The Market and the Net:
Personal Boundaries and the Future of Market Institutions

  Philip E. Agre
  Graduate School of Education and Information Studies
  University of California, Los Angeles
  Los Angeles, California  90095-1520
  USA

  pagre@ucla.edu
  http://dlis.gseis.ucla.edu/pagre/


  Telecommunications Policy Research Conference
  Alexandria, Virginia
  October 1998


  This is an early draft of 6 October 1998.  About 3400 words.
  Comments appreciated.  Footnotes and references to follow.


//1 Introduction

The last five years have brought tremendous public visibility to issues of
infrastructure.  This would seem odd.  If any topic should remain confined to
the technical analysis of experts, it is surely infrastructure, which by
definition is a means to an end, and not an end in itself.  Star even makes
the case that infrastructure should be understood precisely as that which
disappears from view in the course of routinized social action.

The explanation for this paradox is simple enough.  Public talk about
infrastructure is not just about infrastructure; it is also, in many ways both
acknowledged and unacknowledged, talk about fundamental social institutions.
This is inevitable.  A complex story about infrastructure cannot help but
presuppose a story about the purposes to which it will be put: the actions it
will support, the relationships it will mediate, the constraints it will
impose, and the changes it will bring.  As a new generation of information
infrastructure now begins to mature and become integrated with institutional
practice, we need to become aware of the stories that we have been telling
ourselves about institutions.  Our responsibility as story-tellers increases
as our stories are made real in people's lives, and if we do not choose our
stories consciously then all manner of cultural mythology will flow into the
imaginative vacuum that any new technology opens up.

I propose to investigate the seeming convergence between two sets of stories
about human relationships: those told by the most publicly visible enthusiasts
for the Internet and those told by neoclassical theorists of economic
institutions.  What these stories have most straightforwardly in common is a
normative picture of the interconnections among people, which, they hold,
should be capable of ceaseless and costless reconfiguration.  Enthusiasts of
the Internet imagine a world in which every person is, for all practical
purposes, equally near to every other person, and the very concept of packet
switching inscribes the notion that patterns of interconnection are not
necessarily stable from one moment to the next.  Enthusiasts for the idealized
neoclassical market, for their part, imagine the market maximizing aggregate
wealth by making it possible for individuals to identify optimal trading
partners, whose identities as well may continually change.

Obvious as it may seem, this analogy is quite complex underneath, and I
propose to unpack it in stages, as follows.  In section 2 I will describe two
versions of the economic story, North's theory of economic history and
Posner's analysis of privacy law, arriving tentatively at an apparent tension
within the market enthusiasts' notions of freedom.  Section 3 will turn to the
Internet, sketching and criticizing four widespread understandings of the
Internet's effects on social institutions of all sorts.  Section 4 will draw
on these analyses to conduct an extended comparison and contrast between the
technical and economic analyses of institutional life.  Section 5 will use a
fresh analysis of Posner's economic theory of privacy as the point of
departure for a considerably more realistic normative analysis of the place of
information infrastructure in social institutions.  And section 6 will
conclude by drawing out the consequences of this argument for the relationship
between the human person and the institutional system.

//2 Market institutions

In his two most celebrated papers, "The nature of the firm" and "The
problem of social cost", Ronald Coase laid the foundations for a vast
literature on the nature of economic institutions.  In each case, the
argument took the same general form.  If all of the many assumptions of
classical economics were realized in the world, Coase argued, then the
world would resemble Adam Smith's market of small producers engaging in
optimal, wealth-maximizing exchange.  Those assumptions do not entirely
hold, however, and so economists can set about explaining divergences
from the ideal market in terms of divergences from the assumptions, and
explaining tendencies toward convergence to the ideal market in terms
of increasing congruence between the world and the classical economic
assumptions.

In "The nature of the firm", Coase applied this pattern of argument to the
question of why large business organizations, which do not exist in Adam
Smith's world, nonetheless exist in ours.  His answer is that firms exist
because real-life market transactions are not costless, and that firms
will expand until the costs of organizing economic activity by command
within the firm -- so-called coordination costs -- exceed the costs of
organizing economic activity by means of market exchange -- so-called
transaction costs.  Coase's many followers have argued that a decrease in
transaction costs, due among other causes to changing legal rules and
technologies, should disintegrate the firm and move the economic system
toward Adam Smith's millennium.

