Sunday, June 25, 2017

The Efficient Allocation Of Blame

Netflix recently canceled one of my favorite shows... Sense8.  The show is about 8 strangers who share a psychic connection that allows them to utilize each other's strengths and knowledge.  Sense8 is by far the best fictional depiction of Hayek's important concept of partial knowledge.  So I really want to blame somebody for Sense8's cancellation.  Netflix is the obvious choice... but is it truly the best choice?  I really don't want to inefficiently allocate blame.

In order to efficiently allocate blame, it's necessary to thoroughly understand exactly why Netflix canceled Sense8.  From what I've read, the audience was too small.  Not enough people watched it.  Far more people watched 13 Reasons Why.  In other words, 13 Reasons Why was more popular than Sense8...

Which show should Netflix have canceled?  If this is all the information that we have to go on, then Netflix should have canceled Sense8.  It is obviously less popular.  So I should blame all the people who didn't watch the show?  Not necessarily.

Just because something isn't popular doesn't mean that it isn't valuable.  Let's imagine that Netflix gave each and every subscriber the opportunity to divide their subscription dollars however they wanted among all the different content.  To be clear, it would not be like iTunes or Blendle where specific content requires payment to access it.  Netflix subscribers would simply have the option to divide their $10 dollar monthly fee however they wanted between Sense8 and 13 Reasons Why and all the other content.  The more dollars that subscribers spent on a show, the greater its value.

Let's imagine how subscribers might divide their dollars between 13 Reasons Why and Sense8...

Now which show should Netflix have canceled?  If this is all the information that we have to go on, then Netflix should have canceled 13 Reasons Why.  It's obviously less valuable.  It's less beneficial.

There's one more thing that we'd need to know in order to make a truly informed cancellation decision... the cost of each show.  I'm guessing that Sense8 was more costly than 13 Reasons Why.

Right now Netflix knows the cost of each show, but it doesn't know the benefit of each show.  It's a bit difficult to make an intelligent cost/benefit decision if the benefit isn't actually known!!!!!

Check out this article by Steven Horwitz... The Economist’s Superpower.  In it he applies Frederic Bastiat's Seen vs Unseen to the Wonder Woman movie.  I haven't watched the movie but evidently it involves Wonder Woman contemplating the true causes of war.  Let's make a list...

13 Reasons Why
Wonder Women movie
What Is Seen and What Is Not Seen
The Economist's Superpower

One of these things is not like the others.  There is only one thing on this list that we can actually see the demand for... the Wonder Women movie.  We can't see the demand for Sense8.  We can't see the demand for 13 Reasons Why.  We can't see the demand for What Is Seen and What Is Not Seen.  We can't see the demand for The Economist's Superpower.  We can't see the demand for war.  But we can see the demand for the Wonder Women movie.

Is this the Seen vs Unseen that Horwitz discussed in his article?  No.  It really isn't.  Let's consider Bastiat's Seen vs Unseen.  He was like yeah, a broken window requires that the owner will have to buy a new window, but if it hadn't been broken in the first place, then the owner would have spent his money on things that he truly needed.  Yeah, war requires that a lot of money be spent, but if the war hadn't been started in the first place, people would have spent their money on things that they truly needed.  Yeah, the pyramids required that a lot of money be spent, but if they hadn't been built in the first place, then people would have spent their money on things that they truly needed.

Let's break it down...

1. It matters what people truly need
2. People's true needs can only be revealed by their spending decisions
3. When people aren't given the opportunity to decide how to spend their money, they end up paying for things that they don't truly need

We can't see how much money Horwitz was paid for his article.  Maybe he didn't receive any money?  In any case, FEE certainly does receive money.  It decides how to divide all the money that it receives among all the articles/authors.  This logically means that the donors aren't given the opportunity to decide for themselves how they divide their own money among all the articles.  Therefore, the donors end up paying for articles that they don't truly need.

Netflix and FEE are based on different models.  Netflix receives money from subscribers while FEE receives money from donors.  But in neither case do the supporters have the opportunity to use their money to signal the value/benefit of specific products.  So neither organization knows the actual benefit of any of its products.  This entirely prevents both organizations from making adequately informed cost/benefit decisions.  As a result, the supporters end up paying for products that they don't truly need.

