Notes mostly on the economics of information and ideas. As a periodic reminder, you can unsubscribe from this list by sending a message that looks like this: To: firstname.lastname@example.org Subject: unsubscribe Also, Eudora users are once again implored not to use the "redirect" command. I am still receiving a steady stream of misdirected mail caused by people who redirect my messages to their friends and then add extra notations that mislead their friends about where any reply to the message will actually be sent. Qualcomm's decision to keep the "redirect" feature on an easy-to-find menu in Eudora is akin to keeping a loaded handgun lying around, disguised as a coffee cup. The "redirect" comment isn't just an accident waiting to happen -- it's an accident that happens every day. It's flat-out bad design, and Qualcomm should be ashamed. Some Web pages constructed by students involved in the demonstrations in Serbia are on the Web at: http://galeb.etf.bg.ac.yu/~protest96/ Thanks very much to the RRE readers and friends who responded to my call for comments on my undergraduates' term projects. Most of the comments were kind and helpful, and we very much appreciate them. Some other comments, however, were neither kind nor helpful. These, as best I can tell, were provoked by my humorous declaration of a revolution in Web design. My whole idea in declaring this revolution was to suggest that we forget about making cool Web pages for awhile and learn instead to make useful ones. Looking at these beginners' draft term projects, however, some people were clearly still wearing their "cool" eyeglasses. They saw misplaced links, spelling errors, and the usual stuff that happens when beginners try something new, and they got nasty about it. One of them, a long-time RRE subscriber and an otherwise nice person, sniped (just to me, thankfully, so far as I know) that the students' pages were "warmed-over term papers". Well, duh. What really struck me is how hard some people found it to evaluate what the students' pages said, independently of their surface form. I don't think those people are dumb, but I do think that they've been influenced by Internet hype, with its relentless focus on conduits and surfaces and its relative indifference to the substantive importance of the ideas that those conduits and surfaces might convey. Another problem is that we tend to presuppose that a Web page will be defined as "information about topic X", whereas my students' draft project pages are defined as "analysis of the structure and workings of some community which might or might not find it useful to have information about topic X organized in some particular way online". It's a conceptual jump from a focus on "what" (a subject matter) to a focus on "who" (the lives and needs of a user community). It's more complicated, but I think it's a necessary first step. Despite all this, as I say, most of the comments were helpful, and the students are hard at work on their revisions as we speak. We're in the thinking stages here of a longer-term project -- using simple, powerful social mapping techniques to motivate clear stories about good design. We'll know that these techniques are working when they start telling us that the best design for some particular purpose involves 3-by-5 cards, not Web pages. We'll keep you up to date. All ten-year-olds on the Internet should aim their Web browsers at http://members.aol.com/rcmoeur/signman.html It's a directory of US standard highway signs, including good-sized color images of every sign. The book that's blowing my mind right now is Lowell Bryant and Diana Farrell's "Market Unbound: Unleashing Global Capitalism" (Wiley, 1996). Don't bother reading Peter Huber's cheesy article about this book in the current issue of Forbes (the one with the blaring pink cover about CYBER POWER). Just read the book. It's a detailed account of the transformation of global capital markets. Economics changed in early 1994, they argued, as it suddenly became possible to engage in arbitrage among different countries' interest rates on a large scale. Their book is rather technical and absymally edited, and of course its major goal is to recruit consulting clients for the authors' company, but its facts are remarkable nonetheless. They explain a lot about financial derivatives, for instance, that had not been clear to me. They also explains the amazing changes in the banking industry now being brought on by the securitization of a wide range of revenue streams. Above all, they explain why we do not yet have a truly global capital market, and what it would be like to have one. The book also helped me understand why New York investment houses were blanketing the landscape circa 1992 trying to sell radioactive derivative products to naifs like Procter and Gamble and Orange County, California. To wit, they were selling lucrative risk hedging products to their financially savvy customers, but this also required them to go out and sell the complementary risk to someone else. If financial markets are working correctly then this "someone else" will be an equally sophisticated party with a complementary risk profile, or an even more sophisticated speculator with massive research capabilities. But financial markets often don't work correctly, and so in practice the counterparty was quite often an unsophisticated investor -- like most finance officers, public or private. Bryant and Farrell also provide the fullest exposition I've seen of the now-common thesis that global capital markets are bringing an end to national sovereignty. This doesn't seem to bother them very much, and the only risks they see are the risks that will follow if governments disobey the orders of the capital markets. Peter Huber thinks that's just great. I've been hearing way too much talk about the end of democracy lately. The religious