Saturday 4 July 2015

Advertisers Should Pay You

Advertising is a natural resource extraction industry, like a fishery. Its business is the harvest and sale of human attention. We are the fish and we are not consulted.

Two problems result from this. The solution to both requires legal recognition of the property rights of human beings over our attention.

First, advertising imposes costs on individuals without permission or compensation. It extracts our precious attention and emits toxic byproducts, such as the sale of our personal information to dodgy third parties.

Second, you may have noticed that the world's fisheries are not in great shape. They are a standard example for explaining the theoretical concept of a tragedy of the commons, where rational maximising behaviour by individual harvesters leads to the unsustainable overexploitation of a resource. Expensively trained human attention is the fuel of 21st century capitalism. We are allowing a single industry to slash and burn vast amounts of this productive resource in search of a quick buck.

I. A Classic Market Failure

The advertising industry consists of the buying and selling of your attention between 3rd parties without your consent. That means that the cost of producing the good - access to your attention - doesn't reflect its full social cost. Movie theatres, cable channels, phone apps, bill-board operators, and so on price the sale of your attention at what it takes to extract it from you, i.e. how easy it is for you to escape their predations. This is often much lower than the value to you, or to others, of directing your attenti­on to something else.

Since advertisers pay less to access your attention than your attention is worth to you, an excessive - inefficient - amount of advertising is produced. We are continuously distracted from what we actually want to do, like watch a movie or listen to a song, or read a book, by messages we don't want or need. Being constantly addressed in this intrusive way changes how we think and behave. As Matthew Crawford has noted, it makes us harried and irritable, and we try to cope by closing ourselves off from the world and each other.

It's a classic case of market failure. The problem has the same basic structure as the overfishing of the seas or global warming. In economics language people's attention is a Common Good. Taken moment by moment it is a finite resource, like a sandwich, whose consumption by any party means that other parties can't consume it, including the person themselves (Rivalrous). At the same time our current institutions make it difficult for any party to prevent others from consuming it (Non-excludable). Our attention is a valuable commodity and a vast number of businesses are determined to dig it out of us and sell it before someone else does.

Why Now?

Advertising is an old racket, but these days it feels as if we are almost drowning in its insidious manipulative bullshit - inside novels, in airplanes, on concert tickets, on poor-people's foreheads, on eggs in grocery stores, on public trash cans, on the inside and outside of public buses, in police cells and on police cars, on the back of toilet doors, inside newspaper 'articles', and on and on and on. Why is this so? A number of reasons suggest themselves.

First, as we have become more wealthy our consumption decisions have become more valuable. People can now be induced to pay much more for a carefully branded and positioned beer product than the competitive market price of the mere commodity of 'beer'. We desire and can afford a more interesting consumption experience. As a result supernormal profits are available to those who can persuade consumers to buy their version of beer. Of course economics wins in the long run: the promise of those supernormal profits both attracts competitors and finances increased spending on advertising to compete to attract customers' attention until economic profits fall back towards zero. But in the meantime, a vast quantity of advertising has been produced.

Second, technology has made advertising even more intrusive. Not only is it now possible to print advertisements on grocery store eggs and to put digital displays above pub urinals. The digital age has added an extra level of exploitation. Every moment we spend on the internet or with our smart phones is being captured, repackaged and sold to advertisers multiple times. Advertisers (and other 3rd parties like credit rating agencies) will pay a great deal for our profiles because the better they know us the greater the effectiveness of their advertising. That's another way of saying that their advertising becomes harder to ignore. They can hunt us more assiduously and individually as we browse the internet, their banner ads and pop-ups following us around no matter where we go.

Third, a shift in social norms has made it more acceptable to sell other people's attention. Increased prices have spurred the development of a sophisticated market for our attention, together with an entire industrial sector of attention miners. Anyone in a position to access our attention, like the managers of pubs, hockey arenas - even this blog - will be approached by multiple companies offering to pay a fee to install their advertising screens, banners, or cookies.

Simultaneous to the appearance of this new opportunity for rentier profits has come a weakening of our moral constraints against exploiting this kind of power over people. Whether you call it neo-liberalism or something else, we are certainly living under the domination of a cult of market individualism. The result is not only that it has become morally acceptable to sell off other people's attention without their consent in the name of free market economics. But, in addition, anyone who refuses to do so is is considered an Economic Idiot: someone who leaves money on the table. If she is an agent for the owners, like the manager of a city's public bus fleet, then she is guilty of neglecting her moral duty as a trustee to secure and advance their financial interests.