It boils down to a very simple question... how much do you need this?  If you, as a supporter, can't answer this question with your money, then you're going to end up paying for things that you don't truly need.

FEE and Netflix are two non-market spaces.  There are countless non-market spaces.  The largest such space is of course the government...

This means that the terraces of the Champ-de-Mars are ordered first to be built up and then to be torn down. The great Napoleon, it is said, thought he was doing philanthropic work when he had ditches dug and then filled in. He also said: "What difference does the result make? All we need is to see wealth spread among the laboring classes. - Frédéric Bastiat, What Is Seen and What Is Not Seen 

Because the government is a non-market space, taxpayers pay for goods and services that they don't truly need.  It might seem like Bastiat's solution was to decrease the size of the government's space.   If the government is going to waste people's money, then it should be given less money.  A small defective government is better than a large defective government.  However, Bastiat definitely wanted the government to be effective.


Thus, considered in themselves, in their own nature, in their normal state, and apart from all abuses, public services are, like private services, purely and simply acts of exchange. — Frédéric Bastiat, Private and Public Services

When James Goodfellow gives a hundred sous to a government official for a really useful service, this is exactly the same as when he gives a hundred sous to a shoemaker for a pair of shoes. It's a case of give-and-take, and the score is even. But when James Goodfellow hands over a hundred sous to a government official to receive no service for it or even to be subjected to inconveniences, it is as if he were to give his money to a thief. It serves no purpose to say that the official will spend these hundred sous for the great profit of our national industry; the more the thief can do with them, the more James Goodfellow could have done with them if he had not met on his way either the extralegal or the legal parasite. - Frederic Bastiat, What Is Seen and What Is Not Seen

If the socialists mean that under extraordinary circumstances, for urgent cases, the state should set aside some resources to assist certain unfortunate people, to help them adjust to changing conditions, we will, of course, agree. This is done now; we desire that it be done better. There is, however, a point on this road that must not be passed; it is the point where governmental foresight would step in to replace individual foresight and thus destroy it. -  Frederic Bastiat, Justice and Fraternity

What do we want with a Socialist then, who, under pretence of organizing for us, comes despotically to break up our voluntary arrangements, to check the division of labour, to substitute isolated efforts for combined ones, and to send civilization back? Is association, as I describe it here, in itself less association, because every one enters and leaves it freely, chooses his place in it, judges and bargains for himself on his own responsibility, and brings with him the spring and warrant of personal interest? That it may deserve this name, is it necessary that a pretended reformer should come and impose upon us his plan and his will, and as it were, to concentrate mankind in himself? - Frédéric Bastiat, What Is Seen and What Is Not Seen

Apparently, then, the legislators and the organizers have received from Heaven an intelligence and virtue that place them beyond and above mankind; if so, let them show their titles to this superiority. — Frédéric Bastiat, The Law


People should get just as much benefit from public goods as they do from private goods... but government planners really aren't above mankind, and they certainly can't concentrate mankind in themselves... therefore... ?

Most libertarians argue that the solution is to shrink the size of the government's space.  "Starve the beast".  But that's like arguing that FEE and Netflix should be smaller spaces.  The real problem isn't the size of a non-market space, it's the fact that the supporters can't decide for themselves how they divide their contributions among all the different goods in the space.  So the real solution is to transform non-market spaces into market spaces.

Bastiat correctly identified the problem.  Unfortunately, he only hinted at the correct solution.  Or, he flirted with it.  Or, he danced around it.  In any case, I feel like I can slightly blame Bastiat for Sense8 being canceled.  But if Netflix does become a market then he will certainly deserve a decent share of the credit.

What about Horwitz?  He is far more blameworthy than Bastiat.  Not only does Horwitz have the opportunity to stand on Bastiat's shoulders, but he also has the opportunity to stand on Mises' shoulders, and on Hayek's shoulders, and on Friedman's shoulders, and on Buchanan's shoulders.  Despite these incredible opportunities to see far more of the economic picture than previous economists, Horwitz still doesn't see the incredible benefit of transforming non-market spaces into market spaces.

