Monday, August 22, 2016

The Pragmatarian Model For The Economist

Reply toWe are anonymous by Adam Smith

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Adam Smith! Really? If Adam Smith was alive today… what recommendation would he have for The Economist? Easy! The Invisible Hand. Adam Smith would argue that your publication should make it really easy for subscribers to use their fees to communicate their interest in your articles.

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident that it would be absurd to attempt to prove it. But in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce. — Adam Smith, Wealth of Nations


When you bundle all your articles together… how can you truly know whether any specific article is promoting, or sacrificing, the interests of your customers?

General-fund financing is analogous to a market situation where the individual is forced to purchase a bundle of goods, with the mix among the various components determined independently of his own preferences. — James Buchanan, Earmarking Versus General-Fund Financing


You amputate the Invisible Hand when you bundle all your articles together. You could easily unbundle your articles simply by allowing subscribers to “earmark” their fees to the articles that most closely match their preferences. For all intents and purpose… The Economist would transition from a command economy to a market economy. Your publication wouldn’t just write about the market… it would be a market. The Invisible Hand would be free to do its job…

It is thus that the private interests and passions of individuals naturally dispose them to turn their stocks towards the employments which in ordinary cases are most advantageous to the society. But if from this natural preference they should turn too much of it towards those employments, the fall of profit in them and the rise of it in all others immediately dispose them to alter this faulty distribution. Without any intervention of law, therefore, the private interests and passions of men naturally lead them to divide and distribute the stock of every society among all the different employments carried on in it as nearly as possible in the proportion which is most agreeable to the interest of the whole society. — Adam Smith, Wealth of Nations

Right now I’m trying to persuade the journalist… Jeff Jarvis… that this is a good idea…

Cross Pollination: Journalists and Economists
Jeff Jarvis’ Critique of the Pragmatarian Model

It’s one thing for Jarvis not to immediately recognize the immense benefits of applying The Invisible Hand to publications. Same thing with this website. But The Economist is going to lose so much credibility if it fails to recognize the benefits of this model. How could people trust what your publication says about the market when it becomes painfully obvious that your publication is entirely clueless about how and why the market works in the first place?

Who am I though? Does it matter? I’m certainly not Adam Smith. Since you want to pretend to be Adam Smith… then it should be really easy for you to let me know if I’m missing something. I eagerly await your reply. Or the reply of The Economist’s hive mind. Either is fine.

Jeff Jarvis' Critique of the Pragmatarian Model

In my previous blog entry... Cross Pollination: Journalists and Economists... I shared the pragmatarian model (Buchanan's solution) with the journalist, professor and author Jeff Jarvis.  Much to my pleasant surprise he took the time and made the effort to share his thoughts on the model.

I figured it's definitely worth dedicating a blog entry to carefully going through and considering his thoughts.   Before I do so, let me try and put the pragmatarian model in a nutshell.  It's basically the subscription model... but where subscribers can use their fees to communicate their valuation of the content.  For example, if we applied the model to Amazon Kindle Unlimited (KU)... then subscribers would be able to divvy up their $9.99/month fee however they wanted among the million plus titles.

Ok, so let's jump in...

1. You assume that our product is a thing called content: articles. You are trying to determine a market value and create a market for it. That's misplaced. The underlying value of journalism is the information it imparts and the service it provides. That value should be measured not in media terms ("how much is my article worth to you?") but in the public's terms ("how much did this help improve my life or my community?").

Let's say that Amazon KU switched to the pragmatarian model and your book, Geeks Bearing Gifts, was one of the titles that people could read and allocate their monthly fees to.  After reading your book... subscribers would then be able to answer this very important question... "how much did this book help improve my life or my community?"

How, exactly, would they be able to answer this question?  They would certainly still be able use the star rating system and write a review (contingent valuation techniques).  But they would also have the opportunity to use their monthly fees to answer this question (demonstrated preference).  It stands to reason that, the more of their monthly fees that they allocated to your book... the more it had helped improve their life and/or community.  And the more fees that people allocated to your book, the brighter its value signal.  And the brighter its value signal... the more likely that other people would see the value signal and be inspired to read and valuate your book.

To be clear, subscribers could continue allocating their fees to your book each and every month.  If Samantha, for example, really loved your book, and continued loving your book, then each month for the rest of her life she could use her fees to communicate her undying love for your book.  We could easily imagine that she'd end up paying a lot more for your book with the pragmatarian model than she would have with the current one-price-fits-all (OPFA) model.  For all intents and purposes... the pragmatarian model eliminates consumer surplus.  People's true valuation of books would no longer be largely latent.

So with the pragmatarian model... Amazon KU subscribers would have the opportunity to use their monthly fees to answer this very important question... "how much did this book help improve my life or my community?"

What would be wrong with their answer?  For sure you might disagree with it.  But what, exactly, would be wrong with it?   And how, exactly, could people provide a better, or more accurate, or more precise, or more concrete answer to the question?  Pretty much the only two options are stated preference (contingent valuation) and demonstrated preference.

2. Information is a commodity. Once it is known in a free society, it can and should travel freely. Thus copyright does not protect information. Information can't be owned. All that can be owned is the treatment of that information.

We just considered the pragmatarian model applied to Amazon KU.   At any time throughout the year subscribers could allocate their fees to the books that match their preferences.

Let's think bigger!  Let's apply the pragmatarian model to the government.  At anytime throughout the year taxpayers could allocate their taxes to the public goods that match their preferences.  Let's take it a step further and move all digital goods (books, movies, shows, music, software) over to the public sector.  Every book would be freely available.  Taxpayers would be free to allocate their tax dollars to the books that matched their preferences.  How many tax dollars would they allocate to your book?

Here's the important question again... "How much did this book help improve my life or my community?"  However, with the current context of your book being in the public sector... the question expands like so...

"How much did this book help improve my life or my community?  Did it help improve my life more than UCLA did?  Did it help improve my life more than the EPA does?  Did it help improve my life more than the war on terror does?  Did it help improve my life more than the war on drugs does?"

