Self-important Adoption Officials

[Tim Lee]

I was struck by this passage from the color-blind adoption story I linked to in my previous post:

Professor Elizabeth Bartholet, who directs the Child Advocacy Program at Harvard Law School, believes that the concept of striving for color blindness is sound. She foresees problems if race once again becomes a key determinant...

"What cannot be done is have a pass/fail test that turns on whether you give the politically correct answers," she said. "If social workers are allowed to use training to determine who can adopt, there's lots of experience showing they abuse that power."

This reminds me of this excellent passage from David Friedman's Law's Order:

Some time back, my children decided that they wanted kittens, so we took a trip to the local Humane Society. It was an interesting experience. We ended up spending several hours waiting in line to receive one of a small number of permissions to "adopt" a pet, filling out forms, and then being interviewed by a Humane Society employee to make sure we were suitable adopters.

What was puzzling about the experience is that kittens are a good in excess supply. The Humane Society has more of them (and of cats, puppies, and dogs) than it can find homes for and, although it does not like to say so, routinely kills surplus animals. Rationing goods in excess supply is not usually a problem. Yet the Humane Society was deliberately making it costly, in time and effort, to adopt a kitten, and trying to select which lucky people got to do so, despite their knowledge that the alternative to being adopted was not another adoption but death. Why?

Part of the answer was that they gave out only seven adoption permits at each two hour interval because that was as many as they could process, given a limited staff and the requirement that each adopter be suitably checked and instructed. But that raises a second question. Since they did not have enough staff to process everyone who came, why insist on extensive interviews? Better owners are no doubt superior, from the standpoint of a cat, to worse owners, but almost any owner is better than being killed, which was the alternative.

So far as I could tell, the only real function of the process was to make the employees feel important and powerful, handing out instructions and boons to humble petitioners. That suspicion was reinforced when the woman interviewing us insisted very strongly that cats should never be permitted outdoors, stopping just short of implying that if we would not promise to keep our new pets indoors she would not let us have them. On further questioning, it turned out that she did not apply that policy to her own cat.

We left the Center petless, obtained two kittens from a friend (and very fine cats they have become), and I wrote an unhappy letter to the local newspaper with a copy to the Humane Society. The result was a long phone conversation with one of the women running the shelter. She explained that there were two models for such shelters: one in which animals were given out on a more or less no questions asked basis and one involving the sort of "adoption procedures" I had observed. When pressed on the fact that the real effect of her shelter's policy was to discourage adoptions and thus kill animals that might otherwise have lived, she responded that if they followed the alternative policy nobody would be willing to work for the shelter, since employees would feel they were treating the animals irresponsibly. That struck me as a kinder version of the explanation I had already come up with.

I wonder if something similar isn't happening in adoption agencies—that adoption officials spend a lot of time screening parents not because such screening is better for kids generally, but because doing more screening makes the adoption officials feel important. If this is happening, it's obviously a much more serious problem when the victims are children than kittens.

The chapter from which I got that passage is worth reading in full, especially the passage preceding it in which he makes a compelling case for legalizing adoption markets, which would obviate many of the problems with the current adoption system.

Incidentally, memo to David Pogue: Law's Order is freely available online, yet I purchased a dozen copies for a book club I was running a couple of years ago. Giving away an electronic version of something doesn't mean no one will buy a paper copy. In some cases, it might even bring more publicity to your book if (for example) it causes bloggers to quote favorably from it and encourage their readers to buy it.

Burger Stands and Free Content

[Tim Lee]

OK, this will be my last post on the subject of free content, but I wanted to highlight this excellent comment by Lance Linden from the previous post:

Let's say that down the road is a burger stand run by a retiree. Because the retiree has other sources of income, she need not sell her hamburgers at a price that would max-out her revenue. She sells her burgers because she loves to cook and likes having something to do with her time. Your argument as I read it ("everyone is made worse off by there being less of this superior output. The fact that you can get enough 'to pay the bills' is irrelevant") is that this retiree is harming the burger-eating community by reducing the incentive of restaurants to make better, cheaper burgers. This does not make sense to me.

Price points are shaped by the seller's financial needs, goals, and expectations, and sometimes those goals are capped at merely "pay the bills." These price points, regardless of how they were reached, influence the marketplace. Sellers who choose higher price points need to compete in other areas, thus enforcing *stronger*, not weaker, incentives to create higher-quality content. This is as true with creative and information-based works as with hamburgers or anything else tangible. The only difference is the information can be created and increasingly be distributed more cheaply than stuff that can be eaten or dropped on a foot.

