Shiller’s Narratives: EconTalk 2020

Russ Roberts chatted with Bob Shiller about his book Narrative Economics on the EconTalk podcast in February 2020. (What looks like a complete transcript is available on the podcast page under “Audio Highlights.”)

Shiller’s Narratives: AEA 2017

Robert Shiller’s 2017 AEA presidential address helped me understand what he means by narratives ("Narrative Economics," NBER Working Paper 23075). He explicitly includes explanations, and implicitly includes beliefs and descriptions; I think is far too broad. It looks like he’d count any concept as a narrative.

A little political history story

From the Talking Politics podcast episode Are We Losing Faith in Democracy? (Jan 29, 2020), here’s a nice little example of how stories are told in political economics.

Narrative in economics: Shiller’s stories

I was excited by the title of Robert Shiller’s new book Narrative Economics: How Stories Go Viral and Drive Major Economic Events (2019), but disappointed to find that he defines “narrative” much more widely than the stories I'm looking for, and was hoping to find. Overall, though, I think his meaning is close to my interest in myths: stories spread by word-of-mouth that shape how society imagines itself.

Economic rivalry, interference and spectrum allocation

I’m intrigued by the questions:

• What is the relationship (if any) between rivalry and licensing regime in spectrum regulations to date? 
• And what should it be in the future? 

 I think such work could shed light on efforts to allocate and assign millimeter-wave spectrum (roughly, above 30 GHz).

Who gets the apple?

I’ve been looking for a metaphor to illustrate the weaknesses I see in the FCC’s “you two just go off and coordinate” approach to solving wireless interference problems among operators.

Let's think of the responsibility to bear the cost of harmful interference as an apple.*  It’s as if the FCC says to Alice and Bob, “I've got an apple, and it belongs to one of you. I’m not going to decide which of you should have the apple; you decide among yourselves.”

Now, if Alice were the owner of the apple and valued it at 80 cents, then the answer would simply depend on how much Bob valued having the apple (and rational negotiation, of course). If having an apple was worth 90 cents to him, he’d get it for some price between 80 and 90 cents; if it was worth only 60 cents to him, Alice would keep it. Problem solved.

Trouble is, the FCC doesn’t tell them who actually owns the apple, and even if it did, it doesn’t tell them whether it’s a Granny Smith or a Gala. The odds of Alice and Bob coming to an agreement without going back to the FCC is slim.

The analogy: The FCC’s rules often don’t make clear who’s responsible, in the end, for solving a mutual interference problem (i.e. who owns the apple); and it’s impossible to know short of a rule making by the FCC what amounts to harm (i.e. what kind of apple it is).

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* There's always interference between two nearby radio operators (near in geography or frequency).  While the blame is usually laid on the transmitter operator, it can just as reasonably be placed on the receiver operator for not buying better equipment that could reject the interference.

The internet is not an ecosystem, but…

The “internet ecosystem” metaphor is ubiquitous; I’ve used it myself, though with some trepidation. I think I can now reconcile why it’s both wrong and useful.

It’s wrong, strictly speaking, since many aspects of the ecosystem-internet mapping are questionable. As I blogged in 2007 about the “business ecosystem” terminology, the validity of the metaphor is undermined by quite a large number of mapping mismatches:

Number: a food web consists of billions of interactions among animals and plants; a business web comprises a relatively small number of companies

Metrics: Biomass a typical rough measure of an ecosystem; does that map to total revenue, profitability, return on investment, or something else?

Topology: An ecosystem is a lossy, one-way energy flow; as each organism is eaten by the next, energy is lost. Business relationships are reciprocal, and generate value.

Time scales: Species change slowly, but companies can change their role in a system overnight through merger, acquisition or divestiture.

Choice: Interactions between firms can be changed by contract, whereas that between species is not negotiable except perhaps over very long time scales by evolution of defensive strategies.

