The Macroeconomics of Information and Attention: How the Economy Works as A Whole

December 18, 2008
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In my previous posts, I discussed applying Mankiw’s Brief Principles of Macroeconomics to the attention economy postulated by Herb Simon and went through his first set of ten economic principles, which concern how people make decisions. In this post, I’ll consider the second set of principles, which concern how the economy works as a whole.

5. Trade Can Make Everyone Better Off.

Trade unifies the information and attention markets, si

In my previous posts, I discussed applying Mankiw’s Brief Principles of Macroeconomics to the attention economy postulated by Herb Simon and went through his first set of ten economic principles, which concern how people make decisions. In this post, I’ll consider the second set of principles, which concern how the economy works as a whole.

5. Trade Can Make Everyone Better Off.

Trade unifies the information and attention markets, since information and attention are often the commodities being traded. While these commodities can be monetized, they are more often traded as is, especially in the online markets.

In the online world, the market for trading information and attention is the link economy. Links are themselves a form of information, but more importantly they serve to promote other information. In the early days of the web, that promotion had a straightforward effect: a link offered the possibility that a browsing user would click on it and thereby consume the linked content.

Today, however, links serve an even more important role: link analysis are the main basis used by web search engines to determine the authority of a web page, which in turn is a major factor in determining whether and how prominently that page appears in search results. Indeed, a key aspect of web search is the arms race between search engines and “black hat” search engine optimization (SEO) experts who try to game the ranking algorithms by link spamming.

Despite the fraud, however, the link economy is a critical mechanism for creating value. As many people have pointed out, the best sites are designed to give users the information they want, even if that means directing users to other sites. This enlightened altruism earns users’ trust and loyalty. Sites also develop trust relationships with one another, formally or informally cooperating to satisfy complementary information needs.

6. Markets Are Usually a Good Way to Organize Economic Activity.

It’s hard to imagine an alternative to a market economy for information and attention (at least in the free world), but central planning is often a matter of degree. Governments may restrict what information is published or who can access it, and governments may themselves act as information producers and consumers.

While the broad freedom to publish and consume information is so taken for granted in modern democracies, one might ask if this free-for-all leads to the efficient allocation of information and attention resources. In fact, the massive duplication of online content and the prevalence of spam might suggest inefficiencies in the present allocation.

Nonetheless, it’s hard to imagine that we’d do better with central planning. In countries where governments attempt to tightly control the flow of information, citizens often manage to work around those controls, and the trend seems to be towards loosening control of information, e.g., in China. Indeed, information and attention markets may be the poster child for the effectiveness of free markets in general.

7. Governments Can Sometimes Improve Market Outcomes.

While central planning is generally a bad idea, governments can and do help information markets in at least two ways: providing infrastructure and regulating against monopolies.

One of the most dramatic examples of government creating value through infrastructure is the Internet itself. It is impossible to imagine any single information producer making the investment in such an ambitious and far-sighted project. Yet the Internet has created enormous value for both information producers and consumers.

Government also serves a key role in regulating against monopolies. Much of the historical concern about Microsoft and the more recent concern about Google reflects the critical role these companies play in routing information consumers to information producers. Government intervention–or, more importantly, the threat of government intervention–helps ensure that no one will exert and abuse monopolistic control over this market.

To sum up: information and attention create a global economy and thus are subject to the market dynamics familiar to such economies. As with other economies, the invisible hand usually knows best, but at times it is necessary for governments to make far-sighted investments or prevent abuse.

In the next and final post in this series, I’ll consider the set of Mankiw’s principles on how people interact.

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