This is the great thing about markets: they tend to self-equilibrate. If the amount of content supplied at a price of 0 is inadequate, consumers will be hungry for more content and will be ready to open their wallets, leading to a non-zero price. If, in contrast, there's a lot of content around for free, then it will be a struggle to get people to pay for your content unless it's significantly better than the free stuff. Which of these conditions will obtain is an empirical question that will only be answered in the marketplace. But there are good reasons to think that, for most types of content, the equilibrium price will be zero.

This has nothing whatsoever to do with whether any given writer, musician, or programmer is able to make a living, or whether his salary is a "living wage" with good benefits. If some people are willing to create high-quality content at very low costthat will place downward pressure on profits and wages in that part of the market. That's unfortunate for the people competing with them, but there's nothing unfair about it, and it doesn't really matter how people manage to provide so much free content—whether it's done as a hobby, supported by third-party charity, or thanks to a clever "free-based" business model. All that matter is that the content is being produced.

The concern seems to be that profits might go so low that nobody is able to produce high quality content at all. But this confuses cause and effect. To the extent that producing high-quality content is unprofitable, it's precisely because there's so much high-quality content being produced that it's pushing profits down. Obviously, it doesn't make sense to predict that in the future content will become so plentiful that no one is able to produce it any more.

You'll notice that you commonly hear protectionists make the same kind of argument about "unfair" competition from overseas workers: competition in industry X is causing job losses in industry X, so what if competition in general causes all of our jobs to go away? Back before he was shrill, Paul Krugman tackled this argument in one of my all time favorite essays. At bottom, the argument suffers from a fallacy of composition: The fact that more competition in one sector reduces jobs in that sector doesn't mean that more competition everywhere means everyone loses their jobs. Likewise, the fact that competition from the web is costing jobs in the newspaper business doesn't mean that the long-term result will be no jobs in the news business at all. Quite the contrary, the reason things are so grim in the newspaper business is that there's more and better content available from other sources. The newspapers' decline is an unfortunate side-effect of a generally positive trend, not a harbinger of future problems.

And just to be sure there's no misunderstanding: none of this has anything to do with copyright.

This Blog Post Is Available At No Charge!

[Tim Lee]

Alan Jacobs, blogging at the American Scene, (where I'm also a sometime contributor) wasn't impressed by Mike Masnick's post on "free"-based business models. I find Alan's post a little bit ironic because I'm pretty sure that (unless Reihan is playing favorites among American Scene bloggers) he didn't get paid to write his post. His post was titled "MY WRITING DOESN'T WANT TO BE FREE," but I was still able to read it without paying for the privilege. Something doesn't compute there. Anyway, Alan says:

When Poole points out — in response to the surprisingly common argument that bands, say, can give away their records for free and make money with live shows and t-shirt sales — that computer programmers don't program for free and sell mousepads on the side, Masnick replies, serenely, that that comparison doesn't apply because programmers get salaries. Well, precisely. But rock musicians don't. Freelance writers don't. This is Poole's point, and David Pogue's too. They write for a living, so if they make their writing available for free, how do they pay the bills?

I think the problem here is one part miscommunication, and one part failure of imagination. In point of fact, some programmers do give away their code (in the form of contributing to free software projects) and sell goodies (in the form of setup and support services for that software) on the side. Of course, most of the time, these business models are pursued not by individuals, but by firms. As I pointed out on Monday, this is the business model of several software firms, including Red Hat and MySQL. But the essential point is the same: giving away your "main" product as a way of selling complementary products is a perfectly viable way to make money.

Of course, the individual programmers in such companies get salaries, but that objection confuses free content with free labor. Content, once produced, can be produced infinitely at near-zero cost; Red Hat and MySQL can give copies of their operating system and database, respectively, to anyone who wants them at near-zero cost. In contrast, labor is and always will be scarce. Obviously, it would be insane to suggest that writers, musicians, programmers, and other creative professionals should provide their labor for free. As a freelance writer and sometime programmer, I would object to that as loudly as anyone. But on the other hand, virtually all the content I produce is given away for free, supported in some cases by advertising or other publicity-based business models and in other cases by charitable contributions. I and the organizations I work for "make my writing available for free," yet so far I've been able to "pay the bills." Amazing how that works.

Now, Alan wants to know how David Pogue could make a profit off of his book. My guess is that Pogue dramatically overestimates the negative effect releasing an electronic version of his book would have on sales of the paper book, and that he ignores the possibility that an electronic version might even spark additional interest among some readers in the paper copy. I have purchased several paper books that had free online editions simply because the paper book is more convenient for curling up with on the couch.

