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 this basis; 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. (But strictly speaking, the internet is not a medium, but rather a carrier of media.)

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 new, such as disintermediation, spam, and convergence (but are they really so new?).

It will help to bear in mind the general principles that are 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. (All socio-technical discourse is theory laden, even if the theories are vague and unarticulated; so it is better to have explicitly given theories, of a high quality.) 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:

• Disintermediation refers to the theory that the internet will eliminate intermediaries in transactions; it is often justified by a very questionable application of neoclassical economics; reintermediation is its more likely alternative, that new intermediaries will arise, operating in different ways from the old ones.
• Spam is a slang word for a grass-roots concept, not very well defined, but closely related to strongly held moral views. The phenomenon to which it refers, junk mail with many many addressees, is certainly anti-social, though perhaps not strictly criminal (at least, not yet).
• Message is a well defined technical term, related to the SMTP internet protocol for email.
• Convergence is a theoretical term, intended to summarize a trend in technical and commercial applications towards integration of communications and computation; it is often strongly projected into the future (e.g., see the Call for Papers: The Political Economy of Convergence, by Colin Sparks).
• Cyberspace is a term originating in science fiction (Vernor Vinge via William Gibson); it is perhaps best viewed as a name for a certain kind of mythological story about the internet, involving separation of body from mind, heroic individualism, etc. Like any other large scale social phenomenon, especially a new one, there are background cultural metaphors and stories that color our perception of what is going on. For the internet, these include the American frontier, radical notions of freedom, and myths of utopia (see The Market and the Net by Phil Agre).

8.1 Some Basics of Economics

Every educated person should know a little economics, and especially engineers should, since so much of their professional work involves making cost/benefit tradeoffs. This subsection discusses some fundamentals of neo-classical economics, with a bit of emphasis on its basic assumptions.

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 that 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 of assertions that can be "defeated" by later assertions in a dialogue. For example, one might replace a default general assumption by some more specific information. Another important idea in this general area is the theory of vagueness, which notes that most words have fuzzy meanings; the theory of fuzzy sets provides a precise logic of this kind, which however fails to capture all the phemenology of vagueness.

McCain's wish to judge economics by its practical applications seems very good; however, this unfortunately yields a very harsh judgement, 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 recognize 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. Assumption (4) 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. And let's not forget the first ssumption that we discussed, denote it (0), which is symmetry. (It is easy to see from McCain's Chapter 3 that these assumptions are implicit in his approach, even though he does not state them.)

Discuss supply and demand, Keynes, here.

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 discussing the (undesirable) psychological condition of instant intimacy. After that, Agre argues against Posner, by pointing out two fallacies.

Agre concludes by saying 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 highlight that the point from Agre's paper 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, most often unconsciously.

This course argues that neo-classical economics is an oversimplified theory which does not take account of many very important factors (such as depletion human and natural resources, to say nothing of emotional, aesthetic, and ethical issues) and which often yields incorrect results, but which nonetheless has a strong intuitive appeal. In these respects it is much like technological determinism; however, it is better than technological determinism in that its way of thinking is genuinely interesting and potentially valuable, if applied sufficiently carefully.

For a very utopian view of ecommerce and encryption, you might want to read the novel Cryptonomicon by Neal Stephenson; this book also has some entertaining World War II history, especially of the war in the Philippines, of course mixed in with some even more entertaining fiction.

It is also interesting to notice that the argument for one of the alternatives to ATM technology suggested in the Odlyzko interview is that it would be effective because it would operate as a free market, in just the sense imagined by Adam Smith. This system would have a number of identical subnets, each charging a different rate, so that (presumably) the most expensive will be the least loaded, and hence provide the best service - or if not, then users will migrate to less costly subnets, thus again making it the least loaded. (Here "users" are large corporations, not individuals.)

