economics – Page 4

Create Value, Not Jobs

Treat all economic questions from the viewpoint of the consumer for the interests of the consumer are the interests of the human race.

-Frederic Bastiat

Public discourse on matters of the economy is and has always been dominated by the idea that the road to prosperity is to create jobs. In a moment of high unemployment, the “create jobs” rhetoric becomes that much more prevalent. We get a “Jobs Bill“; opponents of Obama’s reform call it “job destroying“; after a brief period of discussing deficits and debt national news outlets turned right back to talking about jobs.

Reading Tyler Cowen’s The Great Stagnation and Erik Brynjolfsson and Andrew McAfee’s Race Against the Machine, I was surprised to see that they considered lack of jobs to be one of the key problems of our times. Surprised, because I have become accustomed to economists arguing that jobs are not what matter, wealth is. Upon closer examination, however, I think that what they are arguing is consistent with that–they are putting it into the rhetoric of jobs because that is accessible to most people, but what they are saying is different from what a politician means when he calls for job creation.

A Very Human Propensity

This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual, consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.

-Adam Smith, Inquiry into the Nature and Causes of the Wealth of Nations

In a barter economy, things are straightforward. I can only get something I want from you if I give you something that you want. I have to provide you with something of value.

This is still how the economy works on a fundamental level; money is just an intermediary between barter exchanges. Instead of giving you something you want, I give my employer or my customer something that they want. They give me money, which I can give to you so that you can turn around and get something you want. The person that you give it to accepts it because they can turn around and exchange it for something that they want.

Sensing a theme? Wealth is merely the ability to get things that we want. Since most of us are not independently wealthy, we have to work to create things that other people want in order to get what we want. The most common way to do this since the dawn of the industrial revolution has been to work for someone who needs human labor to accomplish some end–an end that is valued by consumers.

But it isn’t the only way–Henry Ford wasn’t an “employee”; he was an entrepreneur who developed more efficient ways to provide consumers with something of value at a lower cost. Moreover, he figured out how a little value could be added by large numbers of workers in the process.

There are also freelancers; people who are not employees nor employers, but work for specific clients at specific times. Rather than providing a valued service steadily over time, they do it on a case by case basis, and depending on the industry can face lean seasons and busy seasons.

Value, Not Work

The point is, our goal should never be to “create jobs”. Our goal should be to enable people to contribute something valued by other people. The value is the point, not the work. If someone finds a way to provide value to hundreds of millions of people and it requires no more effort from them than batting their eyelashes, that would be a win.

So why are economists like Cowen and Brynjolfsson talking about jobs? The stories they are telling, while far from the same, have a common theme which I interpret as follows: the forward march of technology has made it very difficult for people who have traditionally had low-skill or even middle-skill occupations to contribute value. As Arnold Kling succinctly put it:

The paradox is this. A job seeker is looking for something for a well-defined job. But the trend seems to be that if a job can be defined, it can be automated or outsourced.

He goes on to say that people who are capable of working in “less structured environments” are going to get a premium at this moment–in other words, people like entrepreneurs and freelancers.

His story, which he used to call the Recalculation but lately has referred to as Patterns of Sustainable Specialization and Trade (PSST), goes like this:

One industry overwhelmingly dominates the economy (first agriculture, then manufacturing).
Rapid technological change enormously increases the productivity of that industry while providing a lot of untapped potential in other areas.
Since many fewer workers are needed now, there’s a period of massive unemployment before entrepreneurs figure out how to make the most valuable use of all the surplus labor.
A new pattern of sustainable specialization and trade emerges that is optimal to the current state of technology.

In Kling and Brynjolfsson’s story, we’re at step 3. Technology has made it easy to replace workers with machines in old industries, but it is not yet obvious how those workers can contribute value in the young industries. Solving that problem is non-trivial.

An Important Distinction

This is not a matter of semantics. If you think the problem is a lack of jobs, all sorts of dangerous “solutions” may come to mind. Anything from having the government hiring en masse to do make-work, valueless jobs, to setting high tariffs and immigration restrictions so that domestic companies and labor do not have any foreign competition.

Frederic Bastiat was a 19th century French economic journalist who spilled a lot of ink attacking such foolish notions. You have to think about wealth from the perspective of the consumer. Yes, there would be more “work” to do if we cut off trade and immigration, but it would also impoverish just about everyone as the cost of getting anything would skyrocket. Getting a job is not an end unto itself; the whole point is to trade our labor for other things that we want. Getting a job at the cost of not being able to afford anything is an absurd proposition.

As for make-work jobs, I would rather the government send the poor a check to do what they want with than to force them to “play real job”. At least then they would have the time to think about how they can contribute something of real value!

Economists like Cowen and Kling get it. Farhad Manjoo does not. He wrote:

Most economists aren’t taking these worries very seriously. The idea that computers might significantly disrupt human labor markets—and, thus, further weaken the global economy—so far remains on the fringes.

