[BoldlyDubious]

As usual, a most detailed and clear criticism :-)
Here are my point-by-point replies.

Originally Posted by CWatkinsNash

I fail to see how there can be a reduction in casual sharing when you go from "sharing takes effort, requires doing stuff and breaking the law" to "easy to legally share just by handing off a copy of the file".

Because with my scheme sharing is not casual.
With current DRM systems, every file that gets shared can be shared by everyone with everyone else. There's no mechanism pushing someone who is willing to share to refrain from giving a copy of her/his files to anyone who asks. And there's no mechanism pushing people who receive a file from the original buyer towards avoiding to share it with other people, who will share it with other people... ad infinitum.
With my system, sharing generates risks for the original buyer. So the buyer will be much more picky in choosing who to share with. And the chosen people will be those that care for the buyer most: i.e., exactly the people that will avoid performing further sharing of their own for fear of damaging their friend/spouse/relative.

So the first situation (current DRM) is one of exponential growth of the diffusion of a file: every person who gets a file can become a new center of diffusion. There's no damping mechanism at all, because (promised) punishment is as much hyper-terrible as hyper-unlikely.
The second situation (my proposal for social DRM) is one where a strong mechanism for damping is in place. Social links between people tend to keep the file within a finite circle of people comprising the original buyer and his most close acquaintances. There's no exponential spread, only local "sharing groups", each having a media buyer at their center and an outer layer of his closest acquaintances around her/him. Passing of files from one group to the other tends to not occur, even when the same person belongs to different groups. In fact, passing files is mostly done by buyers, and by definition different "sharing groups" have different buyers as their centers.
(Of course the geography of "sharing groups" is dynamic. It changes for each specific file and evolves over time, but the key property of such groups -resistance to exchange of files between different groups- is always retained.)

Originally Posted by CWatkinsNash

However, reducing piracy was one of your initial selling points, and it's now not.

I strongly object to this. Not because it seems to me that my "social DRM" will reduces piracy, or at the very least does not increase it (though I am pretty convinced of this). But because reducing piracy was not the aim of my proposal: only a side effect that should make it interesting to publishers.

My main "selling point" is that my social DRM system removes the absurd limitations imposed to media buyers by current DRM systems, legalizes a set of "sharing practices" (such as letting your spouse or kids or closest friends read your books) that have a key impact on people's cultural lives, and empowers media buyers by giving them the possibility of choosing what to do with their media (such as backing up).

Getting this result without any increase in piracy would already be a great result in my view. If, as a side effect, piracy is reduced, I think that publishers should be happy as well.
Of course, my reasoning may be flawed: this is why I really appreciate the thinking effort that you and the other posters of this thread are putting into helping me finding flaws.

Originally Posted by CWatkinsNash

Not everyone thinks about the author in the equation. They liked a book, it's legal to share, so they do. [...] It's not that they hold any ill will or don't think the author deserves it, they just don't think about it at all.

That's my point too! Maybe these people don't care about the author (or the publisher or...), but the surely care about themselves. With my system, if you buy media and share them without really thinking about what you are doing, you will almost certainly be damaged personally by this by getting fined. My social DRM turns the problem of preventing "piracy" into a personal problem of the buyer, so even the most selfish buyers will care about what happens to their files. The good thing is that if you think before you share, you don't actually risk anything and, in exchange for your increased responsibility, you get the freedom to actually own your media, i.e. to do with them what YOU want and not what the publisher wants. You are in charge: exactly the opposite of what happens with current DRM systems.