METANOMICS: A STATE OF AFFAIRS:

LIBERTARIAN WELFARE AND ITS ROLE IN VIRTUAL COMMUNITIES

OCTOBER   14, 2009

ANNOUNCER: Metanomics is brought to you by Remedy Communications and Dusan Writer’s Metaverse.

ROBERT BLOOMFIELD: Hi. I’m Robert Bloomfield, professor at Cornell University’s Johnson Graduate School of Management. Today we continue exploring Virtual Worlds and the larger sphere of social media, culture, enterprise and policy. Naturally, our discussion about Virtual Worlds takes place in a Virtual World. So join us. This is Metanomics.

ANNOUNCER: Metanomics is filmed today in front of a live audience at our studios in Second Life. We are pleased to broadcast weekly to our event partners and to welcome discussion. We use ChatBridge technology to allow viewers to comment during the show. Metanomics is sponsored by the Johnson Graduate School of Management at Cornell University and Immersive Workspaces. Welcome. This is Metanomics.

ROBERT BLOOMFIELD: Welcome to Metanomics. Today we’re joined by Cornell economist, Robert Frank, to follow up on our discussion of libertarianism we began last week with Adam Thierer. But our topics will range pretty broadly because Bob is such an interesting guy, and I should mention, for full disclosure, a colleague of mine here at the Johnson School. Bob’s early research focused on labor economics, but he quickly brought in an iconoclastic element by considering both behavioral and evolutionary forces in economics.

It wasn’t long before he was writing books that appealed to both the popular and professional audience, starting with Choosing the Right Pond: Human Behavior and the Quest for Status. Then Passions Within Reason: the Strategic Role of the Emotions, The Winner-Take-All Society, Luxury Fever, What Price the Moral High Ground. His two newest books The Economic Naturalist and The Economic Naturalist’s Field Guide. Let’s see. I think I missed one: Falling Behind: How Income Inequality Harms the Middle Class. He’s even busier than you think because he’s also a monthly columnist for the New York Times and co-author of a bestselling textbook Principles of Economics, and his fellow author on that book is someone you may have heard of, Ben Bernanke. Bob, welcome to Metanomics.

ROBERT FRANK: Yeah, nice to be on with you, Rob.

ROBERT BLOOMFIELD: I really appreciate it. Welcome also to all of you who are watching on the web at metanomics.net or in Second Life at our Metanomics Sim or any of our event partners. We’ll be tracking the text chat so keep those questions and comments coming, and we’ll try to respond to them as we can.

Bob, last week we talked with Adam Thierer, of the Progress & Freedom Foundation. He specializes in online speech privacy and child protection. He’s what I think of as a traditional Libertarian, opposed to nearly all regulation, arguing instead for parental and personal responsibility, empowering people by what he calls rules, tools, schools and talk and keeping government out of it as much as possible.

Now I understand, Bob, that you’re writing a new book The Libertarian Welfare State, and you argue in favor of a pretty long list of government programs and regulations, including some restrictions on speech and laws protecting privacy. So why do you call that libertarianism?

ROBERT FRANK: You know I think the purpose of all regulation really is to prevent undue harm to others. That was John Stewart Mill’s criterion for running the government. He argued that it was only legitimate for the government to intervene to prevent undue harm to others and used the word “undue,” but I think you have to understand the criterion to mean that. And some cases, it’s very easy to see when preventing harm is clearly justified. We don’t allow people to hit one another over the head with a stick, for example. If you do that the law will sanction you for it without any question. Nobody denies that that’s legitimate. But then there are other areas where it’s not so clear.

There was a great example that came up with an advice columnist. A guy wrote in one day to say that 20 years ago when he’d been a high school senior, he had done this horrible, cruel thing to a classmate. He and his friends had called her up one night and told her that she had won the Ugliest Girl in the Senior Class prize. They had gone through and selected her as the Ugliest Girl, and he said he remembered to this day her anguished moan as she dropped the phone, and he said he wished more than anything could turn back the clock and undo that. The fact is that girl was probably injured more seriously by the words those boys spoke to her that night than if she’d been hit over the head pretty hard with a stick. And yet we don’t allow the stick injury, but we allow the words to injure.

I think if there were some practical way to separate out gratuitously harmful forms of speech like those kids engaged in and restrict only them and not the beneficial acts of speech we try to protect then we would probably do that, but it’s very, very difficult to write the law that way. So yeah, you always get into difficult balancing acts, but sometimes we’ve decided that it really is the sensible thing to do, to prevent certain forms of speech. You’re not allowed to yell, “Fire!” in a crowded theater, no matter

how much you say you derive pleasure from doing that, it’s just too risky to other people.

ROBERT BLOOMFIELD: Let’s take a look at something specifically on speech that Adam Thierer had to say. This is such a big issue for virtual communities. It becomes a pretty common focus of Metanomics’ free speech and privacy. We got a tape of some comments Adam Thierer had, talking about the elitist roots of regulations governing privacy and free speech together. Texas, if we can roll that tape, let’s take a listen to Adam.

[VIDEO]

ADAM   THIERER   - OCTOBER   7, 2009

In a paper that a colleague and I at PFF wrote last year, called What Unites Advocates of Speech Controls and Privacy Regulation, my colleague, Berin Szoka, and I argued that many times what at root animates movements to regulate these things is simply sort of an elitist belief that, one, people are sort of too ignorant or too busy to be trusted to make wise decisions for themselves and/or for their children, and, two, what also unites them in this elitist belief is that all or most people essentially share the same values or concerns, and therefore, a broader community standard or governmental standard should trump individual or household standards. So I’ve already talked a lot about that. I won’t impact that any further since I’ve already discussed it.

