Dec 162010
 

Several weeks ago Steven Johnson took to the op-ed page of The New York Times to defend his excellent new book on innovation and to declare “I am not a Communist.”  The question of possible communist sympathies was raised, apparently, on a World Network imagebook tour, in reference to his support of what he dubs “fourth quadrant” innovation.  The “fourth quadrant” refers to innovations produced by networked non-market actors, a category including open-source software, among other things, which Johnson argues has an unparalleled track record in fostering breakthroughs.

Does that make him a communist?  He doesn’t think so:

the problem is that we don’t have a word that does justice to those of us who believe in the generative power of the fourth quadrant… The choice shouldn’t be between decentralized markets and command-and-control states.

And he’s right.  The rise of the web has exposed the market-state dichotomy as transparently inadequate.  Projects like Linux and Wikipedia hint at the emergence existence of a very different model of economic organization that seemingly fits neither category.

It is a model we are only beginning to understand, and yet in many ways it challenges some of our core beliefs about how to organize a society.  In the contest between markets and central planning, the market has been largely (and largely justifiably) ascendant.  Yet the lessons of its ascendancy are subtly and not-so-subtly contradicted by the ways in which we organize, communicate and produce information online.

To understand how, we have to temporarily return to the battle between market and state.  In The Future of Ideas Lawrence Lessig writes:

Over the past hundred years, much of the heat in political argument has been about which system for controlling resources – the state or the market – works best.  That war is over.  For most resources, most of the time, the market trumps the state.  There are exceptions, of course, and dissenters still.  But if the twentieth century taught us one lesson, it is the dominance of private over state ordering.*

Why?  That is, of course, a question fit for a lifetime of inquiry.  But let me take a stab at summing it up: because humans are selfish and stupid.

Motivation

Markets motivate us by aligning incentives.  We are more likely to exert effort when doing so directly benefits us.  A considerable portion of social science revolves around this tenet, which might be expressed short-hand as Most of us are self-interested most of the time.  We often tend to simplify even further by treating selfishness as profit maximization.  As Harvard’s Yochai Benkler explains it in his masterpiece The Wealth of Networks:

Much of economics achieves analytic tractability by adopting a very simple model of human motivation… Adding more of something people want, like money, to any given interaction will, all things considered, make that interaction more desirable to rational people.  While simplistic, this highly tractable model of human motivation has enabled policy prescriptions that have proven far more productive than prescriptions that depended on other models of human motivation — such as assuming that benign administrators will be motivated to serve their people, or that individuals will undertake self-sacrifice for the good of the nation or the commune. (pg. 92)

Information

Markets prevail over central planning in large part due to the stupidity cognitive constraints of central planners.  We can only gather and process so much information.  Which means our actions have unforeseen consequences, the future is hard to predict, etc.  Here I’ll lean on Cass Sunstein channelling Hayek in his book Infotopia:

Hayek claims that the great advantage of prices is that they aggregate both the information and the tastes of numerous people, incorporating far more material than could possibly be assembled by any central planner or board… For Hayek, the key economics question is how to incorporate that unorganized and dispersed knowledge.  That problem cannot possibly be solved by any particular person or board.  Central planners cannot have access to all of the knowledge held by particular people.  Taken as a whole, the knowledge held by those people is far greater than that held by even the most well-chosen experts. (pg. 119)

Similarly, in his 1977 book “Politics and Markets”, political scientist Charles Lindblom describes the “key difference” between markets and central planning as “the role of intellect in social organization” with “on the one side, a confident distinctive view of man using his intelligence in social organization [central planning]; on the other side, a skeptical view of his capacity [markets].” (pg. 248)

The Networked Information Economy

At the macro level markets continue to maintain these advantages over planning.  But is there another game in town?  What we see on the web challenges us to at least reconsider the unassailability of markets, both with respect to motivation and information.  Asks Benkler:

Why can fifty thousand volunteers successfully coauthor Wikipedia… and then turn around and give it away for free?  Why do 4.5 million volunteers contribute their leftover computer cycles to create the most powerful supercomputer on Earth, SETI@Home?

Econ 101 has a hard time answering.  The high profile success of these and other projects forces us to remember that the simplistic model of human motivation, central as it is to our faith in markets, was never universally true.  Further, they invite us to revisit the usefulness of such an assumption, and to strive for a more complete model of human motivation.  We create and produce for any number of reasons beyond profit, including altruism, status, or even – in a world of low transaction costs – boredom.

Just as the market’s claim to dominance in motivating us is starting to be challenged, some are revisiting its dominance in aggregating information.  Sunstein explores the subject in Infotopia and highlights increasing efforts to aggregate human preferences online, including Amazon and Netflix.  If it’s obvious that we are doing better and better at aggregating information thanks to the Net, it’s less obvious how this might challenge the role of the market.

Imagine that Netflix has a small, set number of a rare movie to rent, and that it’s in high demand.  Who should get it first?  Auction the privilege off to the highest bidder, responds the free market advocate.  And, particularly in a scenario where customers have equal wealth at their disposal, this method has a lot to recommend it.  The market is incredibly efficient at allocating resources under ideal settings.  Tremendous gains in human welfare have been predicated on this fact.  But Netflix is developing sophisticated algorithms to use your preferences for movies you’ve seen to predict what movies you’ll like.  Is it so hard to believe that some day in the future an algorithm could – given the aim of maximizing viewer enjoyment – “beat the market” in determining how to distribute the movie?

We are undoubtedly in the early stages of understanding what motivates us to collaborate online (and off), and probably even less far along in our efforts to manage and make useful the wealth of information online, including identifying and aggregating our preferences.  I’ve been purposefully vague here in describing the new model I’m discussing.  Better defining that model will be the topic of a future post.

My argument here is simply that our increasingly connected world – what Benkler calls the “networked information economy” – invites us to question some of the most basic premises that have led us to organize our society around the market.  It would be foolish to let those premises, and the new models that challenge them, go unexamined.

*Lessig is explicit that he is talking about consumption, not production.  It’s a useful distinction, however the two are more related than he seems to admit in this instance.
**In borrowing Lessig’s words here I don’t mean to subscribe to any aggressively free-market worldview.  The choice between a centrally planned economy and a mostly privately organized one may be settled.  The battle over where to draw the lines in the mixed economy rages on.
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