We treat digital goods like they are private goods.  The reality is that we should actually treat them like public goods.  But if, and only if, we have a market in the public sector.  We currently have a command economy in the public sector.  So if we moved all digital goods over to the current public sector... the results would be predictably disastrous.  The variety and quality of digital goods would plummet while their cost would skyrocket.

But if we created a market in the public sector and moved digital goods into it.... then people would look back at our current system and their minds would be blown by the sheer absurdity of spending money on a book before you've even read it.

3. Any economist should give worshipful respect to the concept of abundance and its impact on the market and pricing. The net creates abundance. It wrecks scarcities. Media made its business by controlling a scarcity ("I own the printing press and you don't so I get to say what goes on it and I set pricing for access to it, nya-nya-nya"). In an abundant market, the price of a commodity will inevitably fall toward zero, any economist's tricks notwithstanding.

"Nya-nya-nya"... heh.  Rare orchids that sold for $20,000 dollars a hundred years ago are now so abundant and cheap that people throw them out after they are done blooming.  But the only reason that these orchids are now so abundant is because the value signal for them used to be so bright.

Personally, my favorite book is, by far, Adam Smith's Wealth of Nations.  If we could choose where our taxes go... and digital goods were in the public sector... then I'd certainly want to allocate a lot of my taxes to this book.  Because, as far as I'm concerned, similarly wonderful books are painfully scarce.

My favorite movie is, by far, Wong Kar-wai's Chungking Express.  I saw it for the first time two decades ago and have yet to see another movie that comes even close to it.  If we could choose where our taxes go... and digital goods were in the public sector... then I'd certainly want to allocate a lot of my taxes to this movie.  Because, as far as I'm concerned, similarly wonderful movies are painfully scarce.

The only way that society's limited resources can be put to their most valuable uses is when our allocations accurately communicate/reflect our valuations.

Which is your favorite book?  Which is your favorite movie?  Did the amount of money that you spend on them accurately communicate the size of your love for them?  I'm pretty sure that it did not.  And the same is true for everybody else.  The logical result is that there's an abundance of popular content and a shortage of valuable content.  Creators are really really really not mind-readers.  So we deeply hurt ourselves when we hide our true valuations from creators.


4. I wrote about all this in my book, noting the pricing paradox of information: https://medium.com/geeks-bearing-gifts/the-pricing-paradox-of-information-1ace4fbcd9ff#.wjbczycwj


It's wonderful that you referenced Adam Smith... but he didn't really apply the Invisible Hand to public goods.  While I certainly wish that he had, it seems a bit greedy for me to do so.  Like, wasn't it enough that he came up with the Invisible Hand in the first place?  And when people talk about his Invisible Hand concept... they invariably quote the wrong passage.  Here's the right passage...

It is thus that the private interests and passions of individuals naturally dispose them to turn their stocks towards the employments which in ordinary cases are most advantageous to the society. But if from this natural preference they should turn too much of it towards those employments, the fall of profit in them and the rise of it in all others immediately dispose them to alter this faulty distribution. Without any intervention of law, therefore, the private interests and passions of men naturally lead them to divide and distribute the stock of every society among all the different employments carried on in it as nearly as possible in the proportion which is most agreeable to the interest of the whole society. - Adam Smith, Wealth of Nations 

This is the Invisible Hand.  And it's so so so beautiful.  Like I mentioned though, Smith didn't apply the Invisible Hand to public goods.  So when you're talking about the paradox of pricing information (a public good)... you need to cite the economist who did apply the Invisible Hand to public goods...

Under most real-world taxing institutions, the tax price per unit at which collective goods are made available to the individual will depend, at least to some degree, on his own behavior. This element is not, however, important under the major tax institutions such as the personal income tax, the general sales tax, or the real property tax. With such structures, the individual may, by changing his private behavior, modify the tax base (and thus the tax price per unit of collective goods he utilizes), but he need not have any incentive to conceal his "true" preferences for public goods. - James M. Buchanan, The Economics of Earmarked Taxes

If Medium, for example, switched to the pragmatarian model... then this would eliminate the paradox of pricing information.  Why?  Because subscribers would not have any need to conceal their "true" preferences for information.

Let's get more specific.  Here's a screen shot of your Medium story that you linked me to...




With a quick glance I can easily see that 45 people like your story.  But with a quick glance, or even a long glance, I can't see how much these 45 people like your story.  Can you see how much these 45 people like your story?  Nope.  You can't.  They didn't tell you and you're not a mind-reader.  You're not omniscient.  Nobody is.  Hence the importance of using cash to communication with each other.

So why didn't these 45 people use their cash to communicate their valuation of your story?  Because, why buy the cow when you can get the milk for free?  It's the classic free-rider problem.  It's the basic problem with public goods.  It's the reason, or at least the best reason, for taxes.

But what if Medium switched to the pragmatarian model?  Would these 45 readers have any incentive to hide their true valuation of your story?  Nope.  Because doing so would not reduce their subscription fees.  Therefore, the amount of their fees that they allocated to your story would tell you exactly how much these 45 people value your story.   And just like that... the paradox of pricing information goes right out the window.


5. We need to fundamentally reinvent journalism not around mass-media economics and presumptions and not around the ideas of content and distribution but instead around how we help society organize its knowledge and improve their lives. Reach to relevance, volume to value.
But thanks for the attention!

The pragmatarian model really isn't mass-media economics!  Find me some mass-media types citing James Buchanan.  Need a hand?  Ok...

Nobel Prize winning economist James Buchanan died earlier this week, and I have to say he really stands out for such a highly regarded scholar as someone who's work I feel like I don't understand or appreciate. - Matthew Yglesias, James Buchanan: A Plea for Help

Fortunately enough the economist Tyler Cowen responded to Yglesias' please for help... What made Buchanan special as an economist?   But even Cowen didn't mention Buchanan's paper on earmarking.

Of course I'm biased... but I'm really sure that history will prove that Buchanan's paper was the most important "Easter Egg" to be overlooked.  Why am I so sure?  Because Buchanan's paper is the model that will help minimize the chances of important "Easter Eggs" being overlooked.

