Nishith Hegde discusses the ways in which economic theory has failed to keep pace with the internet.

Scientia potentia est. Knowledge is power. Intuitively, we have valued information for centuries. Yet economists, deeply concerned with ‘value’, have been slower to accommodate it into theory. Authors like Spence and Stiglitz first developed concepts such as screening and signalling, which try to verify untestable information, in the 1970s. More recently, behavioural economics grapples with informational inconsistency – when individuals do not behave the way they tell us they will – and with biases in perceiving information. As our theories grow more robust, we even model information itself as a commodity – something that can be sold and purchased – and as university students invariably convince themselves, as a form of capital which can eventually be used to demand a wage premium. Uncertainty, or incomplete information, is priced into every modern model of transaction, speculation, and choice.

A Whole New World  
In its infancy, the internet was dubbed the ‘information superhighway’. The reason for this isn’t just that information travels unimaginably quickly online, it is that the way internet technologies supersede old assumptions makes them look like horse-and-carts in comparison.

Even the most sophisticated models have been upended as a result. For example, most models presume some information asymmetry, revealing value instead through prices and behaviour. By contrast, modern internet-empowered agents have unprecedented capabilities in information collection, creation and transmission. Our own phones collect intimate information about our preferences, location, and even health. Each byte of data optimises advertising. Perfect price discrimination, a mere hypothesis in brick-and-mortar stores, is suddenly possible: that is why flight prices can vary so much based on the cookies in your browser.

Consumers benefit too. In Akerlof’s famous “Market for Lemons”, a buyer cannot distinguish a healthy car from a dud. Today, anyone can freely research a car’s MOT history before signing. Discovering products is effortless: search engines print millions of results, and fine-tuned reviews help optimise consumption choices to preferences. Markets that previously could be locally monopolised are forced into perfect competition. If a firm is exploitative, consumers merely find and order from another. An employer need never hire a worker without Googling them first; yet that same worker is empowered to negotiate their salary when they can look up the rate offered by competitors. Confident that they are taking a smaller gamble, both agree more readily, and benefit from better employment matches.

Other modelling assumptions suffer nothing less than iconoclasm. There is no concept of scarcity in many internet-enabled marketplaces, when tangible products like education, books, and music can themselves be turned into pure data. Instead of a ‘Market for Lemons’, today, Beyonce’s Lemonade is a multi-platinum album streaming online, exploiting the fact that digital distribution allows near-infinite duplication at near-infinitesimal cost. Illegal file-sharing frustrates every government crackdown, yet this crime is not conventionally ‘theft’ : availability is not reduced for others. The heresy of the internet is that it transforms private products into public goods.

Fake News, Sad!
However, the effect of these technologies is not wholly positive. When information can be taken without people’s consent or knowledge, it disempowers them and strips them of choice. And, with so-called ‘fake news’, the internet disseminates not just more information, but sometimes false information.

Studies repeatedly demonstrate that respondents believe around half of the news they consume, even if it is unverified, and estimates of exposure suggest the average American encounters one such story monthly. The effect is skewed decision-making, reducing the agency of individuals to protect their interests. Behavioural economists such as Kahneman and Tversky had already shown that individuals often make worse decisions with partial information than with no information due to the overriding influence of subjective biases – but if you believe you possess true information, why would you ever question your choice at all? Claims that Brexit would deliver £350 million weekly for the NHS or that Hillary Clinton ran a paedophile ring, are perfectly sensible from the perspective of voters responding to false information. For now, at least, answers in the fields of economic and political science remain scant regarding this new dilemma: information which is negatively informative; and it remains unclear what unforeseen challenges future technological developments may present.

We’re all cruising down the information superhighway, but our final destination remains, for now at least, maddeningly unknowable.


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