conservative magazine First Things, for example, has been ruminating lately about whether the Church should declare the US government illegitimate and institute a revolution. We're not talking fringe wackos here -- we're talking authors like Chuck Colson, widely read opinion leader amongst the largest organized constituency of the country's Congressional majority party. Now, of course, you'll recall that Chuck Colson had another career subverting democracy, but he got caught that time. Now he's legit, talking about revolution in public and running an organization whose mission is "Biblical standards in sentencing" -- by which he means that people like him shouldn't have to go to jail in the future. Why isn't this big news? Is democracy about to die in its sleep? Let's wake it up before it's too late. I read in the Wall Street Journal last week that MTV is trying to charge online services every time their users access the mtv.com Web site. I laughed at first. But then it hit me, as the article pointed out, that MTV is basically trying to institute the cable television model on the Internet. Then I stopped laughing. But only for a minute. I received several incredulous messages after my little commentary at the top of that court decision in Cyber Promotions v AOL. The court had reasoned that AOL could block incoming messages from Cyber Promotions simply because it's a private party and not covered by the First Amendment. While I find Cyber Promotions to be just as obnoxious as anyone else, this decision concerned me because of the precedent (discussed at length in the decision) of political speech being regulated in shopping malls. The incredulous messages came from people who found it inconceivable that the Internet could evolve in a direction that made it impractical for dissidents to exercise meaningful free speech rights just by setting up cheap web sites. In my opinion, those folks lack imagination. Let's get clear about this: standards-wise, the Internet as we know it right now is little more than a vacant lot. The services that people actually see are little more than SMTP and HTTP. SMTP and HTTP, while indubitably revolutionary in the things they portend, are toys. The real action will come with the next couple generations of standards, and the basic character of the Internet could change radically depending on how those standards evolve. In historical terms, the TCP/IP standards and HTTP were flukes: open standards that spread like wildfire while the big players were asleep. Historically, most important standards have only been implemented through coordinated action by big players, either singly or in alliances, and I don't see why the Internet should be any different. Let's take ActiveX. Simson Garfinkel reported last week on basic security problems with ActiveX. The problem is simple: whereas Java applications are interpreted in a safe little sandbox, ActiveX is just a matter of downloading code onto your computer and running it. Why can't that code trash your hard drive or ship your personal data to Anguilla? The only reason, Simson reports, is that the people who wrote that code have crossed their hearts and promised not to do such things. Furthermore, useful ActiveX implementations are only available for Windows OS's and Intel processors. What happens, then, if ActiveX becomes the dominant standard on the Internet? If ActiveX becomes the dominant standard on the Internet then Microsoft may have another near monopoly. More to the point, it will only be safe to download ActiveX controls from highly-reputed, bulletproof corporate Web sites. The average citizen will be able to publish controls, but nobody will download them for fear that they may be destructive. My point is not that this scenario is inevitable, only that it is entirely possible. Nothing is inevitable. Other scenarios are possible too, some good and some bad. And the scenario that actually happens will be a choice that people have made. If you choose to run an ActiveX-enabled browser, then that is a choice. And it is not only a choice for yourself. It is also a choice that affects other people, inasmuch as network effects tend to reinforce the position of whatever player first establishes a dominant position in any given niche. In a world of network effects, Kant's categorical imperative takes on a new meaning. Kant suggested that you refrain from doing anything that would cause bad consequences if everybody did it. In a world of network effects it's actually worse than that, since if you do it, everybody else is more likely to have to do it. You might have noticed that I have been evolving a new genre of book advertisement on RRE. When somebody I know publishes a book that I like, and the book seems relevant to RRE, and it occurs to me, I send the author a note suggesting that they assemble an advertisement for my list. I use the advertisement for Vinny Mosco's book as a model: title, publisher, ordering information, blurbs, etc, plus a few pages from the book so people can get the idea. The idea is to create a win-win situation: the author sells more books and RRE readers get a capsule summary whether they want to read the book or not. When I send such suggestions to my author friends, one of two things happens. Sometimes the author just sits down and whacks out the ad without ado. Other times, and this is more common case, the author passes my suggestion along to the publisher, who just sits on it and does nothing. Why? The publishers, it seems, cannot get their minds around the idea of sending out a few pages of their intellectual property for free to a large Internet mailing list. "Think of it as a loss-leader", I say. "You couldn't buy a mailing list as good as mine for the kind of book you're marketing." But no. It's not as though they actually ever say no. They just get confused and put it off until