Foresight: Humans are pre-eminent among animals in their ability to anticipate the behavior of other actors, explore counter-factuals, think through What If scenarios, etc. The response of a system containing humans to some change is therefore much more complex than that of a human-free ecosystem. “Dumb” agents in an adaptive system respond to the change; humans respond to how they think other humans will respond to their response to those people’s responses etc.

Goals: Biological systems don’t have goals, but human ones do. There are no regulatory systems external to ecosystems in a state of nature (if such things still exist on this planet), but there are many, such as rule of law and anti-trust, in human markets. Natural processes don’t care about equity or justice, but societies do, and impose them on business systems. If ecosystems were a good model for business networks, there would be no need for anti-trust regulation.

The connotations of the metaphor are also misleading. Ecosystems are often used to connote stability and vibrant self-regulation; in fact, they often suffer catastrophic collapses. Companies are exhorted to invest in their ecosystem with the goal of becoming a keystone species. It’s not clear why they should do so, from the ecosystem perspective: keystone species don’t typically represent a lot of biomass. Their “bottleneck position”, however, is attractive from the perspective of a company that wants to extract rents through market power.

However, the ecosystem concept has gained traction because there is a deeper truth: both the internet and ecosystems are both examples of complex adaptive systems. (A complex adaptive system may be defined as a collection of interacting, adaptive agents; other examples include the immune system, the human body, stock markets, and economies. Note that adaptive systems are often nested.)

Thus, the internet is to an ecosystem as a whale is to an elephant. It could be useful to think in terms of elephants if one has to manage oceans but doesn’t know much about whales, since both are large, social mammals. However, one can just as well explain whales in terms of elephants – and the differences, e.g. living on land vs. in water – can be decisive in some cases.

With this realization, the utility and limitations of using an ecosystem metaphor when thinking about the internet, as I did in my Internet Governance as Forestry paper, have become much clearer to me. Lessons from managed ecosystems can illuminate the dynamics and pitfalls of managing the internet, and principles (such as the Resilience Principles I outlined in my recent talk at Silicon Flatirons; my presentation starts around time code 01:36:00 of the video) derived from one can be applied to the other.

Objects of governance: From things to behaviors

In spite of our penchant for abstraction, we think best in concrete terms. That means we prefer to think about things rather than processes, including when it comes to communications regulation. The growing intangibility of our world is making this harder to do, however.

The legal scholar William Boyd introduced me the concept of an “object of governance”, i.e. the explicit focus or nominal topic of regulatory activity. [1] Boyd is concerned with deforestation as an object of climate governance [2]; a quick web search throws up examples like organized crime, “The East”, the Sahel, and risk. Objects of communications regulation include personally identifiable information (PII), spectrum, phone service, and the internet.

While most of these objects are intangible, they are at least to some extent thing-like; they’re nouns. It becomes more tricky when regulation addresses behavior – that is, verbs. I’ll work through a few examples in communications regulation where the object of governance started off as a thing/noun, and is becoming a behavior/verb:

Privacy: From PII to Use

The current approach to protecting privacy on the web is rooted in the notion of data security: information exists somewhere, and needs to be protected. However, an alternative conception based on appropriate use rather than access restrictions is emerging. [3] [4] The idea is that the tradition Notice & Choice regime is complemented by use-and-obligations model where organizations disclose the purposes to which they intend to put information, and undertake to limit themselves to those uses.

Wireless regulation: From spectrum to radio operation

Radio regulation has been framed in terms of government management of a “spectrum asset” for many decades. Even though in practice the regulations concerned themselves with the operating parameters of transmitters, the idea that some underlying asset existed has been a useful fiction, particularly as the detailed technology and service choices have been increasingly privatized through auctions of general-use licenses.