Perhaps the most sophisticated of the enthusiasts for this view has been
Douglass North, whose theory of economic history has explained the wealth of
nations in terms of the economic institutions that have facilitated or
frustrated trade.  North has influentially characterized institutions in a
broad way, as the "rules of the game" -- the combination inter alia of laws,
customs, technologies, and mental models by which economic activity is
coordinated.  For present purposes, I want to focus on a single observation
that North makes when introducing his theory.  He notes that game theorists
have also sought to explain the rise of cooperative activities among
individuals with otherwise potentially conflicting interests, and that they
have concluded that cooperation requires a small group of individuals bound
together in long-term intimate relationships.  The problem with this theory,
North points out, is that it heads in the wrong direction.  Surely, he argues,
the central datum in economic history is precisely the passage from this kind
of stable intimate group to the institutions that facilitate impersonal
exchange among large numbers of relative strangers.  Large-scale trade
requires impersonal institutions because strangers could not otherwise
negotiate and enforce every one of their voluminous transactions if every deal
had to be built from scratch.

Coase's "The problem of social cost" addressed problems of law.  When a
dispute comes before a court, Coase observed, the market generally has an
opinion, so to speak, about the correct outcome: if market transactions
were costless, the parties would all be motivated to make a deal that
maximizes their joint wealth.  If they have taken their dispute to court
instead, then the market resolution must be impracticably costly, and the
court's job is to fashion a rule that approximates the same effect.

Richard Posner has employed this startlingly amoral argument as the basis for
a sweeping program of economic analysis of law.  For present purposes, I want
to consider only the opening comments of Posner's provocative analysis of
privacy law.  To apply economic analysis to questions of privacy, Posner
proposes that human relationships of all sorts be understood on the market
model.  In entering into a relationship, be it employment or friendship or
marriage, he suggests, one is effectively selling oneself, or at least trading
various commitments.  And if this is true, then the market will only function
correctly in the presence of perfect information -- that is, if everyone can
costlessly know everything about all of their potential partners that they
require to make jointly optimal decisions about which ones to associate with.
Such a conception of human relationships is obviously at odds with many
widespread intuitions about privacy.  Yet even though Posner does find
sufficient economic justification for certain delimited privacy rights, his
point of departure is an explicitly stated assumption that, just as a merchant
might misrepresent the attributes of her goods, likewise people wish to
reserve privacy rights mainly in order to misrepresent themselves or otherwise
manipulate the workings of the relational marketplace.

Baker has justly identified as a "mystery" the clash between Posner's analysis
and common intuition (together with the legislation that the intution has
motivated).  So far as this intuition is concerned, Posner is advocating a
sort of market authoritarianism.  A central characteristic of an authoritarian
culture is its routine invasion of personal boundaries, and this is what
Posner's panopticon marketplace would seem to require.  And yet this intuition
does precisely nothing to refute Posner's misrepresentation analysis of
individuals' acts of personal reticence.  The mystery remains, and my own
analysis will be getting somewhere once the mystery can be resolved.

Nonetheless, these few observations do already point to a tension within the
political project of neoclassical market enthusiasts: a conflict between two
conceptions of freedom.  On the first, substantive conception, freedom roughly
equals prosperity and is guaranteed by the allocative efficiency of the
idealized market -- in other words, by the gains to trade.  On the second,
formal conception, freedom roughly equals individual autonomy in market
choices.  These conceptions of freedom conflict, notoriously, because of the
role of personal information: whereas substantive market freedom requires
broad rights to reticence and the capacity to bargain over release and use of
personal information like anything else.

//3 The Internet and institutions

Let us leave the analysis of economic ideas and turn to prevailing ideas about
the Internet's consequences for institutions.  I will consider four of these
ideas: community, cyberspace, disintermediation, and decentralization.

(1) In the United States, normative ideas about the Internet's place in
society have been strongly influenced by a distinctively American conception
of community.  Founded in the reformed-Protestant communitarianism of the
utopian settlements of 17th century New England, this conception idealizes a
thoroughgoing intimacy.  Religious division, urbanization, and commercialism
led American culture in different directions, and yet the culture has been
persistently haunted by a sense of having fallen from that original ideal.
Accordingly, many Americans have looked to the Internet to restore that lost
perfection, whether in newly settled online virtual communities or in the
revived civic life of geographic communities.  Whether or not this ideal is
something to be desired, however, the evidence for it in reality is anecdotal
at best.

(2) The utopian ideal of Internet community is closely related to the notion
that the Internet constitutes a qualitatively distinct sphere of human life
that might be called cyberspace.  Here, once again, a national cultural ideal
is being projected onto technology.  The concept of cyberspace feels
excitingly new precisely because it resonates with a half-forgotten ideal of
days gone by: cyberspace, in short, is the city on a hill.  Legal scholars
have even seriously suggested that cyberspace be treated as a distinct legal
jurisdiction, and this separation is the Internet's analogue of the hopes that
were originally invested in the New World.  The very possibility of conceiving
the Internet in this way, however, is rapidly passing away as the Internet
becomes integrated into the institutional world around it.  The Internet's
governance is increasingly affected by the strategies of the largest players
in existing industries, and the directions of Internet architecture,
particularly on the applications level, are increasingly bound up with the
established practices of those industries.