Certainly technology can and is disrupting human labor markets–but that isn’t going to “further weaken the global economy”. It is going to increase our productivity, make it easier to provide consumers value for cheaper. It will make it hard for people replaced by machines to figure out how they can create additional value, for a time.

But we need to get our priorities straight; what we want to do is help people create value. Unless giving someone a job will enable them to create more value than it costs, the existence of that job is counterproductive.

We Are All Storytellers

From early man painting on the walls of caves, to the Enlightenment’s Republic of Letters, to J. K. Rowling writing books that are read in every corner of the globe, humanity has always been a species of storytellers. We are so deeply embedded in our own stories that we often lose sight of this, thinking of ourselves as the rational animal, or the moral animal. But these are parts of larger stories about ourselves; the one thing that is fundamentally human is not rationality or morality. It is our propensity to tell stories.

Characters in an Ongoing Story

Human memories are not stored like computer memory; they are recreated every time we attempt to call upon them. Moreover, they are recreated from the context of our present challenges and perspective. This makes a certain sense from an evolutionary standpoint–the only reason for an animal to have memory at all is to help it solve the problems it faces now and will face in the future.

In practice this means that our vision of our life up until now is always influenced by the story we believe about ourselves at this moment. For all of us think about ourselves as characters in an ongoing story; our life is not just a series of unrelated events but a cohesive plot with threads that run throughout. These threads have implications which influence the choices that we make.

Most of us also see ourselves as part of a much larger story; the story of our family, the story of our community or culture or nation, the story of mankind–and for many, the story of God. I am not a believer in that sense, but it has been my limited experience that feeling as though you are a part of a story much larger than yourself is both humbling and one of the few true paths to satisfaction. Of course, there are also those who devote themselves to larger causes and leave nothing for themselves–my story of the good life requires avoiding too much myopia and at the same time making sure not to give away too much of yourself.

Coherence is not Correctness

If called upon to explain something, especially our own actions, we will come up with a story that makes sense to us even if it quantifiably has nothing to do with reality. The fact that a story appeals to us does not make it accurate, even if it is internally consistent.

The past year–never mind the rest of the current economic downturn–has seen an enormous amount of imaginative storytelling in the economics community. In January, Tyler Cowen came out with The Great Stagnation, in which he described the current state of our economy as in a slowdown after a period of tremendous innovation and before another such period. Though Cowen is a libertarian himself, much of the criticism has come from libertarians who feel that The Great Stagnation contradicts their Schumpeterian story of markets feverishly generating innovation.

More recently, Erik Brynjolfsson and Andrew McAfee came out with Race Against the Machine, in which they argue that innovation has actually been accelerating and the problem is that machines are replacing people in many low-skill occupations and entrepreneurs have yet to figure out what new tasks those people can be productively put back to work doing. Arnold Kling tells a similar story, calling it variously the Recalculation Model and Patterns of Sustainable Specialization and Trade.

This debate between Brynjolfsson and Cowen is an excellent example of the difficulty in making a case for one story over another. Both individuals are very smart and extremely well versed in the literature and the data on the subject under discussion. Both employ statistics from official and academic sources. But statistics in and of themselves mean nothing–unemployment, for instance, is simply a number that the Bureau of Labor Statistics arrives at by conducting a survey of a subset of the population and then plugging the results into their statistical models. For the number to have any meaning, we have to have a story about the process that generated it–a story based on assumptions about meaningful sample sizes and what exactly unemployment is–not to mention why we should care.

Cowen has a story that involves, among other things, median income. Brynjolfsson came prepared with a story about why median income did not make the point that Cowen believed it did. Cowen came prepared with a story about why Brynjolfsson’s productivity statistics did not mean what he argued that they did. Seen as a struggle between contradicting narratives, the whole thing is really fascinating.

I find Brynjolfsson’s story much more appealing than Cowen’s, but both are perfectly coherent. Neither their appeal nor their coherence is really any help in figuring out if either of them are true.

Science is Storytelling

Science is a body of theories, and a theory is just a story about some specific aspect of the world we live in.

I think people tend to bristle when I say this because they think the implication is that science is as subjective as aesthetic taste, but that is not what I am saying. There is such a thing as a true story, or at least stories that are more or less accurate than one another. The fact that something is a story does not automatically relegate it to the same status as Little Red Riding Hood and general make believe.

What sets science apart from other bodies of stories is the powerful processes it has for filtering the more accurate and testable theories from those that are inferior in either or both regards.

Of course there are those who argue that science really is no different from fictional storytelling; but I find it hard to take this point of view seriously. Call my crazy, but I don’t think airplanes or the computer I’m typing this on came from nowhere.