tomorrow. The publishing industry knows in a vague, diffuse way that it needs to wake up and comprehend the new technology, but it sure has a long way to go. The economics of information is really starting to bite, and the economics is shouting in your ear: "Give stuff away for free!" We'll see if they get it. When I encountered the December issue of Wired on a newsstand in Los Angeles, the first thing I noticed was its 310 pages. I quickly checked the December issues of all the fashion magazines, hoping that Wired had more pages than any of them. Alas, Vogue (I believe it was) had 346 pages. The interminable cover story about laying fiber optic cable in exotic locales was actually engrossing in a very masculine sort of way. "Hacker tourism", it's called, and yet this new genre of travel writing isn't that much different from travelers' tales across three hundred years. I hope that Edward Said (author of an influential book on orientalism) writes an article about it. I'll probably have more to say later on Todd Lappin's informative article about Fedex, which I recommend to everyone. In the meantime, I'll just assume that Todd wrote the part about Fedex's desire to be left alone by the government before Fedex launched its awesome lobbying campaign in Congress to prevent its employees from forming a union like those of its main competitor, UPS. Sometimes people write to me to explain how I should run my mailing list. Last month, for example, one person wrote to explain that I was abusing my mailing list by including my own opinions on it. The most recent of these back-seat drivers rebuked me for failing to offer Borders equal time for Michael Moore's article on anti-union activity at that company, and for failing to send out a New York Times article in which the Borders people told their side of the story. I don't tend to reply as nicely to such messages as I would like. They're easy to write, but they would take a lot of work to debunk. First of all, no corporate PR person has ever returned one of my phone calls. Second, of course, New York Times stories are copyrighted. Third and most importantly, it is perfectly weird, is it not?, to suggest that my little mailing list has an obligation to provide equal time to anyone the size of Borders. The doctrine of equal time, which has long been flouted by organizations with considerably more power to harm than I have, was based on a premise of scarcity: if you occupy a big chunk of the nation's broadcast bandwidth, then you have an obligation to serve the public interest. The Internet doesn't work like that. Now, I do send out rebuttals to RRE items when the rebuttals are themselves of broad interest. I have also retracted a very small number of RRE messages that have turned out to be serious turkeys. And we do need to understand what the rules are in this new medium -- or, if we don't want to say "rules", what values should guide us. My point is, it's way too easy to simply carry over phrases from other media to reason about this medium. It's inevitable, of course, that people will think about unfamiliar situations using analogies to familiar situations. That has happened repeatedly in the history of media -- after all, the analogy to radio and television is what gave us the Communications Decency Act. But analogies are only useful if we unpack them and determine whether the reasoning really carries over. In this case, it doesn't. Much of the remainder of these "notes" consists of thoughts about economics that have been accumulating in my head lately. I am not an economist, and so it is entirely possible that some of my thoughts aren't original. Some of them are probably found in Coase, for example. If you know of materials I ought to be reading or citing, by all means let me know. In the meantime, I won't claim originality for any of this. I just find it interesting. Lately I have been hearing a lot about the "marketplace of ideas". This phrase, which comes and goes historically, is one more example of the importation of economic ideas into places where they don't belong. The logic seems clear enough on the surface: an argument is like a sales pitch, agreement constitutes sale, and it's in people's interest to make wise purchases, so the market will discern truth if we simply leave it alone. But like most of these economic analogies, this one falls apart as soon as we take it seriously as economics. Let's suppose that we were founding an economics of ideas. We would first need to reckon with the fact that ideas aren't goods like cars and steaks. They are public goods, for one thing, and so the burden is really on the economically minded to explain why our ideas shouldn't all be provided by the government. We'd also have to get past the fact that ideas aren't property, nor is it easy to imagine how they could be. Research people do have an semiformal system of norms and practices for allocating credit for ideas, but that's not the same thing as property. Credit for ideas cannot be sold, for example. Perhaps even more importantly, much -- if not most -- of the utility that people derive from ideas comes from *other people* believing them. If you believe that my products are safe, then other things being equal I will sell more of my products. If you believe that my theories predict imminent changes for your life, then you are more likely to buy my book. If you believe that capitalism is a just social order, then you are less likely to organize a revolution and expropriate me. Notice that this kind of utility from ideas depends only tangentially on whether the ideas are true or not. That is, the utility that I derive from your faith in capitalism is independent of whether capitalism really is a just social order, or even whether there is a fact of the matter. This observation could set us on a long and potentially interesting path of economic