Monday, July 27, 2015

Creating The Most Efficient Demand Net

Chris Chen shared this story... The Real Relationship Economy — Part II

My reply...  If a market is missing, then make one!

Chen's reply...

Thanks for the comments. As I mentioned, I really hated coming to the “government redistribution,” conclusion. Part of my premise is that society, at some point, will not have limited resources in terms of goods and services and I’m trying to anticipate how we respond to that situation. I love the idea of creating a market-based solution to value healthy relationships. Can you expand upon that idea? 

My reply...

Hi, I’ll be happy to share some thoughts about market based solutions to facilitate compensation of “healthy relationships”.

Imagine that you're going fishing with a net.  The problem is that the holes in your net are too large... and good sized fishes are swimming right through them.  You'd capture a lot more fish if the holes in your net were a lot smaller.

This analogy doesn't work perfectly because, when you cast a net for fish, you don't want to capture the tiny fishes.  But when you cast a net for demand, you do want to capture all the demand... even the tiny demands.  A lot of little demands can really add up!

Creating markets where they are needed helps to minimize the holes in the fishing-for-demand net.

Let's say that you go to your local park and you spend the entire day picking up litter.  Is there any demand for this particular activity?  We can guess that most people who visit the park will prefer it if there's less litter.  But, we don't know how much they prefer it.  My term for this is demand opacity.  The demand for a litter-free park is unclear.  As a result, it's doubtful that the supply will be optimal (perfectly match the demand).

One way to help clarify the demand would be to create a website that facilitates the monetary communication/exchange between suppliers (people who pick up litter) and demanders (people who prefer litter-free places).  You could enter the relevant litter-removal details (where, when, how long) and people could give you as little as a penny for your efforts.  Again, a lot of little demands can really add up!

This method of clarifying demand would have a few challenges...

1. verification
2. the free-rider problem

Neither challenge is insurmountable.

Verification can easily be accomplished with drones!  Well... in the not-too-distant future at least.  You'd have your personal drone buzzing around you documenting your litter removal efforts.  Anybody on the website would be able to watch the live feed and, after you finished, the entire recording would also be available.  Another method would be to wear a shirt that has the litter website and your username on it.  Let's say that I'm having a picnic at the park and I see you picking up litter.  I go to the website, look up your username... allocate $0.50 cents to your current activity ... and vouch for you... and/or add to your reputation.

Like I explained in my first reply to your story, the free-rider problem could be solved, more or less, by correlating contributions with advertising.  If I own a sandwich shop that's adjacent to the park... and I'm looking to advertise my business and generate some goodwill... I can go to the litter website and make a contribution to people who have removed litter from the park.  The larger my contribution... the higher up on the relevant pages (home, park, recipients) my contribution/name/business/website will be displayed.  This will generate traffic to my website... which will help me make an informed decision regarding how much to contribute.  Essentially, the litter-removal website will simultaneously function as an auction for advertising space.

Are there any other challenges?  Probably... but certainly there aren't any that can't be overcome.

With this website, people would know the demand for litter removal.  Well... past demand wouldn't perfectly predict future demand... but this is always true.  Demand is never perfectly clear because nobody has a crystal ball.  But when it comes to picking up litter, demand could certainly be a whole lot clearer.  The clearer the demand, the more likely it is that the supply will be optimal.  Making an informed decision requires adequate information.

Well... I mentioned past and future demand... so I might as well include present demand by giving a shout-out to Alex Tabarrok's assurance contracts.  More recently... Assurance Contracts for Indie Films.  Using our example, as a park becomes more and more littered... people could put more and more money into a pool.  As the pool of money gets larger... the incentive increases for somebody to pick up the litter and collect the pool of money.  Assurance contracts can certainly help clarify demand.

Picking up litter isn't the only...ummm...other-person-benefiting activity that can be done at a park.  For example, this guy in Miami attached some orchids to trees at a local dog park.  I think that most people who visit a park will prefer to see more, rather than less, flowers.  And again, the fundamental question... how much do they prefer seeing more flowers at their local park?  We don't know... but we should know.

Does it make sense to have a website for litter-removal and another website for flower-addition?  Or does it make more sense to try and create an inclusive website?  If an inclusive website is better... just how inclusive should it be?

On Facebook... people share all sorts of activities.  What would happen if Facebook facilitated demand clarification?  How much money do you allocate to your friend's engagement?  How much money do you allocate to the subsequent marriage?  How much money do you allocate to the wife's pregnancy and the birth of their child?  How much money do you allocate to their couple's therapy?  How much money do you allocate to their divorce?