If we applied the pragmatarian model to Medium.... then every subscriber would be eagerly looking for Easter Eggs.  When subscribers found Easter Eggs... then they would use their fees to say, "Here's a good one!  Please don't overlook it!"  This entirely decentralized and highly incentivized process of discovering and valuating information would create a priceless treasure map.

This is really not how mass-media currently works.  This is not how scholarly papers work.  This is not how Google search results work.  This is not how Spotify, Amazon KU or Netflix work.  This is not how The Wall Street Journal, The New York Times,  The Financial Times or The Economist work.  This is not how the government works.  This is not how anything currently works.

So if you're pointing at any current system in order to criticize the pragmatarian model... then either I'm not doing a good job of explaining how the model is different (which is entirely possible)... or your criticism is way off target.  Because the differences really aren't minor... they are major.

The pragmatarian model represents a paradigm shift.   Hopefully you'll decide to give it another shot!  Hopefully you'll write a dozen best selling books about it!   If not, then no worries.  Thanks for the thoughts!

Saturday, August 20, 2016

Cross Pollination: Journalists and Economists

Every orchid sexual encounter is a ménage à trios— an orchid which wants to deliver its pollen to another orchid and a pollinator that is seduced into being their delivery boy. The hummingbird, of course, has no interest in this love tryst but is bribed with nectar into doing their reproductive work. - Carol Siegel, Orchids And Hummingbirds: Sex In The Fast Lane


Our economy is based on a division of labor.  Simply put, few people are a jack of all trades.  Specialization has greatly boosted productivity.  However, sometimes it really seems like the division of labor goes... boink.

Today I read this story... Death to the Mass: Media must rebuild its business around relevance and value, not volume.  It was wonderfully written by Jeff Jarvis who is a journalist and a professor at CUNY-J.  Yesterday I read a great overview of the general problem... John Oliver isn’t responsible for saving journalism.  It was written by Joe Amditis who is a grad student at CUNY-J.  In his story, Amditis shared this video...






All the media experts are scratching their heads and spending lots of money in order to try and find the solution.  Here's how Jarvis concluded his story...

To accomplish that, I believe the industries need cross-pollination. Perhaps the greatest benefit of Google’s Digital News Initiative and its Newsgeist events is that each side learns more about the other. At our next convening of product development executives in news, we will invite product (sorry: not business development) people from platforms so they can dig into specifics on small matters (e.g., Facebook and Google treat a news organization’s desire to update the news differently) and large (can we begin to build standards for data exchange?). News companies are desperate to hire technologists. I also suggest that the platforms would be well-served to hire senior journalists — just a few — not to build competitive news operations (who wants to go into that business?) but to act as translators between our cultures and, more importantly, to help the platforms better serve their own users. That is what we all want to do. None of us are kings. We are all merely servants of the public.

Jarvis is correct that cross-pollination is needed... but even though he argued that media should focus on value... he really doesn't seem to see the relevance of economists.  So here I am!  Kinda like a hummingbird!

Amditis is correct that John Oliver isn’t responsible for saving journalism.  But there's absolutely no need for Oliver to save journalism.  A Nobel Prize economist saved journalism half a century before it even needed to be saved!!!


1954: The Nobel Prize winning economist Paul Samuelson writes The Pure Theory of Public Expenditure. It has been cited nearly 8,000 times and is by far the most widely cited (popular) economic justification for government.  Samuelson's surprisingly short, yet quite dense, paper was basically about the free-rider problem.  He argued that we can't trust people to honestly communicate their valuations of public goods.  Why buy the cow when you can get the milk for free?

So did Samuelson save journalism?  Nope.  He correctly recognized that the free-rider problem was a real problem... but his solution was taxation (subscription) and planners (editors) simply assuming people's preferences.

1956: A young whipper snapper, Charles Tiebout, challenges Samuelson's conclusion by writing... A Pure Theory of Local Expenditures. It's been cited around 15,000 times. So it's even more popular than Samuelson's paper. Tiebout argued that people can and do honestly communicate their valuations of public goods... simply by moving to municipalities that offer bundles of public goods which more closely match their preferences. Aka voting with their feet... "foot voting".

So did Tiebout save journalism?  Nope.  Like Samuelson, he correctly recognized that the free-rider was a real problem.  And like Samuelson, his solution was taxation (subscriptions) and planners (editors) simply assuming people's preferences.  The difference is that in Tiebout's story, taxpayers (subscribers) communicate their preferences simply by moving to whichever municipality (newspaper) supplies the bundle of public goods (articles) which most closely match their preferences.  Of course this is a much better solution for articles than for other public goods because it's incredibly easier to move to a new newspaper than it is to move to a new city, state or country.  However, this is one of the solutions currently being used to save journalism... and it's obviously not working.

1963: The Nobel Prize winning economist James Buchanan writes The Economics of Earmarked Taxes. It's by far the least popular paper out of the three and has been cited less than 300 times. Buchanan basically argued that since people are paying taxes anyways, how they would earmark/allocate them, if given the opportunity to do so, would accurately communicate/reflect their preferences for public goods.

So did Buchanan save journalism?  Yes!  Very yes!  Like Samuelson and Tiebout, Buchanan recognized that the free-rider problem was a real problem.  So he appreciated the necessity of taxes.  However, unlike Samuelson and Tiebout, Buchanan had a problem with planners (editors) simply assuming people's preferences.  So his solution was for taxpayers (subscribers) to allocate their taxes (fees) to the public goods (articles) which most closely matched their preferences.

To be perfectly honest I wasn't quite sure if an editor was the closest equivalent to a government planner.  So I searched for "role of editors in newspapers" and found this...

The news editor is called upon to use his discretion, discrimination and imagination in reading the public mind and select the stories which have real news value and can be called important by his readers-quite a large number to be allotted a "splash" position on the main news pages according to the subject matter [or] field of activity they are concerned with. - Praveen Karthick, What is the Role of News Editor of a Newspaper?

Samuelson had quite a bit of faith in the ability of planners to accurately read the public's mind...

The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive. - Paul Samuelson

Buchanan really did not share Samuelson's faith.  With newspapers, the assumption of omniscience doesn't have horrible consequences because it's relatively easy for unsatisfied customers to "move" to a different newspaper.  Of course, the less newspapers there are... the more problematic the assumption of omniscience becomes.

