An Economics of Polarization

This post is a response to yesterday’s discussion in Davidson Now’s pop-up MOOC,  “Engagement in a Time of Polarization”.   The key provocation for the discussion was Chris Gilliard’s great essay Power, Polarization, and TechThe video of the hangout discussion is embedded at the end of this post for you.

In his discussion of social media rules and platforms, Chris poses an interesting hypothetical:

If we had social media and rules for operating on platforms made by black women instead of bros, what might these platforms look like? What would the rules be for free speech and who gets protected? How would we experience online “community” differently than we do now? Would polarization be a bug instead of a feature? The historical disenfranchisement of black and brown women and men is compounded by these same folks still being walled off and locked out of tech institutions through hiring policy, toxic masculinity at the companies, and lack of access to venture capital. “Black women are the most educated and entrepreneurial group in the U.S., yet they receive less than 1% of VC (Venture Capital) funding.”

I’m going to argue that if Facebook or Twitter or one of the other monster social media platforms had been staffed and created by black women (or just about any other historically disenfranchised group) the results would likely have been the same.  I’m not arguing an “all people are corrupt” position. Rather, I want to highlight the institutional conditions and economics by which these firms come about.  The institutional framework in the US, combined with some straight forward economics pretty much sets the path. Any group of entrepreneurs would likely end up in the same place, behaving the same way, and producing the same polarizing products/services.

I say this not as a voice of gloom, but rather to highlight that if we want to avoid or dismantle the damaging polarization and surveillance capabilities of these social media mega-platforms, we need to make institutional and legal changes.  And those legal and institutional changes may be in areas you don’t suspect such as antitrust law. First, I want to bring to light two different aspects of the institutional economics of these firms. The first is price discrimination and the second is corporate capital funding structures, especially for start-ups.

The bros that started, coded, and grew these social media platforms such as FB, Twitter, Google, and even Amazon, didn’t set out to polarize the population. Each had an interesting concept to provide people such as search (Google), interpersonal social connection (FB), or quick broadcast chat (Twitter).  But those services required large user bases and people were unlikely to pay for the privilege. So a monetization model was needed. Advertising and/or data sold to advertisers. Most folks know that these platforms with their data enable advertisers to “target” specific higher-probability buyers for their products.  But just increasing the likelihood that a specific ad will result in a sale isn’t the gold.

The gold is in price discrimination. Always has been.  I don’t have time now to fully explain price discrimination, but there’s a Wikipedia entry on it and an Economics Help site entry for it. An individual’s real demand curve for a product is very difficult to ascertain. It’s a hypothetical. It’s how many would you buy at all the possible prices? Looked at from a seller’s viewpoint, it’s what’s the maximum price I can charge and still sell as many as I want?  If the seller knows, he/she can charge prices that capture all the consumer surplus value for themselves instead of sharing the joint benefits of the transaction. 

If an advertiser/seller can gain enough information about a potential buyer’s real demand curve, it’s the route to profit nirvana. But historically it’s been difficult to do price discrimination. For products, there’s that pesky Robinson-Patman antitrust law. Often it’s been done via proxy indicators of group preferences – think Ladies’ Night at the bar or higher prices for business travellers on airlines. Getting the knowledge has been tough.  Big data from social media solves that problem.  That’s why social media data is so valuable and profitable and why FB/Google/Amazon/Twitter chose that route to monetization instead of subscriptions or memberships.

This price discrimination behavior is nothing new and neither are the abuses. It’s what made John D. Rockefeller’s Standard Oil so profitable and so socially destructive 120 years ago.  The urge to find ways to price discriminate is inherent in corporate market behavior.  The only limits legal.  We used to pass and enforce antitrust laws against such behavior, but that’s been considered bad form ever since the Reagan administration listened to the Chicago boys back in the early ’80’s.

To enable price discrimination practices, the social media monsters had to find more and more data about each and every user.  There’s a direct line between individualized data and monetization.  Now the marketers don’t call it discrimination. They call it differentiation.  They want to know exactly how every person is different from everybody else and find little homogenous groups to put them in.

The purpose was economic & marketing discrimination/differentiation. But once the differences are revealed. Polarization, a side effect, is all about finding differences, not commonalities. Finding commonalities doesn’t make money for marketers.

I don’t think any of the bros that did this at these platforms intended or planned to polarize the nation. It was just an unintended, unconsidered consequence.  Don’t get me wrong. I’m not absolving them of responsibility.  Sometimes unintended consequences could and should have been foreseen. It’s kind of like drunk driving. Very few, if any, people set out to drink and the drive with intent of killing somebody.  It happens because they didn’t think and didn’t foresee the consequences of their actions.

Given the incentives and demands of capital structure, I think any group would likely have gone for the price discrimination-data collection jackpot, especially since there are no legal guard rails against it and they likely would have to as a startup.

Now that gets us to another question. Why did FB/Twitter/Google, et al, find the need to maximize the monetization?  Well, here we can fault them. The reason was greed but again it was unintended, unforeseen consequences.  Their choice of capital structure forced it. They went for too much cash at the IPO’s.

Chris is right. Black women as a group are highly entrepreneurial. But there are maybe 4 motivations for entrepreneurship. Some do small businesses because there’s no other option – that’s a lot of present black women entrepreneurship. Some start businesses just to be left alone (like me 20 yrs ago). Some just want to get stinking rich and leave (Peter Theil, Paul Allen). And some want to get stinking rich, build a huge legacy corporation, and rule the world (Zuckerberg, Bezos).  FB/Google/Twitter et al chose to go the IPO route to become stinking rich.  Google, IIRC, did it twice.  The cash they gathered from those IPO’s did more than fund operations and some growth. It was in excess of their real cash needs. The consequence was they needed continuous high growth rate in both users and profits.  That’s what Wall Street style financial capitalism both rewards and requires. With the high, continuous growth, there’s no stock premium No stock premium = low stock price = founder isn’t really that rich.

My argument is that some other group, black women or POC or whoever, might have done things differently, but only if they had set different goals of not getting rich. Unfortunately, the US corporate funding and legal systems don’t really allow for enterprises that in-between. It’s either struggle for funds as a non-profit or go for continuous profit maximizing high growth.

There’s not really an institutional option for funding “just adequate to provide a utility-like service”.  To get the funding to start, any group effectively commits to the profit max, high growth route.  And that commitment drives the monetization strategy of data collection to seize the gold of price discrimination.

Is it all gloom and doom? No. I don’t think so.  But arguments that simply ask for firms and developers to be more “ethical” or even just more diverse aren’t likely to work in my opinion.  We need to change a lot of the rules of the game.

I do have suggestions for those changes, but this more than enough for tonight.


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