But in a sense this is beside the point. As competition in the market for information goods continues to increase, more and more creative professionals are going to find that their competitors are releasing works for free, supported by sales of ads, concert tickets, consulting service, or other complementary goods. The transition to "free"-based business models is virtually complete for news and opinion and it's becoming increasingly common with music and software. (And of course television and radio have operated on this model for decades) I'm not going to predict when it's likely to happen with books, or what the book-based business models of the future will be, but the point is that if it does happen, no one is going to keep buying David Pogue's books simply so he can continue feeding his family.

If you can figure out a free-based business model for your creative works, it's a huge competitive advantage, because it's much easier to reach a larger audience if you don't ask people to pay. That's why we've seen a steady drumbeat of failed paywall-based business models in the newspaper business. Evidently Pogue hasn't figured out a business model that will allow him to make money while giving away his manuals, and that's fine. Maybe none exist. But Pogue's lack of creativity isn't evidence that no one else will figure something out. And it certainly doesn't prove that "free"-based business models in general are doomed to failure.

Photo courtesy Paul Keleher

Who Will Do The Reporting?

[Tim Lee]

Some of the commenters are not convinced by my assertion that web-based news sources will pick up the slack from mainstream newspapers. Peter Bautista, for example, writes:

Take all these blogs, for instance (including those here at The Atlantic). Almost none of them do their own reporting - they're commentary on original reporting done by others. Without those reporters, what are the blogs going to talk about? The Atlantic blogs have the institutional support of the Atlantic magazine, which can pay reporters, but a magazine's reporters can't don't cover the immediate breaking news that a newspaper reporter does. If there are no newspapers, who's doing the original daily reporting?

The first point is that as I understand it, at least one of the Atlantic's bloggers Marc Ambinder actually does do original reporting. But setting that aside, here's the macro-level trend in the news business: The 20th century's major information distribution technologies—newspapers, magazines, and television and radio broadcasts—were characterized by economies of scale. One large newspaper could operate more cheaply than 10 smaller newspapers that together had the same circulation. As a result, the industry got highly concentrated, with large, monolithic institutions like the New York Times and the Washington Post hiring large staffs of reporters that covered every conceivable subject.

The 21st century's dominant information distribution technology, the Internet, isn't characterized by the kind of economies of scale. As a consequence, the optimum size for a news organization is likely much smaller than it was in the 21st century. What we're seeing is the disaggregation of the news business. Instead of dozens of media organizations with staffs in the hundreds or thousands, we're likely to see thousands of news organizations with a few dozen—or even fewer&mdash employees.

Continue reading "Who Will Do The Reporting?" »

David Pogue and the Economics of Free

[Tim Lee]

When I'm not guest-blogging for Megan, I'm a regular contributor to Techdirt, a blog that focuses on the technology industry. The site's owner, Mike Masnick, has gotten a lot of attention for a post he did on Friday about making money by giving stuff away. It's a response to New York Times columnist David Pogue, who attacked the "Slashdot argument" that "books, music, films, software and so on ought to be freely distributed to anyone who wants them, simply because they can be freely distributed." Pogue helpfully explains that simply giving away copyrighted material free of charge doesn't magically make one rich.

Now, as Mike points out, this is a bit of a straw man. Nobody is arguing that simply giving one's creative works away for free will magically allow one to make a living. Rather, the argument is that giving away information goods (which have zero marginal cost) can expand the market for other goods that can then be sold at a profit. The most obvious example is advertising—lots of sites give away content or applications in order to sell ads. But this isn't the only example by a long shot. Musicians can give away their music to sell more concert tickets. Free software companies like Red Hat, IBM, and MySQL give away software in order to increase demand for their support contracts. In addition to advertisers, successful bloggers give away their blog posts in order to build up their traffic and get speaking fees and book advances.

Most of these business models have become newly viable as the Internet has pushed the cost of transmitting information close to zero. Fifty years ago, you needed expensive equipment to produce information goods like newspapers, television broadcasts, or music albums. And it was therefore necessary to charge for the finished product in order to recoup those costs. Not surprisingly, the businesses that have grown up around those 20th century distribution technologies are not too enthusiastic about business models that involve giving away for free product that used to fetch them a nice fat profit margin.

This kind of discussion invariably turns to "piracy," and especially peer-to-peer file sharing. It is commonly suggested that the real problem is that kids these days don't have enough respect for copyright law, and that all that's needed is to better educate them about the importance of respecting copyright. Now, I have some sympathy for this point of view. I don't participate in illicit file sharing and I don't have much sympathy for folks who do so and get caught. Nevertheless, I think this line of argument misses the point rather badly. Because although the short-term problem facing many content industries may be illegal sharing of their copyrighted materials, the long-term threat is that their prices will be undercut by competitors who share their own intellectual creations free of charge. This has already happened in the news and punditry world, as thousands of bloggers and news sites provide for free the news that newspapers charged for a couple of decades ago. And it's beginning to happen in the music industry. The fundamental challenge facing the incumbent content industries is not "piracy" but dramatically increased competition.

