial system.” Bhattacharya continues, saying it’s never clear where the line is between too much and too little regulation.

“You have the Lord of the Flies extreme on one hand, where individuals without an authority figure explode into violence and chaos,” he says. “On the other hand, there’s 1984, where you see how authorities abuse individuals. I take the view that there is no solution to this tension. All we can do is fumble along as best we can.”

Although he personally feels ambivalent about insider trading, Bhattacharya acknowledges that if nearly all countries ban it, it must be because “no one likes insider trading.” He is willing, then, to categorize the practice as one of the few financial activities that he believes is best kept under legal constraints.

“Because market economies are flawed, we should have regulations,” he concludes. “But because governments are even more flawed, we should have few regulations.” And above all, any regulations must be “vigorously enforced.”

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Raj Rajaratnam, billionaire founder of the Galleon Group, a major hedge fund, is led in handcuffs from New York’s FBI headquarters in October 2009. In December 2009, Rajaratnam pleaded not guilty to conspiracy and fraud charges in the huge insider-trading case.

Elisabeth Andrews is a freelance writer in Bloomington, Ind.

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Spend It Well Money don’t get everything, it’s true But what it don’t get, I can’t use I need money (that’s what I want) —“Money,” Jerry Lee Lewis

by Lauren J. Bryant

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Indiana University

n my way to talk with David Craig, I get a little nervous. Craig, an associate professor of religious studies, is an expert in ethics, particularly the ethics of consumption — that is, our moral obligations as consumers.

During the hour-long drive to meet him on the Indiana University – Purdue University Indianapolis campus, I self-consciously check what I’m wearing — no ostentatious clothing labels or jewelry, thank goodness. But would Craig disdain the noncarpool trip I’d made in my fossil-fueled minivan (at least I was listening to NPR), drinking coffee from everyone’s favorite corporate coffee shop? How bad was I going to feel about my latté?

Arriving in a book-laden office, I’m relieved to be greeted by a crisply dressed man sitting behind a sleek laptop computer who quickly describes his intellectual work like this: “The simplest way of saying what I’m interested in is, it’s about people’s desires. We want things! Much of the moral life is about figuring out whether we can get on the same page about what we want.”

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Ruskin who?

Craig developed an interest in the “what we want” question as a graduate student at Princeton University, where he studied a combination of political theory, philosophy, and religion as he pursued his Ph.D. in religious studies. While working as a self-described “alienated bureaucrat” for the Environmental Protection Agency, processing paperwork related to budgets and private contracts, Craig says he became “horrified” by the ways public policy goals were “subsumed by minute cost-benefit analysis.”

Craig told his academic advisor he wanted to write a dissertation criticizing rational choice theory — the economic theory that in all exchanges, we try to maximize our advantages and minimize our losses, based on rational choices. His advisor pointed him to John Ruskin.

Ruskin (1819 – 1900) isn’t commonly known among ethicists, or economists for that matter. Today, he is primarily remembered as a prominent Victorian art critic. But Ruskin was a prolific writer (“his corpus is four times longer than the Bible,” Craig says) and a vocal social critic. According to biographer George Landow, Ruskin’s interpretations of human society changed the views of men such as Mahatma Gandhi and had a greater influence on members of the 19th-century British Parliament than Marx’s Das Kapital.

Eventually, Craig published his book John Ruskin and the Ethics of Consumption. Studying Ruskin, Craig says, changed his approach to ethics. The art critic’s work helped him appreciate the importance of aesthetics to ethics, especially when it comes to consumption.

“Ruskin’s criticism mixes beauty and morality,” says Craig.

“Think of a place like the Lucas Oil Stadium [which replaced the RCA Dome] in Indianapolis. Ruskin would have argued that such a modern-day cathedral expresses a shared sense of beauty and also a sense of a purpose that’s worthy of vast public expenditures. We can read general passions, loyalties, and convictions from people’s symbols, such as architecture or what they purchase.

“Many of our ethical debates about who we are and what is good start from basic premises that can’t be articulated fully in

On being well-made In Ruskin’s, and Craig’s, view, ‘spending well’, or good consumption, means purchasing well-made things produced by well-made people.

A well-made consumer, Craig explains, is thoughtful. He or she is capable of reflecting on the lives of people who produce the thing about to be bought. Do the producers work in decent conditions and live in healthy environments? Are they paid a fair wage? Do they have access to essential things (food, education) they need to develop themselves?

“Ruskin had a keen sense that in buying from others, we help make them into the people they are,” Craig writes in his article “The Virtues and Limits of Good Consumption,” published in the journal Soundings. “If we pay fair prices for work done in decent working conditions by people who have chosen their work, then we can help make people well. If not, then we literally make other people’s lives a misery by … denying them a

David Craig is an associate professor of religious studies at Indiana University – Purdue University Indianapolis.

chance to make the most of themselves.”

For example, local food movements (e.g., farmers’ markets, “slow food,” community-supported agriculture) let shoppers learn something about where, how, and by whom their food is grown. Buying products made according to fair-trade standards can extend our conscious consumerism.

But Craig acknowledges there are limits to what consumers can know. “We can patronize electronics stores that accept e-waste for recycling, but it’s hard to get past the sleek lines of electronic gadgets to the guts of their production,” Craig says.

“At some point, public policy tools, from safety regulations to carbon taxes, are needed to help us learn [to make consumer choices] that consider the political and economic frameworks that help people have better lives.”

A little character In a free market system, we demonstrate our consumer choices by paying a certain price for a certain thing. But consuming according to price alone can stunt our moral and ethical growth.

“In the capitalist marketplace, if all we are willing to seek is our own advantage in every transaction, then we create a market system in which the only thing we share is mutual covetousness,” Craig says. “An economy can run that way, but it is a system of people taking advantage of each other.”

To move toward good consumption, we need to cultivate a little moral character, Craig says, starting with the virtue of piety. In its ancient Greek sense, piety is associated not so much with religious devotion and godliness, but more with recognizing and acknowledging “the sources of our existence,” he says.

From a piety point of view, economic exchange is not about seeking individual advantage in every transaction. Instead, “the task is to seek out the gifts you have received,” Craig says.

“Piety is about learning how to receive the things we buy with a

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All-consuming We display what we care about by consuming, Craig observes.

Humans are inherently social creatures who want to belong, and consuming things — from food to fashion to fine art — is a powerful way we express identity, both our connectedness to a group and our individuality. Just think of teenagers cruising the closest shopping mall, each of them sure they are rocking a personal style, all of them wearing the same $60 pairs of Converse sneakers and $100 pairs of designer jeans.

In a now-classic article on retailing first published in 1955, marketing consultant Victor Lebow describes “the real meaning of consumption” like this: “The measure of social status, of social acceptance, of prestige, is now to be found in our consumptive patterns. The very meaning and significance of our lives today is expressed in consumptive terms.”

Lebow’s rhetoric might be chalked up to the man-inthe-gray-flannel-suit mentality of the postwar ’50s, but his definition of consumption echoes a fundamental truth about humans, says Craig: We want things, and those things signify.

“We’re desiring, striving creatures who want good things,” Craig says. For that reason, he says, the “simple life” of fulfilling basic needs is insufficient. “The simple life is not the answer to our problems. I don’t think it satisfies people, channels their energies, allows for dynamism in life.”

It’s not that Craig downplays the problems caused by human consumption. As an ethicist, he believes many of human society’s choices in cultural, environmental, political, and economic realms border on madness. But like John Ruskin, Craig thinks there is a different way to consume — by developing a practice of good consumption.

“Ruskin would have said, ‘Spend money,’” Craig says. “’Spend it. Just spend it well.’”