But the point is that we see our government today trying to aggressively regulate the internet both for speech-related concerns and privacy-related concerns, and these two themes come up again and again and again, the idea that people are too lazy or too stupid to make their own decisions or protect their own privacy or safety, and then secondly the notion that, again, someone else should make the decision for them because there’s some broader public interests or national interest involved.

[END OF VIDEO]

ROBERT BLOOMFIELD: Okay. Bob, I guess as one Ivy League elitist to another, what do you make of Adam’s argument?

ROBERT FRANK: Yeah, I think none of us is very willing to embrace the idea that some bureaucrat knows more than we do, and he’s going to restrict what we say or do or how we arrange affairs for our kids. That’s a realm of regulation where I think most people are very uncomfortable for the state to intrude. The kinds of regulation that have been in my focus have been really ones that I think are designed to prevent [fairer?] _____ to third parties. In that case, I think we still have an interest in

restraining regulation to the extent possible. It’s way better to give people an incentive to behave slightly differently and then let them choose than it is to say, “Well, you have to do this,” or, “You have to do that,” or “You can’t do this,” or, “You can’t do that.”

ROBERT BLOOMFIELD: You talk a fair bit when you make the case for a libertarian welfare state indirect forms of harm become quite an issue here. I’m wondering how far you want to press that issue. I guess the bottom line for me as I look through a lot of the things that you propose, that are derived from trying to reduce indirect harm, so the two of us might agree to do something, but it harms a third person who isn’t party to the agreement, is hard for me to see the difference between that view of libertarianism and the view of, say, an economically literate, liberal Democrat or maybe a center-left European politician. Where do you see the differences arising?

ROBERT FRANK: Well, I think, traditionally, liberal Democrats have been willing to endorse fairly coercive forms of regulation. I think back to the early days of environmental regulation. People didn’t have any problem at all telling the utility companies that, in order to cut down on SO2 emissions, they had to buy coal from specific regions, in the Midwest, that had low sulfur content. They couldn’t burn coal from other regions. This, we now know, is just a horrendously inefficient way to reach a given air-quality target. The government doesn’t know very much about what technologies firms have available to them, what things might be invented, if people had an interest in changing the outcomes that we see now.

I think what the government can do is give people an incentive to produce cleaner air, in conjunction with what they make. And economists started proposing as far back as the late 1960s that firms be forced to buy permits if they wanted to emit SO2 or other noxious gases into the air. I think many liberal groups were aghast at the idea, “What? You’re going to let rich firms pollute to their heart’s content?” It’s a very strange model of firm behavior implied by that comment, the idea that firms derive pleasure from polluting the air. In fact, the real reason firms pollute the air is that it’s cheaper to produce without a filter on your smokestack than to produce with one.

And, if we force firms to buy a permit every time they discharge smoke into the air, they’re going to ask themselves, “Well, is there’s some cheap filter that I get to put on the stack that will enable me to avoid having to buy that permit?” Some firms will say, “Yes. The answer to that question is, there’s lots of good options available.” Others will say, “No. We’re doing it the only way we can do it.” And, by requiring permits, you automatically steer the task of filtering the smoke out to the firms who can do it in the cheapest way. It’s never our goal to get pollution down to zero; it would be way too costly to do that. So what we want to do is adopt a system of regulation that lets the low-cost responders identify themselves, and that’s what the

pollution permit system does. We’ve got that same permit system proposed now in the global warming debate; CO2 permits are one of the items on the table.

But I think by now liberal Democrats, for the most part, have come around to the wisdom of that kind of proposal. You’ll see on the websites of environmental groups laudatory praise for the effluent permit approach. But I think, from that lesson, we’ve gradually learned that there are less heavy-handed ways to steer people’s behavior in directions that will cause less harm to others. It’s not the firm’s goal to make the Polar icecaps melt; they just try to produce as cheaply as possible, so we’ve got to give them a little push to make them take the external costs on others that they’re imposing into account when they make decisions.

ROBERT BLOOMFIELD: Whether we’re talking about pollution or free speech, one of the things that has become more and more important is the internationalism, the international nature of the challenges that we face, say, global warming and the fact that so much communication now is international, that it’s hard to come up with common standards.

The other part of Adam Thierer’s concern was not just handing the decision rights over to some elite bureaucrats, but also the conceit of saying that there’s enough commonality among everyone, among all these different communities, that one size can fit all. Internationalism’s got to pose a challenge for this type of [welfare state?].

ROBERT FRANK: Yeah. I think a lot of the problems we face today is that there’s really a global commons: the atmosphere of the planet belongs to everybody and hence to nobody. And when people dump stuff into it, it affects everybody. If we want to try to get people to stop dumping stuff into it, we’ve got to give incentives for them to cut back on their air pollution, but with no world government with the power to impose sanctions against people who dump pollution into the air it’s very difficult to do that.

I think we’re going to be struggling to cobble together enforcement regimes that can take actions like that. I think the trade treaties are likely candidates. You can’t survive globally without access to the world trade network, and, if the community of nations wants to slow global warming, I think we’ll probably have to use trade treaties as a lever to get people to comply with the global warming agreements we might try to push forward.

ROBERT BLOOMFIELD: Those will definitely be, I guess, much more status to the Libertarian, I guess, since the trade treaties will be between nations.