inquiry. It would help us to explore in economic terms what Oscar Gandy calls "information subsidies" -- research and story ideas that PR people provide for free to help reporters write their stories. The economics of ideas is particularly important as we contemplate the future of the Internet as a commercial medium. Consider the situation of an Internet content provider -- let's say, one that distributes information to users' machines to be displayed on a screen saver. That company faces a quandry: where to obtain the content? One option would be to pay reporters. Another option would simply be to plug itself into PR Newswire, a free service that consists of very little except press releases. Which option will enable that company to compete and thrive? Well, it could be that its customers actually want a steady stream of press releases on their screens. Or perhaps their customers don't care what they get on their screens. Or perhaps their customers would prefer to get news articles written by reporters, but they aren't willing to pay what it would cost to get those articles. It all turns on the customers' ability to judge the utility that they are deriving from the stuff that appears on their screens. The problem is, information commodities are inherently hard to evaluate, precisely because their utility consists in being previously unknown. Content providers therefore have a strong incentive to provide content with a high apparent utility and a low actual cost of production. One way to reconcile that tension is to provide consumers with materials obtained from the PR departments of interested parties but dressed up to look like the results of serious reporting. In practice, of course, this tension is negotiated in an extremely complicated variety of ways. Sometimes you'll get raw press releases blasted onto your screen. Other times you'll get something written by a reporter who has consulted several sources, but whose basic story idea, core facts, and referrals to experts were all provided by a PR person. Opinions differ widely about whether newspapers and TV news serve the public well in their existing configuration. As technology changes, however, those questions will be negotiated all over again. Understanding those negotiations will indeed require an economics of ideas. And that economics is wildly incomplete until takes due account of the incentives that I have to convince you of some idea. How to judge those incentives? If the traditional picture of economic rationality is to believed then everybody judges those incentives all the time, so that their investments in persuasion are guided by the same utility-maximizing calculus as any other investments. How does new technology change those judgements? When it becomes cheaper for me to conduct research that selectively supports my views, do I have a greater incentive to persuade people of them? When I gain additional channels to communicate my views to the people whose beliefs I want to affect, do I have a greater incentive to formulate those views and chase down the facts that would seem to support them? Do those same conclusions hold when other parties also have greater incentives to promote conflicting views? Is the result a rough parity in the funds supporting advocacy of different views, or is the advocacy of differing views funded in proportion to the utility that could be obtained if people believed them? The 12/3/96 Wall Street Journal includes an article about Wall Street's campaign to dissolve Social Security; it emphasizes that a big public splash won't be as helpful to their cause as quiet funding for think tanks. Who has how much of an interest in funding think tanks to support the opposite agenda? Greenpeace can raise $10M extra by convincing you that dioxin is poisoning you, let's say, but chemical manufacturers can save $100M by swaying public opinion against further regulations on dioxin. Or maybe it's the other way around. In either case, let's find out. The 12/2/96 issue of The New Yorker provides an interesting datum on this issue. It concerns the fate of one very consequential idea, the rational expectations theory of macroeconomics. Rational expectations is an idea; how can we understand the economics of this idea. The facts are that rational expectations is an alternative to traditional Keynsian macroeconomics, and that its novel premise is that everyone understands the economy perfectly well and can predict the economic consequences of all government actions. You might say that this is completely implausible on its face, and in fact it is basically false, as its originator now admits. But then, given this, we need some explanation of why it has largely taken over the relevant parts of the academic economic world. Two reasons suggest themselves: (1) it is a convenient theory for people who wish to minimize government intervention in the economy because it predicts that such intervention is necessarily futile; and (2) it is a convenient theory for academic economists because it permits them to revisit every last one of the traditional questions of macroeconomics using new mathematics. Which of these theories is true? The economics of ideas would suggest (1); the economics of academic credit would suggest (2). The truth, from what I can determine, is a combination of these. Foundations established to promote conservative political views have invested heavily in supporting the work of economists whose views they have found congenial; this trend took its modern form forty ago throught efforts of the conservative economist Friedrich Hayek, who worked to persuade wealthy people to throw their resources into the war of ideas in society. On the other hand, I can attest that all academic fields exult whenever a new vocabulary comes along that requires hordes of old questions to be revisited. Academics are swidden