8. The Net, the Web, and Some Economics
Let's begin with some technical points about the net with which you are probably already more or less familiar. The internet rests on the 7 layers of the TCP/IP protocol. The design is intended to allow building new protocols on top of them; for example, audio and video streaming are now in common use, but would have seemed almost science fiction in the earliest days of the internet. The web is a less recent example, which uses the http protocol. The basic idea of the internet is packet switching, which means breaking information up into small "packets," each which of which may get to its destination by a different route, and which are resent if not received. Thus it is by design highly decentralized, flexible, reliable, and extensible; this is in sharp contrast to most other media, e.g., books, newspapers, TV, telephones.
Some aspects of the internet, and more specifically of electronic commerce ("ecommerce"), can be difficult to understand - and I don't mean technically. A vast array of questions are being raised by this extremely rapidly growing new medium for communication. Many of these are actually the same old questions that have vexed communication of all kinds for centuries, such as privacy, politics, and pornography; others may seem quite new, such as disintermediation, spam, and convergence (but are they really new?).
It will help to bear in mind the general principles listed below (some of which we have already discussed):
1. First, it should be clear that the internet exists in the context of society; it is not an autonomous force for change; it is subject to regulation, and in fact, it is increasingly being regulated; the internet and society are inextricably tied together. Technological determinism is not true for the internet.
2. Like anything else, in order to discuss the internet, we need appropriate concepts, with methods for applying those concepts, and theories within which they are given meaning. It is important to distinguish among the many different kinds of concepts and assertions that are relevant to the internet. Some are (more or less) factual, while others are deeply intertwined with dubious theory, and still others are pure speculation. The following list of examples is intended to illustrate the great diversity of kinds of concept that exist, each with its own kind of loading:
8.1 Some Basics of Economics
Classical economics begins with Adam Smith's famous 1776 book An Inquiry into the Nature and Causes of the Wealth of Nations, usually known as just The Wealth of Nations. Smith wanted to know what causes (what we would call) a high and rising standard of living. Although Smith thought division of labor was the most important cause, today's economics puts its prime emphasis on resources, which are taken to include labor and capital, as well as so called natural resources (oil, gas, etc., plus water, air, etc.); in addition, technological innovation is considered important by both Smith and by modern economists. The role of resources in improving production can be either to use existing resources more productively, or to use more resources; these two strategies correspond (roughly) to micro- and macro- economics, respectively, which are the two main branches of modern economics. All of this can be found in Roger McCain's webtext.
McCain's webtext characterizes economics as what he called a reasonable dialog; but I would rather call it a dialog of practical reasoning (this emphasis on dialog goes way back, to Plato's version of Socrates in ancient Greece.). Practical reasoning is what we do every day; this is a huge topic that is still poorly understood, in stark contrast to the formal reasoning of classical logic, which is very well developed, but only applies to an ideal world of Platonic truths. However, modern philosophers have made some progress with practical reasoning, and one important concept is defeasible reasoning, the idea that many assertions can be "defeated" by later assertions in a dialogue which (for example) replace default general assumptions by more specific information. Another important idea in this general area is the theory of vagueness, which notes that most words have fuzzy meanings.
McCain's wish to judge economics by its practical applications seems very good; however, this unfortunately yields a very harsh jusgement, since economists do such a terrible job of making predictions and giving advice, e.g., look at their predictions about the US economy, or their advice for restructuring Russia's economy.
Perhaps Adam Smith's most important concept is that of a free market; the idea is that free trade among buyers and sellers will result is an optimal pricing and an optimal distribution of goods; the catch-phrase invisible hand is also used for this (alleged) process. This idea is still enormously influential today, but it is vital to recongize that Smith's theory depends upon the assumption that all players involved have approximately equal power; this assumption is called symmetry, and is obviously false in (most of) today's world; equal power must be taken in particular to include equal access to information, for which economists use the technical term perfect information. (These and other important issues surrounding symmetry are not discussed in McCain's webtext.)
Classical economics was out of fashion for many years, one of its strongest critics being John Maynard Keynes, who (along with Karl Marx) pointed out the tendency for "boom-bust" cycles, and who suggested remedies for this based on government intervention. But in a revised form called neo-classical economics, Adam Smith and his free market are now very much back in fashion, and much loved by conservative politicians and big business. McCain's webtext gives a good discussion of two other major assumptions of neo-classical economics, namely (1) rationality and (2) self-interest. McCain admits that both of these assumptions are obviously not true in some cases, but he gives arguments that they are still reasonable starting points for constructing models, which is what "positive" economics is supposed to do. He emphasizes that these are not "normative" assumptions, about how people ought to behave. In my opinion, this is more of a rhetorical move than a substantive one, precisely because economic models so often fail to yield correct predictions.
McCain does not discuss two further very basic assumptions of neo-classical economics, that (3) modelling only the allocation of resources is adequate, and (4) resources have only purely monetary value. These too are obviously false in general, but again, that does not prevent economists from constructing models based on them that could still be useful. The second assumption means that the models can be quantitative, which is very important because then classical mathematics can be applied; most of modern economics is highly quantatative. (It is easy to see from McCain's Chapter 3 that these assumptions are implicit in his approach, even though he does not make them explicit.)
8.2 Applications of Economics to the Net
In The Market and the Net, Phil Agre highlights a kind of "convergence" between recent concerns of neoclassical economists and "cyberspace pundits," having to do with the alleged abolition of institutions caused by the internet. Agre describes an approach due to Coase, which says that if some market does not behave like Adam Smith's free market, it must be because some assumption behind that market is not satisfied; there are implicit assumptions here, that markets will behave in an optimal manner if the right conditions exist, and that free markets are what we should have; there is also (I think) a confusion of the technical economic meaning of "optimal" with its more everyday meaning.
Agre then explains what transaction and coordination costs are, and goes over the argument that large firms should cease to exist if transaction costs can be brought down far enough, which is supposedly exactly what the internet is doing, i.e., bringing about Adam Smith's perfect markets. He also gives Douglass North's definition (see also Agre's Review of Institutions, Institutional Change, and Economic Performance) of an institution (as "rules of the game" that define the most basic relationships in social life, especially economic relationships), and then goes over the argument, associated with Posner, that free markets require impersonal institutions and perfect information. Agre relates this to four myths about the internet, which he calls community, cyberspace, disintermediation, and decentralization.
Agre then introduces his own ideas about privacy, which are very different from the idea of having perfect information about all participants in internet markets; the contrast is brought out by discussion the (undesirable) psychological condition of "instant intimacy". After that, Agre argues against Posner, by pointing out two fallacies.
Agre concludes by noting that: in bringing the internet into wider use, we are necessarily building institutions, not destroying them; and that what is really at issue here are questions of human freedom, and human relations, not merely economic freedom and economic relations. I would like to point out that Agre's paper shows that privacy is under attack today not just from legal and technical innovations, but also from changes in the philosophies and myths to which people tend to subscribe, unconsciously or not.
8.3 Internet Economic Myths
The work of Ted Lewis provides many good examples of buzz word journalism and internet mythology (connoisseurs of these art forms will also find the works of George Gilder and back issues of Wired magazine inspiring). One can also find great numbers of failed predictions in these sources, though of course, one can sometimes also find bits of common sense, and perhaps even wisdom.