Jaron Lanier And Gobbledygook Economics

from the that's-not-actually-true.-at-all. dept

Okay, okay. So many people have been submitting Jaron Lanier's latest Wired opinion piece, which is really an excerpt from his new book, Who Owns the Future?, that clearly it needs some sort of response. As you may recall, Lanier trades on his cred as an early-digerati-turned-contrarian to sell lots of books about just how awful the digital world is these days. Of course, any competent look at his claims almost always shows an incredible amount of flat-out wrongness to such a level that it defies belief that Lanier could honestly believe what he is saying.

If one hoped that his latest work would be a trip back towards reality, they will apparently be sadly disappointed. Instead, unfortunately, it appears that Lanier has moved even further away from an accurate model of how the world works, instead preferring to tell us all how he thinks the world works, despite the fact that reality, and all of the data, contradicts his beliefs. I am actually in the middle of (re-)reading a book about the history of economics, and there's a great section on two of the earliest economists, Thomas Malthus and David Ricardo, who both constructed some of the earliest "economic models," which predicted that we were a doomed species (and very soon). Both were extremely incorrect, in part because they failed to understand the basic economic nature of knowledge and how it creates increasing returns, but rather could only see a world in which diminishing returns resulted in inevitable end of all of civilization within a period of probably just a few decades.

Lanier's predictions remind me very much of David Ricardo, in particular. Despite the evidence of new wealth creation from industrialization, Ricardo dismissed it all as a passing fad, and rather was sure that we were in a complete death spiral due to diminishing returns to land. Ricardo's main problem was that he really only focused on one variable in the market, and more or less refused to look at the market ecosystem as a whole. Furthermore, in looking at a single variable -- in Ricardo's case, the price of corn -- and then extrapolating that if it was going up, it would go up forever, and suddenly people wouldn't be able to afford food anymore and society would collapse.

With Lanier, we see something similar, in that he extrapolates out the amount that people pay for music, and assumes that (1) forever will it go down and (2) that this spiral downward will have ripple effects throughout all of society. The problem is, as with Ricardo, the basis of nearly everything he states is not true.

When copying is easy, there is almost no intrinsic scarcity, and therefore market value collapses.

As we have explained many times before, Lanier is confusing price and value. The price of something may decline, but that does not mean the value of it declines. Two quick examples should demonstrate this. All of us value air quite a bit. So much so that we would all die without it. Air has, effectively, infinite value to nearly all of us, save the miniscule population who wish to commit suicide by way of suffocation. And yet, the direct price that we all pay for air tends to be zero in most cases (scuba divers being one tiny exception). The price is certainly not correlated with the value.

My second example may be more directly clear for those who refuse to see air as a product. The price of computing has declined precipitously for decades, while the power behind the computing has increased even more tremendously. This is often referred to as Moore's law, which has continued to hold true for decades, and is likely to continue to for quite some time. The computers we all have today are vastly more "valuable" than the computers we had 10 years ago. They do much more. They enable much more. And yet, these newer computers are all almost certainly less expensive than their comparable past offerings. We do not see anyone begrudging that the "value" of computers is declining because, obviously, that would be silly and nonsensical. Price and value are two separate economic variables. They may interact in interesting ways, but people will only purchase a good if the value to them exceeds the price. This is the basic nature of economics. We buy when the value exceeds the price. To argue that a declining price automatically means a decline in value is simply incorrect.

Similarly, Lanier's complaint that a lack of scarcity is the problem is, once again, not supported by reality. What is clear is that for every abundance, new scarcities are created. An abundance of content leads to a scarcity of attention, for example. The challenge for anyone facing a market in which one product shifts from being scarce to being abundant is to find the related scarcities, but Lanier seems to ignore the fact that such a thing is possible.

What matters most is whether we are contributing to a system that will be good for us all in the long term. If you never knew the music business as it was, the loss of what used to be a significant middle-class job pool might not seem important. I will demonstrate, however, that we should perceive an early warning for the rest of us.

It is unclear exactly which "significant middle-class job pool" he is discussing, but as we recently noted, employment in the music and movie business recently reached an all time high.

Copying a musician's music ruins economic dignity. It doesn't necessarily deny the musician any form of income, but it does mean that the musician is restricted to a real-time economic life. That means one gets paid to perform, perhaps, but not paid for music one has recorded in the past.

So much to unpack in this one bizarre paragraph. First, I have no idea what "economic dignity" means. I have not heard the term before, and it seems to have no real meaning. It appears that Lanier is arguing that having to work for a living is some how undignified, which is quite a condescending and elitist statement to everyone else in the world, nearly all of whom work for a living and rely on the fact that they work each and every day to earn money. The vast majority of the world does not get paid for work they did in the past, but the work they do today (though their past work can often influence how much they can get paid today). This actually seems rather dignified to me, but that's a personal perspective. I fail to see how people having to work to earn money is somehow an affront to society.

And, of course, that already assumes that when someone copies music, it means that a musician is "restricted to a real-time economic life." Once again, the actual data refutes Lanier's basic claims. Why Wired would publish something that is factually incorrect -- and easily proven so -- is beyond me. There are plenty of musicians, for example, that disprove this basic claim. Jonathan Coulton is not living a real-time economic life in having to make sure he gets new money everyday, even as he allows fans to copy his music. Neither is Alex Day, or Amanda Palmer or Corey Smith or the long, long, long list of others we can point to who don't mind people copying their music, but have found reasonable ways to make decent (and sometimes quite impressive) sums of money from their fans. Of course, when confronted with this proof that his argument is completely bogus in the past, Lanier's response -- incredibly -- is to state that all of these artists are lying.