Fourth, we are in the midst of a political and legal extension of citizen rights to corporations, including the right of free speech (e.g. Justice Kennedy's majority opinion in Citizens United). Free speech has two kinds of value: as a means to an end and as an end in itself. There is the instrumental value to others of gaining access to new information and ideas, and observing how well they survive criticism. And there is the intrinsic value to the speaker herself of expressing her thoughts to others. Censorship of persons is taken to be wrong not only because it has a tendency to impoverish the informational environment, but also because persons are social animals who yearn to express our thoughts to others - as I do on this blog - and suffer if we are prevented.

Commercial speech has traditionally been seen as merely instrumentally, and hence contingently, valuable (for economistic reasons I discuss below). However - despite the rather obvious fact that corporations are not people who burn to speak their mind, and can suffer no indignity from censorship - commercial speech has increasingly usurped the moral halo of free speech between persons. Commercial speech used to be understood straightforwardly as a privilege that could be legitimately regulated and constrained to meet society's interests. It is now being seen as a right, something which trumps all ordinary considerations of social welfare.

III. Counter-counter arguments: How economists defend advertising and why it isn't enough

Readers already sufficiently convinced of the badness of advertising or uninterested in more economics talk can skip this section.

The existence of the advertising industry poses something of a challenge to the ideology of free market economics since it seems to go against the principles of consumer sovereignty and consumer welfare (efficiency). Two justifications are prominent in the defence of advertising. First, that it is directly valuable for consumers, for example because it communicates valuable information. Second, that it funds universal access to Club Goods, like TV shows and internet services, whose production is socially valued but would otherwise not be financially viable. There is some merit to both of these but I think they are far from sufficient. Merely identifying specific relevant causal mechanisms is not enough for good social science - it is also necessary to work out how they interact with other mechanisms and thus how much they matter to final outcomes in the real world.

a. The Direct Value of Advertising.
The first and standard mechanism appealed to by economists is that advertising gives consumers valuable information about the sellers and the prices of products they want to buy. The favoured example here is the classified ads section in newspapers. This saves consumers the attention it would have cost to do their own research and encourages producers to compete more strongly on price, thereby allowing consumers to make more efficient purchasing choices.

Perhaps it was the case in 1961 that consumers struggled to find such information for themselves. But it is hard to see how this can still be the case in the internet age, where price comparison websites centralise such information in a far more convenient format than billboards and classified ads, though, of course, price comparison sites do not solve all information problems. (Incidentally, publishing their prices in a comparable format is something many companies resist, for example by deliberately offering complex and non-comparable service packages.)

This argument also seems to neglect the fact that information has costs as well as benefits, especially when you consider the difference between publishing information for consumers to easily find when they want it and advertising as we know it. Advertisements do not concern what the consumer is interested in finding out but what the producer wants to sell - that is why producers pay to access consumers rather than the other way round. Advertising can be used to reduce competition: high spending by rich established players drowns out information from smaller newer competitors and thus creates an entry barrier, converting competitive markets to oligopolies. And advertisements are deliberately constructed to manipulate consumers rather than to inform them, by exploiting our ignorance or cognitive biases with misleading headline prices, statistical fallacies, and so on (see Akerloff and Schiller's recent book 'Phishing for Phools'). Heavy processing by consumers, and often further research, is required to make this 'free' information usable for decision-making.

Second is the counter-intuitive claim that brands communicate their trustworthiness by their conspicuous expenditure on advertising not by what it actually says. When considering which version of the generic washing machine to buy, the rational consumer has to weigh up lots of claims about quality against the objective fact of price. If a brand can demonstrate that its quality claims are credible that makes the consumer's decision much less of a gamble. Like banks housed in grand marbled buildings, companies which pour vast amounts of money into advertising campaigns with extravagant Super Bowl ads are merely communicating their supreme confidence in the quality of their product and its long-term sales.

This argument rather reminds me of JM Keynes' suggestion that in a recession caused by a collapse of aggregate demand one could solve the problem by burying bottles filled with bank notes and then leaving it to private enterprise to dig them up again. Once again it is not that this argument makes no sense at all, but that it takes no account of opportunity cost – the fact that we have better options than nothing. As Keynes put it, "It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing."

Companies wanting to demonstrate confidence in their products don't have to waste so much of our time to do so. There are all sorts of more constructive ways of spending money conspicuously. For example any large company these days has enormous discretion over its effective tax rate. A company prepared to pay billions more in tax than it can get away with must be very confident of itself and could communicate that fact to customers by publishing  it prominently on its products. Or, to reassure customers of its very long-term viability, it could switch to a defined benefits pension system for its employees. Or it could give large amounts of money directly to hospitals and schools and publish its philanthropy as a proportion of revenue; it could make this specific to a certain product by promising to donate the first $50 million in sales.