Photo courtesy of the IUPUI School of Liberal Arts

words,” Craig continues. “Instead, those debates turn on images and symbolism that display what we care about.”

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sense of their giftedness. In this sense, it is central to an ethics of consumption.”

Craig is quick to agree that thinking of purchases in terms of “giftedness” is no easy lesson. It pushes us to think outside the boxes of “costs” and “benefits.” Why was the thing we want made in the first place, and why we are purchasing it? What motivated the people who made the thing? What good were they trying to achieve in their work? What are we purchasing the thing for? Are we making the most of what we receive?

“Good consumption is an exercise in imagination,” he says. “It requires us to imagine the kinds of lives our purchases buy for other people and what a good life is for ourselves.”

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What about Wall Street?

Talk of piety and gifts is all well and good, but what about the machinations of Wall Street? What about the punishing economic meltdown of 2008 – 09 and the bailout-and-bonuses brouhaha that ensued? What are we to make of consuming morally, when the CEO of Goldman Sachs bank describes himself as “doing God’s work”? (See The (London) Sunday Times, November 8, 2009.)

In Craig’s analysis, John Ruskin’s theory of money helps answer such questions. While classical economic theory says money is a neutral medium of exchange, in Ruskin’s view, money is moral. It has proper, and improper, operations, and ultimately, the value of money depends on those operations.

Money’s first moral function is to command people’s labor.

The refusal or failure to pay fair wages drives down the price of purchases. We may end up with more money in our pockets, but it also leaves us holding relatively deficient goods made by workers with relatively deficient lives.

In situations of exploitation, your dollar buys less, lowering the money’s value, Craig explains. “Money becomes relatively worthless when all you can buy with it are cheaply made goods with no lasting value, produced within a social structure of inequality,” he says.

Money retains its value in an economy where consumers take turns commanding one another’s labor. When I pay you to do a service, I ask for (“command”) that service to be performed, and you agree. Then you take your wage and ask someone else to provide another good or service. At each turn, more people are able to satisfy their needs and develop themselves.

Money’s second moral function in Ruskin’s theory is to acknowledge debt. When I buy a product or service, the money I pay is an acknowledgement of my indebtedness —through my purchase, I’ve removed something from our share of goods and services, reducing the store of what we have. This circulating of debt calls forth a “moral act,” says Craig.

Money can never repay what Ruskin called the “toil” that every form of work involves. Acknowledging debts that cannot be repaid is the beginning of taking moral questions into

account as we consume: Who made the goods? In what conditions? For what pay? For what purpose?

Wall Street’s complex mortgage-backed securities and derivatives obscured our moral vision, says Craig. Overpriced, poorly built homes were sold to people who could not afford them. Those loans were bundled, split, and sold to distant investors, while complex derivatives were spun off as insurance.

These dubious forms of finance, completely disconnected from the worth of the houses, the credit of the buyers, or the vitality of the communities, became more and more desired, until their imagined monetary value came crashing down with the global economy in tow.

“When the market went ‘boom!’, we got precisely what we were asking for,” Craig says. “One way or the other, money’s value will finally show through.”

In other words, money is a moral sign that ultimately reflects the wealth or “illth” of our imaginations. Ruskin wouldn’t have been surprised by the recent financial debacle, says Craig. He would have seen it as a predictable outcome of the idolatry of money. In the terms of religious ethics, Craig says, idolatry means loving or desiring things in the wrong order. When it comes to the Wall Street mania, “Ruskin would have said, when people fixate on money for money’s sake, their desires are disordered. He would have said, when people worship false gods, they should beware the wrath of those gods.”

Ordering our loves Craig acknowledges that in a culture like ours characterized by individualism and freedom of choice, any ethics of consumption is shadowed by the problem of paternalism — we don’t like to be told what is right or good for us. But he points out that as a society, Americans already share generally agreed upon standards for what’s good for us — for example, minimum wage laws, child labor laws, and health and safety regulations reflect values we hold to in the realm of public policy and economics.

In the end, though, good consumption comes back to one thing, Craig says: desire. The ethics of consumption involves a debate about desires to decide what we want, what policy standards we will accept, and what common commitments we will uphold. Ethical consumption requires us to train our desires, because in the end, our choices define us.

“We are hooked on unimaginative consumerism as the engine of our economy and a mainstay of our identity,” Craig says. “We need to take more responsibility for how we think about our lives and our society. Starting small with shared activities we enjoy — a community garden, for instance — is an important training ground for bigger change in our world.

“Good consumption takes considerable practice in imagining and acting on the better lives we want. It’s about ordering our loves.”

Lauren J. Bryant is the editor of Research & Creative Activity magazine.

Keeping Up With

E-Commerce

by Jeremy Shere

I

n 2002, Alan Ralsky, the so-called “king of spam,” gave an interview to his hometown newspaper, the Detroit Free Press. Showing off his spacious home and many expensive possessions, Ralsky touted himself as a tech-age pioneer, an e-mail entrepreneur who had figured out how to make millions by flooding inboxes with

unsolicited investment opportunities and other come-ons.

What Ralsky didn’t reveal was that the real source of his wealth was an e-mail-enabled “pump and dump” stock scheme. Detroit prosecutors, working with the FBI and Canadian authorities, discovered that Ralsky’s business consisted mainly of sending bulk e-mail promoting Chinese penny stocks to raise the price and then dumping pleaded guilty to conspiracy to commit wire fraud, money laundering, and violating the CAN-SPAM

Photos by Ann Schertz

Act — a 2003 law regulating commercial e-mail.

For Sarah Jane Hughes, University Scholar and Fellow in commercial law at the Indiana University Maurer School of Law in Bloomington, the Ralsky case is a fascinating example of how far the law has come in regulating Internet commerce, and how far it still has to go.

“State attorneys general are quite good at ferreting out CAN-SPAM cases, but that’s a local solution, not a global solution,” she says. “No U.S. law can protect you against online Nigerian or Russian spammers.”

Given the rapid growth and evolution of e-commerce over the past decade, the ability of regulatory laws to keep up has become a pressing issue for both policymakers and academics, like Hughes, who focus their research on the complexities of buying and selling online. In a recent article, Hughes sums up the central problem succinctly: “Regardless of

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his own shares, leaving his “clients” in the lurch. In 2008, Ralsky was indicted on several counts, and in 2009, he

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Secure, more and/or less In the early to mid-1990s, shopping online seemed like a risky venture. Revealing a credit card number, address, telephone number, and other personal information raised troubling questions about who was seeing all the information and whether the transaction would actually take place. Unlike the secure, trusted atmosphere of a brick-and-mortar store, the Internet seemed like the Wild West — an unknown world where hucksters with multiple identities could operate free of any laws or social codes.

But then along came eBay, Amazon.com, and PayPal, and within a few years, everything seemed to change. With their sophisticated search engines and user-friendly interfaces, and with PayPal working as a sort of online wallet, Amazon and eBay seemed like secure virtual places to shop. By the mid-

panies can raise interest rates and bans deceptive payment policies.

For the most part, U.S. commercial law works, both off- and online. Buy a new TV at a Best Buy store or through the Best Buy Web site, and you can be reasonably certain that your credit card company will bill you for the correct amount. If there’s a mistake, or if mysterious charges appear on your statement, the matter is often easily resolved in a single phone call to customer service. Whether you’re sitting at a computer or standing at a checkout counter, commercial law is well equipped to redress nearly any harm that may befall you while shopping.

No speed limits But there are some important differences between old-fashioned slide-your-card commerce and doing things online, Hughes says. For one thing, there is the issue of scale.

“People sometimes compare the Internet to a mail-order catalogue, and in some ways, it’s similar,” Hughes says. “But it’s one thing to browse a 10-page paper catalogue and another to click through an endless number of links online.”

