Felix Salmon reports that despite the fact that it’s extremely easy to get around the New York Times paywall, many people are nevertheless paying for the online subscription:
But here’s the thing about freeloaders: if they value what they’re getting, a lot of them will end up paying anyway. What happened when the Indianapolis Museum of Art moved to a free-admission policy? Its paid membership increased by 3%. When the Minneapolis Institute of Arts did the same thing, paid membership increased by 33%.
Sales people and business-side executes tend to believe as a matter of faith that if people can get something for free, they won’t pay for it. But all they need to do is look at their own behavior to see how that isn’t true: when they go to a restaurant in a distant town that they’ll never visit again, they still leave a 20% tip…
At first glance one is tempted to celebrate what appears to be irrationality. Economists are fond of advocating rational behavior, but with the New York Times paywall we have behavior which is seems individually irrational, yet helps preserve a commons. With tipping, if you presume that it is the most effective system of encouraging efficient service, then again you have individually irrational behavior that preserves the commons (the commons here is the system itself). Of course behaviors like this aren’t actually irrational, because people value fairness, and the are willing to pay more in order to feel fair. Here our sense of fairness leads to welfare improving outcomes: people feel better because they are behaving in accordance with fairness, and a commons is preserved.
On the other hand, fairness and welfare can also be at odds. For instance, many people may find it unfair when businesses to not share quasi-rents with their employers, and may encourage, both through market and non-market means ranging from protests, to private demand for goods from “fair” goods, to demanding outright regulation or labor cartelization. However, those quasi-rents may be the incentives that businesses need in order to start up the business in the first place, so that the demand that businesses share them (again, this can be market or non-market) may lead to less business creation in the long-run. Here, people’s sense of fairness produces inefficient outcomes: workers capturing quasi-rents may be made better off, but the business owners lose that transfer and future business owners and workers are hurt by less business creation. In short, wealth is destroyed.
With respect to intellectual property, fairness can cut both ways. It is possible for most people to circumvent music copyrights with very little effort. Yet, for many a sense of fairness prevents them from “stealing” music. Sometimes this is efficient and sometimes it isn’t. There are many small bands for whom small drops in album sales could lead them to produce less albums and perhaps leave the industry all together. When people pay for their music rather than illegally download it out of a sense of fairness, the outcome is efficient. There are others who produce less output because the wealth that copyrights afford them means they don’t need to create as much. For example, I’ve argued you could possibly include Stephen Malkmus in this category. Thus buying his music out of a sense of fairness, rather than illegally downloading it, can lead to less efficient outcomes. Fairness can be good or bad in this context.
On the margin, the public’s demand for fairness in copyright laws is probably inefficient. Of course how much the current laws are a function of voter demand versus regulatory capture is a matter for debate. But even if left to popular vote without industry interference, I believe we’d end up with an inefficiently strict regime.
In the same industry, to give one more example, market demand for what is perceived to be fair ticket selling policies certainly leads to inefficient outcomes: scalpers are left with the surplus instead of the artists, thus no extra output is incentivized. The market outcome is of course bolstered by legal restrictions on resales, resulting in part from fairness.
Maybe this is a trivial point that only economists need to be reminded of, but I think it merits keeping in mind. Sometimes fairness leads us to more efficient outcomes, like preserving the commons, and sometimes it leads us to inefficient outcomes, like copyright laws. Be skeptical of fairness, but do not toss it aside completely.
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Friday ~ August 19th, 2011 at 9:08 am
Curt Doolittle
Adam,
This is a wonderful, simple example with which to illustrate grand ideas.
In your example, you’re attributing museum ticket purchase behavior to a supposed ‘fairness’ (which is behaviorally a guilt response), instead of attributing it to ‘status seeking’, (which is behaviorally a status demonstration response.)
At the very least, BOTH emotions (which are themselves a sensitivity to voluntary and involuntary transfers of property) are equally at play. But what does that mean? It means that people who are stronger, higher status, higher dominance, and have more objective value systems seek status, and people who are weaker, lower status, more submissive and have empathic systems operate under quilt. But we are describing the same spectrum from two ends – guilt is a means by which the weaker pursue status through empathy and submission.
The people in your example, who purchase tickets that can be had for free, are purchasing ‘status’, not fairness – fairness is a vehicle for status. If they use a public resource for free, it means that they are lower status. If they pay for it voluntarily, then the ONLY thing that they can buy with it is STATUS. (Status is as much a function of self image as are the perceptions of status by others.)
