The Long Tail

Why Technology Hasn't Saved Us From Inflation (but still can)

I have a piece in the Aug 11th issue of Newsweek International, but Newsweek's website does such a poor job with magazine content that it's practically unfindable (it's actually on the seventh screen of this series of perspectives from economists and other experts). So here it is:

Unleash The World's Engineers
Chris Anderson believes that the price-cutting power of technology can still bring nations relief if only bureaucrats will allow it to.

Technology can be a powerful deflationary force. Thanks to Moore's Law (the remarkable ability of computer technology to double in power for the same price, or halve in price for the same power, every 18 months) if you want a 50 percent discount on an electronic gadget, just wait 18 months. Or turn a service into software, and it's just a matter of time before it is free.

But technology has been unable to offset some of the crucial supply issues around energy and food, both of which are at the core of today's inflationary quandary. Nuclear power was supposed to bring electricity too cheap to meter, but our electricity bills have never been higher. The green revolution was supposed to bring an endlessly bountiful harvest, making hunger a thing of the past, but we now have rice shortages and corn nearly tripled in price over the past year. And for all of our virtual connection via cell phones, video-conferencing and e-mail, we've increased our driving and flying to such an extent that we've outstripped global oil-production capacity, driving energy prices to all-time highs.

What happened? Were we wrong to think that technology would deliver us from rising prices? Well, yes, but it's not technology's fault. We mostly have ourselves to blame for standing in its way.

Why are agricultural yields not keeping up with population growth? In large part because the European Union essentially banned genetically modified crops both on its own soil and in imports, thus exporting its technology-blocking regulations to trade partners in Africa and elsewhere.

Another reason food is so expensive is that fertilizer prices are also near all-time highs. That's because the feedstock for much fertilizer is natural gas, and we don't have enough of that, either. Not because we can't get it out of the ground using high-tech tools, but because we can't get it where it's needed. Of the last 53 applications to build liquefied natural gas (LNG) ports and processing facilities in the United States, 50 were denied because of objections from the communities near where they would be located. Meanwhile we haven't built a natural-gas pipeline from Alaska in part because of similar environmental concerns.

The shortage of natural-gas-transportation infrastructure is also in part responsible for our high electricity prices, as is the multidecade virtual moratorium on new nuclear power plants after Three Mile Island. Meanwhile, policies putting high import tariffs on foreign ethanol (to protect American corn farmers) have raised the price of gas, while a refusal to follow California's lead on car efficiency standards has allowed national gas demand to grow faster than supply.

All this said, I believe today's inflation will ultimately speed the adoption of technologies that can fight it. The higher prices get in the atoms economy, where things get more expensive every year, the more incentive there is to move goods and services to the bits economy, where things get cheaper. How high will airfares have to get (think they're high now? Just wait for new carbon taxes to kick in) before you invest in good videoconference gear and skip the flight altogether? How high will gas prices get before you decide to work a few more days a week from your fully wired home office, or skip the mall and shop online from home? The best way to lower energy prices is to cut demand.

In a world where seemingly everything is getting more expensive, the price of digital technology continues to fall and the differences between those two economies are growing. If getting rich was the incentive to go digital a decade ago, saving money may be an even stronger motivation this time.

The surprising derivation of the word "free"

In English the word "free" is fraught with ambiguous meaning, which is why the open source world has to make the distinction between free as in speech vs. free as in beer. In Romance languages, such as Spanish, French or Italian, the twin meanings munged into the English word "free" are split between two words, one derived from the Latin "liber" (freedom) and the other from the Latin "gratis" (contraction of gratiis "for thanks," hence, "without recompense”, or zero price).

In these languages, "libre" is usually an alloyed good, while "gratis" is often considered a marketing gimmick.In English, marketers take advantage of the ambiguity to use the positive connotations of freedom to help past suspicions over the truth of the pricing meaning.

But that still leaves the question: what's the derivation of the English word "free"?It's actually fascinating: "free" comes from the same Old English root as "friend".

The path is this:

[They both come] from the Old English freon, freogan "to free, love." The primary sense seems to have been "beloved, friend, to love;" which in some languages (notably Gmc. and Celtic) developed also a sense of "free," perhaps from the terms "beloved" or "friend" being applied to the free members of one's clan (as opposed to slaves).

The sense of "given without cost" is from 1585, from notion of "free of cost."

[A fun example of freedom and free combined is in the poster shown above, which Larry Lessig found at an open source conference. The Free Beer this refers to is a recipe that is free to all. But if you want the version someone has already made, you've got to pay for it. This is another example of the time/money business model of free.]

Thirteen words that lose their meaning when the denominator approaches infinity

When you think about it, a lot of the English language is really about ratios within a finite set. So you can say "most Americans" and that's meaningful, because the number of Americans is approximately known and relatively static. Likewise for "few" or "many"--these words are implicitly ratios, and they assume some common agreement on what the denominator is.

The world we grew up in was full of bounded sets--relatively well known and static populations that we could compare. But now we're entering a world of unbounded sets, and it's messing up our language habits. What is the number of "writers" in the world in an age of blogs, the number of "photographers" in an age of Flickr and cameraphone or "videographers" in the age of YouTube?  Today there are perhaps a trillion pages on the Web; tomorrow it will be a quintillion. How many "publications" are there in the age of Twitter?

From a semantic perspective, all these unbound populations are examples of denominators in fractions that no longer make any sense. And that means that the words we use that are based on such ratios are themselves becoming meaningless. So while "most Americans" has meaning, "most bloggers" does not (what's a blogger? How many are there? How do they define themselves? Who's counting?).

This was at the core of the confusion over the definition of the Long Tail (absolute numbers are still meaningful in marketplaces where the number of products grows by orders of magnitude overnight, but percentages are not) and it continues to come up in conversation every day. People want to generalize--"most Wikipedia pages are wrong"; "most YouTube videos are crap"--but the first rule of open systems is that you can't generalize about open systems.

