I’ve had this post in mind for quite a while, and never got in finished to my satisfaction, but it’s been stimulated to a significant extent by reading Clay Shirky, so I thought I’d pop it up now, somewhat half-baked, since Clay is currently visiting Crooked Timber, where I’ve crossposted this.
The biggest single question in political economy is whether and to what extent we can achieve social equality without sacrificing other goods like liberty and prosperity. Neoclassical economics (a project in which I’m a participant) begins with models which imply that, with competitive markets, all factors of production will earn their marginal product. This in turn implies that any intervention that shifts wages or returns to capital away from their marginal product must imply a loss in aggregate income (there are some complex technical issues here which I’ll skip over)
There are all sorts of problems with simple-minded applications of this result. Still, in an economy that fits the standard model of lots of competing firms, all operating in a region where constant returns to scale apply, the standard neoclassical analysis has considerable force. But the growing part of the economy centred on the Internet doesn’t fit this model at all. The Internet is a network and the economies of networks are different, in critical ways, from those of the standard neoclassical model.
There are two largely separate bodies of economic literature on network economies; although the approaches are quite different, the implications of the two are similar in important respects.
One literature is based on the idea of network externalities. In this literature, a network is simply a large collection of nodes, each connected to all the others, like the telephone network. The crucial point is that the benefit of each additional connection is not realised only by the person connected, but by all those already in the network. Hence, in economic terms, networks are characterised by externalities; that is, the productivity of one firm or household is affected by the actions of others. What this means is that market returns won’t produce an optimal network in general.
The other literature, still largely confined to theory, focuses on the stability and topological structure of small-scale networks. (I’m aware of course that economists are coming late to a field in which sociologists and others have been active for a long time). Here’s a typical example, by a couple of the leading figures in the field, Matthew Jackson and Anne van den Nouweland.
The central question is whether there exists a set of payoffs to the participants under which the network can be sustained. The answer is sometimes positive and sometimes not, but to my mind, the really striking feature of this literature is the absence of any concept remotely comparable to marginal product. There’s no general reason to suppose that a network that is stable (in the absence of intervention) is socially optimal in any sense, and hence that there is any particular reason to respect the payoffs generated by the network.
In the context of the Internet, for example, it seems pretty clear that the relationship between the social value of a contribution to the Internet and the capacity to realise a return is tenuous at best. In obvious cases, such as that of spammers, it’s negative. But even for something like Google, which is clearly beneficial in total, there is no clear relationship between contribution and return.
Taking myself as an example, I don’t think I’ve ever clicked on a Google ad, so my contribution to their returns is (or ought to be zero). On the other hand, as a general Internet user, I’ve used Google a lot and, as a blogger, I’ve got lots of readers from Google. But, on the third hand, as a site owner, I spend an inordinate amount of time dealing with comment spam aimed at promoting the Google rank of various scumbags.
So while I’m grateful to Google in many ways, I wouldn’t feel the least bit concerned about a political-economic tax and expenditure regime that limited Sergey Brin and Larry Page to millions instead of billions, and helped others in the network economy (for example, by providing low-cost access to more people).
The more that we see the network economy as the paradigmatic form of organization, the less reason there is to regard the distribution of income thrown up by the market as having any claim to be normative. The topology of a network economy is inevitably a matter of social choice, and the same applies to the associated distribution of income.