In our society, ticket prices at a museum have the same effect as offerings at a temple have had in most of history. People are more charitable where they agree upon means and ends. and less charitable where they disagree upon means and ends. Established norms are ‘charities’. And status is obtained by any individual who contributes to the charity. Status is lost by individuals who do not contribute. The way we get people to pay for things is to attach status to it – to make someone feel better about him or herself by contributing.
**Social status is the human currency. It has to be. If we didn’t pursue status humans couldn’t ‘calculate’ (in the heuristic sense) how to behave any more than they could calculate plans without using prices (in the quantitative sense). If economic calculation is impossible without prices and incentives, then human planning is impossible without status signals and incentives.**
The point here is to help quants understand why people are not acting irrationally. It’s not that they’re innumerate. It’s because STATUS is obtained only in part by money. And monetary decisions, both personal and political are made in pursuit of status. Therefore economically ‘efficient’ actions lead analysts to the wrong conclusions because people make trade-offs. Human society cannot operate without status signals (local feedback) than it can without prices (local information.)
And to relate this concept to current events, they attribute higher loss aversion to status than to money. The USA is in the closing phase of a status war driven by the twin demographic tides of immigration and changing dominance of generations, that is being playing out in politics using the economy as a lever. An opportunity that has come about because we have finally won the 500 year war to propagate our religion-cum-technology of consumer capitalism across the world, and in doing so, lost our advantage.
Economics is second to status. To illustrate this point: if the left was willing to destroy aristocratic society in order to obtain social status, why would the right not be willing to destroy socialistic society in order to retain their status? (Another example: Schumpeterian intellectuals undermine a society in pursuit of status.) Status is the human currency. Money only in part can purchase it.
The combination of communism/socialism, anti-slavery and anti-male-feminism was successful in disempowering the western aristocratic classical liberal tradition and it’s status symbols. This strategy was effective because of the Christian Guilt of the majority. But as these people become a minority, they are acting like one. And they no longer feel guilt. So the lever of the three dominant movements against the aristocratic classical liberal status symbols is weakening.
The question for a political economist,once he understands that STATUS is the human currency, is what institutional framework is possible without the prevalence of the christian classical liberal ‘habits’: the ethical system of soft institutions such as status, myths, morals, ethics, manners, fraternalism, individualism, and the hard institutions of Rule of Law (universal general rules applicable to all), and Republican Democracy.
The SOFT infrastructure of Society is paid for by the forgone opportunity costs we pay by NOT privatizing opportunities we have for personal gain. And these soft costs are codified in cultural habits, and the reason people PAY these soft costs is to gain status, and the opportunity that status affords them. Sure, we pay for the HARD infrastructure with taxes. But if we had to estimate the costs of developing the western fraternal christian republican commercial ethical system, what would they be? They are far more expensive than the taxes we pay – and they are far more difficult to manufacture than law. Demonstrably, they are nearly impossible to manufacture because privatization of opportunities is more natural to man than forgoing them for an abstract good. Creating a system of status that perpetuates the willingness to forgo opportunities is the highest social cost a civilization has.
And unless you understand that principle, you will fail to see why the broader political trend is occurring and why THEY MAY BE RIGHT. We could not create a socialistic society because eliminating the ability to calculate prices eliminated all ‘good’ incentives. If you eliminate status, what incentives do you by consequence, eliminate? You eliminate the very system that makes freedom of property and politics possible, as well as the system that rewards people for forgoing the opportunity to privatize
Small things in large numbers have vast consequences. Many of those small things we take for granted. People in my camp criticize Keynesians for believing that there is a steady state that we manipulate to improve, while being unafraid of failure, when the steady state is actually one of Somalian barbarism, that we protect ourselves from falling into using habits and incentives that are often beyond our understanding.
Curt
Friday ~ August 19th, 2011 at 9:29 am
Adam Ozimek
Curt,
Good points, and very thoughtful comment. A real in depth discussion of fairness should definitely involve status and signaling. When is someone satisfying a desire for fairness, and when is one satisfying a desire to signal high status by acting fair? It’s a hard question. But I would argue that we have good evidence that fairness exists as a real desire separate from status: people behave fairly when nobody is looking. Consider tipping, for instance. Also we’ve seen fairness exhibited in animals. Of course animals can signal status as well, but when nobody is looking? It’s strikes me as even more plausible that societies need altruism than it is that societies need status. Robin Hanson, for one, I think would argue that we should be engaged in removing status from our considerations. I tend to be one foot in both camps. I think you are correct that status seeking incentivizes a lot of our behaviors and institutions, good and bad. I think Robin is right that a lot of status seeking is wasteful and unnecessary. In any case, thanks for the comments.