Dan Geer, in Risk Management is where the Money is, draws the distinction between risk and security, arguing that the key concept is risk, not security, even though the computer science community has concentrated almost exclusively on security (encryption, etc.). This point can be illustrated by some facts from a more familiar mediator of commerce, the credit card. Its security is actually fairly low, because it is easy to get someone else's credit card number, and identities are not very carefully checked in most outlets, and hardly at all over the internet. The usual agreement between the cardholder and the card issuer involves a bank that accepts all risk except the first $50, which the cardholder must accept. The system works well because the delay involved in finalizing the transaction lets the cardholder confirm transactions by default (if you do nothing, the transaction is accepted). Credit cards would not work if the risk were not dealt with in some way that was at least as effective as this. The situation for ecommerce is similar: most book buyers prefer to deal with some well established company like amazon.com rather than take on the (perceived) higher risk of a less well known firm, even though they know that they are likely to pay a slightly higher cost for this risk reduction; it is like buying insurance. Recent problems with eBay also illustrate these points.

8.3 Internet Mythologies

The writing of Ted Lewis provides many good examples of buzz word journalism and internet mythology; connoisseurs of these art forms will also enjoy the works of George Gilder and many items in back issues of Wired magazine. One can find many failed predictions in these sources, though of course, one can sometimes also find some bits of common sense, and perhaps occasionally even wisdom.

Discuss urban legends here. Also the motivation for journalists and their employers towards sensationalism at the expense of accuracy.

8.4 Sociology vs. Economics

Douglass North's definition of an institution as "the rules of the game" is inconsistent with the kind of sociology that we have been studying in this course. Whereas North takes rules as stable and self-sustaining, modern sociologists would focus on the work needed to sustain institutions, in order to make them appear stable; the "rules" are then merely a reification of the results of that work, rather than self-existing entities. This should be obvious from the fact that the rules of an institution can change, even dramatically and quickly, while the institution continues to be obviously the same institution to everyone involved, even though operating in a somewhat different way.

For example, many corporations undergo significant transformations, sometimes called "re-engineering," and yet are clearly still the same corporation; General Motors went through such a re-engineering some years ago, and Hewlitt-Packard is doing so now. Similarly, the business model of MP3.com is currently being greatly revised, but its name, legal obligations, stock, etc. all remain the same. Many many other examples could be given, in which no one doubts that the institution involved is still the same institution. For a somewhat different example, the Olympics are (allegedly) undergoing significant reform, but also striving to maintain continuity with the traditions of its past. Kuhnian revolutions provide other examples of great change over a relatively short time, such as the succession of quantum mechanics over classical mechanics. But physics departments did not fire their faculty or change their names when this happened; the insitutuions of physics carried on almost as if nothing had happened.

More generally, modern ANT suggests looking for the infrastructure of institutions, seeking the hidden work that keeps things going. This is a vastly different perspective from that of nearly all economics, and especially neo-classic economics, which deliberately seeks to abstract away as much as it can, especially those things that cannot be measured.

For a simple but significant example, consider the "institution" of personal computing. It's reasonably clear what the "rules" are - how to use floppy discs, word processors, etc. The advantages of using PCs so are also pretty clear, and so there have been numerous calls for "transfering" this institution to underdeveloped countries. But actual attempts to do so have often run into deep troubles with infrastructure: PCs require a reliable source of electricity; they require rapid delivery of spare parts; they require reliable advice; and so on. In our culture, these are pretty much taken for granted, i.e., they are invisible infrastructure; this is why it has been easy to ignore these factors when imagining the use of PCs in situations that may be very different.

ANT can also help to explain why open source software development works, whereas it seems quite counterintuitive from the viewpoint of economics, which is biased to ignore social aspects, such as the cohesion and peer pressure among programmers; for this reason, open source development for a long time was not taken seriously by large corporations like MicroSoft. In Homesteading the Noosphere, Eric Raymond argues that it is exactly the social links that power this new mode of software production; one part of his argument uses the anthropological concept of a gift culture.

Gift cultures are adaptations not to scarcity but to abundance. They arise in populations that do not have significant material-scarcity problems with survival goods... We can also observe them in certain strata of our own society, especially in show business and among the wealthy. In gift cultures, social status is determined not by what you control but by what you give away. And thus the hacker's long hours of effort to produce high-quality open-source code. - p.8.

Given enough eyeballs, all bugs are shallow.