(3) The Internet is also commonly said to affect institutional orders by
cutting out intermediaries: the institutional players who mediate the
relationships among other participants in the system.  A paradigmatic example
might be found in projects at CommerceNet and elsewhere to establish XML-based
standards for online catalogs for components in manufacturing.  Assuming that
vendors agree on these standardized formats, the effort of searching for parts
can be shifted from dealers' personnel to buyers' Web browsers.  Yet, as this
example illustrates, disintermediation in practice usually turns out to be
reintermediation -- the creation of a new intermediary, albeit one that is
more efficient.  In the XML case, the new intermediary is the provider of a
(quite sophisticated) Web search engine service.

Other cases of reintermediation can be more complex.  The unlamented
decline of traditional stockbrokers in the face of competition from online
trading services is not the elimination of the intermediary's services but
their unbundling.  It is nonetheless commonly held that disintermediation
is inevitable because of reductions in transaction costs.  But this
argument badly misreads Coase: information technologies that reduce
transaction costs commonly reduce coordination costs as well, and it is
altogether plausible that in many cases the Internet will permit existing
intermediaries to grow by merging across geographic and other boundaries,
thus increasing their capacity to match buyers and sellers who have no
more efficient way of finding one another.

(4) It is also commonly held, finally and perhaps most importantly, that the
Internet will decentralized society, breaking down large organizations and
dispersing both economic and political power.  This idea has virtually no
basis in reality, and is founded on a much more general version of the
ubiquitous misreading of Coase.  The Internet does often permit reductions in
transaction costs, but its contribution to reduced coordination costs are much
more straightforward.  To the extent that a firm standardizes its operations
in many locations, the Internet makes it considerably easier to obtain
economics of scale in the information-intensive aspects of the work; this
includes the gathering of statistics, the transfer of expertise, and the
distribution of information products such as policies and software.  The
global economy is manifestly not evolving in the direction of Adam Smith's
market, and this is one reason why.  To the contrary, the clearly emerging
pattern combines shrinking numbers of vast, dominant firms with large numbers
of structurally peripheral firms and, of course, even larger numbers of
individual workers and consumers.  The predominant patterns of relationship in
the new economy, in short, are highly asymmetric.

The global integration of the economy is likewise commonly held to
decentralize political power by preventing governments from taking actions
that can be reversed through cross-border arbitrage.  But political power
is becoming centralized in equally important ways: the power of national
governments is not so much disappearing as shifting to a haphazard
collection of undemocratic and nontransparent global treaty organizations,
and the power to influence these organizations is likewise concentrating
in the ever-fewer global firms.  These observations are not pleasant or
fashionable, but they are nonetheless true.

//4 The market and the net

Despite their compelling surfaces, therefore, the institutional ideas that now
surround both neoclassical economics and the Internet are characterized by
significant internal tensions that become manifest in their failure to
correspond to reality.  It remains to be determined, however, which of these
difficulties reflect simple conceptual muddles and which reflect tensions in
the actual material world.  To make this call, it will be helpful to draw out
some comparisons and contrasts between the economic ideas and the technical
ideas.

To start with, notions of perfect information and transparency play different
roles on the two sides.  The economists have definite ideas about which
information must be publicly available in order for the market to function
correctly; Internet Enthusiasts are merely confident that their technology
will remove the last barriers to the circulation of vast amounts of useful
information of all kinds.  On the other hand, both sides have their own
respective sense that everyone can cheaply know everything they need to know;
this is roughly what perfect information means, and it is what Web search
engines are supposed to provide.

Both the economists and the Internet Enthusiasts plan to demolish
institutions, but the Internet Enthusiasts are particularly systematic about
it.  After all, the common thread among the four concepts I surveyed is the
overcoming of institutional barriers to direct, unmediated relationships among
individuals.  Internet Enthusiasts, in other words, view institutions as
antithetical to human relationships and not, as in the case of North or to a
much lesser extent in Posner, as supporting or even constituting them.

At the same time, North ought to regard the Internet Enthusiasts as striving
for contradictory goals.  The Internet notions of community and cyberspace
appeal to the same general model of sustained intimacy as the game theorists,
and North regards this model as opposing the impersonal market institutions
that would result from a thoroughgoing program of disintermediation and
decentralization as economically-minded Internet Enthusiasts use the terms.

Yet the economists are ambivalent as well.  They want to create the
material conditions for Adam Smith's market, and perhaps as a result they
apply Coase's theory of the firm in a profoundly tendentious way.  This
practice deeply affects their theory of institutions, which are assigned
the clear-cut task of supporting the fully decentralized market, or at
least of keeping trade going until that market can finally be put into
effect.  The world, however, does not work like that, and economics --
the economics of information and its role in the evolution of coordination
practices and their attendant costs -- explains why.