I doubt that Facebook will clarify demand anytime soon.  But I perceive the potential benefit of an equally inclusive website... but with "value" as well as "Like" buttons.

Perhaps the closest website is Patreon.  However, its focus is a lot narrower than Facebook.  Not that it couldn't be expanded though.  Also, Patreon operates on the economically absurd premise that everything an artist creates is equally valuable.  This economic absurdity screws both the suppliers and the demanders.  The suppliers are screwed out of monetary feedback on specific creations... and the demanders are screwed out of the specific types of creations that they want more of.  Demand is only partially clarified.  It's better than complete demand opacity... but the holes in the net are still way too large.

So as far as models go... there's considerable potential for a Facebook type that doesn't just have a "Like" button... but also has coin buttons... penny, nickle, dime and quarter.  This website would help answer the fundamentally important question of how much you like something.  You like that your friend is engaged?  Ok.  But how much do you like it?  You pressed the "Like" button... but are you also going to press the quarter button?  If so, how many times are you going to press it?  What is the intensity of your preference?

And when you added somebody as a friend... rather than seeing their updates sorted by time... you'd also want to be able to sort them by value.  This way you could instantly see the most valuable thing that your new friend has done.  Was it graduating from highschool?  Or from college?  Getting his PhD?  Or getting a job at Google?  Or getting married?  Having a kid?  Having a second kid?  Having the seventh kid?  Having a vasectomy?  Finding God?  Losing God?  Becoming a democrat?  Or a libertarian?  Writing a book?   Donating a kidney?  Winning a Nobel Prize?  Moving to mars?

It’s illegal to sell your kidney… but giving your kidney away could potentially be the single most profitable thing you do. Well… according to the crowd at least. See also: Tabarrok on Alvin Roth… The Hidden World of Matchmaking and Market Design.

Just in case it's not abundantly clear... the benefit of a market-based rather than a government-based solution is that the answer to "how much" is infinitely more accurate.  If everybody has the same answer to "how much" then markets would be entirely pointless.  But the fundamental fact of the matter is that we really don't all value everything equally.  With markets... the supply accurately reflects this fundamental fact.  We all get to decide on our own how much we value things.  With governments, on the other hand, the complete absence of consumer choice guarantees that the supply will not accurately reflect the reality of our diverse preferences/circumstances.  This disparity between supply and demand destroys value.  The government supplies something good... which we all see... but always at the cost of something better... which we can't see.  Just because we value X doesn’t mean that we’d be willing to give up Y.

With markets... who we are as people is taken into account.  When we answer the fundamentally important question of "how much" we value something... our answer shifts the economy accordingly.  When the government answers the question of "how much" for all of us... the economy shifts in less valuable directions.  The government can't embody the immense variety of humanity.  It can't even get close.

This doesn’t mean that we need to get rid of government… it just means that we need to create a market in the public sector. This can be accomplished simply by allowing people to choose where their taxes go. Then each and every one of us can answer the fundamentally important questions of “how much” we value war, peace, the environment, justice, public education, public healthcare and so on.

Will we like all the answers equally?  Of course not.  But how can we hope to improve them when we don't even know what they are?

For all intents and purposes...we're still in the dark ages.  Enlightenment depends on clarifying demand.  When we can all easily and clearly communicate the intensity of our preferences to each other... the economy will shift in the most valuable directions.  And, given the diversity of humanity, clarifying demand will maximize the variety of available opportunities.  Any loss of opportunities that result from technological progress will be more than offset by the gain in opportunities that the same progress will create.

People are willing to pay for plenty of things.  Each willingness-to-pay is a fish that it would behoove us to catch.  Right now society's net has way too many holes and way too many fish are slipping right through them.  This means that there are far less opportunities available.  We can remedy this problem by creating markets wherever they are needed.  For example, Medium could easily be turned into a market simply by adding coin buttons next to the "Recommend" button.  Anybody who values a story could quickly and easily communicate this by clicking the penny, nickle, dime or quarter button.  How many fishes will be caught?  Who knows.  But certainly more fishes than Medium is currently capturing!  And more captured fish means more opportunities.

It's pretty easy to get into the demand clarity mindset.  Anytime you value something, but it's not stupid easy to communicate your valuation, then you've identified where there's room for improvement.  Once you've fully adopted this mindset... then you'll realize that society's demand net is full of very large holes.  In economic terms, society's demand net is extremely inefficient.  There's a plethora of opportunities that should exist, but do not, because countless willingness-to-pay fish are swimming through giant and gaping holes in the demand net.  The sooner that we fix the net by creating markets where they are needed... the sooner that we maximize the benefit that we derive from humanity's most valuable resource... its diversity.

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