The economics of digital platforms, including the sharing economy, has become a hot topic – not only among researchers but also with several new books for the non-specialist reader. Yesterday I took part in the Digital Forum organised by the Toulouse School of Economics – home of Nobel Laureate Jean Tirole, one of the first economists to analyse platforms (or two-sided or multi-sided markets). It was a packed event with some fascinating contributions. And on the train to and from Paris, I read Matchmakers by David Evans and Richard Schmalensee. This follows on from Platform Revolution by Geoffrey Parker, Marshall Van Alstyne and Sangeet Paul Choudary (which I reviewed here), and The Sharing Economy by Arun Sundararajan (here).
All three are well worth reading – they all clearly explain the economic characteristics of digital platforms, with lots of examples. Inevitably there is some overlap but in fact the books complement each other nicely and also include different examples. Platform Revolution takes more of a business design perspective, while The Sharing Economy is specifically focused on peer-to-peer markets. Matchmakers has more about the economic analysis and public policy questions including competition – David Evans’ earlier book, a collection of papers, Platform Economics, was quite heavily focussed on the competition issues.
Some of the examples in Matchmakers are very nice. I particularly liked the case of the US trucking industry. There’s also a chapter on M-Pesa, which I know a bit about; it is a nice description of how it worked in Kenya, although I’d have been interested to read about why mobile money platforms have failed in so may unbanked countries – regulatory barriers in my view. One of the questions about platforms’ success or failure is the extent to which they take advantage of opportunities for regulatory arbitrage on the one hand and can be killed by hostile regulation on the other hand.
Marshall Van Alstyne was one of the participants in the Toulouse School of Economics event and gave a great talk including this chart; he and I agreed that there is a huge research agenda on this subject as we’re entering the era of platforms. I have an issues paper out soonish, sketching some of the questions.
Marshall Van Alstyne at the TSE Digital Forum 16/6/2016
Neoliberalism. I’ve been dipping into Prisoners of Reason: Game Theory and Neoliberal Political Economy by S.M.Amadae. This book argues that game theory (and particularly the Prisoner’s Dilemma) has been a key organising principle and political weapon of neoliberalism. That public policy sees all social and economic relations through the lens of strategic (non-co-operative) interaction by rationally maximising individuals. That Dr Strangelove won the cold war, and won the battle of domestic politics too, shaping modern capitalist society in his own image. The book draws a line from nuclear strategy to thinking about global warming and everything in between.
It seems to me that a large part of S.M.Amadae’s objection is to the idea of ‘rational’ self-interested agents at all, not just to the assumption made in game theory models (and for my tastes the book should have been more careful about distinguishing co-operative from non-co-operative games). She clearly objects to ‘neoliberalism’. My heart leapt, briefly, when I saw a section titled ‘Defining neoliberalism’. It says: “Neoliberalism has a number of agreed-upon facets. All value is commodified and financialized. Work and gradual wealth accumulation are replaced with speculation, risk management and casino finance. …. Experts denounce the possibility for collective actions. … ” This is such a straw man that it didn’t help me at all. Sure, financial markets ran amok, and many – most? – economists identify regulatory, political and ethical failures behind that. Still, there are hardly any of us who think collective action to address climate change is impossible, still less undesirable. Yet it does not seem to me to make us neoliberal if we argue that it’s hard to achieve, that game theory can help us understand why, that we should use market incentives to reduce emissions when possible etc. Yet I suspect Amadae believes we are all neoliberals.
She also seems to believe Richard Dawkins’ The Selfish Gene is a key building block of neoliberalism, giving an evolutionary justification to the use of a game theoretic approach. It wasn’t clear to me what she actually thinks about evolutionary theory per se – is it only the Dawkins version she rejects? – or whether or not it’s a good idea for economics and social science to be consistent with evolutionary biology. She certainly doesn’t like it that evolutionary biologists use game theory, which is quixotic. This chapter ends: “In game theory, norms are Nash equilibria to games in which actors’ preferences and strategies are encoded to result in regularized patterns of play. The only ways to modify the outcomes are to apply incentives or to shock the system such that possibly another stable mutual-best-reply equilibrium could emerge.” The second of these sentences is not correct. Incentives won’t modify the outcomes – that’s the point about a Nash equilibrium. And shock is not the only way to change things. Co-operation to create a new focal point – or changing the rules of the game, the preferences, another, as Kaushik Basu for one has discussed.