ROBERT FRANK: The Libertarian I don’t think wants to say that we all have a right to impose harm on everyone else. There are what I call in the United States

Movement Libertarians, and that is pretty much their position. I think basically they’re just crybabies. They want to do whatever they want to do without regard to effects on others, but that’s not the way life is. You can’t say, “I really like driving 90 miles per hour in a school zone. I have a right to do it.” You don’t have the right to do it. The law has the power to prevent you from doing that.

But I think, if you want to be a Libertarian, I think your real interest in this debate is to acknowledge that the community has the right to try to prevent people from harming others and then argue as effectively as you can for the least invasive forms of regulation to achieve your objective. There’s a great deal of difference between requiring effluent permits and letting firms decide for themselves where to buy the coal or what kind of filter to buy than there is for a panel of bureaucrats to specify in great detail what everyone must do. We know that in the case of the SO2 permit process, the cost of achieving the clean air target was about one-eighth what it was forecast to be. Firms responded very flexibly and cheaply to the incentive system. It was much, much more expensive when we tried to tell them what to do. I think the Libertarian who really wants to get the state off his back, and better not deny that the community has an interest in restraining harm to others. Rather, the focus should be how to make attempts to restrain harm as un-invasive as possible.

ROBERT BLOOMFIELD: One direction that Libertarians often espouse is voluntary associations that can help address issues like the tragedy of the commons; you mentioned, for example, global warming. I’m wondering how far you see voluntary associations, how successful can they be with some of the big concerns that we face? And actually maybe just sticking with free speech for a minute, one possibility is that the global internet becomes filled with numerous communities all with different speech standards, some things might be extremely offensive to one group and in one community, and they would simply leave that community. How successful do you think voluntary association and voluntary organizations can be?

ROBERT FRANK: There’s a long history of trying to regulate behavior through voluntary associations and rules that they impose. We see that in gated communities, for example. And since you don’t have to join any particular gated community, our tolerance for the kind of rules that are legitimate to impose in that context is much greater. Gated communities tell people you have to paint your house only a color from a limited palette that they provide. You have to plant only certain kinds of flowers. There are all sorts of regulations on behavior that, if a state tried to impose them, we would never accept, because it’s a private contract you can opt out, if you want. It’s more palatable in the context of a gated community. It’s the same with online communities. They’re developing rules now. If you don’t find yourself willing to play by the rules, you can opt out. I think there will eventually be problems along those lines.

We know that there are huge network economies. There was a time, fortunately it seems to be receding, when if you didn’t have the Microsoft operating system, you couldn’t participate in the network. And so if Microsoft were to say, “Well, we’re going to impose all these restrictions on you if you’re going to be in our network,” the cost of opting out under those circumstances would have been very high. I don’t think we would be tolerant of regulations imposed in that manner.

ROBERT BLOOMFIELD: When we talk about, well, I guess, not so voluntary associations in the Real World, then we’re often dealing with the problem of secession, that a citizen or group of citizens could decline the social contract with the state and basically say, “Thanks, but no thanks.”

ROBERT FRANK: I think that’s why it’s important to focus our attention on the least invasive ways of changing people’s behavior. You don’t want people to secede. It’s not efficient for people to secede. Generally, it’s a host of practical problems associated with that. So we allow leagues to impose rules. Tom Schilling has a very illuminating example, “Why is it,” he asked, “that hockey players, if they’re skating without a rule requiring helmets, never wear one? Yet, at the same time, they’ll vote unanimously in a secret ballot for a rule requiring them to wear helmets.” His argument was that, if you take your helmet off, you gain a slight competitive advantage that forces the other side to match your step, and so the equilibrium is, nobody’s skating with helmets; everybody’s exposed to serious injury risk. Much better to have everybody skating with helmets. There’s no competitive advantage that way either, but it’s a balanced playing field.

You can’t get to the “everyone wearing helmets” equilibrium unless you have a rule requiring helmets. The slightest competitive advantage is enough to get people to take theirs off. Then people can say, “Well, that’s abridging my freedom,” but that’s an interesting question: Is it abridging a freedom if everybody wants to have a rule? It seems to me more coherent to say you’d be abridging their freedom if you didn’t let them have the rule they want. Now you could say, “If you don’t like the rule, don’t play in the NHL,” or, “Don’t play in the NCAA Division One or whatever league has the rule.” But there aren’t that many leagues now that don’t have rules so you have limited options if you’re not willing to abide by, but the rule makes sense. The rule prevents harm to others. If one team takes its helmet off, it costs the other team something that appears clearly about, which is a greater chance to win.

ROBERT BLOOMFIELD: I’m probably changing your wording a bit, but you talked about in the case of hockey that this a rule that enforces what the players individually actually want, and that’s sounding to me a bit like Thaler and Sunstein’s libertarian paternalism or paternal libertarianism, now I can’t remember, but the idea is that they are going to try to design the choices that we have, whether we are opting in or opting out of privacy agreements and so on. And their goal, as I

understand it, is to make the architecture of decisions help people make the decisions that they truly want to make, but sometimes don’t, due to a lack of attention, effort or knowledge. How do you distinguish yours from theirs?

ROBERT FRANK: I think what they’re doing is really focused on the social science research that documents the fact that people make systematic errors in their own decisions. People don’t save enough. People don’t eat the mix of foods that will promote their health in the long run. There’s a lot of decisions people make that you could argue, from a strict self-interest perspective are really strongly contrary to their own narrow self-interest. Everybody objects to the nanny state prescribing what you have to eat and how much you have to save, and so their solution, which I think makes perfect sense for problems of that ilk, is to say, “Let’s change the environment so that the default option that you’re presented with is the one is most likely to promote your own interests.”

