The Macroeconomics of Information and Attention: How People Interact

December 19, 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 the first seven of ten economic principles, which concern how people make decisions and how the economy works as a whole. In this final post of the series, I’ll consider the last three principles, which concern how people interact.

8. A Country’s Standard of Living Depends on

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

8. A Country’s Standard of Living Depends on Its Ability to Produce Goods and Services.

Over the past two decades, we’ve increasingly heard that we live in an information economy. In the United States, the information economy has been estimated to represent 63% of the total GNP–and that estimate is over a decade old! Even allowing for the inherent challenge in defining the information economy, it’s clear that a large fraction of the goods and services produced in the United States represent information goods, and–present economic concerns notwithstanding–have contributed to the steadily advancing standard of living in this country.

But what if we restrict our attention to the information and attention markets, rather than overall standard of living? Can we still derive insight from Mankiw’s principle?

I think we can best answer that question by looking at asymmetries in the global information market. Information providers, in which I’ll include everything from traditional media companies to web search engines, are heavily concentrated in the United States. As a result, far more attention flows into the United States than out of it. In global economic terms, the United States has a attention trade surplus.

9. Prices Rise When the Government Prints Too Much Money.

Of course, there’s no government printing a liquid currency specific to information or attention. Nonetheless, we can see effects akin to inflation when larger amounts of information become to people without an corresponding increase in the value that information represents. This information glut is the root cause of information overload, and the result is that all information becomes perceived as less valuable.

On the other side, there can be no inflation in the attention market, since people’s attention represents real, rather than nominal, value. If everyone were to have their 15 minutes of fame, then the fame wouldn’t be worth much.

10. Society Faces a Short-Run Tradeoff Between Inflation and Unemployment.

Here I have to admit that it’s a bit of a stretch to apply this principle of macroeconomics to information markets. But this is the last of the ten principles, so I at least owe it a try.

Reducing inflation, in the sense described by the previous principle, requires reducing (or the slowing growth of) the amount of information available for consumption. Naturally, information producers resist such a reduction, as they would like to use this information to gain the attention of information consumers. But it’s a tragedy of the commons: if all of the information producers attempt to optimize for their self-interest independently, the result will be a devaluation of everyone’s information.

This is the hard choice we face as a society when we attempt to remove friction from information and attention markets. It is tempting to reduce the cost of publication to essentially nothing and optimizing the liquidity of attention markets through auction models like those used for search advertising. We can introduce friction to reduce inflation, but only at a cost.

To sum up: information and attention may not be traditional economic goods, but they nonetheless follow general economic principles. And technologists who work with information would do well to learn from those principles.

I’d like to close this series with a story I heard from a colleague at Yahoo Research (either Prabhakar Raghavan or Usama Fayyad) about economics and information. Yahoo runs a online personals site, and encountered a problem common to such sites: women complaining about being inundated by email from men. Yahoo’s engineers saw this as a technical problem and brainstormed technical solutions, such as automatically detecting and filtering out messages that might draw complaints.

But an economist on the staff quickly identified the problem: the lack of scarcity in the system’s attention market. He proposed a simple solution: give men a limited supply of “digital roses” to hand out to women. Then the invisible hand of market economics solves the problem on its own.

I don’t know whether or how Yahoo ultimately implemented this approach, or whether they considered its applicability to other gender pairings. But, as information and attention become increasingly important economic goods, we would do well to learn from their example.

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