But even if there is some optimal number of newspapers for consumers to choose from... why rely on omniscience?  Why not give subscribers the opportunity to use their fees to communicate their valuation of the articles?

Reading through the replies on Javis's story I found this one by Collin Ferry:

I’ve been envisioning automatic (but refundable) micropayments on a per-content basis as an alternative to paywalls and ad-blockers. It could be more lucrative than advertising, create a premium experience, reduce dependency on advertising and eliminate the widespread use of click-bait articles.  Do you have an opinion on micropayment solutions Jeff?

Jeff Jarvis replied:

Yes, and you’re not going to like my opinion. I do not see micopayments saving us any more than pay walls have. Same problems: we produce a commodity — information — rather than a unique product like entertainment. There’s no end of competition. The half-life of our value is the length of a click. There’ll always be someone to undercut your price, even if it’s micro.

Jarvis incorrectly assumes that it's micropayments OR paywalls.  However, Buchanan's solution was micropayments AND paywalls.  Subscribers would use their fees to communicate, via micropayments, their valuation of the articles.

Let's take Medium for example.  Right now Medium doesn't have micropayments OR paywalls.  Here's what it might look like if we added coin and dollar buttons below the stories...




If Jarvis valued my story, then he could click on the $0.50 button in order to clearly communicate his valuation of my content.  Fifty cents would be automatically withdrawn from his digital wallet and deposited into mine.  The total value of the story would also automatically increase by 50 cents.  When people searched for stories the default sorting would be by total value.  So it would be super quick and easy to find the most valuable stories.

It should be really intuitive that it's beneficial for society when it's easier, rather than harder, for people to give each other money.  Giving each other money is a very important form of communication.  So we can do some substitution and say that.... it should be really intuitive that it's beneficial for society when it's easier, rather than harder, for people to communicate with each other.  Well yeah.  Obviously.

Facilitating micropayments would solve the payment problem (eliminate payment costs)... but it wouldn't solve the free-rider problem.  Why should Jarvis "buy" my story when he can read it for free?  That being said, around $300 billion dollars are donated each year in the US.  So the free-rider problem doesn't mean that nobody will pay anything... it simply means that we can reasonably expect voluntary payments to be a lot less than people's true valuations...

allocations < valuations

With micropayments though... when valuing a story is as easy as "Liking" it.... then we can reasonably suspect that lots of people will be happy to chip in a few cents.  However, we can also reasonably expect that, because of the free-rider problem, their allocations will be less than their valuations...

allocations < valuations

In order to tackle the free-rider problem.... Medium could create a small paywall by charging people a very reasonable $1 dollar/month.  Each month subscribers would have 100 pennies to use in order to communicate their valuation of the stories.  They'd have absolutely no incentive to understate their valuations because doing so wouldn't decrease their fees.

Maybe it's just me but semantically it feels a bit awkward to think of these payments as voluntary.  So I think maybe we can instead say that these payments are "pragmatary".  Heh, that's pretty awkward as well but I think there are pretty important distinctions between...

1. voluntary payments (donations)
2. pragmatary payments (allocating your fees)
3. coerced payments (no choice where your payments go)

It would be very easy to ascertain whether $1 dollar/month was a truly reasonable subscription fee.  The earlier in the month that subscribers allocated all their pennies... the more reasonable the fee.  If most subscribers allocated all their pennies half-way through the month.... then perhaps the fee was too reasonable and it could be reasonably increased to $2 dollars.  But if, on the other hand, there were too many subscribers with unallocated pennies at the end of the month... then perhaps the $1 fee wasn't very reasonable.  However, this situation wouldn't last very long!

When subscribers use their fees to communicate their valuation of the content, they would be creating value signals...





Like Batman sees the bat signal and responds to it... talented writers would see and respond to the value signals created by the allocations of subscribers.  This would logically increase Medium's supply of valuable stories... which would logically lead to more subscribers... and brighter value signals.  It would be a virtuous cycle.  A larger pool of subscribers would be able to support a wider variety of niche topics.

Let's consider Netflix.  A while back I sat down and figured out how I might allocate one month’s worth of fees ($10 dollars)…





1. Amelie: $1.50
2. Black Mirror: $0.25
3. Castaway on the Moon: $0.25
4. Rake: $1.25
5. Shaolin Soccer: $0.50
6. Sidewalls: $0.25
7. Snatch: $0.25
8. Spaced: $1.00
9. The League: $0.75
10. The Man From Earth: $4.00


These were all movies and shows that I had given 5 stars to.  But the graph should make it painfully and obviously clear that I don't value all this content equally.   Maybe the star rating system is better than no communication between producers and consumers... but the value signals they create are very inaccurate.

For sure though it's a lot easier to rate content with unlimited stars than it is to valuate content with very limited fees.  It was really hard to figure out how to allocate my fees!  I truly and sincerely felt the opportunity costs.  But consumers considering the opportunity costs of their allocations is the only way to ensure the optimal brightness (accuracy) of value signals.  Accurate value signals are the only way to ensure that we don't waste society's limited creativity and talent on less valuable endeavors.

Ok, let's review...

1. Buchanan provided solution to media problem decades before it was even a problem
2. The media isn't aware of Buchanan's solution

Is it really fair though to blame the media's lack of awareness on the division of labor?  Well no.  The division of labor isn't the problem.  The problem is that experts in different fields can't clearly see each other's value signals.  In other words, the problem is a lack of accurate communication between experts in different fields.

Right now, with the current system, it's pretty easy to see which scholarly papers are the most popular... but we have no idea which papers are the most valuable.  How could we solve this problem?  We could easily solve this problem by applying Buchanan's solution to scholarly papers!  Subscribers would use their fees to clearly communicate which papers were most worthy of the public's attention.  Journalists would be able to easily see the brightest value signals in the different fields and use their wonderful words to help the public understand the importance and relevance of the most valuable papers.      

