Tag Archives: externalities

Increasing Intensity–For Profit

Random Blogging, , ,

Remember when Donald Rumsfeld talked about “known unknowns”? It was a clunky phrase, but in a weird way, it describes much of today’s world.

Take social media, for example. What we know is that pretty much everyone is on one or another (or many) social media platforms. What we don’t know is how the various algorithms those sites employ are affecting our opinions, our relationships and our politics. (Just one of the many reasons to be nervous about the reach of wacko conspiracies like QAnon, not to mention the upcoming election…)

A recent essay in the “subscriber only” section of Talking Points Memo focused on those algorithms, and especially on the effect of those used by Facebook. The analysis suggested that the algorithms were designed to increase users’ intensities and Facebook’s profits, designs that have contributed mightily to the current polarization of American voters.

The essay referenced recent peer-reviewed research confirming something we probably all could have guessed: the more time people spend on Facebook the more polarized their beliefs become. What most of us wouldn’t have guessed is the finding that the effect is  five times greater for conservatives than for liberals–an effect that was not found for other social media sites.

The study looked at the effect on conservatives of Facebook usage and Reddit usage. The gist is that when conservatives binge on Facebook the concentration of opinion-affirming content goes up (more consistently conservative content) but on Reddit it goes down significantly. This is basically a measure of an echo chamber. And remember too that these are both algorithmic, automated sites. Reddit isn’t curated by editors. It’s another social network in which user actions, both collectively and individually, determine what you see. If you’ve never visited Reddit let’s also just say it’s not all for the faint of heart. There’s stuff there every bit as crazy and offensive as anything you’ll find on Facebook.

The difference is in the algorithms and what the two sites privilege in content. Read the article for the details but the gist is that Reddit focuses more on interest areas and viewers’ subjective evaluations of quality and interesting-ness whereas Facebook focuses on intensity of response.

Why the difference? Reddit is primarily a “social” site; Facebook is an advertising site. Its interest in stoking intensity is in service of that advertising–the longer you are engaged with the platform, the more time you spend on it, and especially how intensely you are engaged, all translate into increased profit.

Facebook argues that the platform is akin to the telephone; no one blames telephone when people use them to spread extremist views. It argues that the site is simply facilitating communication. But–as the essay points out– that’s clearly not true. Facebook’s search engine is designed to encourage and amplify some emotions and responses–something your telephone doesn’t do.  It’s a “polarization/extremism generating machine.”

The essay ends with an intriguing–and apt–analogy to the economic description of externalities:

Producing nuclear energy is insanely profitable if you sell the energy, take no safety precautions and dump the radioactive waste into the local river. In other words, if the profits remain private and the costs are socialized. What makes nuclear energy an iffy financial proposition is the massive financial costs associated with doing otherwise. Facebook is like a scofflaw nuclear power company that makes insane profits because it runs its reactor in the open and dumps the waste in the bog behind the local high school.

Facebook’s externality is political polarization.

The question–as always–is “what should we do about it?”

 

The Virus Is An Externality

Public Policy and Governance, , ,

Well, I see the “President” has restarted his pandemic “briefings,” and–wonder of wonders–said everyone should wear a mask. Whether that will convince any of the dangerous idiots who are refusing to do so (because “freedom”) remains to be seen.

My two favorite economists, Joseph Stiglitz and Paul Krugman, are both Nobel prizewinners. I find both to be logical and persuasive–and I’m sure that a great deal of their persuasive power is their ability to explain things clearly to non-economists, of whom I am definitely one. Krugman stepped up to the plate again in a recent column for the New York Times, in which he explained what is at stake in the mask controversy with an analogy to the economic concept of externalities.

Krugman notes that there are a number of possible reasons for rejecting the wearing of a mask.

Some of this is about insecure masculinity — people refusing to take the simplest, cheapest of precautions because they think it will make them look silly. Some of it is about culture wars: liberals wear masks, so I won’t. But a lot of it is about fetishization of individual choice.

Many things should be left up to the individual. I may not share your taste in music or want to do the same things you do with consenting adults, but such matters aren’t legitimately my business.

Other things, however, aren’t just about you. The question of whether or not to dump raw sewage into a public lake isn’t something that should be left up to individual choice. And going to a gym or refusing to wear a mask during a pandemic is exactly like dumping sewage into a lake: it’s behavior that may be convenient for the people who engage in it, but it puts others at risk.