//5 Privacy demystified

We are now in a position to dig more deeply into the mystery of the economic
analysis of privacy.  Comparison of the prevailing economic and Internet ideas
about institutions has led to one central commonality: both of them
misguidedly advocate the compulsive establishment of relationships with people
one hardly knows.  Psychologists refer to this unhealthy condition as "instant
intimacy" and regard it as the opposite of the healthy boundaries that people
require to establish genuine relationships without opening themselves
unnecessarily to harm.

This suggests that adequate ideas about markets, technologies, and
institutions will require more sophisticated ideas about the nature of
human relationships.  Some clues can be found in a fresh look at Posner.
Two fallacies in Posner's analysis can now be readily identified.
The first pertains to his argument that my obligation to represent
myself correctly to particular individuals implies that everyone
should have access at least by default to my personal information.
Emerging technologies deepen the urgency of this particular issue
by making personal information vastly easier to collect and circulate.
Privacy-enhancing technologies, however, make it entirely feasible for
an individual to hand over the keys to his or her encrypted information
to only those individuals who have a reason to see it.  Others, including
those who would attempt to initiate marketing and other relationships
against one's will, would have no such access.  Although they might
seem esoteric, the use of privacy-enhancing technologies simply deepen's
North's principle of the impersonality of market institutions.

Posner's second fallacy lies with the presumption that the participants in
a relationship are related symmetrically, or more precisely that neither
party has power in the relational marketplace.  But this assumption
is altogether false in a world of informational economies of scale and
the consequent flattening of coordination costs in monopolistic firms.
The same economic analysis that counsels laissez-faire in Adam Smith's
relational marketplace should counsel something different in the
marketplace of actually existing capitalism.  This is also the fallacy
of the current unaccountable nostalgia for lex mercatoria, which
anachronistically presupposes a tightly knit community of symmetrically
related equals.

If the foregoing analysis is correct then we must admit as a society that, in
rebuilding our information infrastructure, we are also in the business of
rebuilding institutions, not tearing them down.  We must also admit that, in
building these new institutions, economic efficiency cannot be our only guide,
or perhaps that the demands of economic efficiency are internally
contradictory.  We must also recognize that the principal, indeed quite
overwhelming, problem with the Internet is that it is far too easy to breach
individuals' personal boundaries.  The problem is visible in the plague of
computer viruses, in spam and other out-of-control nuisances, and especially
in the tactics of aggressively antisocial individuals who spread their
emotional poison indiscriminately on the net by relentlessly gaming such
mechanisms as search engines and banner ads.  The solution to such problems
will not be found simply in new mechanisms; any solution will have an
institutional dimension as well.

Consider, for example, the problem of obnoxious Web content in libraries.  The
main established positions on this issue are precisely those of Congress,
which advocates mandatory use of filtering software, and that of the
librarians, who reject any controls at all.  Neither approach is viable.  What
may be viable in the long run is systematic application to the Web of the same
collection development practices that librarians already apply in libraries.
The accumulated wisdom of these practices will have to be generalized and
reoriented: instead of being applied to the library collections of particular
geographically localized communities, they will be applied to the virtual
collections employed by geographically dispersed interest communities.  The
Internet is very good at supporting that kind of institution, and yet the
Internet Enthusiasts have misguidedly set themselves against that sort of
institutional mediation.

//6 Conclusion

The picture of human beings and social institutions that emerges from this
analysis contrasts sharply with that of the economists and the Internet
Enthusiasts.  It begins with the human need to negotiate relationships in an
incremental fashion, maintaining their personal boundaries by using their own
judgement about who to let in, and how much, and when.  A positive model of
both technology and institutions will support this need rather than
undermining it.  Even though they will structure the creation of
relationships, the necessary institutions will not conflict with human freedom
but will provide the conditions for it.  They will provide for impersonal
market relationships, to be sure, but they will do so in a way that corrects
for systemic asymmetries of bargaining power.  This is John Commons' view of
institutions as the results of collective bargaining through which the
conditions of freedom are achieved.

The solution to Posner's privacy mystery is an example.  Since strong
incentives exist to improve economic efficiency by capturing and
distributing market-relevant information, public policy should take a
strong stand for individuals' control over their own information.  If this
principle of individual control is institutionalized in technology and
law, then innovation will find ever more powerful ways to synthesize that
principle with the efficiency imperative.

The notion of social freedom that results from this analysis is far
from both the negative, formal freedom of contract and the positive,
substantive freedom of allocative efficiency.  It is, in particular, a
notion of freedom marked out in the middle of institutional phenomena that
are complex and contradictory by their nature.  The reality of freedom is
not simple.  Nor is it inevitable.