Then again, you really shouldn't need a PhD in economics or an MBA from Harvard to understand that making an intelligent cost/benefit decision depends on actually knowing the benefit.

A few days ago I mentioned the cost/benefit problem in a Medium reply that I tweeted to Noah Smith...

How much blame should I allocate to Noah?  Here's the very first comment that I ever made on his blog...

Allowing tax payers to vote with their taxes would lead to the most efficient division of labor between the public and private sector. 
The only difference between public and private goods is that, with public goods, people can free-ride off the contributions of others. Add the element of coercion (taxes) and the invisible hand can allocate public resources as efficiently as it can allocate private resources.

I made that comment in 2010.  Then I made a "few" more comments on his entries.  Finally, in 2012 he replied...

FWIW, people choosing which programs their tax dollars go to presents a coordination problem. Imagine if the budget last year for highway-building was $50B. Now imagine that everyone thinks they did a good job and highways are important, so they allocate more to highways. But since they all do it at once, the highway-building dept. now has $500B this year. What do they do with all that extra cash?

Let's switch the government with Netflix...

FWIW, people choosing which programs their subscription dollars go to presents a coordination problem. Imagine if the budget last year for sci-fi shows was $50B. Now imagine that everyone thinks they did a good job and sci-fi shows are important, so they allocate more to sci-fi shows. But since they all do it at once, sci-fi producers now have $500B this year. What do they do with all that extra cash?

Let's consult Adam Smith...

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

Recently Noah Smith published a post about the shouting class but he didn't even mention Adam Smith...

The people feeling, during the continuance of the war, the complete burden of it, would soon grow weary of it, and government, in order to humour them, would not be under the necessity of carrying it on longer than it was necessary to do so. The foresight of the heavy and unavoidable burdens of war would hinder the people from wantonly calling for it when there was no real or solid interest to fight for. - Adam Smith, Wealth of Nations

A couple years ago I tweeted the following to Noah Smith...

So did he accept any responsibility for Sense8 being canceled?

I'm certainly happy to make his day weirder, but it sure doesn't seem like he quite grasped why I asked him, of all people, whether he accepts any responsibility for Sense8's cancellation.  The question was random in the sense that it was out of the blue.  But it was relevant in terms of all the information that I've shared with him over the past 7 years.  

If you lead a horse to water, but it doesn't drink, do you blame the horse?  Not if it isn't thirsty.

Honestly I do want to allocate some blame to Noah Smith for Sense8 being canceled.  But maybe it isn't his fault that he doesn't thirst for economic enlightenment.  Perhaps it's his professors' fault.

I think Miles Kimball was one of Noah's professors.  He does deserve some of the blame for Sense8's cancellation.

But I'm pretty sure that Bryan Caplan deserves more blame than Kimball.  In a recent blog entry Caplan wrote...

The heart of the left isn't helping the poor, or reducing inequality, or even minority rights.  The heart of the left is being anti-market.

For thou, even thou only, knowest the hearts of all the children of men?  Figuring out what's truly important to people is what markets are good for.  In theory, Caplan is extremely pro-market.  I say "in theory" because he has never made the case that Netflix should be a market.  As far as I know, he has never once argued in favor of transforming any non-market space into a market space.  And it's not like he's unfamiliar with the concept... Bryan Caplan Please Show Us The Unseen.

Can Caplan be truly pro-market if he is indifferent to the countless spaces that aren't markets?  If he deeply loves markets, then for sure he'd notice, and be pained by, their absence.  But it's not like he's ever argued that prisons or schools should be markets.  Instead, he spends lots of time arguing that borders should be open.

The free flow of people and other resources is only beneficial to the extent that they flow to where they are most needed.  Knowing where resources are most needed depends on accurate value signals.  The minimum wage is an inaccurate value signal.  As a result, it inefficiently allocates people... especially poor people.