So your default option is to be in the 401(k) plan at work, not that you have to take a specific step to enroll in it. You can get out of it if you want to. You can go fill out a form and say, “I don’t want to be in the 401(k) plan,” but most people, if the default option is to be in the plan, they’ll just stay in the plan. There’s a lot of inertia in behavior that’s a systematic tendency that leads to bad outcomes for people. So they just recommend structuring the environment in a way that will make the default options or the thing you see first in the food line be the thing that, on average, will be better for people than the way it is arranged currently. I don’t see how you could really object to that. You can still do whatever you want.

That kind of proposal though doesn’t solve all the problems. It would not, for example, solve the hockey helmet problem, just to post an information remedy in the players’ locker room, saying, “Warning: Skating without a helmet could cost you serious injury.” The players know that. That’s not why they’re not wearing a helmet. They’re not wearing a helmet because they face a collective action problem, and they need a rule to solve that particular collective action problem.

I think in other domains we can do it without a rule. Take the motorcycle helmet laws that many states have. A lot of people are deeply offended by them, but I think there’s a rationale for them nonetheless. There’s a collective action problem there too. Young males, in particular, are reluctant to wear a helmet because they don’t want to seem like a wimp. Their friends will tease them if they wear one. If you take your helmet off, you endure a social cost. Many young men don’t wear a helmet. The helmet rule solves that problem for them. They can say, “Well, I’m not a wimp for wearing a helmet. A cop would give me a ticket if I don’t wear one. If it were my choice, I wouldn’t wear a helmet,” they can say.

I think better still would be to have a fee, if you’re willing to pay the fee, if you’re one

of those people who says, “Truly, the only reason I enjoy riding my motorcycle is to experience the feel of the wind in my hair,” then pay a fee $300 or $500 a year, and get the medallion that you can display on your gas tank, and that permits you to ride without a helmet. That solves the problem for 99 percent of the people who can say, “Well, I’m no chump. I’m not going to pay a fee just to ride without a helmet.” So you’ve solved the collective action problem for the people who suffer from that. And the people who really care have an out. They’ve got an escape valve.

ROBERT BLOOMFIELD: You talk in your proposal for The Libertarian Welfare State, you mention that people place different values on personal autonomy. So the idea here is, if you really feel like you need to be free and feel the wind through your hair, then you’d be willing to pay for it?

ROBERT FRANK: Exactly. You might say, “Well, why should I have to pay? What’s the harm to others?” Every person who doesn’t wear a helmet helps create a climate that makes it more difficult for others to wear one. It’s the same exact structure of incentives as we see in the hockey helmet rule. When one team takes its helmets off, they make it more costly for the other team to achieve its goal. So we’re not saying you can’t ride without a helmet. We’re just saying you cause harm when you do that, and we have to tax something in this world so why not tax those activities that cause harm to others? Just as in the effluent permit case, some people have a hard time reducing pollution, but those people pollute and buy a permit. Some people have a hard time wearing helmets. Let those people pay a fee and get a medallion that entitles them to ride their motorcycle without a helmet.

ROBERT BLOOMFIELD: I don’t know if you’re following the text chat, but this helmet law seems to be getting people’s attention. First, I’ll mention Buffy Beale says a helmet saved her noggin once. But the other thing I’m seeing is a resistance to the idea that, as a Metaverse engineer puts it, “So we should pay fees for our freedoms?”

ROBERT FRANK: Not for your freedoms, no. Again, to say you have freedom is just to avoid the question. You have freedom to do whatever causes no harm to others. If what you do causes harm to others, there’s no a priori presumption that you have the freedom to do it. We have to do an analysis in that case of whether the value to you of doing it outweighs the harm you caused others from doing it.

I had a personal experience with this one too. My son, Chris, whom you know, came home one evening. He was in obvious pain. He was bent over. He’d been riding his bike and had taken a terrible spill, was knocked out and had broken his collarbone and injured his shoulder. We spent three or four hours at the emergency room. The physician who treated him told me that, if he hadn’t been wearing his helmet which was completely smashed on the right side, he would have been killed. We would

have been preparing for his funeral rather than putting a pin in his collarbone.

And so I thought, “Wow!” It was really hard to get him to wear a helmet, but the fact that the Legislature in New York has a requirement that kids under 16, who ride bikes have to wear one, made my task a lot easier. And so hats off to the legislature who voted for that law, as far as I’m concerned. Chris is still alive. He’s writing songs. He just won the Battle of the Bands competition at NYU for the second year in a row. He’s a delightful human being.

ROBERT BLOOMFIELD: Congratulations!

ROBERT FRANK: And he’s alive because of that law. So that’s a law that prevents harm to others, for sure.

ROBERT BLOOMFIELD: We’re coming up on our break halfway through the show. But before we get there, when you were talking about Thaler and Sunstein’s libertarian paternalism, you said that you didn’t see much to object to, to just making the default be something that would be a socially useful outcome and an outcome people would probably choose on their own volition. Now Adam Thierer last week actually did have a problem with that view, and he gave a particular example, which is that I guess there is some movement in Congress, or was at some point, to force makers of game consoles that the default would be that it could only play games rated E for everyone. And so if you wanted to go online, if you wanted to play a game for a teenager or a mature game, you would have to go through a great deal of work to make that happen, and he thought that was terribly inappropriate. I’m wondering what your take on that is.

