Bounded rationality and movie theater popcorn

I’m attempting (successfully, so far) to slog through an intercession class at the moment, so things will be slow to nonexistent here until that’s done. However, I wanted to quickly highlight this post by Gabriel Rossman, who’s doing a good job so far exemplifying what economic sociology has to offer.

Anyway, one of the foundations beneath economic sociology is the idea that markets are embedded in non-market social relations. In the case of price discrimination, which as Rossman notes should only apply to narrow situations, we can get a good sense of how people in the aggregate can affect markets in ways they shouldn’t given standard economic theories.

I’ll parse out the train of thought – first, price discrimination (my addition in non-italics):

These pricing practices [services structured to be complex] are forms of price discrimination, which is to say they are ways to customize the price point so the seller doesn’t leave much money on the table relative to each particular consumer’s willingness to pay. It’s kind of like haggling but it works at scale over a large number of consumers.

Price discrimination is a mixed bag. On the downside it pushes consumer surplus close to zero, meaning you always feel like you’re getting ripped off but not so much that you balk. On the upside it increases total revenues and quantity supplied.

Yet theory would suggest that such price discrimination should only exist in areas of monopoly or price collusion. In areas where there is competition and no collusion, price discrimination should be arbitraged by “sophisticated consumers,” who wouldn’t be duped into frequenting movie theaters with eight dollar tickets and ten dollar popcorn. “Myopic” consumers, on the other hand, would be just fine with it. In a idealized, theory as fact world, everyone wins.

Too bad it isn’t true. A lot of firms, and industries for that matter, count on making money from price discrimination. Here’s Rossman’s favorite example of how consumer myopia works:

My favorite example of how consumer myopia works this way is how rental cars now offer you prepaid gas for about 10% less than the price you’d pay at the pump. The consumer may be thinking, wow, $3.90 a gallon is actually pretty cheap compared to $4.30 at the Exxon station, I should prepay for this full tank of gas. What doesn’t occur to this consumer is that this is only cheap if you use the full tank. If you bring it back with half a tank you’re effectively paying $7.80 a gallon. The consumers who appreciate this don’t buy the plan but those who don’t see the hitch may well buy it. As long as the base rental price isn’t too low it makes sense for the rental company to more or less break even on people who pass up this offer and make an easy $20 or so profit on those who sign up for it.

Of course we see this all time. Common vernacular might call it a scam, which it isn’t, but at the very least it’s something I like to call “the gigantic caveat,” or Rossman describes as “shrouded attributes” – in which the true cost of a service is hidden. This is also known as “nickeled and dimed.” What throws theory way off is that most customers know that the market structure is often “rigged”, sort to say, but given bounded rationality make the myopic choice anyway.

Which is to say the rationality of our decisions isn’t dictated by maximizing economic benefits alone. It’s limited by information (do we know we’re getting nickeled and dimed?), finite time (we can’t spend four months out of the year reading every single word of every single contract, nor contemplate our complicity in encouraging every transaction that features price discrimination), and I would argue social relations as well (there are non-market social pressures to engage in economic activity). Individually, and in the aggregate, we often make economic decisions against our own self-interest…either from ignorance, apathy, or because your significant other expects greasy theater popcorn.

Is Facebook a Tragedy of the (Modern) Commons?

I remember sitting through the Social Network thinking, firstly, “Man, Trent Reznor did an awesome job with this score…” but otherwise enjoying the quasi-fictional story of a sociopath creating what would become the most pervasive online social networking site on the planet – which is to say, Facebook.

My Facebook account was opened after an Americorps *NCCC term in 2005, primarily as means to end, to keep in touch with my fellow corps members. Later, as I moved away from home, I used it as means to an end in keeping touch with friends and family from my hometown. Then as a means to an end for showing long-distance folks daily pictures of my newborn girl, much as I still do now for a rather silly three-year-old girl for folks in Florida and elsewhere. My experience is probably similar to many others – utilizing an online resource as a social means to achieve a social end.