Social Media is Storytelling

As people increasingly cluster into shared digital spaces like Facebook, Twitter, Tumblr, or Reddit, we are getting increasingly exposed to other people’s stories. This includes literally the ongoing stories of people’s lives–as they get married, graduate, or simply have breakfast–but also the stories that other people have invested in. From political ideologies to religious beliefs to celebrities’ lives, we are both connecting with others on the basis of which stories we have in common and getting exposed to the stories of people we’ve already connected with.

The idea that the internet would result in “daily me” or “filter bubble” silos where we’re only ever exposed to what we want to be exposed to is the complete opposite of what is actually happening. The reality is that it is getting harder to avoid being exposed to a family member’s politics, or a friend’s interest in subject matter we find boring or offensive, or any subject that we want to avoid, without avoiding the internet entirely.

Just look at what happens when one story blows up and overshadows another that some people care about. People get angry and frustrated because the fact that others do not share their priorities means that the story they care about gets a lot less attention.

Adapting to life after the great digital migration will require more of a tolerance for being exposed to stories we may have no interest in or have a reflexive hostility towards.

Confession of a Story Hoarder

Storytelling is as close as I come to having something like religion. I love people’s stories; the stories of their lives and the stories they tell to make sense of this crazy and confusing world that we live in. Though I do not believe in the divine, a part of me enjoys the idea of one great storyteller who is writing all of this as we go along. I have a terrible memory for just about everything, but I will always remember your story if you choose to share it with me.

Without being pushy about it, I don’t think anyone should be afraid to share their stories. That’s what human life is all about! It’s how we connect with one another, it’s how we find meaning.

That’s all I have for this particular story. Hope you found it worth the time it took to read it.

The Road Ahead for Digital Content

I used to be one of the true believers of the “bits want to be free” school of thought. The fact that the marginal cost of creating another copy of a digital file, along with the cost of distributing that copy, were vanishingly small, meant that in the long run competition would make charging for content an unsustainable strategy.

The success of iTunes had long made me hesitate, but it is the current rise of companies like Netflix and Spotify that have convinced me that paying for content is not an activity that will be ending any time soon.

The Three Paths

Where we are heading, and where we already are to a certain extent, is to a world where there will be three methods of acquiring different content. First, there will be big bundles like Netflix and Spotify, where you pay a flat rate for all you can eat access to gigantic libraries of video, audio, and text. Everything within those bundles, as well as some additional content not available in those bundles, will be available for straight a la carte sales as well, as iTunes has provided for going on ten years now. Finally, the vast majority of content–that is, an amount uncountable orders of magnitude larger than what is available in the bundles or a la carte stores–will be available for free.

Bundling

Eli has an excellent post on the economics of bundling. In his example, there are a total of 10 songs in a hypothetical market. When sold individually, the rights-holder’s most profitable strategy is to sell them for 50 cents per song. However, when they are sold as one bundle, the per-song cost goes down to 40 cents. I defer the explanation of the logic behind this to his post and the excellent comments on it; if you want to know more about the direction that content industries are headed I highly recommend you take the time to read it in full.

Eli’s example only deals with 10 songs–imagine how low the per-unit cost has been driven for a service like Netflix, which charges 8 bucks a month to access tens of thousands of titles. The fact that users are paying for access, rather than downloading the whole bundle themselves, also allows Netflix to lower the price further.

The digital content industries have only scratched the surface of bundling tactics. We’re getting companies like Netflix and Amazon offering bundled streaming video, and Spotify and Rdio are doing it for music. But I believe it is only a matter of time before someone starts doing it for text. Rumor has it that Amazon is in talks with publishers to create a bundled option for ebooks. This does not surprise me in the least.

Eli suggested that news organizations should stop trying to set up paywalls and instead work on creating a Netflix-like bundle together. We then learned that the Slovakian media was already tinkering with something like this.

The future of bundling in digital content is going to involve both bundles that are much bigger than the current ones, and smaller ones.

The bigger ones will come not just because current bundles will continue to expand their offerings, but because bundle providers will start to mix the categories of content offered in a single bundle. Why should we pay for separate streaming video and streaming music bundles? Why not pay for one bundle that includes both? Or one bundle that includes streaming video, music, access to books and articles, comics, and smartphone and tablet apps? Apple and Amazon are two companies in a position to do just that.

The smaller bundles I have in mind occupy the space between a la carte and the Netflix-like bundles. One kind of smaller bundle that exists right now are albums–an artifact of an earlier era. Apple and Amazon will now let you pay for a whole album, and sometimes a whole season of a TV show, at a lower price than it would cost to buy all of the individual songs or episodes.

But why can’t we pay one price for a band’s entire discography? Or for all of the currently published Dresden Files books, or Walking Dead comics? Or for all of the seasons of a TV series at once?

