Monday, August 22, 2016

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:

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!

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