Yet there are other implications to the pervasiveness and ubiquity of Facebook (as a privatized entity) that go beyond social enhancement and connectivity. One of the most oft-recited issues involve privacy, but recently a Facebook friend – we’ll use his blog moniker KC – brought up a different question:

I noted in a comment that we (being Facebook users) could be thought of as the worlds largest unpaid workforce – at least, unpaid in the traditional form of wages (a point that I’ll touch on later). More importantly, though, I found the question of Facebook’s role as facilitating a type of modern “commons” to be an underdeveloped concept. I asked him to blog about this subject, as well as it’s implicit saliency about democracy, and he obliged.

KC has a nice summary of just how “major” Facebook has become, but then gets down to the business of democracy and “the commons:”

Democracy (from the Greek demokratia) requires public conversation. If citizens can’t talk and argue and negotiate and forge cynical alliances and voting blocs, then democracy doesn’t work. If the people (demos) can’t coordinate among themselves, then they can’t rule (kratia). In ancient Athens and in colonial America, the place for public conversation and debate was the public square (agora).

As he notes, of course, the advent of 20th century technologies has changed the way we organize and coordinate socially. Today, the internet (especially for the under-40 crowd) is the dominate medium for extra-personal socialization and a key driver of information dissemination. He organize his points thusly:

So:
1-Democracy functions in the agora.
2-Today, the agora is online.

And, 3-FB is one enormous part of the agora. Enormous, and sort of inescapable, because it’s a closed system: either you’re on FB, or you’re not.

There is a semi-relevant question about the “closed system” aspect of Facebook, but for the purposes of this post I’ll leave that for another day. The meat of the subject about democracy, the agora and Facebook is here (my emphasis in bold):

Enormous and monopolistic and privately owned. This is one of the weird things about FB that it seems vital for users to discuss but which users, perversely, remain silent about: how is it healthy for our democracy for our agora to be owned, tracked, sold, regulated, and (potentially or subtly) censored by private owners?

There’s a process of sorts I want to go through before attempting an answer to this question. It starts with…

Conceptualizations

Earlier I had written about the idea that people who use Facebook could be thought of as the worlds largest unpaid workforce. This isn’t an original idea – see this piece on info-metrics in the WSJ – but it does require a certain perspective:

1. Our usage of Facebook generates marketable information, something that KC notes, for which the valued worth of the data generated was released in the S1 filing (my emphasis):

The results show that you are worth about $81 to Facebook. Your friendships are worth $0.62 each, and your profile page could be valued at $1,800. The value of a business page is worth approximately $3.1 million. Put another way, Facebook’s nearly one billion users have become the largest unpaid workforce in history.

2. Ergo our collection of friends, likes, interests, locations, as well as other generic demographic information has marginal value. To Facebook our participation in the otherwise normal social process of interacting with other human beings creates a product (information) that can be sold at a profit to others (advertisers).

There are practical limitations to this perspective – other tech companies use similar conceptual transactions (search engines) – but even then Facebook is unique as a business model. As Farhad Manjoo notes:

If this doesn’t strike you as a crazy platform on which to build a billion-dollar business, it’s only because you’ve used Facebook long enough to be seduced by its inevitability. But consider how novel the social network is, as a concept. Even though Facebook is named after a real-world object, the site has no analogue in the offline world—before social networks, the idea of a worldwide map of people and their relationships didn’t exist. Indeed, you don’t have to think back too far—probably to 2005 or so—to get to a point where it would have been insane to suggest that people of all ages in every country would voluntarily disclose everything about their lives to a single website. And, on top of that, that the company behind the site would make a grand profit by using this information as a way to serve up ads. And, finally, that we’d all have fun doing it.

