Externalities and the changing nature of the internet

Cory Doctorow has written a thoughtful and interesting article for the Guardian, which argues that pricing externalities will inhibit the creation of public value.

…the infectious idea of internalising externalities turns its victims into grasping, would-be rentiers. You translate a document because you need it in two languages. I come along and use those translations to teach a computer something about context. You tell me I owe you a slice of all the revenue my software generates. That’s just crazy. It’s like saying that someone who figures out how to recycle the rubbish you set out at the kerb should give you a piece of their earnings.

If every shred needs to be accounted for and paid for, then the harvest won’t happen. Paying for every link you make, or every link you count, or every document you analyse is a losing game. Forget payment: the process of figuring out who to pay and how much is owed would totally swamp the expected return from whatever it is you’re planning on making out of all those unloved scraps.

It would be easy to nitpick at the way Doctorow uses concepts like externality rather freely, but that would miss the point of the essay. Underneath those semantics I think there’s a big idea he’s trying to get at, which isn’t really about externalities at all: it is the complaint that things previously available for free are now priced. It is about the intrusion of money into a creative community.

Think back to Dan Ariely’s discussion of social and market norms. The idea is that we act differently in situations where we perceive as market situations, relative to social situations. In particular, we are less generous towards others and less likely to feel guilty about our breaches of social etiquette when we’re in a market situation. Importantly, once a market norm is introduced into a situation it can destroy the social norms very quickly. Social norms are all about trust and once people feel taken advantage of that trust breaks down and turns into a feeling of betrayal. For example, people may enjoy sharing on Facebook but, once they feel that Facebook is trying to take advantage of their personal information for monetary gain, they feel betrayed and no longer trust it. Social and market norms don’t mix well.*

What Doctorow has identified is a social norm of generosity without expectations that previously pervaded web communities. There are companies, such as Instagram, who took advantage of that to build up a large stock of specific investment and then attempted to monetize it. Whereas we expect our bank to try taking advantage of us (market norm), we feel personally offended if Instagram attempts it (social norm). Consequently, there was a huge outcry about Instagram’s attempted change in their ToS, and that loss of trust could damage the firm permanently.

As attempts to monetize online activities continue it is likely that these conflicts between profit motives and social norms will become more common. Companies recognise how valuable it can be to create social norms in their interaction with users. However, that generates tensions with their quest for profits, which can ultimately end up destroying the social goodwill that is the backbone of their success.

* It occurs to me that this may not hold for economists who are trained to think of everything as a market. Perhaps they will just have to believe the experimental work on the matter rather than looking to their intuition!

Precommitment without external help

In an interesting post Bill Kaye-Blake discusses how we might overcome internalities through autonomous precommitment. As we’ve discussed previously, commitment mechanisms tend to involve external contracts: agreements with friends, or monetary contracts are common. But might we be able to commit our future self without external mechanisms?

I wonder if selecting identities is a way that people overcome the problem of time-inconsistent preferences.

By deciding ‘I am a vegetarian’ (or ‘I am a non-smoker’ or ‘I am a saver’), you construct the immediate consumption problem differently. The impact of the burger or cigarette isn’t on your heart or lungs but on your identity. The marginal impact on your physical health may be nearly zero, but the impact on your identity is binary. You are no longer that which you have decided to be.

Selecting an identity allows you to make a portfolio of decisions all at once. You commit to the identity. Then, to preserve the identity you have to do the behaviour in the future and in the now. Identity becomes a strategy for pre-commitment.

Eric points to this paper by Sunstein and Ullman-Margalit, which says much the same thing

The difficulty with observing skill

Skill vs luck:

“There’s a part of our brain that’s called the interpreter,” he says. “It’s designed to make sense of what we’ve seen, to give it a narrative. And we always see causes; so if Person A succeeds where Person B fails, we assume that Person A had some skill that Person B didn’t.

“Even when we know it’s random, we can’t help but see the workings of skill.”

This hyperactive pattern-detector is likely to be an evolutionary adaptation, says Kahneman: a false positive will generally be less harmful than a false negative, an imagined lion less of a problem than an unnoticed one.

The whole article is interesting, particularly if you’re a sports fan.

A problem with “advertising bans”

Over at Offsetting, Eric mentions that there is a view that we need to start banning fast food advertisements.  Personally I think this is a dumb idea, but when it’s people’s job to make up arbitrary interventions to “save the world” they will.