In other words, for every legitimate, dependable online retailer, there are thousands of sketchy vendors only a click away.

And although commercial laws technically cover all online transactions, it’s one thing if there’s a mix-up with Amazon,

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From a legal standpoint, online shopping is no more secure than it was in the mid-1990s.

Despite the explosive growth of electronic commerce of all sorts—from shopping to banking to investing—no new Internet-specific federal commercial laws have gone on the books in the past quarter century, with the exception of the CAN-SPAM Act in 2003.

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2000s, buying and selling had become commonplace, assumed by millions of online shoppers to be no less safe than a trip to the local mall.

From a legal standpoint, though, online shopping is no more secure than it was in the mid-1990s. Despite the explosive growth of electronic commerce of all sorts—from shopping to banking to investing—no new Internet-specific federal commercial laws have gone on the books in the past quarter century, with the exception of CAN-SPAM in 2003.

In part, Hughes explains, this is because doing business online is no different than any other type of commerce already regulated by the federal Uniform Commercial Code and other regulatory acts. First published in 1952, the UCC lays out laws governing the basics of commercial transactions—buying, selling, advertising, penalties for writing bad checks, and so on.

The Fair Credit Billing Act, voted into law in 1974, regulates billing practices, while the 1978 Electronic Funds Transfer Act covers the realm of direct electronic deposits. More recently, the Credit CARD Act of 2009 limits when credit card com-

but it’s another if you’re buying used electronics on a Web site hosted on a server somewhere in Russia that is run by two guys with no fixed address.

Alongside the unlimited vastness of the Web, there are problems raised by its speed. “Alan Ralsky was able to defraud so many people not only because he could send spam to so many people at once but also because he could do it so quickly and cheaply,” Hughes says. “In the old days, the expense of sending millions of letters would have limited the scope of the scam, but today with the ability to send an unlimited amount of e-mail around the clock, there’s virtually no limit.”

Together, the scope and velocity of the Internet lead to two more regulatory challenges: anonymity and jurisdiction.

Ralsky succeeded in part because he was able to pose as a legitimate investor. His flamboyant nature and willingness to give interviews eventually got him caught, but online fraudsters have since gone largely underground while developing evermore sophisticated means of separating people from their money. Clicking on a link in an unsolicited e-mail from your

Photo courtesy of the Maurer School of Law at IU Bloomington

how dedicated the law is to preventing and redressing injury,” she writes, “it cannot reform itself fast enough to keep pace with the imaginations of individuals who are intent on committing fraud or with the types of errors that may be introduced as payments move from paper to electronic.”

The challenge, then, is to figure out how to enable the law to keep up. And the first step is to understand the culture of electronic commerce and what makes regulating it so tricky.

bank alerting you to a problem may open what appears to be the bank’s own Web site. But it may instead be an ingenious mockup created to trick people into giving away passwords, bank account numbers, and other sensitive information.

While such scams are by now well-known, tracking down the perpetrators is often impossible. And even when Internet fraudsters are identified and caught, the problem of jurisdiction remains. For a victim of Ralsky’s stock scheme living in Germany, do U.S. or German laws apply? If the victim sues Ralsky through German courts, is there any means of enforcing the judgment?

There are few clear answers. What is certain, Hughes says, is that we’re not likely to see an international e-commerce regulatory body anytime soon. “It’s a matter of sovereignty,” she says. “Most governments simply don’t want to give up the power to protect domestic consumers and don’t want to be beholden to some international body.” Even within the United States, laws regulating electronic commerce vary from state to state, with little specific federal guidance.

Buyer beware So if, as Hughes has argued, the Internet moves too quickly for the law to keep up, what’s a consumer to do? The answer: fend for yourself. “Consumers need to educate themselves about the benefits and pitfalls of doing business online,” she says.

“You wouldn’t sell your car and sign over the title for a personal check with no way of knowing if the check will clear. It’s the same thing online—you have to be cautious.”

From its inception, the Internet has been self-regulating.

Computer viruses, e-mail scams, and other schemes are regularly monitored by thousands of ad-hoc watchdog groups spreading the word about the latest threat. Large commercial sites like Amazon and eBay include vendor ratings and customer comments. One of the best ways of knowing whether or not to buy something online is to read the comments lists.

Uniformly positive reviews make the purchase a safe bet, while enough negative comments stand as fair warning that the buyer should beware.

For now, Hughes says, given the speedy growth of online commerce and the snail’s pace of regulatory evolution, the best consumer protection is common sense. Just as the scope and speed of the Internet make it a breeding ground for scammers, those same qualities empower the average consumer to make smart decisions.

“It’s the old ‘kick the tire’ routine—when you buy something online, do enough research to make sure you’re dealing with a legitimate vendor,” Hughes says. “If you make use of the technology and your smarts, you can do pretty well.”

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Sarah Jane Hughes is a University Scholar and Fellow in commercial law at the Maurer School of Law at Indiana University Bloomington.

Jeremy Shere is a freelance writer in Bloomington, Ind.

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Play Money Indiana University

by Jeremy Shere

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S

ince going online in 2003, the virtual world Second Life has attracted millions of users who digitally navigate an endless world featuring landscapes urban and rural.

The Second Life universe includes its share of whimsy — players can levitate, fly, and teleport from place to place — but in many ways, it closely mirrors the real world. You can buy and develop land, take classes, go to parties, decorate homes and apartments, look for jobs, even start a business. In fact, Second Life is teeming with shops and stores of all kinds, where Lin-

den dollars — the Second Life currency named for Linden Lab, the company behind the online world — can be spent on virtual tables, books, art, music, clothes, domestic help, labor, and a virtually unlimited amount of other goods and services. By all accounts, the Second Life economy is booming.

But what kind of economy is it? Do gamers who are buying and selling virtual goods in a make-believe world using Linden dollars really constitute an economy that is, well, real?

“It’s as ‘real’ as the economy in the flesh-and-blood world,” says Edward Castronova, a professor in the College of Arts and Sciences’ Department of Telecommunications at Indiana

University Bloomington. “The currency and goods and services may exist only in the game world, but within that universe, there’s an economy that functions pretty much like ours.”

The explosion of massively multiplayer online role-playing games (MMORPGs) presents novel opportunities to study human behavior, says Castronova, author of two books about virtual worlds. “[Virtual worlds] give you the ability to study beehives, not just bees,” he says. “You can’t set up five different real-world New Orleans and throw five Katrinas at them to see what happens. But you can do this with virtual worlds.”

For researchers such as Castronova, online worlds make it

Accidental expert Castronova didn’t set out to become an expert on virtual economies. In fact, his interest began as a lark, a joking response to professional disaster. In the late 1990s, the University of Rochester — where Castronova began his career —shut down its program of public policy. Just a few years before he was set to earn tenure, Castronova was out of work.

Although Castronova did find a job teaching economics at California State University Fullerton in Los Angeles, he felt stuck and uninspired, his career seemingly at a dead end. For solace, he started playing video games, in particular EverQuest — an online, role-playing fantasy game featuring wizards, dragons, warriors, and epic quests. Fascinated by games and puzzles and disenchanted with his daily reality, Castronova soon became a dedicated gamer.

“I wasn’t married, I was living in a dinky apartment in L.A., feeling old and scuffed up by the world, and here was this place where I could be a hero,” Castronova says. His EverQuest avatar, a healer, was popular and successful in the virtual world. “In real life I was stuck teaching cynical, demoralized students, but when I went online, groups on a quest always needed a healer. It was incredibly rewarding.”

The deeper Castronova got into EverQuest, the more he began to see parallels to the real world, especially the economy.

As a prank, in 2002 he began writing a spoof study focusing on virtual economies in online games. “But what started as a joke soon became something more serious,” Castronova says. “The more I looked into it, the more I realized that the EverQuest economy was surprisingly large and complex.”