Which is a long way of saying that Facebook is a weird business. The products they offer are people, simultaneously “sold” to other people (who, in this eleventh dimensional thought exercise, can also be thought of as potential “hires”) that value alternative modes of communication and those that value information that can be used to craft advertisements. The dichotomy between Facebook users as labor and product brings me to my next point…

In-kind Workforce

The point of this exercise in conceptualization is to structure the framework for understanding the relationship between Facebook, its users, and the inherent implications for agora. As original a business model that Facebook is, the medium of exchange that fuels social networking is as old a civilization itself. To this notion one needs to understand that markets (for goods and services or labor) are not natural. They require several preconditions for existence, one of which is a vehicle for parties to exchange goods and services or labor (such as coin, paper, or credit).

In this specific instance the market for both the labor and consumer aspect of Facebook operations use a medium that is older than coin; in-kind exchanges. Traditionally, in-kind exchanges are described as bartering – I have six sacks of grain that you want, you have ten satchels of beans that I want, let’s exchange our goods! Now of course this is rather inefficient by today’s standards (even though it’s still utilized), but the reasoning for it’s inefficiency explains how online social networks work. In-kind exchanges operate on rather narrow terms because they require the “double coincidence of wants,” which is to say in order for a transaction to occur you have to want grain and I have to want beans – otherwise the deal doesn’t happen. This is how Facebook works; users are willing to give the information that online social interactions produce in exchange for the facilitation of an online social network that compliments their real world relationships. Presto, we have our “double coincidence of wants,” laborers that are consumers in an privatized agora.

Is it Bad?

So here’s the sixty-four thousand dollar question, no? Is it unhealty for a large portion of our modern day agora to be privately owned? First let me say, in reference to the title of this post, that I understand that the “tragedy of the commons” as originally used doesn’t apply this situation. My usage of the term is entirely grounded in the context of the importance of agora to the functioning of democracy. If this offends passionate observers of term origins then I apologize. The meaning of this term (like so many others) can change, which underscores my answer to KC – that the cultural meaning of agora has changed to include this aspect of private ownership.

A privately owned agora violates the spirit of it’s original intent, which is meant to be a place (at least in Western definitions) owned by everyone, for everyone, to facilitate the types of interactions that KC defined. The proliferation of private property that mimics the commons has unfortunate consequences because those who “talk and argue and negotiate and forge cynical alliances and voting blocs” should do so in an environment free of nonpublic influence. These are the implications I alluded to earlier – that an ad-filled agora necessarily includes private influence (and ownership of speech) in the one area it shouldn’t be included and shouldn’t have ownership.

Another notable agora that is privately owned is Zuccotti Park. It serves as an imperfect facsimile of the commons, and that had consequences for the type of activity that facilitates democracy. A similar example would be that of enclosed shopping malls, which are spaces meant to copy environments that are conducive to congregating and yet limits free speech (and again, the ever-insistent advertisements). This is the worry that I believe implicit in KC’s question. What are the consequences?

The Question of Failure

One question that has hung on my shoulder during this whole process; Is Facebook’s facilitation of an agora-like environment a collective epistemic failure on our part? The Occupy movement in Zuccotti Park raised many questions about privately owned public spaces. Facebook has raised no such questions (excluding KC, or course).

Perhaps it is because, conversely, the benefits of agora still (to some degree) accrue in “the private commons.” The Occupiers in Zuccotti Park still made a difference. Social movements still effectively use Facebook to organize, forge alliances, and affect democratic outcomes. These online social networks, maybe perversely, rely on such activity for their existence in a way that shopping malls and parks do not. In this way they are notably different and may affect the meanings we attach to our participation. This is the part where it gets cloudy for me, and this is also where I often shrug my shoulders.

Perhaps this would be my question to KC…who’s to blame?

Message in a Graph

From the New York Times (whose graphs lately have been top notch):

From the article:

Spending by the federal government, adjusted for inflation, has risen at a slow rate under President Obama. But that increase has been more than offset by a fall in spending by state and local governments, which have been squeezed by weak tax receipts.

Of the administrations shown, overall growth in Mr. Obama’s first three years has been the slowest. But that is largely because government spending did not accelerate as it normally does when the private sector is weak. The private sector grew faster in the first three years of the Obama administration than it did in three of the previous five administrations — the exception being Bill Clinton’s administrations, when private sector growth was more rapid. In both of George W. Bush’s terms as well as in the first three years of the George H. W. Bush administration, though, the private sector grew more slowly.