The reference to “going to a gym” was prompted by the stubborn idiocy of Florida Governor Ron DeSantis. Krugman had opened his column with a discussion of Florida’s soaring Covid-19 case count, and the Governor’s culpability for that rise.

Florida has, of course, become a Covid-19 epicenter, with soaring case totals and a daily death toll now consistently exceeding that of the whole European Union, which has 20 times its population. But DeSantis won’t contemplate any rollback of the state’s obviously premature reopening; he even refuses to close venues that are perfect coronavirus incubators.

In particular, he insists on letting gyms — closed spaces full of people huffing and puffing — stay open. Why? Because “if you are in good shape you have a very low likelihood of ending up in a significant condition.”

As Krugman points out, this isn’t true–but the fact that healthy people can and do contract the virus is almost beside the point: gyms should be closed because the people we are trying to protect aren’t the people working out, but the people with whom they will come into contact. As he says, even gym rats have families, friends, and co-workers.

And that brings us back to externalities.

Unregulated free markets simply cannot solve the problem of externalities. Externalities are defined as costs imposed on non-consenting others, on people who have no say in the matter. Pollution is the classic example–the factory that dumps its waste in the local river in order to save the cost of proper disposal requires a government cleanup paid for with our tax dollars. Spreading a virus raises precisely the same set of issues yet, as Krugman notes, many conservatives seem unable or unwilling to grasp this simple point.

And they seem equally unwilling to grasp a related point — that there are some things that must be supplied through public policy rather than individual initiative. And the most important of these “public goods” is probably scientific knowledge.

The people who refuse to wear masks are clones of the lawbreakers willing to dump industrial waste into our rivers, and spew harmful chemicals into the air we all breathe.

The pandemic has simply allowed them to advertise what and who they are: self-centered and illogical ignoramuses polluting the environment we all must share.

 

Fair Trade

Public Policy and Governance, ,

Lest the title of this post confuse you, I’m not talking about the fair trade goods that stock the shelves of shops run by well-meaning nonprofits. That movement—to insure that craftspeople abroad are paid fairly for the goods they make—is well intentioned and important, but it isn’t the subject at hand.

The operation of a market economy—capitalism—rests upon a definition of what constitutes a fair trade. It is usually framed as the amount that a willing buyer and a willing seller, both of whom are in possession of all relevant information, agree is a fair price for the goods or services in question.

There are, rather obviously, economic areas where markets don’t work. Health care (no matter what GOP congressmen insist) is one of those, because the buyer and seller do not both possess all relevant information. Economists call this “information asymmetry.” As a practical matter, when one party to a transaction has important information that the other party doesn’t have, the party with the information has an unfair advantage.

There are other situations where markets can be manipulated. One of the most common involves externalities.

Economists use the term “externalities” to refer to the costs of an economic activity that aren’t paid by either party to the primary exchange, but are instead “offloaded” to someone else—typically, taxpayers. The most common example is pollution: a local factory produces a toxic chemical in the process of manufacturing its widgets, but rather than properly and safely disposing of that chemical and including the cost of disposal in the price of the widget, the factory owner dumps it in a nearby river.

The seller makes a bigger profit, and the buyer gets a better deal on his widget purchase. Meanwhile, we taxpayers pay to clean up the river.

Most of us have no problem identifying this as unfair all around. Such practices distort the marketplace, allowing people who break the rules to profit at the expense of the rest of us.

In today’s economy where the lines between public and private are being increasingly blurred, where private-sector companies ask for—and receive—government subsidies and favorable regulations, where the corporations that can afford well-connected lobbyists enjoy privileges that are unavailable to the mom and pop store on the corner, externalities are harder to detect.

America is in real danger of losing real capitalism. Increasingly, what we have is corporatism, and that’s a very different animal.

Corporatism has been defined as the socio-political organization of a society by corporate interest groups. And all signs are that we aren’t stopping there; the words “oligarchy” and “plutocracy” are more frequently heard in American political discourse these days.

Today’s plutocrats and oligarchs are the rich and superrich who effectively dictate economic policy. And they make the widget factory guy look like a piker.

When markets work as they should, where they should, they really do operate as Adam Smith described; the “hidden hand” improves life for all of us. When the system has been corrupted—when, in transaction after transaction, we socialize the risks and costs and privatize the profits—the only people who prosper are the “haves.” And the greedy.

And that’s not fair trade, by any definition.