At this point maybe I should mention that I'm a little... unclear... about the division of credit for Buchanan's solution.  Clearly Buchanan didn't argue that we should apply his solution to Medium or Netflix.  But why didn't he argue that we should apply his solution to scholarly papers?  Unfortunately, he's no longer around for us to ask.  So I'll be happy to take a reasonable and fair amount of credit for, and ownership of, this immensely valuable intellectual property.  And accordingly, I'll expect a reasonable and fair amount of compensation for any implementation of this idea.  What's reasonable and fair?  Ideally that should be up to some group of subscribers to decide.  These subscribers should be able to decide how to divvy up their fees among all the different people responsible for breathing life into Buchanan's idea.  If Jarvis, for example, takes Buchanan's idea and runs with it farther and faster than I have been able to ... then it's only fair and reasonable that he should receive more fees than I would.  If subscribers decide that some technologist was largely responsible for bringing Buchanan's idea to life... then they should use their fees to communicate their valuation of his contribution.

So far I'm the only one trying to breath life into Buchanan's idea.  As far as I know, nobody else seems to appreciate how his idea solves the problem with government and media.  And it's entirely possible that there are some minor, or major, details that I'm missing!  But it's not like Jarvis, for example, is arguing that Buchanan's solution is the wrong solution because of... x, y and z.  Jarvis doesn't seem to realize that Buchanan's solution even exists!

It's sort of a catch-22 because it's not like I can allocate my fees to Buchanan's paper in order to help bring it more people's attention.

In conclusion maybe I should say something about the fact that all the economists that I've mentioned in this entry are dead.  So yeah... it's a ménage à trois with dead economists and live journalists and... me... the hummingbird.  Heh.  Well... we certainly have a lot to learn from dead economists but I probably should give a shout out to a few live economists...


  1. Alex Tabarrok - My favorite living economist but a bit economically incoherent.
  2. Peter Boettke - Loves Buchanan, hates the assumption of omniscience, but rarely, if ever, writes about the importance and relevance of earmarking.  It's a mystery.  
  3. John Quiggin - His implied rule of economics is really wonderful.  But he doesn't seem to know how we can avoid breaking it.  


Paul Romer also comes to mind... but I'm heartbroken that he didn't want to solve my pretty puzzle.

Is Virtuous Rent Truly Virtuous?

Reply toUniversal Income as a Good Form of Rent by Peter Barnes

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I clicked the *heart* button because… there’s a considerable amount of economic goodness in your story. However, there is a pretty glaring logical inconsistency. You start with a not unreasonable criticism of traditional rent… “traditional rent is income received not because of anything a person or business produces”… but then you go on to propose and promote virtuous rent. However, virtuous rent would also be “income received not because of anything a person or business produces”.

It can be very reasonably argued that your criticism of traditional rent is far more applicable to virtuous rent. With traditional rent, you have to spend your own time and money in order to make money. There’s uncertainty and risk and you might lose your shirt. But with virtuous rent, you’re not even spending your own time and money. You’re certainly not managing a property. You’re certainly not endeavoring to keep customers happy. You’re certainly not wining and dining politicians and gambling that they’ll keep their word. With virtuous rent there’s absolutely no sacrifice or diligence or effort or risk involved. It’s pure reward.

Income isn’t a function of owning resources, it’s a function of using them…

Moreover, what is a resource today may cease to be one tomorrow, while what is a valueless object today may become valuable tomorrow. The resource status of material objects is therefore always problematical and depends to some extent on foresight. An object constitutes wealth only if it is a source of an income stream. The value of the object to the owner, actual or potential, reflects at any moment its expected income-yielding capacity. This, in its turn, will depend on the uses to which the object can be turned. The mere ownership of objects, therefore, does not necessarily confer wealth; it is their successful use which confers it. Not ownership but use of resources is the source of income and wealth. — Ludwig Lachmann, The Market Economy and the Distribution of Wealth

If it didn’t matter how resources were used, then all lottery winners would increase their wealth.

Even if there wasn’t a logical inconsistency at the heart of your support for virtuous rent… you still have a fundamentally flawed premise with regards to externalities. There are numerous and significant negative externalities associated with producing sofas. Do these negative externalities represent a cost to society? Sure. Definitely. But do you think that you can adequately guess the size of this cost? If so, then do you also think that you can also adequately guess the size of the benefit? Of course there’s absolutely no need for you to do so because that’s what consumers are for. But in the absence of the spending decisions of consumers… do you think that you could adequately guess the size of the benefit? I’m sure that you recognize that this is the very premise of socialism. I’m also sure you’re aware that socialism doesn’t work so well at guessing society’s benefits or costs.

It is impossible for anyone, even if he be a statesman of genius, to weigh the whole community’s utility and sacrifice against each other. — Knut Wicksell, A New Principle of Just Taxation

Sofas, like every product, have a light side (yang) and a dark side (yin). The yang of sofas is having a comfortable place to cuddle. The yin of sofas is living in a more polluted world. It’s just as beneficial to know how much consumers are helped by sofas’ yang as it is to know how much consumers are hurt by sofas’ yin. Consumers have the freedom to use their cash to communicate their valuation of sofas’ yang… but they have far less freedom to use their cash to communicate their valuation of sofas’ yin. This is because of taxes.

The premise of taxes is pretty reasonable…. the free-rider problem. When you spend your money to communicate your valuation of a sofa’s yang… then you and your cuddle buddy get the sofa all to yourselves. I can only sit on, and enjoy, your sofa if you give me permission to do so. However, if you spend your money to communicate your valuation of a sofa’s yin… then you don’t get the marginally more clean world all to yourself. You have to share it with me and everybody else.

So the premise of taxes is pretty reasonable. What is not reasonable is the fact that planners get to decide for us how our taxes are spent. It really doesn’t matter that we get to elect our planners… it’s still socialism. The logical and detrimental consequence of having socialism in our public sector is that planners will not adequately guess our true valuations of the yin of products… just like planners cannot adequately guess our true valuations of the yang of products.

The solution is simple. We create a market in the public sector by allowing taxpayers to choose where their taxes go (pragmatarianism). To give credit where credit is due… the Nobel prize economist James Buchanan deserves credit for this idea… The Economics of Earmarked Taxes. Netflix subscribers already have to pay a fee… so they might as well use their fee to accurately communicate their valuation of the content. They have absolutely no incentive to pretend that they value some content less than they truly do. “Lying” won’t reduce their Netflix fees… so they might as well be honest.