Back to (jobs) square one

Chart via Kevin Drum who notes, as well as others, that with todays job’s report President Obama can now say he’s presided over total net job growth (because these things only matter in so much as they can be spun, of course):

It’s been a long time (too long) coming, but we’re back to square one.

The jobs-skills divide revisited

Tangentially related to what I wrote yesterday, Barry Ritholtz has a summation of papers submitted to a recent San Francisco Federal Reserve Bank conference on the “mismatches between the skills of jobseekers and the needs of employers.” Specifically there’s been some question about the degree to which our current (lack of) employment can be explained by such a mismatch. I noted that the Economic Policy Institute wasn’t convinced that it was a significant issue, and it seems that those at the SFFRB conference would agree (emphasis mine):

[...] These changes may have increased mismatches between employer needs and worker skills. In general, we find that this doesn’t appear to be the case. Estimates of the extent of skill mismatches in recent years indicate that it has been limited and is likely to dissipate. Moreover, the conference’s research presentations and a panel of workforce development specialists did not identify a noticeable increase in mismatches in recent years. Thus, concerns about growing skill mismatches may be overblown. On the other hand, successful integration of low-skilled workers into the workforce represents a continuing problem.

The summary has good details as to why “this doesn’t appear to be the case,” but I’d also highlight that the conference participants nevertheless discussed solutions to matching skills to employer needs – stressing the role of community colleges to provide technical bridges to employment. My eyes always catch this suggestion because I see my local “junior” college pursuing much the same goal. Most of their structural and curriculum expansions (with the exception of a new arts theater) has been directed towards fulfilling employment needs for our region.

Low wages, race, education, Indiana and other sundries

A different subject, sure, but the National Archives has great pictures.

I noticed this Economic Policy Institute (EPI) report on low-wage worker trends via Derek Thompson – who has an excellent overview you should go read on the top 10 low-wage states and jobs. For my part I just wanted to note a few things, but first here’s Thompson on the sorts of jobs we’re talking about:

The chart below looks at the six occupations with the highest share of low-wage workers (in RED) and also shows you their share of the total workforce (in BLUE). The upshot is that the top six six categories — each with at least a third of their workers earning less than $23,000 — make up more than one-third of the economy. Broadly speaking, the occupations with some of the worst pay are local-service jobs, especially in the non-tradable sector.

So mostly we’re talking about food prep, and to a lesser extent personal care/building maintenance.

Anyway, here is the presentation by race (by percentage):

Some obvious disparities; African Americans and Hispanics are overrepresented in the poverty-wage workforce – 11 percent to 14.1 percent and 15.3 percent to 23.6 percent, respectively.

Which sort of relates to my first point; education still matters, especially for racial minorities. Thompson writes:

[...]What you get is a classic argument for the power of education. Four-year graduates are underrepresented in the poverty workforce and less-than-high-school grads are overrepresented in the poverty workforce.

Coupled with this graph I threw together:

Of course even the percentage of those that start and don’t finish do better than those that never started:

The other thing I wanted to highlight was that my home state of Indiana didn’t make Thompson’s list but it came close – 12th, after New Mexico:

The way EPI breaks this down by hourly wage:

Thus, workers at 0 percent to 100 percent of the poverty threshold earned from $0–$10.73 per hour in 2010, while workers falling in the category of >100 percent to 200 percent of the poverty threshold earned from $10.74–$21.46 per hour. Workers between >200 percent and 300 percent of the poverty threshold earned from $21.47–$32.19 per hour, while workers above 300 percent of the poverty threshold earned more than $32.19 per hour.

Thus, 28.5 percent of workers in Indiana make $0-$10.73 an hour, and the bulk (43.6) earn $10.74-$21.46.