More importantly, it reminds me of one of the first posts I wrote on the blog:

So food with a McDonalds wrapper does taste better. Now I’m sure many people will take this as a sign that advertising is evil, as it can lead to children being overweight, however I think it is an awesome service provided by McDonalds. You see McDonalds advertising makes food taste better, they increase the value of the product to an individual by advertising it, and getting all your senses excited. Although two otherwise identical products might seem homogeneous to you, the fact that the McDonalds wrapper is on one and not the other implies that one has the value associated with advertising while one doesn’t. As all McDonalds is doing is increasing the value of their product, thereby increasing demand I don’t have a problem with it.

Advertising creates value.  Also, I haven’t mentioned here that advertising provides information.  There may be a case to regulate advertising given perceived misinformation, or we could even stretch this to a concern about children (as long as we are honest that this belief is based on targeting “bad parents”).  However, even when we head this far an advertising ban is overkill.

Remember, the goal of policy is to “maximise happiness”, where what gives people subjective happiness may differ from what we believe or assume – not to make people do the things we want, and target things we don’t like.  This involves using mechanisms that allow people to reveal preferences (markets for example), and avoid bans and direct regulation as a last resort.

More on the economics of love

There is an excellent article on the Stuff website about the economics of love, an issue we’ve written about a couple of time before.

While I enjoy using economic concepts to describe relationships, I hadn’t actually considered the fact that we have a lot more cold hard data now-a-days with online dating!  I quite enjoyed this:

Economist and chief executive of economic consultancy Lateral Economics, Nicholas Gruen, agrees internet dating has increased the efficiency of the market for love, but hints at a harsher reality for love-seekers.

”One obvious point is that online dating generates vastly more hard data about dating – so we’re getting much better information than we used to have. It’s showing that dating is very like a market with strong ‘objective’ values around which assortative mating takes place.’’

Assortative mating is the idea that people with highly valued attributes, such as good looks or intelligence, tend to pair up with similarly endowed partners. Most people think they are ranking people according to their own subjective values, says Gruen.

“But if you look at the evidence, there is a very strong assortative mating going on, so the best footballers typically have the best looking girlfriends and all that sort of stuff.

‘‘You mightn’t think it’s counter intuitive, but it’s certainly counter to the narrative of love – depressing for those of us who would like to buy into the idea of love as sui generis, but not so surprising if we look around.’’

Another example where looking at cold hard incentives trumps over believing there is some other guiding force that will magically help us out – superb.  Maybe I shouldn’t be so mean about the idea of hope – but to be honest, hope is more about consumption value than anything else right 😉

Update:  On rereading, some people may find that statement a lot harsher than I intended.  All I was meaning was that love and relationships do be appear to be based on preferences and choices, rather than appearing at random – and I’m generally a fan of being able to conceptualise things which makes me happy.

Let’s just hope that a recognition of the objective factors that are valued in the marketplace to relationships doesn’t lead to government interventions – or taxation … although I wonder if anyone will try to point out market failures in the dating market.

Behavioural economics and policy

Stephen Gordon applies the Lucas critique to behavioural economics and nudges:

A key insight of behavioural economics is that people don’t always and everywhere re-optimise whenever their environments change. Instead, they will often – or even usually – make use of various rules of thumb and/or passively accept the default option. …This the idea behind ‘nudges’: you can alter people’s behaviour by making minor changes to the frames in which people operate…

But this only works if the change is subtle enough to not attact the full, direct attention of the decision-maker. If the change is big enough, people will haul out the full artillery of their rational selves in order to try figure out what optimal decision is. This means that behavioural economics is unlikely to be of much use in policy-making.

What he’s saying is a policy that takes advantage of people’s rules of thumb relies on them using the rules of thumb. If the policy is a big enough change in the circumstances they face then they might change their rule of thumb, which changes the effect of the policy. Unless you know how people form their heuristic, you can’t target it with policy.

For example, setting organ donation schemes to be opt-in by default may increase the level of donation because people don’t have a strong preference over whether they donate after death. If you applied the same reasoning to a decision that people care deeply about then it might have no effect because people will make the effort to choose their preferred option.

It’s an interesting point but I think Gordon goes too far by suggesting that it invalidates the targeting of behavioural heuristics. Read more