Right now we have a market in the private sector. Consumers have absolutely no incentive to lie about their valuation of sofas’ yang. If we had a market in the public sector…. then taxpayers would have absolutely no incentive to lie about their valuation of sofas’ yin. Instead of progress being lopsided and skewed to the superficial, it would be balanced and harmonious.

Economic enlightenment means clearly seeing that the true source of society’s problems is not the market in the private sector… it’s the absence of a market in the public sector.

Better Communication, Better Markets

Reply toThe “Why” in Wage Segregation by Samuel Hammond

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It’s neat, and smart, that you juxtaposed the two things. But it doesn’t seem like you did an adequate job of making the case for subsidizing lower productivity workers. Why would we want to subsidize lower productivity workers? This paragraph seemed to be the extent of your case…

Rising premium on quality signals like educational attainment, polarizing wages, and lower social mobility / “Coming Apart” dynamics may therefore all be symptoms of the same phenomena. For better or worse, pooling equilibria promoted a degree of churn between rungs on the social ladder, and denied the ability of imperfect signals to sort one into a low wage destiny.

I’m pretty sure that Ezra Klein isn’t going to hire me as a writer. Which makes sense… I’m a pretty terrible writer. But if he did hire me… then I’d get paid more (certainly more than Medium pays me!)… and somehow I’d also become a better writer? A much better writer? If there was solid evidence that this was indeed the case then I think that Klein would act on it. Who doesn’t love a diamond in the rough?

However, your conclusion doesn’t seem to be that Klein really needs to open his eyes and see and appreciate and understand the enormity of my raw and untapped potential… your conclusion seems to be… universal basic income.

You give up on trying to persuade Klein of my incredibly latent value and instead reach into his pocket and put his money into my hand. Thanks? My writing skills would greatly improve? Voila!? I would shine on like the crazy diamond that I truly am?

Speaking of diamonds… I don’t think that I’ve been equally productive in every romantic relationship that I’ve ever been in. Just like I don’t think that all of my relationships have been equally healthy or beneficial. If it was possible, would it be desirable to mandate a minimum benefit for relationships? I don’t think it would be. You’d be giving people an incentive to stay in less productive relationships.

What if people could get the minimum benefit even if they weren’t in a relationship? It seems obvious that this would decrease their incentive to find and start productive relationships.

No two relationships are equally productive. This isn’t just true of romantic relationships…. this is true of all relationships. The minimum wage gives workers an incentive to stay in less productive relationships. And a basic income would decrease people’s incentive to find and start productive relationships.

A good relationship depends on good communication. People’s willingness to sacrifice is a super important form of communication. Actions speak louder than words. So it’s a problem when the government decreases the goodness of communication. Like most government “solutions”, universal income would make the problem even worse.

If you truly want to help people… then you should focus on improving the goodness of communication. Can we get rid of minimum wages? At this point in time it seems a bit outside our range of effectiveness. But what about here on Medium? What if there were some coin and dollar buttons below every story?






If you liked my story, despite how poorly it was written, you could clearly communicate your valuation of my content by clicking the 50 cent button. Fifty cents would be automatically withdrawn from your digital wallet and deposited into mine. The total value of my story would increase by 50 cents. When people searched for stories the default sorting would be by their value. It would be easy to find the most valuable stories. Once I had enough money in my wallet… I could cash out and Medium would take a very fair and reasonable cut.

Wouldn’t this system increase the goodness of communication? Of course! It would eliminate the payment problem. However, there would still be the free-rider problem. So what if, for example, Netflix allowed their subscribers to use their monthly fees to communicate their valuation of the content? A while back I sat down and figured out how I might allocate one month’s worth of fees…





1. Amelie: $1.50
2. Black Mirror: $0.25
3. Castaway on the Moon: $0.25
4. Rake: $1.25
5. Shaolin Soccer: $0.50
6. Sidewalls: $0.25
7. Snatch: $0.25
8. Spaced: $1.00
9. The League: $0.75
10. The Man From Earth: $4.00


Yeah, it was really hard. Talk about opportunity cost. But I had absolutely no incentive to understate my valuations. Doing so certainly wouldn’t have decreased my monthly payment.

Wouldn’t this system (the pragmatarian model) increase the goodness of communication? Wouldn’t consumers have better relationships with content creators?

Minimum wages decrease the goodness of communication. And so would a universal basic income. Decreasing the goodness of communication makes society worse. If we want to make society better… then we need to increase the goodness of communication.

Markets are all about the goodness of communication. Improving communication means improving markets. Better communication means better markets. Right now Medium is a pretty terrible market. We can’t use our cash to communicate our valuations of each others’ stories. Facilitating payments would make Medium a much better market. If the free-rider problem is a real problem, which it probably is, then switching over to the pragmatarian model would make Medium an even better market.

How many websites are really terrible markets? Is Vox a terrible market? Of course it is. I’m sure you’ve never used your cash to communicate your valuation of any of Klein’s stories. Klein is certainly a better writer than I am… but to the extent that I understand what makes markets better… I’m certainly a much better economist than he is. He’s a great writer and a terrible economist. I’m a terrible writer and a great economist. Sounds like a match made in heaven! But he never returns my phone calls. :(

And even with those websites that do put their content behind paywalls… can subscribers use their monthly payments to communicate their valuation of the content? Nope. So they are terrible markets as well.

The internet has a gazillion really terrible markets. If we vastly improved these markets by applying the pragmatarian model to them, then we would all clearly see that any perceived necessity of a universal basic income was the consequence of people’s failure to understand the importance of good communication. And people’s failure to understand the importance of good communication is the consequence of my terrible writing skills.

Of course I might be wrong! I might have fallen asleep in a few econ classes or zoned out while reading a few econ books. So if you think there are any details, minor or major, that I’m missing… please enlighten me!