agriculturalists: the old ground having been plowed, its credit having been fully extracted and converted into tenure files and reputations, the forest is allowed to grow back while the young and the hustlers move on to clear fresh ground somewhere else. The forest has fully grown back over the ground that Keynes first plowed, notwithstanding that those old Keynsian models are still the ones that track the economy best among actual practicing economists who need to make money for their employers. This leads me to some disagreements with the New Yorker article, which verges on anti-intellectualism in two of its presuppositions: that the academic field of economics should be measured primarily by its usefulness to private sector employers of economists, and that abstract mathematical modeling is necessarily detached from practical reality. Economics should be measured in a whole variety of ways, not the least of which is its usefulness to other fields of human inquiry such as history and epidemiology. And abstract mathematical modeling is a powerful tool that can be used rightly or abused. The danger of mathematical modeling is indeed that it will become detached from reality. That danger stems from two sources: (1) on an ideological level, the capacity of mathematics to hide counterfactual premises, such as those of rational expectations theory, beneath layers of esoteric codes; and (2) on an institutional level, the tendency of mathematical formalisms to take on an independent life when research are judged on the internal logic of its "results" and not on the rigor of its engagement with reality. The fact is, problems of information are central to economic organization, and they are becoming even more central as information technology becomes central to the economy. The economics of information brings out another, even more fundamental problem with the conventional formalisms of economics. A premise of these formalisms is that people act to maximize utility. This sounds very technical, but it threatens to become meaningless in practice unless we can find some way to define and measure people's utilities except by inference from their actions. The matter has been debated endlessly, but in practice things almost invariably return to the same point: using the prices that people will pay for things as proxies for their utilities. The technical way of saying this is that prices stand as a proxy for subjective or expected utilities -- they serve, in other words, as "revealed preferences". The problem here is not that their utilities are subjective. The problem, quite the contrary, is an altogether objective matter of credit assignment. If I purchase a given shirt, what utility will I enjoy? I can estimate the likely utility in various ways: by trying it on in the store, by learning about good shirt construction and then looking at the stitches, by following fashions to ensure that this shirt won't mark me as a loser in the coming season, and so forth. However, as Ed Baker (whose work on the economic aspects of First Amendment law I strenuously recommend) pointed out to me, other utility consequences of my purchase lie beyond my capacity to estimate. For all I know, that paisley shirt that I put back on the rack in 1991 would have caught the eye of the woman of my dreams, and she is now married to someone else. The real utilities associated with a market choice, then, necessarily fade beyond some point into the counterfactual mists of life. Now, most people won't take this problem seriously in the case of a shirt. But what about a product that contains an invisible carcinogen whose effects on me will never be pinned down? Eventually, of course, it becomes impossible to reason about such matters. Some cases, moreover, are uncontroversial matters of fraud and misrepresentation. In other cases, notwithstanding the prevailing assumptions of perfect information in the marketplace, we are inclined to blame people for not taking more effort to anticipate the consequences of their purchases, for example by learning from the experiences of others. In between these extremes, however, is a large middle ground in which it is inherently difficult to anticipate the utilities associated with a purchase, and in which sellers consequently have a competitive imperative to exploit the difference between anticipation and reality. (This is the microeconomic analog to the failure of the rational expectations theory in macroeconomics.) And information commodities are such a case: since it is hard to evaluate whether information is true, it is consequently hard to anticipate the utilities that would be associated with believing it. Of course, one can conduct a great deal of additional research, but this would create an exponential explosion of extra costs, not the least of which is the opportunity cost associated with no longer having a life. In practice, no matter how skeptical we are, we have little alternative to believing most of what we hear. (Economists describe some of these situations in terms of asymmetries of information: the seller knows things that the buyer does not. But that formulation is only adequate to our purposes if the seller has perfect information about the buyer's likely objective utilities in the future, when in fact the seller is probably much more interested in developing information about the buyer's likely subjective utilities in the present. This is fortunate, because otherwise we would have to get into a long, confusing discussion of information asymmetries in markets for information commodities.) The bottom line, in my opinion, is that the economics of information works fine so long as we neglect what the information actually says. But if we believe that the health of our society depends on whether people are able to get adequate supplies of unadulterated information, we're on our own.