It's important that problems are tackled in the correct order.  Before borders are opened, it's necessary to abolish minimum wages.  In order to abolish minimum wages, people have to understand the importance of accurate value signals.  But before people can understand the importance of accurate value signals, they first have to understand the importance of value signals.  The best way to help people understand the importance of value signals is to help them understand that valuable, but unpopular shows, will be canceled if their value is unseen.

I don't actually know if this is the best way.  But the fact is that everybody hates it when their favorite show is cancelled.  It doesn't matter if somebody is a socialist or anarcho-capitalist, they are pained by the loss of their favorite show.  People are very different, but not so different that some people enjoy loss.  Everybody hates losing their keys.  Life is all about avoiding/minimizing loss.  So it's really important to efficiently allocate the blame for our loss of Sense8.

Where it gets tricky is how to divide the blame between Bryan Caplan and Alex Tabarrok.  As far as I know, Caplan hasn't publicly addressed the economics of bundling content.  Tabarrok, on the other hand, has.  Unfortunately, he supports bundling.  I endeavored to explain the problem with bundling content and he addressed my critique on his blog.  Even though I didn't manage to persuade him, he did draw attention to my arguments against bundling.

Caplan and Tabarrok were both colleagues of James Buchanan.  This is interesting because he is a super strong contender for deserving the least blame for Sense8's cancellation...

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

Netflix subscribers are already paying a monthly fee.  So if they are given the opportunity to earmark their fees to their favorite content, they wouldn't have any incentive to conceal their "true" preferences.

I tried really hard to explain this concept (here and here) to Jeff Jarvis.  He responded to my first attempt but didn't respond to my second.  So perhaps it wouldn't be entirely unreasonable to allocate some blame to him for Sense8's cancellation.

Buchanan's paper was written in response to a contender for the most blameworthy...

But, and this is the point sensed by Wicksell but perhaps not fully appreciated by Lindahl, now it is in the selfish interest of each person to give false signals, to pretend to have less interest in a given collective consumption activity than he really has, etc. — Paul Samuelson, The Pure Theory of Public Expenditure

Samuelson correctly understood that false signals are a problem, but then he simply assumed that planners would be able to divine the true signals.  Voila!  Sense8 is cancelled!

For some reason I think that "Voila!" should be reserved for when decent things are pulled from a magician's hat.  So "Voila!" really doesn't seem like the appropriate word for Samuelson pulling Sense8's cancellation from his butt.   Let me try again...

Samuelson simply assumed that planners would be able to divine the true signals.  Oh shit!  Sense8 is canceled!

It's better but not quite anti-magical enough.

Oh yeah, I should probably mention that Buchanan's paper wasn't nearly as popular as Samuelson's paper.  The importance of a paper is largely determined by how many times it's been cited.

Citation indexing is currently employed to map the breaking "hot" areas of science. Clusters of a few extremely highly cited papers can indicate a rapidly moving area of research. An unintended corollary of this system is that government fund-givers use the Citation Index to assist them in determining whose research to fund. They count the total number of citations -- adjusted for the "weight" or stature of the journal publishing the paper -- of an individual scientist's work in order to indicate the importance of that scientist. But like any network, citation evaluation breeds the opportunity for a positive feedback loop: the more funding, the more papers produced, the more citations garnered, the more funding secured, and so on. And it engenders the identical reverse loop of no funding, no papers, no citations, no funding. -  Kevin Kelly, Out of Control 

Can we blame Kelly for not reading Buchanan's paper?  Google didn't read Buchanan's paper either...

Now, Google is a republic, not a perfect democracy.  As the description says, the more people that have linked to a page, the more influence that page has on the final decision.  The final vote is a "weighted average" - just as a stock price or an NFL point spread is - rather than a simple average like the ox-weighters' estimate.  Nonetheless, the big sites that have more influence over the crowd's final verdict have that influence only because of all the dollar votes that smaller sites have given them.  If the smaller sites were giving the wrong sites too much influence, Google's search results would not be accurate.  In the end, the crowd still rules.  To be smart at the top, the system has to be smart all the way through. - James Surowiecki, The Wisdom of Crowds

Surely I can blame Surowiecki for not appreciating the difference between a regular vote and a dollar vote.