The paper was rejected by all traditional, paper-based economics journals but found a home online, on the Web site of the Social Science Research Network — a global research archive based in the United States. By the end of the day, the paper had 500 downloads — an astonishing number in the early 2000s. Suddenly, Castronova’s phone started ringing.

He fielded calls from game developers, economists, and even U.S. Department of Defense officials interested in using virtual worlds as a wartime communications tool. “They were shocked to see that 14-year-old kids were expert at manipulating all the information on-screen during game play,” Castronova says. “My main contribution was to tell them that in the future, virtual worlds might be where our most treasured assets are located.”

Energized by the intense interest in his project, Castronova kept writing about virtual, game-based economies. Finally, he caught the attention of the Department of Telecommunications at IU Bloomington, who recruited him in 2004.

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Photo by Rachel Seed, courtesy of the College of Arts and Sciences, IU Bloomington

possible to test the validity of economic theories in an array of possible scenarios involving real people — via avatars — shopping, browsing, buying, and selling. “These games are like macro-scale petri dishes for studying economic behavior,” he says. “That’s fascinating. Today there’s less of a divide than ever between what’s ‘real’ and what’s ‘virtual.’”

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‘All money is virtual’ A central premise of Castronova’s research is that the economies of online virtual worlds are real, or at least behave according to the same laws that govern economies in the nonvirtual world.

It’s a provocative idea but also a tough sell, given that participants in online game-based economies are often teenagers pretending to be orcs, elves, and wizards battling monsters. “I encountered a lot of skepticism because people assumed that kids involved in fantasy role-playing wouldn’t care about prices and the law of supply and demand,” Castronova says.

But he has found that when it comes to buying, selling, and other basic economic behaviors, elves and orcs apply the same reasoning as bargain hunters or Wall Street traders. In a simple experiment, Castronova created two versions of an online world identical in nearly every detail. But in one world, after players had been exploring it for some time, Castronova raised the price of a potion to make it twice as expensive as the same potion for sale in the alternate world. As soon as the price went up, players started buying less of it.

“It makes perfect sense, because just like in the real world, when you raise the price of something, people typically demand less of it,” Castronova says. “The brain is a collection of modules that interact in strange and unpredictable ways, but when it comes to money, we seem to be wired to behave in a very particular way, no matter the context.”

As for whether the virtual nature of online worlds might somehow skew or undermine the logic of how people act with money, Castronova has a ready answer. “This is virtual,” he says, slapping a dollar bill down on his desk. “It’s just a piece of paper with words and pictures on it. And it works as currency because it’s part of an unspoken social agreement that’s not really enforced by anyone.”

To further illustrate the point, Castronova points to a frame on his office wall containing Deutschmarks from the 1920s.

There’s a 1,000-mark bill, a 5,000-mark bill, a bill worth 500 million marks, and a 20-mark bill. Yet thanks to wild inflation in the German economy of the period, the bills are worth the same amount.

“All money is virtual,” Castronova says, whether it’s in the bank, in your wallet, or in the form of Linden dollars. “Whether you’re playing Monopoly or buying things in a store in a virtual world, the same principles apply — there are things you want that are hard to get which you are willing to pay for.”

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Slay the dragon Castronova allows that there are some differences between gaming economies and real-world economies—namely that, all things considered, there’s ultimately less at stake in the world of a game.

“A virtual game economy is completely safe,” he says. “You can lose your character and possessions if you die in the game, but you can always start over.” Plus, in games there’s no such

thing as homelessness, no need for basics like food and shelter, or protection from physical violence. The types of goods that matter most in online worlds are what economists refer to as country club or luxury goods, like cars and plastic surgery.

But in developed nations where, for the most part, basics such as food and shelter are plentiful and cheap, the economy is driven largely by the sale and purchase of luxury items. So when it comes to economics, Castronova says, virtual worlds are useful test tubes. In several studies and in his book Synthetic Worlds: The Business and Culture of Online Games (2005), Castronova describes dozens of parallels between game economies and other economies. One of the most striking yet most obvious is the prevalence of stores in many multiplayer games.

Even the most otherworldly often have shops with a shopkeeper and items for sale on virtual shelves.

“It’s not really so surprising, because a store represents safety, an orderly space with stable rules governing fair transactions,” Castronova says. “Just like in a brick-and-mortar store or an online marketplace like Amazon, in a game you want to be able to trade hard-earned resources for cool stuff.”

Despite their fantastic trappings, Castronova says, most online role-playing games are conservative when it comes to basic economic principles. Unlike the real world, where jobs come and go and workplace rivalries get in the way of promotions and bonuses, multiplayer games are more equitable. Complete a quest, and you earn a set number of points. Slay the dragon, and you are rewarded.

Blurring the line Alongside their value as petri dishes for testing economic theories, online games have become lucrative businesses in and of themselves. Multiplayer games played on consoles like XBox 360 and Sony PlayStation 3 rake in billions. And within online worlds like Second Life, a handful of virtual entrepreneurs have made millions selling virtual goods.

In some cases, game-world currency has spilled over into the real world, to problematic effect. A Chinese online game using an invented currency called QQ coins caused problems when real-world corner stores began selling the coins. Soon, stores began accepting QQ coins in exchange for goods. The coins were on their way to becoming an alternate currency until the Bank of China quashed it.

As larger numbers of people spend more time and money playing online games, Castronova says, game-based economies will continue to intersect with economies in the outside world in increasingly complex and interesting ways.

“The line between what’s virtual and what’s real has become blurred to the point that the distinction has become almost meaningless, at least where economics is concerned,” he says. “The more we learn about how economies behave in the online world of games, the more we’ll know about human behavior generally.”

Jeremy Shere is a freelance writer in Bloomington, Ind.

by Elizabeth Rosdeitcher

R

ebecca Spang, a cultural historian of 18th- and 19th-century France, did not get into her research on money through the usual routes. She did not go to business school or study finance or even major in economics as an undergraduate. Instead, her route passed through French cafés, bakeries, and butcher shops. It included stews and patés, cookbooks and crockery, cheese and truffles, and all manner of edible things.

Such items populate Spang’s award-winning first book, The Invention of the Restaurant, which traces the emergence of what we now call “the restaurant” as part of the intricate social and cultural transformations of the French revolutionary

period. After completing her book on French dining, Spang set out to explore France’s economic life, particularly the symbols — the ornaments and accessories — used to represent the new democratic ideas in revolutionary France. For example, at the time, wearing a blue, white, and red ribbon was required by law for men to display their loyalty to the nation.

“I was thinking about all the symbols of the French Revolution, and I wondered, ‘Who made them, where did they come from, how did they get distributed?’” says Spang, who is an associate professor in the College of Arts and Sciences’ Department of History at Indiana University Bloomington. “As I was reading, among other things, classified advertisements — because I figured if you go into business manufacturing blue, white, and red ribbons, you have to advertise them — it dawned on me that the symbol that circulated the most widely and was produced in the greatest quantity was money.”

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Photo by Ann Schertz

Two Sides of the Same Coin

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Rebecca Spang is an associate professor in the College of Arts and Sciences’ Department of History at Indiana University Bloomington.

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Just as the symbolic ribbons made their way into people’s lives, so, too, did a large volume of paper money. Spang’s curiosity led her to study money not only because it is the means for acquiring stuff, but also because money is a kind of stuff itself.

This is a side of money most of us do not typically consider.

As Spang observes, “most of us barely remember that money has a material form.”

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Stuff and Cents Stuff and Money in the Time of the French Revolution (the working title for Spang’s next book, forthcoming from Harvard University Press) is the story of a time when the materiality of money featured prominently in people’s lives.