However, a new generation of radio technologies has been used to call this approach into question. “Open Spectrum” advocates have argued that dynamic wireless technologies obviate many underlying assumptions of current regulation, and prefer “commons” access over exclusive licenses. [5] Some in the RF engineering community recommend that regulation take into account dynamic adaptation at all layers in the network stack, not just at the radio layer. [6] I have argued that a static, spectrum-as-asset approach is not a given; a more dynamic radio-as-trademark interference metaphor is perfectly workable. [7]

Universal Service: From telephony to internet access

The Universal Service Fund in the US, and its equivalents in other countries, was conceived of as guaranteeing phone service to those who would not otherwise be able to afford it, particularly in rural communities. There is no a great deal of debate about extending the universal service concept to the internet. However, since internet access can come in an unlimited variety of flavors, it is unclear what the goal of the program should be. Phone service is the same everywhere; but what broadband speed is “good enough”? The regulatory debate is moving away from how to fund phone service to how to define baseline access.

Common carriage: From a neutral network to network management

The most recent of these debates concerns the 21st century equivalent of common carriage for the internet. The rallying cry of Network Neutrality had satisfyingly thing-like connotations: there was a network, and it had to have the attribute of neutrality (noun/adjective). Over time is has largely been agreed that network operators should have some discretion in managing the behavior of their network. The question has now become a behavioral one: what is degree of network management (verb) is appropriate?

Implications

A shift in the objects of governance from things to behaviors suggests a shift in regulation from ex ante to ex post action, that is, from making detailed rules up-front to stating general principles and enforcing breach after the fact. In Law’s Order [8], economist David M. Friedman compares speed limits (ex ante) with reckless driving (ex post), and observes that ex post punishments are most useful when the behavior is determined by private knowledge that the regulator cannot observe.

"Ex ante punishments can be imposed only on behavior that a traffic cop can observe; so far, at least, that does not include what is going on inside my head. Ex post punishments can be imposed for outcomes that can be observed due to behavior that cannot—when what is going on inside my head results in my running a red light and colliding with another automobile."

When an object of governance is thing-like, and changes in the attributes of those things are easily observed – a data breach occurs, some packets don’t cross the network – then ex ante rules are attractive. When governance concerns behavior, particularly behavior that is difficult to observe – the uses to which data is put by a company, whether a particular network management technique discriminates against a competitor – then the regulator has to fall back on ex post enforcement. The difficulties with ex post are well-known, though: from providing sufficient clarity up-front about what would constitute a breach, to the political difficulty of exacting very occasional but very large penalties from powerful players.

Footnotes

[1] Note that this is not the traditional meaning of the term, which used “object” as synonymous with “objective”, e.g. Edmund Burke: “To govern according to the sense and agreement of the interests of the people is a great and glorious object of governance. This object cannot be obtained but through the medium of popular election, and popular election is a mighty evil.”

[2] Boyd, William, “Ways of Seeing in Environmental Law: How Deforestation Became an Object of
Climate Governance”, to be published in Ecology Law Quarterly

[3] Daniel J. Weitzner, Harold Abelson, Tim Berners-Lee, Joan Feigenbaum, James Hendler, Gerald J. Sussman (2007) “Information Accountability”, Computer Science and Artificial Intelligence Laboratory Technical Report, MIT-CSAIL-TR-2007-034, June 13, 2007

[4] Business Forum for Consumer Privacy, “A New Approach to Protecting Privacy in the Evolving Digital Economy: A Concept for Discussion”, March 2009

[5] Kevin Werbach (2003), "Radio Revolution: The Coming of Age of Unlicensed Wireless," New America Foundation and Public Knowledge, no date on document, dated 15 Dec 2003 on NAF site

[6] Preston Marshall (2009) “Quantifying Aspects of Cognitive Radio and Dynamic Spectrum Access Performance” (see slides 15, 16)

[7] J Pierre de Vries, (2008) "De-situating spectrum: Rethinking radio policy using non-spatial metaphors" New Frontiers in Dynamic Spectrum Access Networks, 2008 (DySPAN 2008). http://ssrn.com/abstract=1241342

[8] David M. Friedman, Law's Order: What Economics Has to Do with Law and Why It Matters, Princeton University Press: 2001. See Chapter 7 for a discussion of ex ante/ex post.

Property rights without assets

I’m still nagging away at the implications of the fallacy that spectrum exists. Sorry.

