Anomalous Presumptions

Kevin Burton wrote an interesting post which brought this topic into focus for me. I’ll apologize in advance: my post raises some interesting questions, but doesn’t provide much in the way of answers.

Kevin talks about the amount of money CraigsList is leaving on the table, by not running advertising. As it happens, I’ve had a similar conversation with Jimmy Wales, in which he described the issue similarly to his interview here.

Both Wikipedia and CraigList have the potential to generate *hundreds of millions* of dollars in revenue that they have chosen to forgo.

I would guess there are a lot of other organizations like this — their current income is more than enough to support the services they provide, but they generate far more social value than they capture in revenue, and as a result they could easily generate lot more revenue without significantly impairing their service.

This revenue forgone could amount to multiple billions across all the relevant services.

So why does Economics 101 not operate here; why do these organizations have the power to generate so much more revenue than they need to operate? Note that this is probably not temporary in at least some important cases — both Wikipedia and CraigsList are likely to continue to become more entrenched and generate more social value, so they will leave more money on the table.

Of course the answer is that network effects dominate in both of these cases, and probably many others. The unusual thing about these cases is that they have decided to forgo the revenue, making the huge gap visible. A lot of other companies with some form of major entrenchment maximize their revenue and then burn it up in waste of one sort or another, or pass it on to their shareholders as dividends.

Not only that, but the usual Econ 101 justification for making lots of money — it helps increase investment in that type of business — is a non-starter. CraigsList and Wikipedia don’t need more investment to grow, and investment by others is unlikely and anyway probably wouldn’t increase social value. The economic signal generated is useless, possibly harmful.

In many of the businesses mentioned above, the economic signal is also misleading or harmful. More investment in one of these powerful businesses often won’t generate more social value.

Furthermore, if any social value is clearly lost in this situation, it is the value to *users* of being shown highly relevant advertisements. The clearest loss of social value is the absence of ads itself! In this respect, the monetary signal is perhaps accurate.

So one question that arises from these cases is how big a market failure we are looking at, and what sort of institutional changes would fix it, or at least improve the situation? Based on my own experience, my guess is a really huge failure. But I don’t have institutional proposals at this point.

Further questions are raised by Kevin’s suggestion that Craig take the money and give it to charity (or perhaps social reinvestment). Wales told me that a significant group of Wikipedians wants the same thing. I wouldn’t be hostile to this, but it raises interesting questions. Why should the money not be left to its current owners to spend as they wish, perhaps on charity? In this case, since the money would come from advertising, it would presumably be left with companies, not individuals.

Of course this is an argument we hear for reducing taxes. In this case, it seems like a clearly bad idea; the companies will just end up spending it on less efficient advertising, or dissipating in other ways.

So this raises another question: When should a big organization take our money (or someone else’s), because it can make better use of it than we could?

Now of course we feel that taxes are “taken” while the money these organizations would get is “freely given”. Or as a libertarian might argue “The government has no right to take my money by force”. But even that argument is more complicated. Both the government and Wikipedia get our money because they are entrenched and risky to replace. Replacing our current government (not the people, the institution itself) would be messy and would involve a major risk of very costly chaos. That is why governments mostly get the population to go along with them, even if they are not doing a great job.

Wikipedia would be easier to replace than a government, but as Wikipedia gets more entrenched (as an institution and community, not a pile of content) it will be harder and harder to avoid it or replace it, even if it screws up more often than it needs to, or develops some kind of persistent unnecessary bias. And yet, Wikipedia has clearly not gone out of its way to entrench itself. It gives away its code and its data. All of its operating decisions are open. It has no power over contributors or users, except everyone’s knowledge that if they want to use or contribute to an encyclopedia, Wikipedia is the best place to go.

So perhaps governments to some significant extent are the same. Even though they do attempt to assert a monopoly on force, maybe that is a symptom not a cause of their dominance (at least in the better cases). And maybe if Wikipedia or CraigsList gets sufficiently entrenched it will seem imposed on us. After all, if we signed a contract to advertise through CraigsList, then we’d have to pay, on pain (ultimately) of force. And what if we felt we had no choice but to advertise through CraigsList?

So, a final set of questions: What can these organizations teach us about the morality of power? Do we need to worry that they’ll abuse their power? And conversely, how far could we go toward improving our society by better understanding what makes these organizations unusually benign?

Filed by Jed at 1:27 am under Social order
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