In the contemporary United States, “we have been peculiarly immune to these sorts of questions and concerns,” says Spang. But to live through the period of the French Revolution in the late 18th and early 19th centuries, was, she suggests,

to be plagued by questions about money’s value and how that value was — or, more unnervingly, was not — incarnated in its literal form. How money worked and what it was made of were two sides of the same coin.

Spang’s awareness of various uses and forms of money was sharpened by writing about restaurants, particularly the “peculiarity of the restaurant as a situation in which, unlike others, you consume first and pay later. Imagine if I wear a pair of boots until I don’t like them anymore, and then I pay the people at Zappos.com. It doesn’t work that way.”

Despite some commonalities between her two topics, Spang says her history of money is taking a very different direction.

While The Invention of the Restaurant offers an explanation of how the restaurant as we know it came to be, Stuff and Money does not lend itself to such a neat plot. “After all,” Spang notes, “the various monetary experiments of the revolutionary era largely ended in institutional chaos.”

Penny wise he one-cent coin, a part of the United States’ circulating currency since 1793, has gotten a makeover for 2010, courtesy of artist and Indiana University graduate Lyndall Bass. Bass created one of four designs selected for the reverse side of the 2010 Lincoln penny.

The new penny is being issued to commemorate President Abraham Lincoln’s “preservation of the United States as a single and united country,” according to the U.S. Mint.

Bass’s design on the “tails” side of the penny features a union shield with a scroll draped across it and the inscription E Pluribus Unum (“out of many, one”). The union shield dates back to the 1780s and was used widely in the Civil War. The shield is also featured on frescoes decorating the halls of the U.S. Capitol Building. According to designer Bass, the waving scroll symbolizes that “money does not become true currency unless it is moving,” she says.

Bass holds a bachelor’s degree in fine arts and a master’s degree in instructional systems technology from IU Bloomington. While at IU, Bass studied with Bonnie Sklarski, a now-retired IU professor of painting and fine arts.

After the U.S. Mint was created in 1792, one of the first coins it made the following year was the one-cent coin, which looked very different from the modern version. The image on the first cent was a lady with flowing hair who symbolized liberty. The coin was larger and made of pure copper, while today’s cent is made of copper and zinc.

In 1857, the cent showed a flying eagle on the front and a wreath on the back. From 1909 to 1958, the Lincoln penny’s reverse side featured two sheaves of wheat and became commonly known as the “wheat penny.” From 1959 to 2008, the reverse featured an image of the Lincoln Memorial, commemorating the 150th anniversary of Lincoln’s birth.

When Lyndall Bass was a single mother putting herself through IU, she recalls taking a shortcut through the Indiana Memorial Union past a marble fireplace. Inscribed on the mantle was a quote from Abraham Lincoln: “I will study and get ready and then maybe the chance will come.”

“There were many days that Mr. Lincoln’s quote sustained me and gave me courage,” Bass says. “For this reason, my experience at IU is, for me, emblazoned on the penny.”

For more on Lyndall Bass and her artwork, see www.lyndallbass-art.com/.

Images courtesy of the U.S. Mint

Image courtesy of the College of Arts and Sciences, IU Bloomington

T

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Photo by Ann Schertz

Matters of Life and Debt Spang views her work as part of a wider endeavor to understand French history in terms of how ordinary people experienced it. Because both the presence and absence of money is an omnipresent feature of everyday life, it offers access to “ordinary” experience.

But financial and monetary issues also played a central role in the Revolution itself. “You could say that the French king started the Revolution by calling the Estates-General, the parliamentary body that hadn’t met for 175 years, because the monarchy was bankrupt,” says Spang. “From the very beginning, the Revolution was a financial problem.”

This fiscal fact has fallen out of the story for some historians, who over the past 20 years have focused more heavily on the political philosophies guiding the Revolution’s principal actors.

In Spang’s telling, though, the monarchy’s debt was not only instrumental to the unfolding of the Revolution, but also to the way in which that debt affected the lives of the people.

As she explains it, to pay off the debt, the state took control of church lands and sought to use this land to pay off their creditors. The government, however, did not give the land away outright. Instead it “issued paper money backed by the value of the land,” Spang says.

“Imagine you’re a banker or arms manufacturer who is owed a lot of money,” she explains.

“Maybe you don’t want a piece of land in Auvergne somewhere. So the state issues as much paper as the value of the land and gives the paper bills to people it owes. Then they can use the bills as money. The idea was that eventually the people who have the bills will want to exchange the bills for the land and once that happened, the bills would come back to the state.”

But the numbers did not add up so easily. “First the state authorities kept discovering that the land was more valuable than they thought, and that the debt was bigger than they thought. So the revolutionary lawmakers said, we better print some more [money].”

In setting up this system, the government could issue the paper bills only in large denominations because, given the size of the debt, it would have taken decades to manufacture enough small bills to cover it. And the large bills were useless in daily transactions. For example, the smallest denomination issued by the central government was 200 livres. A four-pound loaf of bread sold for

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about eight sous. At 20 sous to the livre, a 200-livre note would purchase 2,000 pounds — literally, a ton — of bread. Of course, no one would purchase bread in that quantity, but because 200-livre notes were the smallest bills, there was nothing with which to make change if someone wanted to buy only two loaves.

With the larger bills too large to be useful, officials and businessmen started issuing their own smaller paper bills, backed up by the larger state-issued notes.

In the first years of the Revolution, the French government consented to this practice. The system worked in local contexts where “everyone knew each other and they knew that all the little paper was backed up by a big piece of paper, which in turn was backed up by a piece of land somewhere,” says Spang.

“But in larger commercial cities, it didn’t work.”

Spang compares the transactions of the small, traditional town of Toul in northeastern France to those of the prosperous 18th-century shipping city of Nantes on the west coast, which got fabulously wealthy on the slave trade. Such different-sized towns demanded a different kind of money. In Toul, all the money “ended up at the baker, the wine merchant, and with two or three other people” who traded smaller bills for the larger one, Spang says. But the larger town of Nantes served as the hub of an expanding global network and issued enormous amounts of paper money that spread outward.

In short, the people of 18th-century France did not think of paper money the way we think of it today. Bills were not interchangeable. On the contrary, “what made the bills more credible was to differentiate them,” Spang says. “People tracked the receipt of particular bills. If you could know everyone who had a certain bill, you could presumably trace it back to its source of value. Each one of the bills had its own identity.”

According to Spang, during this period, people freely expressed their doubts about the trustworthiness of paper currency. Ordinary merchants and artisans, she observes, might have said, “‘I think all this paper money would circulate more freely if it all had pink ribbons tied to it. That would make it seem official.’ Or a figure involved in the silk-weaving industry in Lyon might have said, ‘I understand you have this problem with the paper because it is kind of fragile and anyone can make paper. If you printed the money on silk, that would make it distinctive. I could have my factories converted and ready to do this.’”

In other words, people were preoccupied with the sheer materiality of money. Even as the political authorities tried to explain that the paper money was not simply paper money but “land in a form that could circulate,” Spang explains, “people were intent on making sure that their money representing land was distinct from counterfeit versions of it. To do that, they had to be preoccupied with its material form.”

This preoccupation with money’s material form extended to the writing and symbols printed on the currency as well.

“Some villages thought putting Greek letters on it would make

it look fancier, more erudite, more difficult to counterfeit, and would give it more legitimacy,” Spang says. “One or two used Hebrew letters. All currency was signed by local officials, and when they increased the amount of paper that they issued, they still signed it. It later became a real conflict whether to use machine-printed signatures. They wondered if that would be as meaningful.”

Material Matters Ultimately, the state put an end to the local production of paper money, which it came to see as a threat to national unity.