I’ve been struck recently that many if not most definitions of property rights seem to turn on a relationship to an asset. For example, Gary Libecap in Contracting for Property Rights defines them as "the social institutions that define or delimit the range of privileges granted to individuals to specific assets" (1990:1); or Yoram Barzel in The Economic Analysis of Property Rights: "Property rights of individuals over assets consist of the rights, or the powers, to consume, obtain income from, and alienate these assets" (1997:2). Such definitions set out to define rights which assure the owner of an asset that they can derive value from that asset.

However, one can have rights to create value that do not require the existence of an underlying asset – unless, of course, one takes the position that the existence of a property right necessarily implies an asset. [1]

Therefore, let me distinguish between any property right, which is an asset in itself, and a property right to exploit an asset, which entails two assets: the right itself, and the underlying asset. All assets can lead to property rights – perhaps tautologically, in that something might not be counted as an asset if it does not have rights associated with it – but not all property rights require assets.

Examples

It always helps to make things concrete. One property right without an underlying asset is a New York taxi cab medallion: it's a right to operate, but there isn't an underlying asset. The right is tied to a particular place (New York), but that place isn't the asset.

Another common asset-less right is a franchise, that is, an agreement to sell a company's products exclusively in a particular area or to operate a business that carries that company's name.

Perhaps my favorite is a trademark, that is, a word, symbol, or phrase, used to identify a particular manufacturer or seller's products and distinguish them from the products of another. One might use the word “Wired” to brand a magazine, but the word isn’t the asset; when I last counted about a year ago, there were about 27 distinct trademarks using the word "wired" in the US.

Notice that permission for an agent to behave in a particular way is the essence of all these rights – and of rights that require assets, too. Therefore, I’d contend that behavior is the key to property rights, and assets are optional.

There are of course many property rights to assets, from owning a pencil to the right to extract oil in a particular region. Note that the underlying assets don't have to be tangible: an algorithm over which one has a patent is a perfectly viable intangible asset (perhaps made so exactly by the property right).

Implications

This distinction between property rights that do and do not require underlying assets matters: if one assumes an underlying asset where there is none, one is liable to over-assign rights.

For example, if trademark regulation assumed that the word being used was the asset, then it might give the owner of the trademark the right to all possible (commercial) uses of the word. There would be only one “Wired” trademark in the US, let’s say owned by Condé Nast; the companies who wanted to use the word to sell cologne, art supplies, energy drinks, stationery, electronic door chimes or automobile wheels would be out of luck. This would be a loss because an entrepreneur could apply the letters w-i-r-e-d to some new product that couldn’t be confused with a magazine without seeking (and probably failing to get) Condé Nast’s permission.

Similar reasoning applies to radio regulation. The existence of radio licenses doesn’t mean that there is an underlying asset, “spectrum”. [2]

If one regards a radio channel as an asset, then (Anglo-American) regulators have shown a proclivity to grant an expansive array of rights. Following the norm of technology and service neutrality, they have defined operating rights so broadly that pretty much preclude all operations that radiate energy in that channel, regardless of its harm to the licensee, in order to allow the licensee to operate in any conceivable way. [3] Such a broad definition forecloses new entry by potentially useful but non-interfering services

A broad definition also forecloses future arrangements of radio operating rights that are not tied to channel-based world view. Bands and channels, as regulatory constructs, are in large part a consequence of the two-stage super-heterodyne radio design that first filters a broad range of frequencies at the "RF stage", and then after down-conversion picks out a narrow range at the "IF stage". This is an old-fashioned approach that is increasingly becoming obsolete [4] - but it is enshrined in regulation.

References

Barzel, Yoram, Economic Analysis of Property Rights, Cambridge University Press 1989, second edition 1997
Libecap, Gary D., Contracting for Property Rights, Cambridge University Press 1990

Footnotes

[1] A view of property rights that does not require the existence of underlying assets is not identical to the "bundle of rights" approach taught in law school property classes; there it's taken as a given that there's an underlying asset - paradigmatically, real estate - and the bundle explains how it can be simultaneously “owned" by multiple parties.

