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.


  1. Thanks for taking all this effort to solve our problem. Just a few problems with it:
    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?").
    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.
    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.
    4. I wrote about all this in my book, noting the pricing paradox of information:
    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!