During the Revolution’s most radical years of 1793 and 1794 when the king was deposed, then executed, and a republic was declared, Spang says, the state decided, “‘Enough of this revolutionary instability and uncertainty We’re in charge now.’”

The state insisted that the people stop issuing their own paper money and accept the paper currency issued by the central state. “It became an effort at a centralized managed economy, which, given the state of the infrastructure, they could only poorly execute,” she says.

At a later point, during the hyper-inflation of 1796, the government attempted to issue a new paper currency and take back the old. They claimed, explains Spang, “that the existing paper was issued on the wrong basis, so they were going to issue other stuff. And of course, at that point, the new currency was already losing value even before it made it into circulation, because who was going to believe the state at that point?”

Manufacturing value, it appears, is no easy matter. And in the process of trying to do so, the state had its own encounter with materiality — it ran out of paper. A horrible paper shortage made state-issued paper money worth more as paper than as currency. At the same time, the state was issuing so much paper money that “they had to have 800 printing presses running 24 hours a day with thousands of men and some women working,” Spang says. “And because until the 1850s most paper is made from rags, it was very expensive.”

Such observations about money are not those of economists. Writing about topics in economic history with the tools of cultural history, Spang highlights the ways in which material forms of money are as important to its value as the numbers that are written on it.

“I try,” she explains, “to work through this episode in French history without doing the kind of thing that economic and finance historians tend to do, which is to evaluate, ‘Was this a good policy, did it work, did it not work?’ I’m not as interested in this period from the policymaking perspective as I am from the perspective of how people lived through it.”

Elizabeth Rosdeitcher is a freelance writer in Bloomington, Ind.

The $ound of

Music

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o quote from that tuneful stage classic The Sound of Music, “How do you hold a moonbeam in your hand?”

It’s a question that aptly summarizes the current state of the music recording industry. In this age of YouTube and MySpace, iPods, iTunes, and MP3s, how does one pin down the essence of creating, performing, and making money off of music?

Experts say the music business has never undergone a more revolutionary time. Consider the events in the life of Erich Stem, assistant professor of music and resident composer at Indiana University Southeast. A violinist since the age of 12, Stem came to the campus in New Albany, Ind., after completing a doctorate in composition at the University of Maryland and working as a full-time classical composer for more than a decade. He wrote, and continues to write, commissioned pieces that have been performed internationally by orchestras and smaller ensembles. Stem’s work has also been recorded on a variety of labels, and he has won numerous national awards and grants. Since joining the IU Southeast faculty in 2004, he has taught composition and music theory to undergraduates.

So far, Stem’s career path sounds fairly traditional, but he’s also a trailblazer. With Department of Music colleague Joanna Goldstein, for example, he founded IU Southeast’s 2-year-old “music industry” bachelor’s degree concentration, in which students can specialize in sound engineering or the music business. Stem also launched the New Music Project, a scholarly endeavor to find, preserve, study, and promote new classical music. Backed by funding from IU’s Commitment to

Excellence initiative, the New Music Project has enabled Stem to create a campus-based recording company, New Dynamic Records, which is now in its fifth year of operation (see sidebar). The music industry major and the New Dynamic label both speak to contemporary realities musicians face.

“It’s a whole new world now for the musician,” says Stem.

“Since the proliferation of personal computers and the Internet, you can be more independent; you no longer need the support of a big label to be heard. Also, file-sharing programs, beginning with Napster in the late 1990s, have made it possible for musicians to get their names and their work out to hundreds of thousands of people without much up-front investment. With your own computer and production software, your own Web site, you can now compete with the mainstream recording companies that used to provide the only way to reach a large public.

That’s the upside. On the other hand, there’s now more competition among individual musicians than ever before.”

But even as file-downloading sites displace record stores, downloads threaten CDs, and independent labels upstage recording conglomerates, some financial facts of life in the music business have remained the same. For example, “the main source of income for most musicians is still performance,” Stem observes. “For classical composers like me, it’s still from service-oriented activities such as commissions. Similarly, most pop performers still earn most of their money through touring and less from the sales of recordings.”

Stem and Goldstein have designed the IU Southeast music industry program to prepare students to thrive in this environ-

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by Karen Garinger

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Indiana University

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Photo courtesy of Indiana University

A New Dynamic rich Stem, assistant professor of music and resident composer at Indiana University Southeast, founded New Dynamic Records in 2005 with the goal for the label to become, he says, “one of the very few labels to promote new classical music that can connect to younger listeners.” Five years later, New Dynamic is attracting a younger-than-average audience and enabling college students to work for a real recording company, gaining valuable skills as they play vital roles in producing innovative and challenging music.

In February of 2006, New Dynamic’s first CD, Influence, was released to critical acclaim. The CD combines recordings of several ensembles playing pieces by five contemporary composers that incorporate influences from eclectic sources such as Chinese folk music, jazz, Stravinsky, pop music, and spirituals. Influence was the company’s first release, but it was the last one to be offered only as a CD, without the option for downloading tracks from the Internet.

“We started engaging in digital distribution with our second CD release, Spiritual Overdrive, which featured the Aurelia Saxophone Quartet,” Stem says. “From now on, we intend to sell each

education center, recording label, and distributor,” he says.

Denham is enthusiastic about the sound engineering courses taught by adjunct lecturer Tim Haertel, who offers internships to sound engineering students through his nearby studio TNT Productions.

Lasher’s and Denham’s coursework and extracurricular experiences both reflect how the business of music has changed.

For Lasher, it’s about keeping up with the legal and operational aspects of the music business. “The music industry is everchanging and relatively new as industries go, and there are so many legal and contractual issues to understand,” he says.

In Denham’s case, the latest release from his band Anagnorisis is a case study in how production and distribution have changed. “With our last release, ‘Alpha and Omega,’ we uploaded the music and digital copies of the printed materials to nearly every file-sharing community that we could and had an awesome response,” he says. ‘This do-it-yourself, free distribution of our material has gotten us noticed all over the globe and has even sparked interest from labels. Digital media really is the way of the future, but because there is so much competition, you have to be very persistent and keep the quality of your material in mind.”

Mark Need would agree with Lasher and Denham’s views on the entrepreneurial emphasis on today’s music business.

A clinical associate professor of law, Need directs the Elmore Entrepreneurship Law Clinic, a joint program of IU Bloom-

Photo courtesy of New Dynamic Records

ment. Students in the music business track take marketing and music law as they also complete courses in music history and theory, ear training, music literature, and performance. The required music courses for students in the sound engineering track are comparable, but their career-specific studies include topics such as electronic studio resources, studio techniques, and sound for picture production. Both tracks offer students ample opportunities for internships in music businesses and organizations in the Kentuckiana area.

Two of those students are Patrick Lasher of Corydon, Ind., and Zak Denham of New Albany, Ind. Lasher is completing the music business track, and Denham is in sound engineering.

Both Lasher and Denham have been proficient players of multiple instruments since childhood. “I decided to go to school in a music-related field because I really wanted to do something fun with my life and not just sit behind a desk in a quiet office,” says Lasher, who is a percussionist in the IU Southeast Commonwealth Brass Band. He expects his training to lead to employment in a music-related business, and looking ahead a few years, envisions returning to the IUS campus for graduate study. “I’d really like to earn an M.B.A. so I can possibly teach some of the music business classes here,” he says.

Denham plays guitar both in the local cover band, The Brewskies, and in Anagnorisis, a rock band he characterizes as “aggressive metal.” He hopes to open a versatile music center that will include “a store, recording studio, performance venue,

release via digital distribution as well as on CDs.” A market for classical music in CD format still exists, says Stem — at least in the near future. “Classical record labels are beginning to put their catalogues online in anticipation of eventually phasing out CDs, but an attractive feature of CDs is the booklet insert, which can be held and read,” he says. “For classical fans this seems to be an important part of an album, but I think later generations of classical music fans will appreciate learning about the background of a CD from text or video on their mobile phones or computers. They might not care about holding a piece of paper in their hands, and classical labels will gladly accept this change, since producing and distributing CDs is extremely costly.”