ROBERT FRANK: Well, I mean there are some people who think that any behavior whatsoever ought to be permitted. There shouldn’t be any attempt to regulate any behavior. I take a more pragmatic view about behavior in general. I say don’t regulate behavior unless there’s a pretty clear showing that the behavior causes more harm to others than the value it holds for the person who’s engaging in the behavior. That’s a practical test. I really don’t know the literature on how much harm is caused by games rated at different levels so I really don’t think I have any informed opinion about whether it makes sense to put hurdles in the way of people who want to play mature games. I don’t know whether they cause harm to other people.

ROBERT BLOOMFIELD: Okay. So that would be the way that you would approach it.

ROBERT FRANK: If they did, then let’s look at the numbers.

ROBERT BLOOMFIELD: Okay. Great. Well, that gets us to the end of the first part of our discussion. We’re going to be back in just a couple minutes to continue talking with Bob Frank, and we’ll be discussing wages and the tradeoff of status and money. So I think people, especially in Second Life, who know the low wages associated with work, will be quite interested in that. But right now what we’re going to do is spice up our third year of broadcasting a little by splicing in excerpts of discussions from our archives. So we will be right back with Robert Frank after this quick stroll down memory lane.

[VIDEO]

ROBERT BLOOMFIELD: With Metanomics now in its third season, we thought it’d be fun to take a look back at some of our past shows and guests since September of 2007. With over 80 episodes to choose from, we chose some of the most interesting, engaging and occasionally contentious discussions. As always, you can see the complete episodes at metanomics.net or on our iTunes channel.

ARCHIVE:DMITRI   WILLIAMS   - OCTOBER   27, 2008

DMITRI WILLIAMS: And Oldenburg has this list which says, "Do these things fulfill the function of a third place? First place is home. The second place is work." And so we spend a lot of time in each of those two.

But the thing is, if we spend all our time at those two places, we actually have pretty lame social lives because, even though we find mates that work and have friends at work, it's not really enough to make us well-rounded human beings. So what everybody really wants is that idyllic space where you go and you have these people who are a little bit of an outlet to the rest of the world. A classic case of this for Americans is pretty well embodied by the sitcom Cheers. Right? You walk in. Everybody knows who you are. Everybody knows your name. And you have this mixing experience. ROBERT BLOOMFIELD: My god! It sounds like you're about to break into the theme song.

DMITRI WILLIAMS: I know. I'm ready. But I mean who doesn't aspire to that. The show was on for over ten years. It's no accident that it appealed to something in the American psyche. In a country where we're more and more splintered and more and more atomized in the suburbs where we don't actually run into each other, we need these third places so that we can interact with people that we don't see all the time, and more important, that we can interest with people who aren't necessarily like us. Where we can go and relax and have a little bit of fun, where nobody's in charge, where it's all about a regular group of people, and there's no sense of hierarchy or

as much status.

If you're playing darts in a bar, it doesn't matter if you're the CEO of a company or you're a drunk or a burnout, what matters is can you talk a good game and can you hit the damn bull's eye. And that's just one of the nice things about third-place functionality. And it's just this important outlet for really expanding your social network. Ask people who don't look just like you, and therefore, don't just think like you, which is one of the problems we have with some social networking. And we found that MMOs fulfill most of these criteria so it doesn't mean that, if you go into Lineage or World of Warcraft or Second Life, suddenly you're going to have this amazing social life. There are a lot of good and bad, but we were saying, "Okay, it fulfills the necessary conditions that at least could be an outlet for those people who think that nothing good could ever come of going online."

[END VIDEO]

ROBERT BLOOMFIELD: This is Rob Bloomfield back on Metanomics, with Robert Frank. Bob, the first book I ever read of yours was Choosing the Right Pond: Human Behavior and the Quest for Status. One of the things you do in that book is provide evidence that there’s wage compression in companies, with the highest-status people making only slightly more than those below them. And your explanation is that the top workers are basically taking status instead of money, and they could switch jobs, go to another firm where they would have lower status, but more money. I’m wondering if you’d be willing to take a stab at applying this to virtual communities.

Certainly, in the blogosphere, we see extremely popular bloggers making little or no money, but getting a lot of visibility and often respect. And certainly, in Second Life, the going wage is far lower than minimum wage. There are a lot of people who are working very hard and building themselves up in the community, but not making much money. Do you see the same status-wage tradeoff at work here?

ROBERT FRANK: Yeah, I think this is really not so much an instance of the argument in Choosing the Right Pond as an argument I made elsewhere in the What Price the Moral High Ground book that you mentioned at the introduction. It’s true that you see people with the same training and ability and effort levels earning vastly different salaries in different domains. So just a familiar example is the not-for-profit sector typically pays much, much lower wages than the for-profit sector, even when the workers are doing what look to be identical jobs requiring identical effort and so on. I think the typical explanation there is that well people care more than just about the wage, they care about the satisfaction they get from the job.

If you’re working in a nonprofit, whose mission you approve of, you go home at the

end of the day and say, “I did something useful today.” If, on the other hand, you’re writing ad copy urging teenagers to start smoking, you go home at the end of the day and maybe don’t feel so great about what you did all day. So we expect the wage of the ad copywriter for RJR Nabisco to be much higher than the wage for the ad copywriter for the American Cancer Society, who’s trying to write copy to urge teenagers not to start smoking. So there is that.