So here are five words that I would suggest are usually meaningless in a world where the populations we're talking about are limitless in size and diversity and doubling overnight (just add the word "blogs" after any of them and you'll see what I mean):

1. "Most"
2. "Average"
3. "Typical"
4. "All"
5. "None/No"

And here are eight more words that are not quite meaningless but tend to obscure more than they reveal:

1. "Majority" (Is this really measurable?)
2. "Minority" (ditto)
3. "Many" (What does that mean?)
4. "Few" (ditto)
5. "Leading" (In what domain? When? To whom?)
6. "Top" (ditto)
7. Almost any declarative about a class, such as "is" or "are" (as in "open source software is..." or "Wikipedia editors are...")
8. Implicit ratios such as "Virtually all..." or "Practically no..."

My advice: try to avoid these words when talking about open systems. Generalizations are always dangerous, but never more so than today. And yes, I know that is itself a generalization. See, it can happen to anyone!

I wish people would stop using "economy" as just a smart-sounding metaphor

Economists use incentives to explain human behavior. In traditional economics these are mainly monetary incentives, but the expansion of the field to behavioral economics in the 1970s introduced other factors, such as risk minimization and social rewards, that weren't directly tied to money but could influence actions all the same. The current vogue for all things economic has encouraged the Freakonomics crowd to use the same language to explain the emerging online world: today we use the sweeping terms "attention economy", the "reputation economy" and "gift economy" to explain the extraordinary rise of non-monetary phenomena such as open source or Wikipedia.

There is only one problem with that use of "economy"--I'm not sure what it means, and I don't think most of the people who use it do either, since they rarely bother trying to take it any further than a metaphor. But if attention and reputation really are economies, shouldn't we able to quantify them, using economic equations?

What is the money supply of reputation? What is the currency conversation rate from of one form of attention into another? How would you measure wuffie inflation?  

Don't look to academics for the answers. Late last year Yale held a two-day conference on "Reputation Economies in Cyberspace".  I suppose the cringe-making term "cyberspace" should have warned me off, but I've just spent an hour reading all the papers submitted by the 30 academics who spoke, but there isn't a proper economic analysis amongst them. (Another tip-off: most of the participants were lawyers).

There have been some clever attempts to use the language of economics to describe attention markets, such as this nifty pirouette from 1999:

If the attention I pay to others is valued in proportion to the amount of attention earned by me, then an accounting system is set in motion which quotes something like the social share prices of individual attention. 

It is in this secondary market that social ambition thrives. It is this stock exchange of attentive capital that gives precise meaning to the expression "vanity fair" .

But when it came time to quantify it back then, the author had only "a person's presence in the media" to measure. A 2001 book called The Attention Economy didn't get much further. 

I think we can do much better today. Now we have a NASDAQ of reputation--it's Google. What is the currency of reputation online other than PageRank, which measures the incoming links that define the network of opinion that is the Web? And what better measure of attention is there than Web traffic? 

In economic terms, we convert from the Reputation Economy to the Attention Economy to cash by using this formula: The economic value of your site is the traffic your PageRank brings from Google's search results for any given term, times the keyword value for that term. (Higher PageRank means more traffic, since you'll appear earlier in the search results). And you can convert that traffic into plain old cash by simply running AdSense ads. 

For example, my UAV site, DIY Drones, has PageRank 6 (out of 10). That means it appears on the first page of results for the search term "UAV" (albeit low on that page). Right now that gets me about 60,000 pages views a month from Google (which is about a third of my total traffic).  The search term "UAV" is currently worth about $0.20 per click. 

So let's express this in economic terms [note: the following are totally back-of-the-envelope calculations. I'm hoping that they're within the right order of magnitude, but I'm not promising anything better than that]. 

• My reputational wealth is 6 out 10. [Note: this is just for DIY Drones. The Long Tail site has higher PageRank (7) and Wired has higher yet (9), but for the sake of this analysis I'm pretending that there is no reputational transfer between these different parts of my life.] Assuming that reputation wealth is distributed like monetary wealth, which it to say a Pareto distribution, my equivalent net wealth in dollars would be around $200,000. That's comfortably middle class. 
• My income is my share of the attention economy. There are, estimates Kevin Kelly, 100 billion clicks per day on the Web. The US represents about 20% of global web traffic, so we'll call that 20 billion clicks a day or 7.3 trillion clicks per year. I get 2 million of them, or 2.74x10^-7 of US web traffic 
• To make an analogous leap to the monetary economy, the US GPD is around $14 trillion. If I had the same share of that as I do of the Web, my annual income would be around $3.8 million. Which means that I'm richer in attention than I am in reputation for some reason (or, more plausibly, that PageRank is somehow undercounting my reputation). 
• But I'm not making $3.8 million. The conversion rate between these non-monetary currencies and real money reflects the size differences between the online economy and the offline economy. In reality, my 2m annual page views will only make me about $3,800 in Google AdSense revenues per year, so the conversion rate from real dollars to attention dollars in my world is 1,000 "Web credits" to the dollar.

Okay, this is admittedly a very poor attempt to quantify the Attention Economy and the Reputation Economy in real economic terms. But that's only because I don't have enough data and skill to do it properly. Inside Google, two offices down from CEO Eric Schmidt, sits former Berkeley economist Hal Varian, who has both the data and skill to do this right. And trust me, he has. 

It is possible to move beyond the woolly metaphors and treat Attention and Reputation like real economies. So when are we going to stop using the word "economy" as rhetorical smoke when we describe non-monetary markets and start measuring them like the economy they really are? If there's is a secret formula to Google's success, it's in doing exactly that.