New Dynamic followed Spiritual Overdrive with Against the Emp-

Photo © Patrick L. Pfister

ington’s Michael Maurer School of Law and Kelley School of Business. He also serves on the faculty of IU’s Johnson Center for Entrepreneurship and Innovation. His role, he says, is to advise faculty and students in all disciplines in an effort to help them “market, monetize, and protect their intellectual products.”

Need emphasizes how important it is for music professionals to consider questions such as what it means to have a copyright, how they should interact with recording companies, and who owns the music that they sell (or, as is becoming increasingly common, the music that they intentionally give away online). The answers to these questions, he adds, are not always crystal-clear. “Laws covering the recording industry are antiquated,” he says. “Technology is advancing so quickly that the law can’t keep up with it.”

Need is also a part-time radio disc jockey with a longstanding personal interest in the evolution of the music industry. He commends programs such as the IU Southeast music industry concentration. “Music is just as much an entrepreneurial business as the mom-and-pop ice cream store down the street,” he says. “Programs such as this one [at IUS] teach our students that entrepreneurship is everywhere.”

Erich Stem is an assistant professor of music and resident composer at Indiana University Southeast.

tiness, which highlights performances of contemporary classical works by the Pittsburgh New Music Ensemble. The company’s most recent release, Breath Beneath by the saxophone ensemble the PRISM Quartet, appeared earlier this year.

Although New Dynamic is a not-for-profit entity, it has garnered thousands of dollars in sales. The label’s CDs and MP3s can be purchased online from companies such as CDBaby and Amazon, and MP3s are available at Napster, iTunes, and other file-downloading sites. The CDs are sold at New Dynamic artists’ concerts as well, and Stem is investigating retail possibilities in the New Albany, Ind., area.

Most of the recorded performances, so far, have taken place on campus, in the Richard K. Stem (no relation) Concert Hall. The permanent staff of the company consists of IU Southeast faculty members. Erich Stem is the artistic director, and Tim Haertel, adjunct lecturer in sound engineering, is the executive sound engineer. Faculty members are also among the recorded performers.

“On our most recent release, one of the artists is our IU Southeast Arts Institute faculty member Cory Barnfield on saxophone,” Stem says. “On our next release, we’ll be recording our department chair, Joanna Goldstein, and her ensemble, the Kentucky Center Chamber Players.”

Rounding out the staff are IU Southeast students from artsoriented programs. “We partner with the art department’s Design Center on the artwork and layout of our CD covers,” Stem says.

“This has been a tremendous opportunity for the students because they get to work on actual products that will be sold to the public.” Their efforts have received professional recognition; the students who worked on Influence won awards from the Louisville Graphic Design Association for their creation of the New Dynamic Records logo and from the Louisville Advertising Federation for their CD jacket design.

Students in the music industry concentration at IU Southeast (see accompanying article) complete internships at New Dynamic— those in the sound engineering track gain technical skills, and those in the music business track learn to market and promote the company’s products. “These students are very talented and creative,” Stem says. “They come to us with strong musical and technological backgrounds, and we help them sharpen their abilities.”

—K.G.

Research & Creative Activity | S P R I N G 2 0 1 0

Photo courtesy of New Dynamic Records

Karen Garinger is senior writer and editor for the Office of the Trustees of Indiana University in Bloomington.

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Learning

by Steve Kaelble As a tenured, full professor, Ali Jafari knows the drill expected of research professors: perform research, get published, attract research grants. And he’s fine with that, but for him that has never felt like enough. “I never receive full satisfaction from my work after my work is published,” he says. “I always want to see it in use.” Call him professor, but Jafari is also very much an entrepreneur. And as an entrepreneur, he has turned Indiana University into an investor—in fact, he has helped IU strike investment gold.

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Indiana University

he big payoff came last year, when the university collected $24 million on a $130,000 investment in ANGEL Learning Inc., Jafari’s startup company that grew for just under a decade before negotiating a nine-figure sale to a competitor. Jafari, professor of computer and information technology and director of the CyberLab at Indiana University – Purdue University Indianapolis, also collected millions in the sale and has followed up the success with the launch of another company.

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bringing coursework online The ANGEL Learning story springs from a longtime fascination of Jafari’s. “Design, research, and development in the area of learning technology has been my research interest and focus starting with my Ph.D. dissertation,” he explains. Flash back to the mid-1990s, when the Internet was coming into widespread public use. “The concept of distance learning during that time was very hot,” he says.

Institutions, including IUPUI, were eager to deliver their educational product to students in far-flung locations. Videoconferencing seemed the most likely bet at the time. “The problem was, it’s expensive and it’s not something you can easily receive in your house,” Jafari says.

“We very quickly realized the potential of the Internet and how it could change distance learning,” he continues. “My research went 100 percent into how to use the Internet for teaching and learning, especially for distance learning. Of course, there was no technology, no tools available.”

Jafari, whose CyberLab research and development laboratory was founded through the Purdue School of Engineering and Technology at IUPUI, came up with a course management system called Oncourse. “We wrote the software in my laboratory with help from students. We developed a piece of management software that a teacher could use to put content on the Web, and a student could use to receive that content,” he says. “The idea was to complement classroom content as well as replace videoconferencing.”

The value of Oncourse was clear from the start. IUPUI provided resources to make Oncourse available for all courses, and its use eventually spread to all eight Indiana University campuses. “I quickly realized that we were sitting on a multibillion-dollar concept,” Jafari says.

Educators and others around the world took note of the breakthrough, too. As Jafari worked to persuade the university to commercialize the Oncourse concept, a private company acquired an online learning system that was being developed at Cornell University. That company was Blackboard Inc., which quickly brought to market its own course management software for universities and other learning institutions. “I was very disappointed,” Jafari admits.

Birth of an ANGEL Blackboard may have struck first, but Jafari pushed ahead, undaunted. In the middle of 1999, IU provided seed money to help Jafari and his lab adapt Oncourse from a custom-designed application into a marketable product. The new product was

Photo courtesy of the IUPUI Office of Communications and Marketing

ANGEL

Ali Jafari is professor of computer and information technology and director of the CyberLab in the School of Informatics at Indiana University – Purdue University Indianapolis.

borrowing money. They want a piece of the pie and to start controlling the company,” Jafari says.

As the company grew, it hired permanent staff, and Jafari returned his full-time attention to his university work. He retained his share of the ownership interest, though, as did Indiana University and the IURTC. Those stakes in ANGEL Learning proved surprisingly valuable last year when the much bigger Blackboard Inc. came calling with an unsolicited takeover offer.

Blackboard offers lots of green Blackboard proposed to pay about $100 million in cash and Blackboard stock to acquire ANGEL Learning. “With ANGEL Learning, we bring onboard a premier education-technology company with a tremendous reputation for innovation and e-learning leadership,” said Michael Chasen, Blackboard’s president and CEO, when announcing the deal in May 2009.

“Independently, we’ve each led the way in many areas of the industry. Now we can put the strengths of Blackboard and ANGEL together.”

The fact that Blackboard stepped forward with an interest in ANGEL Learning is testimony to the success that the IUPUI-bred company was having in the marketplace. ANGEL Learning’s market share was significantly smaller, but it had built a reputation for high quality and customer service that was winning customers from Blackboard. Beyond those satisfied users, the academic software industry also was impressed with ANGEL Learning’s accomplishments, awarding the com-

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christened ANGEL, short for “A New Global Environment for Learning.”