The importance of webpages isn't determined by a market.  The importance of academic papers isn't determined by a market.  The importance of shows on Netflix isn't determined by a market.  So many many many markets are missing.  But so few few few people even notice their absence.

To be honest though, I'm pretty sure that I deserve most of the blame for Sense8's cancellation.  This blog entry isn't wonderfully written or organized, there's a severe shortage of cleverness, and my diagrams aren't eye-catching.  This really isn't my forte.  But it's the most important job that nobody else is doing.  Voila!  Here I am!  I've got the heart of a champion!  I'm doing my very best to do the most important job.  I'm arguing, albeit poorly, that not-markets should be markets.  I'd make a super strange comic book hero.

But if you're reading this, then guess what?  Now you know the problem and the solution.  So if your favorite show gets canceled despite its social benefit being unknown, then you'll be partly responsible.  This thought provides me with some comfort.

While I'm at it, I kinda want to blame this guy...

It’s like some asshole coming up to you at the bus stop and saying “Ready to have your mind blown? Modern life is often alienating and lonely.” Thanks for the insight, Socrates, I’ve never been exposed to such wisdoms before. - Freddie deBoeryou people are out of your minds, Master of None is terrible

Given the opportunity, I'm guessing that he wouldn't allocate any of his subscription dollars to Master of None.  I gave it a thumbs up but not sure if I would allocate any dollars to it either.  It's good but it's not great.  It's charming, but it's not nearly as charming as Amelie.

Part of the reason that I want to blame deBoer is that I sent him an e-mail about Classtopia but he didn't reply.  So it's not like he's ignorant about the idea of transforming non-markets into markets.

Scott Alexander is in the same general category.  Alexander and deBoer could both do a far better job than I am at selling Netflix being a market.  Except they aren't likely to do so if even Caplan and Tabarrok aren't interested in doing so.  Does that make sense?

*scratches head*

On Facebook we can see how many thumbs up a post has received.  On Youtube we can see how many thumbs up (and down) a video has received.  But on Netflix we can't see how many thumbs up/down a show/movie has received.  Subscribers can judge content by its cover, but not by its popularity, or lack thereof.

If Netflix subscribers could divide their dollars among all the content, then I'd definitely want to see how many dollars a show has received.  Some content would receive a lot more dollars than other content.  Just like some cars are a lot more expensive than other cars?  Well... cars are private goods while the content, in the context of Netflix, is a public good.

I can't take a random Lamborghini for a ride, but I could certainly watch a "luxury" show.  Eh?  Let's consult Smith...

The market price of every particular commodity is regulated by the proportion between the quantity which is actually brought to market, and the demand of those who are willing to pay the natural price of the commodity, or the whole value of the rent, labour, and profit, which must be paid in order to bring it thither. Such people may be called the effectual demanders, and their demand the effectual demand; since it may be sufficient to effectuate the bringing of the commodity to market. It is different from the absolute demand. A very poor man may be said in some sense to have a demand for a coach and six; he might like to have it; but his demand is not an effectual demand, as the commodity can never be brought to market in order to satisfy it. - Adam Smith, Wealth of Nations

I'm guessing that a coach and six was the equivalent of a Lamborghini.  Thanks to rich people being willing to pay so much money for fancy rides, better and better rides became more and more affordable.  Orchids and oranges and many other things used to be luxury goods, but now they are common goods.

What about books?  Books are certainly a lot more affordable than they used to be.  But we don't generally hear about any modern books being luxury items.  Luxury cars?  Yes.  Luxury books?  No.  It's tricky because books are simply vehicles for ideas.  A faster car can more quickly transport a person from point A to point B.  But there's no such thing as a faster book that can more quickly transport ideas from the book to your brain.  Too bad!

A bestselling book doesn't mean that many people especially appreciated the physical book itself, it means that they especially appreciated the ideas that the book contains.  However, even when somebody truly loves some ideas in a book, it's not like they are going to continue buying the same book.  They might buy it for others.  Personally, I love the ideas in the Wealth of Nations but it's not like I've ever bought it for myself or others.  Why buy the cow when you can get the milk for free?

