Sunday, August 7, 2016

Alex Tabarrok For And Against Value Signals

Despite my best efforts, Alex Tabarrok is still my favorite living economist.  Here he is for value signals...

Here's what he recently wrote against value signals...

Dead people tend not to be very creative so I suspect that the retroactive extension of copyright will not spur much innovation from Eames. The point, of course, is not to spur creativity but to protect the rents of the handful of people whose past designs turned out to have lasting value. - Alex Tabarrok, Copyright Protectionism

Here's my illustration of the value signal concept...

Can only Batman see the value signals?  Nope.  Do we only want Batman to see the value signals?  Nope.

The increase of demand, besides, though in the beginning it may sometimes raise the price of goods, never fails to lower it in the run. It encourages production, and thereby increases the competition of the producers, who, in order to undersell one another, have recourse to new divisions of labour and new improvements of art which might never otherwise have been thought of. The miserable effects of which the company complained were the cheapness of consumption and the encouragement given to production, precisely the two effects which it is the great business of political œconomy to promote. - Adam Smith, Wealth of Nations 

Does Batman want to be the only one who sees the value signals?  Yup.

When by an increase in the effectual demand, the market price of some particular commodity happens to rise a good deal above the natural price, those who employ their stocks in supplying that market are generally careful to conceal this change. If it was commonly known, their great profit would tempt so many new rivals to employ their stocks in the same way, that, the effectual demand being fully supplied, the market price would soon be reduced to the natural price, and perhaps for some time even below it. If the market is at a great distance from the residence of those who supply it, they may sometimes be able to keep the secret for several years together, and may so long enjoy their extraordinary profits without any new rivals. Secrets of this kind, however, it must be acknowledged, can seldom be long kept; and the extraordinary profit can last very little longer than they are kept. - Adam Smith, Wealth of Nations 

Looking through the comments on Tabarrok's entry I found a few relevant ones...

The incentive is not for Walt Disney, it’s to show others how well they could do by creating new works. A weak incentive, I’ll grant you, but an incentive nonetheless. - Gary Lowe
Ain’t nothin’ wrong with protectin’ IP rights.  If a mundane story with Mickey Mouse as the lead character sells 20x more than the same mundane story with Gregory the Hairy Elephant with Anger Management Issues, then there’s surely some value in the character, whether created at character inception (Disney himself and his workers) or in later development (work by the company later on). Either way, as the rights holder, they should be in control. It hardly stifles innovation if you can’t use a character or a specific design of furniture. Build a better one. If you build it (and market it well), they will come! - Lazy Rentier

Here's Tabarrok for value signals...

The most valuable public goods are constantly changing, just as the most valuable private goods are constantly changing.  The signal provided by prices and mobility is therefore of great importance. - Alex Tabarrok, Market Challenges and Government Failure

Here's Tabarrok against value signals...

Facebook moved to an algorithm years ago. At the time, the move caused complaints but I think algorithmic feed has made Facebook more relevant, especially in recent years when the algorithm has gotten quite good. The profits agree with my assessment. Many people don’t understand that there is no serious alternative to an algorithmic feed because most people’s uncurated feeds contain well over a thousand posts every day. It’s curate or throw material out at random. - Alex Tabarrok, Defer to the Algorithm

No serious alternative?  Value signals aren't a serious alternative?  As I explained, Facebook now gives people the option to boost their own posts.  The more money you spend on your posts... the more people who see them.  So why not give users the opportunity to boost anybody's posts?  This would essentially be crowd-boosting.  The more the crowd values a post, the more money that they'd be willing to spend to boost it, and the larger the crowd that would be able to see and valuate the post.    So it's not...

A. curate
B. random


A. curate
B. random
C. value signals

What's the correct answer?  I'm pretty sure that the correct answer is "C"... value signals.

Here's Tabarrok for value signals...