It is one thing to sing for your supper occasionally, but to have to do so for every meal forces you into a peasant's dilemma: The peasant's dilemma is that there's no buffer. A musician who is sick or old, or who has a sick kid, cannot perform and cannot earn. A few musicians, a very tiny number indeed, will do well, but even the most successful real-time-only careers can fall apart suddenly because of a spate of bad luck. Real life cannot avoid those spates, so eventually almost everyone living a real-time economic life falls on hard times.

First of all, as we noted above, none of those musicians are singing for their supper at "every meal." They all have very significant buffers. Case in point, Amanda Palmer recently had to cancel a bunch of shows to tend to a friend who had health issues.

However, there is a larger point here, which is this: Lanier seems to imply that in the past, every musician was able to live comfortably off the sales of their music, and none had to work daily to make a living. This is, by any stretch of the imagination, laughable. It was under the old system that only a "very tiny number indeed" were able to do well. And the rest made nothing and were flushed out of the system. What we have today is a system with much more opportunity to build a career, and to control that career. Furthermore, the idea that if you can't perform live, you cannot make money is simply untrue. Look at the example we pointed to of Alex Day above. He doesn't perform live, but has built a very nice career for himself. Artists today are raising money via new methods like Kickstarter that don't require them to tour (though, certainly, some tie their campaigns to touring). The idea that if people are copying your music you can only make money from performance is simply not true.

Meanwhile, some third-party spy service like a social network or search engine will invariably create persistent wealth from the information that is copied, the recordings. A musician living a real-time career, divorced from what used to be commonplace levees like royalties or mechanicals, is still free to pursue reputation and even income (through live gigs, t-shirts, etc.), but no longer wealth. The wealth goes to the central server.

Again, this is an incredible (by which I mean incorrect) rewriting of history. Under the old system, in which there were gatekeepers, the vast majority of the income went to the record labels, and not to the artists. And note that Lanier does not explain why you cannot get "wealth" from other means. He just states it as true. And yet, as we've seen time and time again, many artists who embrace new models have become quite wealthy doing so. And tons of artists trying to make it under the old model did terribly.

Please notice how similar music is to mortgages.

Wait, what?

When a mortgage is leveraged and bundled into complex undisclosed securities by unannounced third parties over a network, then the homeowner suffers a reduced chance at access to wealth.

Let me double down on the "wait, what?" statement from before. Let's be frank here: this is not true. First of all, a mortgage (a liability) is nothing like a song (an asset). When a mortgage is "leveraged and bundled into complex undisclosed securities by unannounced third parties over a network" is has no impact whatsoever on the homeowner's "chance at access to wealth." None. Zip. Zero. Zilch. That's because nothing directly changes for the homeowner. They still have to pay their mortgage. And the mortgage is not an investment in wealth, it's a liability.

The securitization of mortgages is a completely different issues, having to do much more with insurance, which later turned into speculation. But, again, this has nothing whatsoever to do with music, because Lanier seems to be comparing apples to orangutans.

To put it another way, the promise of the homeowner to repay the loan can only be made once, but that promise, and the risk that the loan will not be repaid, can be received innumerable times. Therefore the homeowner will end up paying for that amplified risk, somehow. It will eventually turn into higher taxes (to bail out a financial concern that is "too big to fail"), reduced property values in a neighborhood burdened by stupid mortgages, and reduced access to credit.

Lanier is pointing out the serious issue of systemic risk from an interconnected and overly centralized banking system, combined with crony capitalism that seeks to prop up the system. But, again, that's completely unrelated to anything having to do with music. In fact, if you really wanted to use this analogy, it would likely go in the other direction. Because unlike the banking system, what we've seen in the music industry is a less monolithic, less interconnected, more distributed, more open system that has allowed for greater innovation and value creation spreading out to the nodes, rather than being hoarded in the center.

Access to credit becomes scarce for all but those with the absolute tip-top credit ratings once all the remote recipients of the promise to repay have amplified risk. Even the wealthiest nations can have trouble holding on to top ratings. The world of real people, as opposed to the fantasy of the "sure thing," becomes disreputable to the point that lenders don't want to lend anymore.

I've completely lost track of the analogy here, because there is no actual analogy. I'm guessing that he's now arguing that the labels are the banks, so... are we supposed to be rooting for the banks here? Should we want the record labels to be considered "too big to fail"? The analogy is so confused that we're left wondering who we're rooting for here.

Once you see it, it's so clear.

Clear as mud.

A mortgage is similar to a music file. A securitized mortgage is similar to a pirated music file.

No. They're nothing alike. They're about as unalike as you could possibly imagine.

In either case, no immediate harm was done to the person who once upon a time stood to gain a levee benefit. After all, what has happened is just a setting of bits in someone else’s computer. Nothing but an abstract copy has been created; a silent, small change, far away. In the long term, the real people at the source are harmed, however.

Except, again, that the two situations aren't even close to analogous.

At least in the past, we could argue that Lanier was simply making bad assumptions. But with this piece it's gone beyond bad assumptions into what appears to me to be gobbledygook economics. Making some weird statements that make no sense and have no support or basis in reality, and then declaring a to equal b and the case is closed.

It almost makes me wonder if the whole thing is merely a form of performance art or a sort of practical joke, in which Lanier seeks to see how many people he can fool into actually agreeing with an argument that clearly has no logical thread or real basis. But, as a serious piece of market criticism, it is simply not believable.