If you look at Huffington Post, for instance, you’d see there that they’ve got many people whose opportunity cost of time seems reasonably high. Why are they writing for free on Huffington Post? The simple explanation, to my eye, is that they really value the visibility they get by getting their words in front of a big platform like that.

You do see compression within each platform too. Yeah, and I think that’s explained by the top dog, values being the top dog. Why should you get to be the top dog for free? The only way you can be the top dog within a group is if somebody’s the bottom dog. Why should anyone agree to be the bottom dog unless you get a little extra pay for doing it? It’s a little bit of socialism in the private sector that we see there. Progressive income tax schemes implicitly levied within each work group in effect.

ROBERT BLOOMFIELD: Now Choosing the Right Pond book is from the ’80s, I think.

ROBERT FRANK: In 1985, that was published.

ROBERT BLOOMFIELD: In 1985. So since then, one of the things that’s been in the news so much is the huge wage disparity between the very top dogs, the CEOs of large corporations and their workers, with the ratio of income having skyrocketed over the last 30 years or so. And so I’m wondering, does that go against the notion that there’s salary compression and that people trade wages for status?

ROBERT FRANK: Yeah. At first glance it seems to, but, in fact, no it doesn’t contradict the earlier pattern at all. The earlier pattern refers to how much wages differ for people who are all doing the same job: the accountants at General Motors, for example; the assistant professors at Cornell, in a given department, where there’s just a group of more or less similar people doing the same task. There you see a lot of wage compression. I think it’s explained in part by compensating differential for rank within the group.

When you look at CEO pay, you’re not really comparing the wages of CEOs within the group, you’re looking at how CEO pay differs relative to the pay of the average worker in the firm, and there you really have seen an explosion. It’s over 500 times as much at the CEO level as the average American large-company average worker

now. It was only 42 times as much as recently as 1980. So that explosion, I think, is accounted for in part by the fact that there’s really been a profound change in the structure of markets.

There are many more markets that have the kind of structure we used to think was observed only in entertainment and sports. So if you look at the music industry, for instance, in the old days, if you wanted to hear music, you had to go to a live concert hall to do it so there were really jobs enough for 10,000 tenors on the tour. Everybody wanted to hear the best one, but you couldn’t. Maybe the best one couldn’t get to all the venues. Now most of the revenue comes from the sale of recorded music, although that’s under attack now too. So the recording companies need only a handful of tenors. They bid like mad to get the ones that everybody thinks are the best or at least the most familiar ones. Those people are in seven-figure salaries in an instant. Others who are almost as good end up teaching music lessons to fourth graders. It’s a very explosive increase in the quality that we have seen.

The upside of that is that more people are buying what they buy from the best performer in the market now. If you’re a CEO, you’re making decisions for market that spans the globe now. A bad decision is much costly than it used to be. If you’re a CEO and you make a good decision, on the other hand, it’s a much more valuable good decision because the market reach has extended so much.

And it’s really much more a free-agent market. That’s the other big change we’ve seen. It used to be that, to get to be the CEO of a big company, you had to come up your whole career within the firm. That idea went out the window about 25 years ago, and many, many CEOs are hired from the outside now, and that’s had the effect very similar to what we saw in the free-agent breakthrough in professional sports. Players got more valuable when TV came, but their salaries didn’t start going up dramatically until the court decisions that gave them the right to sell their services to the highest bidder. Now, de facto, we have a free-agent market of CEOs [in the market realm?] too, and salaries just exploded as a result of that.

ROBERT BLOOMFIELD: These sound like the arguments you make in another one of your books The Winner-Take-All Society, why the few at the top get so much more than the rest of us. That book was published in 1995, I believe.

ROBERT FRANK: Yes.

ROBERT BLOOMFIELD: And that was before the advent of the internet. One of the things that people have talked about a great deal with the internet is the notion of the “long tail,” that there are so many niche markets so you can end up with a lot of small winners. I’m wondering, how would you update the arguments you just made

to account for the internet age?

ROBERT FRANK: Yeah. I think that’s one of the really encouraging possibilities that technology has put in front of us. The Backlist Book Titles used to just died quickly, never to be seen again. Chris Anderson explained in The Long Tail that now we have Amazon and other online marketing distribution channels that keep those titles alive. You can’t show a Hindi movie in Ithaca because there aren’t enough people to go see it, but you can rent a Hindi movie, any Hindi movie just about, that’s ever been made on Netflix and watches it in Ithaca whenever you want. So there’s an active market now for those niche players that would have been washed out to sea in the old days.

That said, though, if you follow the aggregate numbers and look at book sales, for example, year by year, even though the Backlist Titles have a life now, [that they didn’t used to?], if you look at the fraction of total titles sold in a year, a much greater fraction of that total is accounted for by the top 30 books sold that year than ever before. So we’re seeing further and further concentration at the top of the pyramid at the same time we’re seeing a revival of possibility at the bottom of the heap.

ROBERT BLOOMFIELD: That leads into a related question, which is just looking at the economics of internet businesses and especially virtual products and services. Virtual products and services are notable because marginal costs, you know, the cost of having one more user or making one more copy drop almost to zero. And, since the goods can be copied, they’re effectively non-rivalrous, that letting one more person use it doesn’t really take away value from the others. As someone who teaches principles of economics, how do you see these changes in cost structure affecting markets in competition?

ROBERT FRANK: From the economist’s perspective, the right price to charge for any good or service is the marginal cost, and, as you say, if all your costs are up-front development costs and you can stamp out copies for free, then marginal cost is literally zero, and that’s the right economic price to be charging. The problem with that is that, if you charge everybody zero, how do you pay for all those development costs? And so companies are fairly ingenious figuring out ways to do that.