[2] The emergence of the spectrum concept suggests that this is, indeed, the conclusion that has been drawn. Perhaps the reasoning that a property right must entail an asset is one of the reasons why “spectrum” has become such an entrenched concept.

[3] I’m ignoring allowed inter-channel interference; for a discussion of that case, see my report on the meeting held at Silicon Flatirons, “Defining Inter-Channel Operating Rules”

[4] See e.g. Soni & Newman 2009, "Direct conversion receiver designs enable multi-standard/multi-band operation", RF Designline

Let’s hope we’re not rational about climate change

Global warming is a classic collective action dilemma.

A solution to global warming is a collective good and will be undersupplied, as Mancur Olson pointed out back in 1965.

Therefore, if Olson’s premises and argument are valid, we’re dooooooomed.

However: his argument supposed a rational economic agent who will wait for others to act, since his contribution is so small that on its own it won’t make a difference, and it’s absence won’t be noticed.

Only if humans don’t act as selfish rational agents will we avoid a climate catastrophe.

Fortunately, behavioral economics etc. suggests that we have bounded rationality, and even better, psychology and evolutionary biology suggests that non-rational altruism is hard wired.

Maybe there’s hope.

Commons and markets

I attended a Fellows meeting last week at the Annenberg Center at USC last week. The topic that generated most interest was “the commons.” I began to suspect that “commons” is a frame that culture-studies people almost take for granted, in the same way that “markets” is the default for business-studies people. If the meeting had been organized by a business school rather than a communications center, the conversation would’ve been about markets. In both meetings, attendees would’ve argued that their world view was the most certain source of innovation.

While each side says the other is included in their approach, the terms function as shibboleths.

Commons:

1. collective, sharing, relationships, inclusion
2. abundance
3. public goods
4. cultural studies, academics
5. generates positive externalities
6. socialism
7. pro-government, state management, anti-corporation, liberal
8. open, shared
9. suspicious of profit, trusts in altruism
10. feel threatened by the market “second enclosure”, concentration of ownership
11. unlicensed spectrum

Markets:

1. competitive, exclusion
2. scarcity
3. private goods
4. economics, business
5. worry about burden of negative externalities being taxed; focus on internalities
6. capitalism
7. anti-government, pro-corporation, conservative, libertarian
8. closed, proprietary
9. trusts in profit, suspicious of altruism
10. feel threatened by loss of property rights implicit in commons rhetoric – “theft”
11. licensed spectrum

Commons and markets seem to function both as frames and as signaling devices. They’re frames because they each highlights certain aspects and suppress others; and they function as signals because someone who talks in terms of (say) commons will be trusted on a broader range of socio-political issues. Commons is a code for signaling a left-leaning political perspective; markets ditto for the right.

Conceptually they complement each other; commons and markets are like yin and yang. Each needs the other:

Markets need commons

• public goods (defense, clean air) context in which market is embedded
• common knowledge as basis for progress – incentive to publish inherent in limited time patent monopolies

Commons need markets

• farming example: raise sheep on common ground, but sell meat/wool in a market; ditto for lobster fishermen
• academics creating a knowledge commons are paid out of surplus wealth generated by market capitalism (taxes, foundations)

One can see the Internet from either perspective

• common protocols, languages
• commercialization ex VC investment: Yahoo, Google, Amazon, YouTube

That raises the question of what their superset might be. A possible containing frame for commons and markets is “decentralized coordination.” This is itself part of another dichotomy: centralized vs. decentralized coordination. An example from spectrum policy: wonks who argue about unlicensed vs. licensed allocations would agree that either is an improvement on the traditional “command-and-control” system of administration. Saussure may have been right that meaning comes from difference; in that case, there will never be a single non-contested perspective.

I’m most interested in the nexus: how do commons and markets complement each other, and how do you calculate how much of each you need? To what degree can one formalize the interdepence of markets and commons? One can do a simple calculation for real estate to show that a non-zero percentage of public parks increases property values. I’d love to do the same for spectrum, but haven’t figured out how, yet.