The “free” economy comes at a cost
But economists struggle to work out how much
Aug 24th 2017
FACEBOOK, whose users visit for an average of 50 minutes a day, promises members: “It’s free and always will be.” It certainly sounds like a steal. But it is only one of the bargains that apparently litter the internet: YouTube watchers devour 1bn hours of videos every day, for instance. These free lunches do come at a cost; the problem is calculating how much it is. Because consumers do not pay for many digital services in cash, beyond the cost of an internet connection, economists cannot treat these exchanges like normal transactions. The economics of free are different.
Unlike conventional merchants, companies like Facebook and Google have their users themselves produce value. Information and pictures uploaded to social networks draw others to the site. Online searches, selections and “likes” teach algorithms what people want. (Now you’ve bought “The Communist Manifesto”, how about a copy of “Das Kapital”?)
The prevalence of free services is partly a result of history. In the early years of the internet, consumers became used to getting stuff for nothing. They have little idea of how much their data are worth; since digital companies have access to billions of people, the value of one person’s data is tiny anyway. More fundamentally, scarcity is not a constraint in the digital world as it is in the physical one. Data are both inexhaustible and super-cheap to transport. In 1993 MCI Mail was charging people 50 cents for the first 500 characters of a digital message, increasing by ten cents for each extra 500. The internet slashed that price to zero. Charging would have been impractical, so small is the marginal cost.
Users may pay nothing, but companies like Google and Facebook have fixed costs to cover: engineers, data centres, etc. To make money, they squeeze their users indirectly, by charging companies to put appropriate advertisements in front of captive eyeballs. In the second quarter of 2017, Facebook eked an average of $4.65 out of each of its users by peppering screens with ads and promoted posts. (By comparison, just eight cents came from payments and other fees, mainly from people paying for stuff within virtual games.)
In the absence of prices, economists struggle to work out what people are getting back when they barter their data and attention for digital services. Some evidence suggests that they are doing rather well. A recent study by Erik Brynjolfsson, Felix Eggers and Avinash Gannameneni of the Massachusetts Institute of Technology offered people different cash amounts in exchange for giving up Facebook for a month. Based on the responses, they then estimated its average annual value to the consumer at around $750. A simpler survey in the same study (without real cash offers) suggested that on average people value free search engines at $16,600 per year, maps at $2,800 and video at $900.
This sounds like a wonderful deal for the consumer, but it generates problems elsewhere. Take taxes. Professionals are not allowed to evade tax by selling their services for benefits in kind, so why should consumers not be taxed if they are paid for their data in the form of services? Statisticians also struggle in a post-price world. GDP is mostly measured by transactions at market prices. A recent study by Leonard Nakamura of the Federal Reserve Bank of Philadelphia and Jon Samuels and Rachel Soloveichik of the Bureau of Economic Analysis used the amount spent on advertising to estimate uncounted output, and calculated that in 2013 American GDP should have been $19bn higher than reported.
Privacy activists also worry. Consumers tend to respond much more strongly to “free” offers than to prices that are only fractionally higher than zero. When Amazon first offered free shipping in European countries, orders surged—but not in France, where by mistake it charged around ten cents. The activists’ concern is that the “free” label fosters poor decisions, making people, for example, reveal more about themselves than they would in a more formal exchange. Researchers talk of the “privacy paradox”: when asked, people say that they care much more about their privacy than their actions would suggest.
The free economy also troubles competition authorities. Excessive market power can be defined as the ability to raise prices above what would be charged in a competitive market. With no prices to compare, and other options only a click away, companies such as Google seem to operate in an environment of cut-throat competition. It is naive to think so. Consumers are more captive than the low cost of switching might imply. Google, for example, commands a market share for internet search of over 90% in most countries in the European Union, where antitrust authorities in June fined it €2.4bn ($2.7bn) for promoting its own comparison shopping services above its competitors’. Its services may have been free, but the trustbusters judged that its market power was curbing consumers’ choices. In the absence of prices, lack of competition will show up in other ways: demanding more information from users than they want to give, for example; or irritating them by stuffing their service chock-full of adverts.
No such thing as a free exchange
Opinion is divided on whether the free economy needs fixing, and if so, how. In his book “Who Owns the Future?”, Jaron Lanier suggests that tiny payments for digital contributions might correct yet another problem, a misallocation of labour. If companies paid people for useful data, rather than mopping up what they leave behind as they use online services, then prices could nudge people towards more productive online activity. Others advocate tougher regulation, mandating that consumers have the option of paying for a version of their social-media platforms free of advertisements and digital profiles. Neither seems imminent, and each comes with its own problems. But both would at least force people to start counting the cost of that priceless lunch.
The Trump administration is investigating Chinese trade practices
Problems will be easier to find than solutions
Aug 17th 2017
BEING tough on China was a constant theme of President Donald Trump’s election campaign. On August 14th he had another chance to wield his presidential pen to show that he is making good on his promises—in this case of a “zero-tolerance policy on intellectual-property theft and forced technology transfer”. With the cameras rolling, he formally instructed Robert Lighthizer, the United States Trade Representative, to consider launching an investigation into China’s alleged crimes. “This is just the beginning,” was Mr Trump’s final flourish for the news bulletins.
His record of translating signatures into policies is patchy. Two others, launching investigations into whether imports of steel and aluminium threaten America’s national security, seem to have fizzled. But whereas proposals for import restrictions on these commodities met fierce resistance from consumers and America’s allies, China’s trade practices provoke much more agreement. It is one of the few issues about which Republicans and Democrats can agree.
Wilbur Ross, America’s commerce secretary, recently wrote in the Financial Times that “American genius is under attack from China.” Poor countries need ideas and technology from richer ones to grow. But countries hungry for investment may have to offer intellectual-property protection in return. China is different. It is such a draw for foreign firms that it feels able to make tougher demands of them.
American technology giants such as Advanced Micro Devices, Hewlett Packard Enterprise, Intel and Qualcomm are all working with Chinese companies to develop new products. China’s critics see such efforts as examples of its abuse of its market power. Bill Reinsch of the Stimson Centre, a think-tank, says the problem American businesses face in China is that its “policy is to let foreigners in, extract their technology, then force them out”. In some industries, American companies can enter the Chinese market only in joint ventures with Chinese firms. As the Chinese government tries to make China a world leader in technology-intensive industries like semiconductors, driverless cars and biotechnology, the fear is that it will plunder its foreign partners’ intellectual jewels, and then get rid of them.
In response to Mr Trump’s latest order, China’s foreign ministry warned his administration to respect multilateral trade rules. This is a nod to the tool that the Trump administration is poised to use: Section 301 of the Trade Act of 1974. This law harks back to an era of aggressive American unilateralism, before the establishment of the World Trade Organisation in 1995. It allows America to levy punitive tariffs if a trading partner is found to be unfairly restricting trade. In the 1980s it was used to force other countries to buy more American goods.
Since then, it has fallen out of fashion. Unsurprisingly, other countries resented being bullied by the Americans, preferring a globally agreed set of rules. The Chinese think that the Americans should take their complaints to the WTO, a slower process. Dangling the threat of a 301 action made for a good photo opportunity of Mr Trump looking tough. China will be waiting to see if he acts tough, too.
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