Apple came out with a new laptop. They had it in black and in white. They charged a couple hundred dollars extra for the black one, even though it was essentially the same machine. They throw little options out for people who really care about the cool features and aren’t worried that much about price to pay extra. The people who are price-sensitive, they get to come in by jumping a few hurdles. So that’s a standard method that firms use.

In media, it’s not clear how it’s going to shake out. My employer, the New York Times, has been losing money hand over fist, even though, if you had to predict who would be the big winner in the new media environment, I think, by almost any reckoning, most people would have picked the New York Times. They’ve got a commanding position. More people come to their website than any other newspaper. They’ve got still the best talent on their staff. Everybody wants to read it, but nobody’s willing to sign up to pay for it or not enough people are. So that’s the difficulty. And I think they’ll find a way. It’s going to require some additional tinkering and experimentation. ROBERT BLOOMFIELD: I guess related, since you’ve published so many books, how do you see book publishing playing out? Are your books available on the Kindle?

ROBERT FRANK: Some of them are. Not all of them, but some of them are. Some of are in audio book format. And what you see basically is that, for the textbook market, it’s getting harder and harder each year. The competition seems to have driven product development the same way the operating system competition did with computers, just more and more features larded onto the Xbook package. More and more expensive, but they’ve now got the offerings to the point where more and more people just aren’t buying them. They’re figuring out ways to share them and get by. I think we’re still fishing for the model. The way to price goods whose marginal cost is zero hasn’t been come up with as of yet. eBooks, they’re growing in popularity, but most people don’t want an eBook. They still want a book they can cart around and turn the pages of.

ROBERT BLOOMFIELD: Tying this back to the earlier part of our discussion, I’m wondering, as we see all of these industries struggling and unable to turn free into “freemium” or any other form of income, do you see a role for governmental regulation? Or do you think this is a case where the states just need to step back and let the industry shake out?

ROBERT FRANK: Yeah, I think the problem with state funding of media is the same as the problem with state funding of the arts. Do you really want the government bureaucrats deciding which art gets produced? Once art is produced, the marginal cost is zero. Maybe they’re struggling artists, but most people I think, yeah, neither solution is perfect, but I’ll take the struggling artist model if I have to choose.

With media, I think if we saw another ten years and all newspapers went out of business and nothing came along that could do the investigative journalism function anywhere near the standard that we’re used to seeing, might we be willing to consider a model where there are public grants, competitive grants to institutions that would do investigative journalism? Yeah, possibly we would consider that, but I don’t think that would be the first choice. That would be the last resort.

ROBERT BLOOMFIELD: We have time for one more question, and I’m going to let that one be from Mitch Wagoner of Information Week, just because you have really made a name for yourself blending psychology and economics. Mitch notes, “Studies show that once you hit middle class, more money doesn’t make you happier. I think the problem is that middle class seems like a precarious place to be for the last generation or so. Even if all you want is to be in the middle class, you’re still racing to stay in the same place, like the Red Queen.” I’m wondering if you have thoughts on money and happiness and any recommendations.

ROBERT FRANK: Yeah, that’s actually the area I study most. And it’s true, you see some really vexing collective action problems in consumption decisions. How much you spend on a house has clear implications for where your kids go to school. A good [AUDIO GLITCH] better than other schools, a quintessentially relative concept. And the good schools in this country and in most countries, in fact, are located in the good neighborhoods, which is to say the neighborhoods where house prices are higher.

Everybody wants to send their kids to good schools. There are only so many to go around. You’ve got to buy a house in an expensive neighborhood to get access to them. And so if people have more money, if the banks let them borrow more to bid for houses, some people are going to bid more, and then, if you don’t, it’ll be your kids who go to the schools where the kids score in the twentieth percentile, and they have metal detectors at the door. So you’ve got to match the spending of your peers in a domain like that, but it’s a guaranteed frustration. If everybody stands to get a better view, nobody sees any better than before.

I think really giving some serious thought to how you might change people’s incentives about how to spend. Not allowing people to borrow so freely in the housing market would be an idea that would have much commended. I’ve proposed, in many venues, a progressive consumption tax. Report your income to the IRS the same as you do now, but also your savings, as you would for a 401(k) plan. And the difference in those two numbers is how much you consumed this year, and then subtract off a big standard deduction, and that’s taxable consumption. Tax that at a steeply progressive rate, and then less money will be spent making bigger mansions that don’t seem to make anyone any happier, and you’ll steer more money into investment, which will improve our standard of living, in the long run.

Don’t do it now. Do it after the economy’s back to full employment. Don’t do it all at once. Phase it in gradually so you gradually shift spending from consumption to investment, and you’ll get higher growth in income. Eventually consumption will be higher than it would be if we spent with the same trajectory we’re on. So that’s, I think, [AUDIO GLITCH] proposal that could be adopted. It was proposed in the

Senate in 1995, with bipartisan sponsorship. Milton Friedman has endorsed a tax like this. He sent me a nice reprint of a paper he’d published in 1943, urging the adoption of that tax as the best way to pay for the war effort. So I think we could steer consumption in more productive ways, if we wanted to turn to that question. A lot of waste in that domain.

ROBERT BLOOMFIELD: Great! Well, thank you so much for joining us and sharing your views on a variety of matters. It was really a pleasure. I’m sure everyone will rush out to buy your newest book when it appears on the shelves: The Libertarian Welfare State. So thanks a lot.