Friday ~ August 19th, 2011 at 9:29 am
Ryan P
Regarding wealth effects, although they may encourage less output, that doesn’t mean that’s an example of inefficiency. Presumably that means that the highest value of extra wealth on the margin is leisure, and leisure is valuable. (This is why we say that marginal income taxes and VATs cause deadweight loss even in the cases where income effects equal or swamp substitution effects.)
Friday ~ August 19th, 2011 at 1:52 pm
BSE
I’m gone a month and you’re back to union-bashing. Do I really need to keep pointing out the obvious? Economists don’t agree on the efficiency issues related to unions, and for good reason. Let me quote the offending paragraph:
“On the other hand, fairness and welfare can also be at odds. For instance, many people may find it unfair when businesses to not share quasi-rents with their employers, and may encourage, both through market and non-market means ranging from protests, to private demand for goods from “fair” goods, to demanding outright regulation or labor cartelization. However, those quasi-rents may be the incentives that businesses need in order to start up the business in the first place, so that the demand that businesses share them (again, this can be market or non-market) may lead to less business creation in the long-run. Here, people’s sense of fairness produces inefficient outcomes: workers capturing quasi-rents may be made better off, but the business owners lose that transfer and future business owners and workers are hurt by less business creation. In short, wealth is destroyed.”
This paragraph is wrong; the ol’ fallacy of composition, once again. First off, the union action literally can’t destroy the incentive to start a business; the business doesn’t exist yet. While the union should only lay claim to part of the surplus; a strategy to lay claim to all or more than all the surplus would not be incentive compatible. In fact ANY strategy which would drop the firm below the owner’s level of reservation profits would not be incentive compatible for the union. An efficient union would thus drive its share right up to this boundary. Workers themselves would also need to be compensated for being in the union; if everyone’s reservation wages/profits are being driven by the “market” – perhaps imagine unions bidding for workers – so that the marginal worker’s value is their marginal improvement to bargaining position – and the owners their reservation profits equal their market wages. In this case, everyone is earning their shapley value – it takes a lot of assumptions to get this, but I don’t care if its true in the real world, I have a point to make.
Now, read Rajan/Zingales (one of my favorites). The point which is important here is that RZ assume that everyone in a firm is earning their shapley value. This is a little strange for them, since the coalition is only equal to the firm in equilibrium; otherwise the coalitions are just “cliques” in which access to the firm’s capital is being granted to the workers, or not. The point is that when workers receive their shapley value, they will maximize their relationship specific investment (in the data of course, relationship specific investment wouldn’t show up as “investment”, but as “technology” – because it includes things like developing… anything… that makes an individual worker more efficient at a given level of capital).
There are a couple of points which any economist should recognize:
1) The firm has less financial capital for investment – it’s investment will fall – this means that the firm will eventually “die” or “die” sooner, more likely. This is, I believe, part of your point.
2) The pace of technological progress should be higher from the higher level of relationship specific investment.
3) The economy’s total savings falls only to the extent that workers save less than the firm.
4) Since firms are generally borrowers and workers savers – the savings rate for the economy might actually rise.
5) So, there is nearly as much, or perhaps more financial capital in the economy available for investment – as I said, fallacy of composition.
6) So, wealth accumulation is just as fast, or faster under the efficient union equilibrium.
This is only comparing the “efficient union” equilibrium to the non-union equilibrium. So this is all true in theory, but how do you get to the efficient union equilibrium? The efficient union has to be a cartel when dealing with management, but is competitive when dealing with workers. Meh, I’m a theorist, so don’t bother me with practical questions. The point is only that you may have the wrong sign for the effect. In defense of my little model, though, every prediction it makes has come true since the era of deunionization began: fall in technological progress? check. rise in business saving/investment? check. fall in personal saving? check. fall in wages? check. No, I don’t think this is the correct explanation for any of these, but I do get all the right signs.
Now, to add “fairness” back into the mix; to the extent that workers are interested in (and accurately perceive) fairness, they will, on the margin, be more willing to accept lower wages than the “efficient union” equilibrium I assumed above. This will mean that the firm (individually) would have a higher level of investment. To make a long story short: this is a bad example of fairness causing inefficiency. Also, as an aside, this is one more reason that “be nice to business” makes for really bad macroeconomic policy – I’m talking to you, Republicans!
Friday ~ August 19th, 2011 at 2:07 pm
Unions and the Fallacy of Composition « BS Economist
[...] to this post by Adam Ozimek , I left the following long [...]
Friday ~ August 19th, 2011 at 2:37 pm
bdbd
I still have no idea why Chrysler gave me a NYTimes free pass for the rest of the year.
Saturday ~ August 20th, 2011 at 8:10 am
Browsing Catharsis – 08.20.11 « Increasing Marginal Utility
[...] The NYT is now a public good. [...]