The Pragmatarian Model For Inkl

Reply to: Would you pay for news by Gautam Mishra (CEO of inkl)

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Nicely written! But I’m pretty sure though that one-price-fits-all (OPFA) is not the future. On the one hand, like you mentioned, it’s pretty easy for consumers. But on the other hand, consumers don’t equally value articles.

When you charge a dime for every article, you’ll be able to see “breadth”… but you’ll barely be able to see any “depth”. By this I mean… you’ll be able to quickly see how many people like an article (breadth)… but you won’t be able to truly see how much they like it (depth). Unless a reader experiences buyers remorse, you’ll know that their valuation of an article will be at least a dime… but you won’t know how much more highly they will truly value the article. For all you know they might value the article at $5 dollars. That would be some decent depth. All that consumer surplus might seem like a really good deal for the reader… but is it really?

Since you can’t see depth, it’s only logical for your company to focus on maximizing revenue by maximizing breadth. So you end up serving content that lots of people like… but few people truly love.

Think of your favorite movie and book. How much did you pay for them? Did the amount you pay accurately communicate your love for them? Probably not. But if you don’t communicate your love to content creators, and I don’t communicate my love to content creators, and nobody else communicates their love to content creators… then how can we expect them to create a large supply of content that we truly love? Content creators aren’t mind-readers. They aren’t omniscient… they can’t see inside our heart of hearts. So, if we don’t communicate our true love to them… then the logical result will be a shortage of content that we truly love… and a surplus of content that we merely like.

I think of this as a “superficial skew”. The way our system is set up… we can see breadth but we can’t see depth so most of the content is superficial rather than substantial. It’s not impossible to find substantial content… but you really have to dig for it. My Medium home page is filled with stories that I might like to read (usually not)…. but I rarely find anything that I truly value. This isn’t because most people are superficial… it’s simply because our system doesn’t give them the opportunity to accurately communicate their love.

What comes to mind is the old commercial where Tony the Tiger says that some cereal isn’t good… it’s great!!! We need consumers to effectively communicate the difference between… ok… good… great… wonderful. These differences can only be effectively communicated by consumers’ willingness to pay. The more a consumer is willing to pay for content… the higher their valuation of it (the greater the depth).

It should be pretty straightforward that consumers can only know their true valuation of content after they’ve consumed it.

One possible approach would be to add money buttons below a story. Using Medium for example…




While you’re reading my story you’re automatically valuating it. You’re thinking to yourself… ughhh… this guy’s story is incoherent crazy talk! Or… yeah, this makes a lot of sense. Or… wow, this is super solid feedback!

When you finished reading my story… you’d see some coin buttons and dollar buttons. They would allow you to easily, quickly and accurately communicate to me whether you thought my story was… ok… good… great… wonderful. Let’s say that you really liked my story. You’d click the $5 button and five dollars would be automatically withdrawn from your digital wallet and deposited into my digital wallet. The “You” amount to the right of the coin buttons would display “$5.00” and so would the “We” amount. In this case… since you were the only one to positively value my story… your valuation would be same as the total (we) valuation. If Bob read my story and clicked the $1 button… then the “We” amount would be “$6.00”.

Of course everybody would be able to see everybody who valued my story. The list of valuators would be sorted by their valuation so it would be easy to see that you valued my story the most. People could click on your name to see the stories that you value (sorted by your valuation). So, it would be super quick and easy to see which story you most valued. There would also be a tab on your page for recent valuations and another tab where people could see all your stories sorted by their value. So, it would be super quick and easy to see which of your stories was the most valuable.

When people searched for stories… the default sorting would be by value. The most valuable story would be the very first result. It would also be easy to find and read the most valuable story on the entire website. Think about that for a few seconds. It’s worth repeating with emphasis. It would be easy to find and read the most valuable story on the entire website. This is the story that would have the greatest breadth and depth. This is the story with the most substance. This is the most nutritious and delicious story. This is the story that readers loved the most. This is the story that readers were most willing to pay for. This is the story that was worth the community’s greatest sacrifice. With Medium’s current system… we don’t know which story this is. With your OPFA pricing system… we wouldn’t know which article was worth your community’s greatest sacrifice.

If Medium added money buttons… then I could certainly valuate my own story. But the money wouldn’t stay in my wallet… it would be automatically withdrawn and deposited into Medium’s wallet. I’m guessing that people valuating their own stories in order to improve their ranking in the search results would provide Medium with pretty decent revenue. But perhaps Medium could take a fair and reasonable cut when people cashed out.

There’s one “minor” detail with this system…

Suppose the government pays for the mosquito spray through taxes. The efficient approach would be to impose a tax on each resident equal to his or her marginal valuation. Simple enough, but there are at least two problems with this. First, once people realize that their taxes are based on government estimates of how much they value the good, people tend to understate their true valuation. Why admit you really value the good if, as a result, you get socked with a higher tax bill? After all, people in the neighborhood can enjoy mosquito abatement whether or not they pay for it. So taxpayers tend to understate their true valuation of public goods. This creates the free-rider problem, which occurs because people try to benefit from the public good without paying for it. — William A. McEachern, Economics: A Contemporary Introduction

Why buy the cow when you can get the milk for free? Clearly, if Medium added money buttons then people would have an incentive to understate their true valuations of stories. In other words, readers would have an incentive to lie. However, it’s really important to note that adding money buttons would reduce the free-rider problem by eliminating “payment costs”.

With Medium’s current system, if you do genuinely value my story at 10 cents… nothing would technically stop you from paying me 10 cents. I’m not sure if paypal would allow you to send me such a small amount of money… but you could ask for my address and mail me a dime. Of course it would be silly to buy a 47 cent stamp and spend quite a bit of time to only send me 10 cents. In other words… the payment and opportunity costs would be too high.

If Medium added money buttons… then this would eliminate the payment costs. Once valuing a story is as easy as “Liking” it… then I’m sure lots of people will be happy to do so. This would reduce the size of the free-rider problem… but it wouldn’t eliminate it. It would certainly eliminate the forced-free-rider problem… the problem of people who would be happy to pay some money but don’t do so because the payment costs are too high. In any case, it should be pretty intuitive that it’s beneficial to make it easier for people to give each other money.

