Fake news: To ban or not to ban?

Following the revelation that Cambridge Analytics used Facebook to define personal profiles to be targeted in the Trump election campaign, there are now “calls for more transparency on the internal algorithms that internet platforms use to promote stories, limits on the “harvesting” of personal information for political purposes, and disclosure by tech companies of who funds “sponsored content” on their websites (FT, 31-3-2018)”.

The emergence of accessible and free (cheap) information through social media created a situation similar that in the XIX Century when cheap printing made a daily occurrence the proliferation of all kinds of pamphlets promising miracles or disasters. Like many today believe without reserve what is said in the press or shown on TV, our ancestors believed in the written word.

Obviously, like cheap printing, social media attracts all types of crooks and loonies as well as politicians. What is different this time is that state-sponsored organizations are taking a greater advantage of the naivety of social media users. But even this is not entirely new. In the past foreign governments have also sponsored radio and press sympathetic to their propaganda.

Fortunately, our ancestors did not impose a ban on printing otherwise we would live in a different world. They simply waited patiently that the general public learned to distinguish the fake from the true and that a more trustworthy press emerged.

Likewise, we should resist any bans on social media. Otherwise, we would end up as in China, Russia or Turkey where only social media acceptable to the respective governments is tolerated.

This is not equal to a complete lack of regulation. Indeed, a soft type of regulation similar to what applies to the advertising industry is more than enough. One should distinguish between what is an acceptable exaggeration, or a non-harmful lie, from those that should give grounds to liability.

For the later, one needs to have rules on secrecy and sponsored messages that strike the right balance between privacy and responsibility.

Likewise, in what concerns the right to use personal information to build profiles and marketing strategies one should not go beyond what now distinguishes what is proprietary or public information used in market studies.

Finally, in what concerns forcing the social-media to provide tools that allow its users to protect against lack of privacy or to avoid spam from fake news, these are necessary but should be solved by business competition. It is desirable that more social networks other than Facebook flourish to provide less or greater degrees of secrecy.

For instance, among my Facebook friends there is one keen to share theories of conspiracy as well as Putin’s and communist propaganda. Now I have only two options, either to block him completely or to block one by one the sites he shares. However, it makes sense for Facebook to add an extra option to block everything that he shares. But this should not be enforced by regulation. I simply need to wait that Facebooks realizes that it risks losing members like me and come up with a solution out of their business sense.

In choices between regulation and liberty one should generally err on the liberty side. So, let us not rush into too much regulation of the social media.

The control of rent-seeking behaviour

Initially business regulation focused on anti-trust policies and barriers to entry. However, rent-seeking behaviour is not exclusive of natural or government sponsored monopolies and oligopolies. Rent-seeking is generally defined as the pursuit of payments beyond those necessary to have the service or factor supplied. Although most of these situations involve licensing, e.g. as in the case of doctors, taxis, drugs etc., or natural monopolies (as in the case of land), there are situations where market dominance may create the same type of rent-seeking behaviour.

I shall illustrate this with two examples related to new technologies and distribution, that is, – rent seekers vs. innovators and distributors vs producers.

With free entry, innovators will enjoy only a temporary monopoly until new imitators come in and drive profits to zero, thus eliminating any rents. However, in sectors subject to winner-takes-all economics that is no longer the case, because innovators can only compete until one of them dominates the market. That is, inventors become like lottery players, playing in the hope of winning a jackpot. Those who get it either retire or become a kind of private equity fund (doing little or no new research) but buying up any new innovators that threaten their dominance.

This eat-or-be-eaten is not always negative. Indeed, many so-called serial entrepreneurs thrive on finding new business opportunities and not on running them for long periods and therefore welcome the possibility of cashing-in and having a higher turnover in their investments. The problems exist when the acquirers use bundling and financial power to stop prematurely the natural selection of the winners.

Consider for example the social network Facebook’s acquisitions of Instagram and WhatsApp, for 20 billion USD, in order to secure dominance in global photo-sharing and mobile messaging. Can we be sure that those services had already achieved their position of winner-takes-all through competition or did they reach it prematurely by being acquired by a dominant player in the same space?

It is important to note that most of those payments were in Facebook shares, which may be seen as counterfeit currency if they are excessively overvalued because of the expected longevity of its oligopolistic position. So who is rent-seeking, the innovators or their acquirers? Probably both, because the innovators capitalize on the anticipation of a wider monopoly position while the acquirer achieves a higher valuation on the assumption that it will be able to maintain its dominant position and capture the rents achievable through such position longer than normal.

However, it is not uncommon that the acquirer ends up writing-off many of such acquisitions and ends up being the “sucker” while the tech entrepreneurs cashes in hefty gains. So, as long as this processes increases rather than limits entrepreneurship, the potential for market perfecting policies on the part of regulators is very limited.

This is possible because inventors also hold a monopolist position. This is quite different from the position of distributors and suppliers. To the extent that retailers manage to concentrate their retail outlets in a few locations their stores achieve a local oligopolistic situation which allows them to pursue rent-seeking. These oligopolies are often reinforced by local planning and licensing regulations.

For instance, during sudden recessions consumer demand contracts and retailers try to stop falling sales through discounts and lower prices. However, these reductions are transferred to their suppliers so that they manage to protect their profit margins throughout the recession. They are able to do so because suppliers no longer have direct access to end-user clients . Therefore, most of the adjustment takes place at the producers level. However, in contrast to the tech sector, here a write-off in the producers’ investment generates a reduction in entrepreneurship but the distributors will not incur write-off losses.

A similar process occurs in sectors (e.g. petrol stations) where the producers are in an oligopolistic position while the retail distributors are many and receive a fixed payment. Obviously, in this case, the producers are the only able to pursue rent-seeking.

That is, there are cases where producers impose a fixed price to retailers e.g. soft drinks, ice cream, petrol and domestic gaz. And the opposite, cases where distributors impose a price to producers, e.g. research, supermarkets, etc. Such practices are certainly anti-competition and may justify some form of regulation. However, in those sectors where both producers and distributors have oligopolistic power (e.g. IT and healthcare) it is not clear whether regulation can add much value.

In conclusion, striking the right balance between market perfecting regulation and intrusive messing up it is not always easy. For instance, in the financial sector excessive regulation often results in the protection of the incumbents which have the resources needed to cope with heavy regulation. Nevertheless, in most domains, whenever the right level of regulation cannot be ascertained, one should err on the low side.

Facebook, popular delusions and capitalism

Today Facebook will close its first sale of shares to the public (IPO) at a record price to an unprecedented retail demand.

In the process it will make the kid who created this popular site (that signed one in every seven human beings) a billionaire beyond his wildest dreams. Will his invention ever return profits that justify valuing his company at such high price (26 times its sales)? Probably not!

As usual, some pundits will protest against such market irrationalities that, from time to time, degenerate into speculative mass delusions of a Ponzi-like kind. Some will even use such episodes to claim that capitalism is rotten and needs to be replaced by a more rational system.

Yet, past manias (tulips, canals, railways, dot.com, etc.) have shown that such episodes are temporary purges providing a peaceful escape to the many frustrations accumulated periodically in all societies.

This was recognized brilliantly by the most quoted critic of unregulated free markets – John Maynard Keynes – in this famous sentence: “It is better that a man should tyrannise over his bank balance than over his fellow-citizens.”

Indeed, the fact that capitalism ends peacefully its own episodes of irrational exuberance is a testimony to the beauty of the capitalist system.

Be prudent but do not blame the system.