Perhaps we economists ought to stop using £ or $ as a unit of measurement in some areas of our work. It seems to me that at least some of the anger about ‘financialization’ and ‘marketization’ in ‘neoliberalism’ stems from the habit of converting all figures in the trade-offs being considered into monetary terms. Opportunity cost could be measured in butterflies, or bitcoin. It isn’t marketization; it’s physics and logic to point out that the same resource, time or land or oil, can’t be used twice. Economists certainly ought to be more willing to talk about social influences and about what forms preferences and about power. But – as ever – I find the N-word, neoliberalism, obscures more than it clarifies. Amadae cites Philip Mirowski’s Machine Dreams, which I thought a highly ideological book. For me, Paul Strathern’s Doctor Strangelove’s Game is a straighter account of the role of game theory – not at all uncritical – and E Roy Weintraub’s Toward a History of Game Theory a detailed historical study of its importance in economics.
I’ve been a bit unwell this week so have been relaxing with not one, not two, but three detective novels – Chief Inspector Chen in the series by Qiu Xiaolong set in Shanghai. They’re hardly action packed but they have a lot about Chinese politics and also the fabric of everyday life, including food. Fascinating.
One of this week’s Don’t Cry, Tai Lake has a plot about environmental activism against industrial pollution. Whatever China’s GDP growth has been – much disputed – it has been fast enough to have exacted a serious environmental cost. Inspector Chen reports back to his Party patron: “I focused my research on issues of the environment. … Pollution is so widespread that it’s a problem all over China. To some extent, it’s affecting the core of China’s development with GDP-centred growth coming at the expense of the environment. It can’t carry on like this, Comrade Secretary Zhao. Our economy should have sustainable development.”
I’ve been working on a paper on the political economy of economic statistics, for a conference in 10 days. Many, many people would agree with Chief Inspector Chen, and not just about China, but it’s hard to move from GDP-centred to something else centred without a consensus about what the something else should be. Perhaps China could assist the political economy of such a transition given its need for a measure that can show increasing economic welfare without costing the earth.
Don’t Cry, Tai Lake: Inspector Chen 7 (Inspector Chen Cao) Enigma of China: Inspector Chen 8 (Inspector Chen Cao) Shanghai Redemption: Inspector Chen 9 (Inspector Chen Cao)
I happened to be reading (as you do) an essay by Thomas Schelling in an out-of-print 1958 NBER volume, A Critique of the United States Income and Product Accounts. It’s a very thought-provoking challenge to the very idea that the double (or in fact quadruple) entry system is appropriate for aggregate economic measurement. He argues that they are an elegant theoretical construct but few of the numbers have any practical interest. He suggests the drive for consistency can be counter-productive: “There is no need to impose consistency on our tables if, in fact, businessmen evaluate a significant magnitude wrongly, or just differently from the economist; both estimates are of economic significance.”
Schelling also writes: “The fact is that the real accounts do not balance, only money accounts do. I think this point is insufficiently appreciated. …[W]hat we call “real” magnitudes are not completely real; only the money magnitudes are real. The “real” ones are hypothetical.” Real values don’t follow the rules of accounting, he emphasises.
This brought to mind the illustrations in Andre Vanoli’s A History of National Accounting (another out-of-print volume – is this a theme?) of the simplified social accounting matrices set out by Richard Stone in his work in the early days of modern national accounting. Increasingly large, they have only a small proportion of cells with anything in them. The actual numbers don’t matter; the point is the logical relations between them. As Schelling says in his essay, they might just as well be asterisks or emoticons (well, he doesn’t say emoticons but they would do fine). It’s ironic that what appears to be the area of economics closest to the coal face of actual data – national accounting – is no less saturated with theoretical (‘hypothetical’) constructs than any other area of economics.
The famous Punch cartoon of the Phillips Machine still has bite
HT Susan Sontag for the title of this post