A la carte

Apple was a true pioneer of a la carte digital offerings with their iTunes music store, which they later extended to include video as well as apps. Amazon has followed in their footsteps, and their Kindle store now dominates a la carte ebook sales.

What Apple did was to drastically reduce the transaction costs of acquiring and listening to music. Before iTunes, the big way to get music to your computer and MP3 player was either to rip it from CDs or to pirate it. Both approaches had transaction costs–you had to have a program to get your music off of your CD, and then have software that took the ripped song files and integrated them into your listening device.

Pirating, while it didn’t cost money, has disadvantages of its own–all the problems one would associate with any black market. First off, you can never be sure of the quality of the file you’re going to get. Secondly, the availability of songs depended entirely on what other people had to offer. There was also always the risk of getting a virus.

The iTunes store had a stable and growing library of titles, it tied the quality of the files to the reputation of a big brand, and it seamlessly integrated with Apple’s own listening device, the iPod. I could go on, but history has shown that consumers saw the advantages of what Apple had to offer and were willing to pay for them.

I think that a la carte libraries will always remain larger than bundles, if just for the simple reason that they will include everything in those bundles. After all, if you are not a Netflix subscriber, the fact that you want to watch one specific movie within Netflix’s library is probably not enough to sway you into signing up. So you can pay for the movie by itself, buying or renting it from Amazon or iTunes.

Then there will be things that content creators do not want to include in the bundles, at least not immediately. When a new season of Doctor Who comes out, the BBC may want to let Netflix subscribers see all the previous seasons to encourage them to watch the current one, but then leave the current episodes in the a la carte stores for the time being.

Free

The vast majority of content will remain available to consumers for a sticker price of zero. The difference in magnitude between what is available a la carte and what is available as bundled content will not be very large. By comparison, the difference in magnitude between what is available a la carte and what is available for free will be more on the scale of difference between a planet and a galaxy, or a universe.

Content industries have always been blockbuster industries, following a power law distribution. Digital technology, the Internet, and the web will only serve to skew that distribution even further–1 percent of the content will account for 99 percent of the revenue, if that isn’t already the case.

Content industries have always had a tiny fraction who were able to make enormous wealth off of their creations, a much larger fraction that could make a decent living, a much, much larger fraction that just used their creations to supplement a primary source of income, and the vast majority who were unable to make a penny off of their creations.

Because of the web and transaction-cost reducing services like app stores, content creators who are unable to make any money off of their creations are for the first time in history able to nevertheless make it publicly available. So that gigantic body of work that will be available for free will come from this category of content creator–and it will comprise what Chris Anderson has called the long tail. Contra Anderson, however, this segment of the market will bring in next to nothing in revenue.

People have and will continue to provide their content for free for a variety of reasons. The most obvious one is that they aspire to make it big–they’re trying to get out of the long tail and into the head of the tail. They can only do so by gaining visibility and building an audience.

Many people who do not desire to make a living off of their creations also make contributions, however. Personally, I do not intend to try and make a living by writing about technology and society. But I write about it both because it is a subject that interests me, and because writing in public helps me connect to others with similar interests. It also provides me with a portfolio I can point potential employers to in order to help them evaluate me. For a more thorough overview of the benefits of making things in public, see Jeff Jarvis’ new book Public Parts.

The availability of free content will continue to put price pressure on a la carte and bundled content at the margin, pushing paid content into even bigger and cheaper bundles. Moreover, more and more new tools will be developed to drive down the biggest cost of free content–its transaction costs. iTunes has driven down the transaction costs not only of a la carte content but of free podcasts. Link sharing on services like Twitter and Facebook drive down the cost of content discovery.

The Content Creator Draft

From the long tail of free content there will emerge a tiny minority of successful individuals who begin to make a living off of what they do. In the world of webcomics, a group of artists are making a living by giving their comics away online for free and making money indirectly, though merchandise, donations, and other similar strategies. Radio host Leo Laporte has managed to successfully make a living by building up a podcast network financed through ads and donations.

From this group, a few will be vaulted up to blockbuster status. Witness Scott Sigler, who began building up a following by podcasting his novels, and then got a book deal with Random House. Or Amanda Hocking, who became so successful selling her books independently in the Kindle Store that she was picked up by a publishing house.

There will remain big intermediaries–like the publishing houses, record labels, and movie studios of today–who will finance the creation of high end content. They used to have an expensive discovery process for finding talent, which for publishers included things like paying “mid-listers” who were not bestsellers but not total flops either. Now, the discovery process will be left entirely to the open web–people will succeed or fail at demonstrating their ability to attract an audience on their own, and the big intermediaries will pick them up only after they have. This reduces the risk to the intermediaries, which in turn reduces the cost of producing high-end content.

So free, a la carte, and bundled content will all be part of the new interconnected digital ecosystem that is growing and maturing around us at this very moment.