What makes this difficult is that it requires some creativity to figure out which business models will be successful. As Mike points out, "give it away and pray" isn't a viable business model. Figuring out what to give away and how to monetize the resulting attention is a difficult problem that everyone, from Facebook to the Atlantic is struggling to solve. But plenty of businesses have succeeded, with Google as the most important poster child. But businesses that specialize in information—news, music, movies, software—have no choice but to take it seriously, because if they don't their competitors surely will.

Photo courtesy of Jeremy Engleman

Killing capitalism softly

John Holbo has a question:

I’ll state my question first: to what extent did people believe, in the 30’s and early 40’s, that capitalism was doomed?

I’ve been reading James Burnham, The Managerial Revolution (1941). And I would like to propose (but I am happy to be corrected) that he was the anti-Fukayama of his day. Just as everyone violently attacked Fukayama’s bestseller as speculative and rather wishful prophecy, while basically agreeing that, yes, it looks like liberal democracy and globalization will be dominant for the foreseeable future; so it seems lots of people attacked Burnham’s bestseller as speculative and even wishful prophecy, while basically agreeing with his major premise that capitalism and liberal democracy were on their last legs. (In case you don’t know, Burnham is one of those who started as a Trotskyite and ended by writing for National Review.)

To a first approximation, everyone in the 1930s and 1940s seems to have believed that capitalism, and quite possibly democracy, were headed for the ashbin of history; the hope (or fear) appears in the writings of everyone from Orwell to Hayek. The question I have is, given this near-perfect consensus, how did we manage to snatch victory from the jaws of defeat? Or did we? We are, it seems, gearing up to nationalize an industry that accounts for 16% of national output--and even libertarian bloggers have been known to speak out in favor of that most socialist of institutions, the Federal Reserve.

This just in

As mortgages become a more popular means of financing homes, home equity falls. Also, once mortgages are common, high inflation increases the amount of equity you have in your house, relative to the residual value of your mortgage. And don't forget to tune in at 11 for our special investigative report: government subsidies cause increases in whatever it is they are subsidizing.

We had to destroy the village in order to save it . . .

I genuinely don't get this comment. I mean, I understand that there are people who think it is immoral that the educated should earn substantially more than people who clean houses. But it seems to me that the obvious solution to this dilemma, until you have effected the radical political change you believe will rectify this situation globally, is to give away all of your salary in excess of the wage of the average housecleaner. Ideally, you would donate it either to people who clean houses, or to some organization you believe will improve their earning prospects.

If you are not going to take the obvious route (and apparently no one is), then I really do not see how you could believe that the best way to help housecleaners is to refuse to hire them. In my universe, decreasing the demand for a good or service drives the price of that good or service down, making whoever supplies it worse off. How often do you meet private contractors who are grateful not to be offered work? If you think housecleaners get paid too little, then you should be hiring as many as you can afford, in order to increase the local demand for unskilled labor, not shunning them. And if you think I'm wrong, why not ask your friendly local independant cleaning lady what she thinks?

Department of Economic Illiteracy

I know, I link Ryan Avent all the time. Well, you'll just have to put up with it, because this is too good to pass up. He finds the Baltimore Sun saying:

The $3.9 billion figure is especially imposing because it is expressed in 2007 dollars. By the end of the planning period in 2035, inflation could add billions to the final total.

And do you realize that while the sandwich I had for lunch cost me $6.50, I could have bought it for 30¢ in 1913! How can I afford it? I'll starve to death?

Process of deduction

A couple of commenters and emailers have asked me to defend my assertion over at TPMCafe that:

At the time, Gore was offering tax deductions or credits for practically anything one might do, from getting born to entering a nursing home. These sorts of tiny lump-sum deductions are generally frowned on by economists; they distort activity, are costly to administer, and unlike marginal rate cuts, provide no positive incentives to increase work.

This is not actually particularly controversial, and the economics is (I think) kind of interesting and important, but at the same time, the explanation is not quite right for the TPMCafe format, so I'll try it here. For anyone who cares, it's below the fold, as it's rather lengthy and a little bit technical. Apologies for those who know all this and find it old hat; this is only for wannabe tax wonks.

Continue reading "Process of deduction" »