“This was a commercial project, something that would be sold as a shrink-wrapped product,” he says. “From the very beginning, ANGEL was going to be commercial.”

The product developed quickly—then came the effort to turn the product into a company. To get a fledgling company off the ground, an inventor typically seeks venture capital, but Jafari and his team had trouble finding this type of investor. So he turned again to IU, which in the spring of 2000 provided a $130,000 investment through its Advanced Research and Technology Institute (ARTI, now the IU Research and Technology Corp.). Jafari also requested and received temporary release from university duties for himself and David Mills—his one-time student, associate director of the CyberLab, a lead developer of Oncourse, and a key player in the ANGEL project.

“We had only one year to make a company stand on its feet,” Jafari says. The company was launched in July 2000 with Jafari as its first president and Mills as vice president. They leased office space in downtown Indianapolis. Before long, ANGEL Learning was turning heads in the industry that Blackboard had come to dominate.

“We truly made it—our bank account never went minus,” Jafari says.

That’s an important achievement, because it meant that ANGEL Learning did not have to seek funding from sources that might have interfered with the company’s ability to control its own destiny. “We did not want to go to the bank and start

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pany one of its coveted Codie awards.

ANGEL Learning was so highly regarded, in fact, that some saw its acquisition as bad news. Inside Higher Ed quoted dismayed officials from a Nevada community college that had recently made the switch to ANGEL Learning software. Similar concern was voiced by Don Gardner, associate vice provost for academic technology at California State University at Long Beach. His institution had just finished a review process and decided to purchase an ANGEL Learning system—Blackboard was not even in the running. “This is of grave concern to us,” he told Inside Higher Ed after hearing word of the deal.

The deal was unquestionably good news for Indiana University, however. The university’s original $130,000 investment had blossomed into a $24 million payout. Equally important, the experience provided a prime example of the value of technology commercialization efforts and offered a great blueprint for a less conventional way to make it happen. As IU President Michael A. McRobbie noted when the deal was announced, “This is our greatest success to date in terms of a university startup company.”

invention, research that advances knowledge but doesn’t lend itself to commercialization? “Faculty members will continue to do work that pushes their fields forward,” Armstrong says.

The point of the IURTC is to ensure that there are no missed opportunities. “As they do their work, hopefully we will find an intersection between a commercial need and the work they are doing.”

What’s more, he points out, anytime a university researcher develops a cutting-edge medication, a new kind of computer application, or some other breakthrough, it’s fulfilling a part of the university’s broader purpose. “You can save lives and alleviate suffering,” he says. “It’s part of our mission as a public institution to improve people’s lives.”

For his part, Jafari thinks it would be progress if higher education were to put a greater emphasis on commercialization of discoveries—perhaps even assigning commercialization the same level of importance as getting published and attracting grants. “This is kind of a paradigm change I would love to see,” he says. “Maybe deans should come up with some expectation that they want to see projects being commercialized.”

From lab to market Commercialization of research is the primary task of IURTC. “It’s a long way from the work that gets done in the labs to where you can use it,” says IURTC President and CEO Tony Armstrong. “We want to help get some of the work out there.”

Armstrong observes that universities have been eagerly pursuing commercialization opportunities since the signing of the Bayh-Dole Act of 1980, named for senators Bob Dole of Kansas and Birch Bayh of Indiana. The act gave institutions that benefit from federal research funding more control over inventions and intellectual property. That opened the door for an increasing flow of commercialization activity, which has really heated up in recent years.

IU’s Office of Technology Commercialization reports that some 125 patent applications covering IU discoveries were filed in fiscal 2007, 171 in fiscal 2008, and 186 in fiscal 2009. Income generated through royalties, milestones, and patent expense reimbursements grew from just over $5 million in 2007 to nearly $9 million in 2009. That, of course, does not include windfalls such as the ANGEL Learning purchase.

IU’s intellectual-property policy ensures that there is shared benefit when a university researcher makes a profitable discovery. A large share of the proceeds go to the faculty member, another piece to his or her lab, some to the campus where the work was done, and some to the university overall. “It’s a way for faculty members to generate funding for the work they do in their labs and create partnerships for sponsored research,” Armstrong points out.

At a time when budgets are continually being cut, the chance to land more research dollars and generate revenues through commercialization certainly is appealing. But what about the kinds of research that are not tied to a product or

next inventions Now that the ANGEL Learning story has run its course — from invention to commercialization to corporate acquisition — Jafari, the entrepreneurial research professor, is at it again.

Actually, Jafari went to work creating another company not long after he pushed ANGEL Learning out of the nest into the business world.

The company is Epsilen LLC, and while it’s not a reincarnation of ANGEL Learning, there’s definitely a family resemblance. Epsilen, too, applies online technology to further the success of education. Its focus is creation of an integrated collaboration and e-learning environment—acting almost like a Facebook for academic and professional purposes. The idea is to enable students and faculty to bounce around between coursework, electronic portfolios, blogs, discussions, and other social media and collaboration tools.

Students using Epsilen products can network with other students across campus and around the world, and because The New York Times Co. is a majority owner of the venture, users have access to 150 years’ worth of articles and interactive features. Epsilen users are allowed to build their “ePortfolios” and retain access to them for life, for free, no matter whether their schools are still doing business with Epsilen. And they can allow others—including assessors and potential employers—to access their portfolios, or selected parts of them.

Epsilen’s Web site proudly proclaims that its technology sprang from the CyberLab at IUPUI. Jafari is listed as board member, founder, and “chief architect officer.” And, no doubt, the author of another chapter in a research success story.

Steve Kaelble is a freelance writer and publication manager for Community Health Network in Indianapolis.

SECOND LOOK

Tetradrachm with Head of Athena [silver; Athens, Greece; ca.

450-500 BCE; © 2010 IU Art Museum: Burton Y. Berry Collection, 82.66.34] Photo: Michael Cavanagh and Kevin Montague

Siglos with King (Warrior) [silver; Persia; 5th century BCE; © 2010

Tetradrachm, reverse side Photo: Michael Cavanagh and Kevin

Drachma with Bee [silver; Arwad, Syria; 169-168 BCE; © 2010 IU Art Museum: Burton Y. Berry Collection, 82.66.81] Photo: Michael Cavanagh and Kevin Montague

Montague

IU Art Museum: Burton Y. Berry Collection, 82.66.81] Photo: Michael Cavanagh and Kevin Montague

‘Old money’ These ancient coins come from the renowned Burton Y. Berry Collection at the Indiana University Art Museum. Berry (1901-1985), an IU alumnus and career diplomat, served the United States in various posts including U.S. Consul in Greece and U.S. Ambassador to Iraq. His collection, gathered throughout his years working in the Middle East, features ancient jewelry and gems as well as coins. The coin with the head of Athena and her owl on its reverse is a Tetradrachm, which was worth four drachmas. Drachmas were used throughout the ancient Greek world and, in some instances, in the Roman and early Medieval/Byzantine periods. The drachma featuring the bee is from Arwad, an ancient port city now in Syria.

The coin with a kneeling king (or warrior) is a Persian coin. Silver sigloi were valued at 1/20th of a gold Daric and were minted from ca. 515 to 331 BCE.

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Where’s George?

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Photo by Ann Schertz

uring production of this issue of Research & Creative Activity magazine, R&CA staff received these dollar bills as change when buying lunch. Just after this photo shoot, we entered the bills’ information at www.wheresgeorge.com, a site created “for fun” that is intended to “allow people to track currency as it circulates around the country and the world.” If you’d like to see where our Georges have gone, visit Reserach & Creative Activity online (www.research.indiana.edu/magazine), follow the link, and find out how our money flows!