ROBERT FRANK: Good to be with you, Rob.

ROBERT BLOOMFIELD: Now we close every segment with a short opinion piece: Connecting The Dots. Last week on Connecting The Dots, I argued against simple claims in policy debates. Well, I’m glad to report that the committee that awards the Nobel Prize in economics clearly listened to my commentary and selected Elinor Ostrom as one of this year’s winners. Elinor has consistently argued against simple solutions to some of the most fundamental problems in economics involving the tragedy of the commons. The committee obviously follows Metanomics very closely also because Ms. Ostrom’s work has important applications to virtual communities, which have been our focus all season. In fact, her book Governing the Commons: the Evolution of Institutions for Collective Action should probably be required reading for anyone interested in virtual communities.

I’m going to illustrate my points talking about over-fishing. Over-fishing is one of the most obvious manifestations of the tragedy of the commons. A fishing ground can support only a limited catch. You catch more, and the fish can’t repopulate for the next year. But each individual fisherman has an incentive to catch as much as he can, crashing the fish population and making everyone worse off.

So Libertarians often argue for one simple fix: avoid the tragedy of the commons by having the ocean be private property, and whoever owns it has an incentive to maintain a sustainable harvest. Now liberals often argue for another simple fix: let government establish laws that restrict the freedom to fish. But these simple solutions are often impossible just because of the internationalism of many of these problems.

So Ostrom argues for complexity. She writes, “Instead of there being a single solution to a single problem, I argue that many solutions exist to cope with many different problems. Instead of presuming that optimal institutional solutions can be designed easily and imposed at low cost by external authorities I argue” (I, that’s Ostrom) “that getting the institutions right is a difficult, time-consuming,

conflict-invoking process.”

Well, Ostrom’s work is also surely a difficult and time-consuming process. She’s documented in great detail how communities have developed their own complicated institutions to manage common resources, sometimes successfully, sometimes not. So Ostrom learned from these studies that success requires a number of conditions spelled out in a paper published by Science Magazine. The community needs to be able to monitor people’s use of the common resource and have broad support for enforcing the community rules.

The community also needs to have a high level of trust and communication, and, as part of that, it needs to be able to limit entry. The problem is that, if new people come into the community too quickly, there’s a loss of social cohesion at the same time that you’re putting additional pressure on the common resource that you are trying to protect. And so together that makes it very hard to maintain effective rules protecting the common resource, and you end up with the tragedy of the commons. Now, to see why this is so important to virtual communities, let’s look at one of their most important common resources: attention. Everyone who posts a comment, chats during an event like Metanomics, updates their Facebook page, sends out Twitters or Plurks or writes a blogpost or, hey, hosts a talk show, they’re all fishing for attention. Now I don’t want that to sound like a bad thing. Drawing attention to issues of interest to the community is a public service, whether it is to educate, to entertain or simply to forge stronger social community bonds. But, just like fishing for food, there are individual benefits to fishing for attention.

And, to see the dire outcome that results when everyone starts over-fishing for attention, just take a look at the state of cable news in the United States. The easy ways to get attention are to sensationalize scandals and disputes, and that’s made all the easier by partisans who are willing to say and do anything to make their side look good and the other side evil incarnate. So actually I should mention an extreme example of this is Bob Frank’s appearance on FOX News, in which the talk show host Stuart Varney feigns outrage to Bob’s rather unremarkable claim that luck is an important element of success. I’ll be sure to paste that link into chat after the show, and you can all have a good laugh. Bob handled himself wonderfully, I should say. Now I think we all have reason to feel quite pleased with the level of discourse we see in the Second Life business and educational community. Not just Metanomics, but other business groups like ThinkBalm and educational groups like ISTE, say. You don’t see much in the way of over-fishing through sensationalism or partisanship, scandal and so on. Comments on Dusan Writer’s blog are generally very thoughtful and sincere, as is the chat during Metanomics broadcasts.

So why is that? I think Elinor Ostrom is onto something because the conditions for successfully maintaining a common resource are all here. We have a relatively

stable community, with strong social ties. Over-fishing for attention is easily monitored. And, for the most part, we support policies that discourage the kind of snark cynicism and extremism that make thoughtful discourse so difficult in many of the largest virtual communities.

So what can virtual communities learn from this new Nobel Laureate? For most, that growth in virtual communities is a tricky matter. Wagner James Au has a post on his blog today, New World Notes, explaining that mainstream adoption is a cure to most of Second Life’s problems. Sure, we’d love to see our community grow, and there would surely be many benefits, but, if we grow too quickly, we risk losing the cohesion and the norms that allow us to maintain our precious common resources. We can handle growth by devising new ways to manage our community and its conversations when it’s larger, or we can find ways to divide into smaller and more manageable sub-communities. But, either way, when I compare the level of discourse in Second Life with what I see on cable news and talk radio, I look at growth with mixed feelings. I’m thankful that Elinor Ostrom has helped me understand why that is.

Okay. That’s all I have to say today. Join us next week when we’ll be switching gears and looking at enterprise adoption of Virtual Worlds. Our guest will be Leslie Jarmon, who has brought the University of Texas into Second Life. Not just one campus, but the entire state system. So if you’re wondering what the future of education looks like and how immersive media fit in, join us next Wednesday, noon Pacific Time. And don’t forget, you can see over 80 hours of Metanomics in our archives at metanomics.net and on iTunes. See you next week. Bye bye.

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