kenneth arrow

Many voting paradoxes (e.g. Arrow’s theorem) ultimately stem from the fact that there is no deterministic way to map [0,1] to {0,1} in any “homomorphic” manner, but this becomes possible once some randomness is permitted.
—  Terry Tao
Whatever the source of the concept, the notion that through the workings of an entire system effects may be very different from, and even opposed to, intentions is surely the most important intellectual contribution that economic thought has made to the general understanding of social processes.
—  Kenneth Arrow | 1968 International Encyclopedia of the Social Sciences essay, “Economic Equilibrium“

“Economics graduate programs may be turning out a generation with too many idiot savants skilled in technique but innocent of real economic issues.”

This was one of the conclusions of the American Economic Association’s Commission on Graduate Education in Economics, formed in 1991, chaired by Anne Krueger and included Kenneth Arrow, Robert Lucas, Joseph Stiglitz, Lawrence Summers and Edward Leamer. (open access to their report)
The members of commission affirmed “that it is an underemphasis on the ‘linkages’ between tools, both theory and econometrics, and ‘real world problems’ that is the weakness of graduate education in economics,” and that both students and faculty sensed “the absence of facts, institutional information, data, real-world issues, applications, and policy problems.” 
“A core curriculum that lacks breadth or balance”, as the commision observed and warned, “will create an excessively narrow image of what it means to be an economist”.
These resonant findings about economics studies and economics’ professional portrait were presented back in 1991- in the dawn of the Neoliberal Globalism era. The “neo-classical” hegemony was then so complete that even the commission simply did not recognize that economic theories other than neoclassical economic theory existed.
Well, now in 2014 (as much as 1994 and 2004, btw) we have all saw and experienced the practical implications of economists’ “empty formalism”, as the commision put it.
I don’t find it consoling that the commission’s general conclusions were so accurate. But I do believe that if something hard to be changed from the inside, it can be tackled from the outside. Determined outsiders can be of great assistance to brave insiders calling for change. Economics will not change without substantive challenges, as well as daily prods and nudges, from economic sociologists and political economists. 

(open access to the report)

[Kenneth] Arrow was able to prove–with the inexorable force of pure mathematics–that the only way to satisfy all of the requirements [of democracy] is to select one voter and give him all the votes. The only “democratic” procedure that meets the minimal requirements for democracy is to anoint a dictator.
—  Steven E. Landsburg, The Armchair Economist 
Crowdfunding Is More Likely to Replace Ads Than Micropayments

The rollout of iOS 9 and along with it adblocking plugins for mobile Safari has re-ignited the debate over the ethics of removing ads from pages. Marco Arment who released the paid Peace adblocker previously wrote a piece laying out his views arguing that publishers have crossed a line with ads and trackers that are too intrusive and disruptive. In response there are now pieces bemoaning the end of independent publishers and the web altogether. And inevitably micropayments are proposed as an alternative to ads.

I continue to be skeptical though that micropayments are the right way to finance content. The reason can be found in Kenneth Arrow’s work on the “information paradox” from 1962! I don’t know how much a piece of content will be worth to me, so I am not willing to pay for it until I have read it. But then of course I have already consumed the content and now my willingness to pay for it drops radically.

This insight explains why it is so difficult to charge for small pieces of content. Their value will vary widely across readers and ex ante any one reader doesn’t know the value. It also explains why it is a lot easier to charge for say a blockbuster movie or a big production value video game – there are enough potential customers who anticipate enjoying the content enough that they are wiling to pay the price *before* experiencing the content. Finally, this also explains why charging for a subscription bundle is a superior strategy for some types of content, such as Netflix and HBO – for some math see this paper by Yannis Bakos and Erik Brynjolfsson.

All the talk about how the actual costs of making a payments are the reason why micropayments haven’t taken off is therefore likely a red herring. Even newfangled super low transaction cost blockchain based systems do not get around Arrow’s Information Paradox.

How then is journalism to be financed? As I wrote in 2014, I continue to believe that crowdfunding is the answer. Since then great progress has been made by Beaconreader, Kickstarter’s Journalism category, and also Patreon. Together the amounts are still small but it is early days. Apple’s decision to support these adblockers may well help accelerate the growth of crowdfunding and that would be a good thing – I don’t like slow page loads and distracting ads but I will happily support content creation directly (just highly unlikely to do so through micropayments while reading). All of this provides one more reason to support Universal Basic Income – a floor for every content creator and also more people who can participate in crowdfunding.

Update: Follow-up post on subscriptions and micropayments