The free rider problem is a challenge to the market provision of public goods. In my paper on dominant assurance contracts I use game theory to show how some public goods can be produced by markets using a special contract.  In an assurance contract, people pledge to fund a public good if and only if enough others pledge to fund the public good. Assurance contracts were not well-known when I began to write on this topic but have now become common due to organizations like Groupon and Kickstarter, which work on this principle (indeed, I have been credited with the ideas behind Groupon, although sadly for my bank account, I don’t think that claim would stand in a court of law). Since no money is paid unless the total pledges are high enough to fund the public good, assurance contracts remove the fear that your contribution will be wasted if other people fail to contribute. - Alex Tabarrok, A Test of Dominant Assurance Contracts

Ok, maybe this isn't Tabarrok being directly for value signals.  But do we want value signals to apply to ideas?  Do we want Tabarrok's bank account to accurately reflect the value of his idea?  Of course.  We really want people to have the maximum incentive to come up with and share good ideas.  I think this could be easily accomplished by crowdfunding ideas.

Here's Tabarrok against value signals...

In 2002 should HBO have individually priced episodes of the Sopranos and sold them through AOL?  Individual pricing generates value but it also has costs. Tradeoffs are everywhere. And, to the crux of the issue, if a law had been passed in 2002 requiring HBO to sell The Sopranos on an episode by episode basis would that have resulted in better and more programming at lower prices? I think not. Similarly, I see few reasons to think that welfare would be improved by a law requiring cable TV companies to price by channel. - Alex Tabarrok, A Critique of Tabarrok on Bundling

It's true that individual pricing has a cost... but there's more than one way to create a value signal.  I didn't mention it in my response, but what if HBO gave its subscribers the option to allocate their subscription fees?   Each month each subscriber would have the option to divvy up their $15? dollars among all their favorite content.  The most valuable shows/episodes would receive the most money.  HBO would take its cut and pass the rest onto the content creators.  And of course everybody would be able to easily and clearly see the value signals.  This system would facilitate far more precise and accurate communication between content creators and consumers.  To put it as cheesily as possible... HBO would be able to clearly see into each of its subscriber's heart of hearts.  The logical result would be a far greater variety of far more valuable content.

If it makes sense to facilitate far more precise and accurate communication between consumers and content creators... doesn't it also make sense to facilitate far more precise and accurate communication between taxpayers and the producers of public goods?  Of course.  Yet, Tabarrok certainly hasn't publicly endorsed pragmatarianism.

Like I said, Tabarrok is my favorite living economist.  So this does feel like I'm looking a gift horse in the mouth.  But it also feels like Tabarrok is kinda undermining his own argument.  We definitely seem to disagree on the proper scope of value signals.  Or maybe... in the cases such as Facebook and HBO... he simply didn't see the viability or practicality of value signals.  And I certainly can't blame him for this oversight.  Well... maybe I can.  Maybe my purpose in life is to point out Tabarrok's oversights.

The important question seems to be... what is the scope for accurate and precise communication between consumers and producers?  I don't see a logical limit.  I really don't see any sort of reasonable or beneficial exception.  For sure I see technical limits... but I really appreciate the importance and benefit of overcoming these technical limits.

Personally, I've never spent any money on Adam Smith's books.  Does this accurately reflect my valuation of Smith?  Noooooooooo!!!   Is it problematic that Smith's value signal does not reflect my valuation of his work?  It's not problematic if I'm the exception.  But I'm pretty sure that I'm not the exception.  I'm pretty sure that I'm the rule.  This means that we can reasonably guess that Smith's value signal isn't nearly as bright as it should be.

Therefore... Smith's books should still be protected by copyright?  Well... like I said... there's more than one way to create a value signal.  With Amazon's Kindle "Unlimited", you can pay $10 dollars/month and have access to over 1 million titles.  Why not give subscribers the option to divvy up their $10 dollars among their favorite books?  If the Wealth of Nations was one of the titles... I'd sure allocate a decent chunk of my $10 dollars to it.  How many months would I do so?  Let's find out!

I'll conclude with some more relevant passages...

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

We must look at the price system as such a mechanism for communicating information if we want to understand its real function—a function which, of course, it fulfils less perfectly as prices grow more rigid. (Even when quoted prices have become quite rigid, however, the forces which would operate through changes in price still operate to a considerable extent through changes in the other terms of the contract.) The most significant fact about this system is the economy of knowledge with which it operates, or how little the individual participants need to know in order to be able to take the right action. In abbreviated form, by a kind of symbol, only the most essential information is passed on and passed on only to those concerned. It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement. - Friedrich Hayek, The Use of Knowledge in Society

And some relevant blog entries...

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