So how can we eliminate the free-rider problem? How can we eliminate people’s incentive to lie? Well… what about the subscription model? With Netflix… subscribers pay around $10 dollars per month and they have unlimited access to a large supply of content. There’s no free-rider problem because only subscribers have access to the content. There is a communication problem though. Subscribers can use the star rating system to communicate whether some content is good… or great… but this system isn’t very accurate. Just because you give a bunch of content 5 stars… really doesn’t mean that you value all that content equally. So giving a movie 5 stars really doesn’t allow you to accurately communicate your true valuation of that movie.

In order to facilitate accurate valuation of the content… subscribers could be given the option to divvy up their $10 dollar fees however they wanted among all the content. Would subscribers have an incentive to understate their valuation of the content? Of course not. Understating your valuation of the content really wouldn’t reduce your monthly fee. I refer to this model as the pragmatarian model.

Let’s apply the pragmatarian model to your company… inkl. You could charge subscribers a dollar a month. Each month they could use their 100 pennies to communicate their valuation of your content. This would allow you, and your readers, to see the breadth and depth of your content. Subscribers would be able to quickly and easily find, read and valuate the most valuable content on your site. Knowing the true value of your content would allow you to put the most valuable content on your homepage. Everybody would know and understand that it was the most valuable content because they would see that subscribers were willing to spend the most money on it. It would probably be a good idea to have tabs on your homepage so subscribers could see the most valuable content that has been added in the past 24 hours, week, month, year and all time.

Let’s say that most subscribers allocated all their pennies half-way through the month. This would be a good sign. It would mean that you could raise the fee to $2 dollars per month. But what if most subscribers did not allocate all their pennies by the end of the month? This would be a bad sign. You would have to lower the fee and/or add more valuable content. However, it wouldn’t be too difficult to add valuable content because subscribers would be using their pennies to communicate which type of content they most valued.

As far as I can tell… your current model sounds pretty similar to blendle’s model. Both models are OPFA. But is reality OPFA? Nope. In reality, one price really does not fit all. So reality is not OPFA. This is why I’m pretty sure that OPFA is not the future. I’m writing this story because I really don’t want the future to be OPFA. If you implement the pragmatarian model… then you’ll definitely beat blendle. Blendle will have a large supply of superficial content and you’ll have a large supply of substantial content. Who truly wants a large supply of superficial content? We already have Medium for that. And Facebook. And Twitter. And Reddit. And Youtube. The entire internet suffers from a super superficial skew. Your company can be the very first one to help fight the superficial skew. Your company can start the revolution against popularity.

To be clear… my motivation in sharing this info with you isn’t purely altruistic. If you implement my model then I will expect fair and reasonable compensation. However, my motivation isn’t purely financial either. It’s also ideological. Once there’s a successful example of the pragmatarian model… then it will be easier for people to see how and why the same model can and should be applied to the government.

Please let me know if you have any questions!

The Pragmatarian Model For Scribd

Twelve days ago I sent this e-mail to Scribd.  I have yet to receive a reply.

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Hi,

I love economics and reading and wanted to share a great idea with you.

Why not give subscribers the option to divvy up their $8.99/month among their favorite titles?  Let's say that I finished reading a book and really loved it.  Underneath the title on your website would be some coin buttons... 1 cent, 5 cents, 10 cents and 50 cents.  I could click whichever coin buttons I wanted as many times as I wanted in order to specifically and accurately communicate my enjoyment to the author.  The money that I allocated would be automatically deducted from my $8.99/month.  You would take your cut and pass the rest onto the publisher.

Under each book you would display the total amount of money that has been allocated to it.  Ideally, you would also display each user who allocated money to the book and sort them by the amount that they allocated.  I could click on their usernames and see the titles that they've allocated money to sorted from most valued to least valued.  When subscribers search for books... the default sorting would be by total value.

On your homepage you would display your most valuable titles.  Right now you can't do that because you don't know the actual value of your titles.  You might now how popular they are... but just because something is popular really doesn't mean that it's valuable.  You really want to know which titles are worth people's allocations.  Readers will want to know the same thing.

Ideally, most subscribers would allocate all their money half-way through the month.  If this wasn't the case... then it would be readily apparent that you needed to increase your selection of valuable books.  However, the guess work would be largely removed because your subscribers would be using their allocations to tell you the type of books that they most valued.

If most subscribers did allocate all their money half-way through the month... then voila!  You could increase the subscription fee and most subscribers really wouldn't mind.  As the size of the pie increased... so too would the incentive for more publishers and authors to try and get a slice.

Of course you would want to super quickly add music and movies as well.  And articles.  Pretty soon people would be happily paying more than $100 dollars a month and enjoying the opportunity to communicate their valuation of your content.  Once valuing content is as easy as "liking" it... then people will be happy to do so.  You'd also want to allow subscribers to befriend, follow and message each other.  By the time Facebook, Spotify, Netflix and Amazon realized how successful this model was... it would be too late.  Well... maybe not too late.  But they would definitely be scrambling to catch up.

Obstacles?  Challenges?  Technically you'd be keeping track of a lot more information.  But it would only be a lot of information if lots of subscribers were happy with the option to communicate their valuation/enjoyment of your content.

Anyways, I'm not sharing this idea altruistically!  I'll definitely be expected to be fairly and reasonably compensated.  However, my motivation isn't purely financial.  It's also ideological.  When you definitively prove that this model is viable... then it would really strengthen the case for taxpayers choosing where their taxes go.  Same concept just on a larger scale.

I've already shared the book idea on my blog...

http://pragmatarianism.blogspot.com/

But I doubt that Jeff Bezos reads my blog.  I'm super sure that it's a viable model though and it's only a matter of time before other people realize the same thing.

Let me know if you folks are interested in this model.  Of course I'd be happy to answer any questions and help assist in any way with its implementation.

While I'm at it... I signed up to your website.  The first thing that I saw after entering my name, password and e-mail was a page asking for my credit card details.  For me it was a total turn off.  Maybe I'm an exception though?  I would think that it makes more sense to first get people hooked and then ask for their credit card details.  When people are on the fence about your service... you really want to avoid doing anything that might push them on the wrong side.