The story, at least for shows and movies, would be very different if Netflix becomes a market.  Let's consider a hypothetical subscriber named Samantha.  She isn't going to spend her subscription dollars to buy Sense8 like she buys a book or an orchid.  She already "bought" the show when she subscribed to Netflix.  So there's absolutely no need for her to buy it again.  Instead, she needs to communicate how much benefit she derives from the show.  This crucial information could be accurately transmitted by Samantha using her subscription dollars to grade the benefit/value/relevance/quality of the show.  Each month she would have the opportunity to decide how many of her $10 dollars to spend on Sense8.  If she really loves it, then each month she would spend many of her dollars on it.

Each month Samantha spends some money on chocolate.  And each month she spends some money on Sense8.  The show is canceled so it's not like she's spending her money on new episodes.  And she might not even be rewatching the episodes.  But each month she still highly values the idea of Sense8.  She communicates her high valuation of the show by spending many of her subscription dollars on it.  She would be using her money to say, "This is still the best show on Netflix."

Every subscriber would essentially use their subscription dollars to help create a treasure map.  Sense8 would be one treasure chest on the map.  The size of each and every treasure chest would be determined by subscribers deciding how to divide their limited subscription dollars among all the different chests.

The treasure map would help subscribers decide how to divide their limited time and attention among all of the content.  It would also help content creators decide how to divide their limited time and creativity among all the different topics.

It stands to reason that some treasure chests are going to be a lot larger than other treasure chests.  Some shows are going to receive a lot more money than other shows.  So there will certainly be luxury ideas.  Will 20% of the ideas get 80% of the dollars?

It's hard to wrap my mind around the idea of luxury ideas.  Luxury items are pretty much defined by most people's inability to afford them.  As oranges became more and more affordable, they become less and less luxurious.

So maybe it's technically impossible for there to ever be luxury ideas.  There will simply be super high quality ideas that most people can afford.

When the highest quality ideas have the brightest value signals, all the subscribers are going to quickly spot and respond to them.  An entire country's worth of people will take the highest quality ideas and combine them to create the next crop of ideas.

The Wealth of Nations was published in 1776.  Around 230 years later, I had the idea to apply Smith's idea of the Invisible Hand to the government.  A few years later I discovered that, 15 years before I was even born, Buchanan had come up with the same idea.  And now here I am with the idea to apply his idea to Netflix and all the other non-markets.

Right now, because so many spaces aren't markets, we don't see or know the social value of countless ideas.  Oh shit!  Super slow synthesis!

If every space was a market, then we'd see and know the social value of every idea.  Voila!  Super swift synthesis!

Speaking of which, here's one last blame candidate...

To understand how persistent growth, even accelerating growth is possible, it helps to step back and ask where growth comes from. At the most basic level, an economy grows when whenever people take resources and rearrange them in a way that makes them more valuable. A useful metaphor for rearrangement as value creation comes from the kitchen. To create valuable final products, we mix inexpensive ingredients together according to a recipe. The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. If economic growth could be achieved only by doing more and more of the same kind of cooking, we would eventually run out of raw materials and suffer from unacceptable levels of pollution and nuisance. Human history teaches us, however, that economic growth springs from better recipes, not just from more cooking. New recipes produce fewer unpleasant side effects and generate more economic value per unit of raw material. - Paul Romer, Economic Growth

Do we need to know how much society values an ingredient?  Of course!  Right now we don't know the social value of Buchanan's "The Economics of Earmarked Taxes".  This means that people can't make adequately informed decisions whether to include it in their recipes.  The same is true of the Wealth of Nations.

A couple times (here and here) I endeavored to explain to Romer the importance of knowing the social value of ingredients.  Unfortunately, but unsurprisingly, he didn't publicly examine my explanation.  So I'm pretty sure that he also deserves some of the blame for Sense8's cancellation.

It's time to stop the senseless cancellations.  It's time to know the social value of each and every idea.  It's time to fully utilize the best ideas.  It's time to transform every non-market into a market.

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