As EPI notes in their assessment of the challenges ahead, education isn’t a cure-all (though it’s certainly worth promoting) and it isn’t enough to simply reach full employment (or whatever the rate of natural employment is…certainly greater than it is today) as the economy recovers. We’re also not necessarily talking about future workers needing more education or training to fulfill low-wage jobs. It’s a matter of what EPI calls the “wage-deficit:”

What matters to workers in the near future is not only the number of jobs available, but what those jobs will look like. Whether workers in the future earn enough for their jobs to be considered good jobs depends on how earnings in their particular occupations rise, as opposed to any changes in the composition of jobs. [...] Instead of facing a skills deficit, workers face a wage deficit. This is powerfully illustrated by the fact that college graduates have not seen their real wages rise in ten years.

This relates somewhat to a matter I wrote about last year concerning low-wage work in expensive cities. Some people prefer to view low-wage workers as individuals who make poor or insufficiently ambitious career decisions. This view may or may not include the notion that their poverty wage is solely a meritocratic failure. Others hold opposite perspectives. I don’t think it really matters though why any given individual is putting together a taco rather than being a doctor when thinking about food prep wages – and whether those positions pay a living wage.

Finance and Wealth Part Two

*Note: This is a second part of a presentation for my Economic Sociology class over a chapter of Miguel Centeno and Joseph Cohen’s book “Global Capitalism” on finance and wealth. Part two is slightly adapted to include some bits of related information (graph!) and light editing for coherence. The first part is here.

More or Less Accountability

The question of where we are today leaves us with wondering whether such a liberated financial system is more or less accountable than the interventionist state policies that preceded it. Proponents of market liberalization long criticized centralized economic control as being prone to manipulation for short-term political gains. Financial liberalization was thought to have freed markets in such a way that substantial and beneficial growth could be broadly shared while maintaining stability through market discipline.

Yet a “key question here is whether, after liberalization, the gravity of control over the financial economy resides with actors that have a greater obligation or constraint to operate in ways that benefit society, and do not use their position of power for self-interest at the expense of the commons.” The events of 2008, and previous smaller crisis, have cast serious doubts whether such an obligation* or constraint exists. Because market discipline rests on the fear of economic failure, the existence of moral hazard creates a situation where a privately managed financial system has incentives to manipulate the economy for short-term monetary gains that can be detrimental to national and global economic welfare. As the authors put it, “‘Private corporations’ chief responsibility is to make profit for shareholders, not take care of society as a whole.”

The Specters of Exploitation and Exacerbated Inequality

Centano and Cohen write that “one of the principle benefits of financial market liberalization is that it encourages investment in enterprises with weaker credit, which typically are poorer and/or prone to financial problems.” Unfortunately what has happened is that such avenues of access to credit (where it exists, that is) for poorer segments in society have nevertheless resulted in stagnant wage growth, and at least for the immediate term a bleak economic outlook for future increases in the ability to save and participate in the credit market.

The authors also note that one of the effects of market liberalization has been to put great financial pressures on governments, who provide key services to the economically disenfranchised, to reduce essential goods and public sector jobs. You can see this directly in the decline of total public jobs since the Great Recession began (obviously, the spike was temporary hiring for the census):

Again the authors ask “whether any gains to poorer people’s wages must be spent on things that might have been provided to them without direct cost under alternative economic systems.”

Dangerous Money

The chapter concludes with the idea that the financial sector has effectively become an independent, influential force in the real economy. Just as financial growth can result in real economic growth, the events of 2008 proved that “financial problems can destroy real economic activity.” It isn’t so much a question of whether financial liberalizationcan create economic opportunities in reallocating financial resources, but whether such opportunities are with the cost when those markets become too powerful and the rest of the world suffers the consequences of the markets’ own excesses.

*Obviously Centano and Cohen shortly thereafter admit that there’s no “obligation” per se for private financial intermediaries to operate in a way that is beneficial to society. This, I think, is a “have your cake and eat it too” problem for neoliberal prescriptions. That is, they would argue that the private allocation of resources is “naturally” beneficial to society in the absence of a formalized obligation – yet even if that was not entirely or universally true “market discipline” would constrict private economic actors in such a way as to produce such a natural beneficence.