Third, is the social status that advertising can confer on a product and its consumption. What's the point of buying a Rolex or Mercedes unless everyone around you knows that it is expensive and is able to appreciate how rich and successful you must be? The business logic here is sound, but not the moral logic. After all what this comes down to is that these companies deliberately waste the attention of the 99% of the population who can't afford their products merely so that those who do buy them can bask in the knowledge that everyone knows the price of what they are wearing and driving. Such advertising constitutes a regressive tax imposed on the rest of us by luxury brands in order to increase the value of their products to rich people.

There is one further argument that occurs to me although I haven't seen it made by economists (perhaps because the Economics of Information approach falls short of a proper Economics of Communication). This is that advertising creates value by spinning a story around a brand that customers want to buy into. They turn a mundane commodity item, like shoes or a computer, into a choice of lifestyle and a means to further your conception of the good. A kid puts on a cape and imagines herself a crime-fighting superhero. This is a crude version of the socially sustained illusions that adults can build our whole lives around and which are nowadays sculpted, in part, by advertisers. Their products become an end worth pursuing in themselves, rather than merely a means.

I think the fashioning of these illusions - turning clothes into fashion; turning food into health; turning diamonds into love - is the most significant way that advertising creates economic value, as real as the industrial transformation of steel into a car or cotton into cloth. A determined optimist might go so far as to claim that this fantasy economy represents our best chance for global environmental sustainability.

But I am dubious of the worth of its achievement, for reasons I have discussed elsewhere. In effect, advertising tries to do our practical reasoning for us, shaping and ordering our inchoate desires into actionable preferences for specific products. But can striving to satisfy such artificially induced preferences really make us happy?

b. Financing Public and Club Goods

Advertising is the financial model for many pure public goods like terrestrial TV and radio, as well as club goods like newspapers, Google's search/email and Facebook. These are goods that tend to have very low variable costs – meaning the cost of serving an extra individual is almost nothing. The socially optimal level of production is universal access for free (i.e. at the marginal cost of zero).

Yet there are still significant fixed costs that must be recouped if producing these is to be financially sustainable. In cases of pure public goods it is implausible to charge individuals for access. In cases of clubbable goods one could take a subscription approach, but its transaction costs might raise the price well above the profit maximising price. In addition, the profit-maximising price of a subscription will exclude most people from access (the path chosen by the academic publishing and pharmaceutical industries), meaning a deadweight loss in social welfare.

Advertising provides an alternative revenue source that makes it possible to profitably provide such services universally at the marginal cost of production, i.e. zero. Advertising thus solves a problem the invisible hand couldn't reach and thereby makes us collectively much better off.

Again, being better than nothing doesn't make advertising better than plausible alternatives to the problem of financing club goods. If these things are so valuable to society there is a case for supporting them with taxes – grants, license fees (many national broadcasters) or payments for ratings. This is a well-established system for funding public and club goods. Taxes have their own inefficiencies of course, as well as some unfairness in requiring people to pay for services they don't use (the childless paying for schools; urbanites subsidising rural bus routes; smokers contributing to pension funds; etc). But the negative costs of advertising are arguably worse, and harder to bring under public scrutiny. For example, news 'shows' can become so dominated by the advertising business model that they are reduced to little more than strings of sensationalist cliffhangers to keep you watching through the next commercial break.

However, the main challenge to the financial sustainability argument is that maximising profitability is a business economics rather than an economics concern (previously). The level of advertising in a product, such as a magazine you thought you had already paid for, is not calibrated to the requirements of financial viability. It is just another source of revenue to be maximised. Google makes $60 billion a year from advertising; Facebook something like $10 billion. These figures bear no relation to the cost of providing the services that their consumers value. They are best understood as rents, payments that accrue to agents simply because of their privileged access to a scarce resource: our attention. Many for profit companies are forced to rely on advertising only in the sense that it is their best strategy to maximise profits and that is what they exist to do.

Alternative models, like Wikipedia's are sometimes possible, and are more socially - i.e. economically - efficient. Wikipedia's value to consumers is in the hundreds of billions of dollars while its annual operating costs are only $25 million. If Wikipedia were to fully exploit its advertising potential it would realise revenues of several billion dollars per year. But it clearly doesn't actually need to do that - its annual pledge drive is quite sufficient. Obviously Wikipedia is unusual. Its operating costs are so low, like Mozilla's, because of its volunteer labour force. But that fact just makes one wonder why we couldn't have a 'democratic' Facebook too, and whether that would not be superior from a social welfare perspective to the current 'farming model' of extracting maximum ad-revenue from its members-cum-livestock.

IV. The Right to Preserve Our Attention

Advertising is a valuable commercial opportunity for businesses with access to consumers' attention, or their personal information. For the companies that buy and sell our attention it is - as all voluntary transactions must be - a win-win. But advertising lacks the free market efficiency that is claimed for it. Advertising is made artificially cheap, like the output of a coal burning power station, because the price at which it is sold doesn't reflect its negative effects on 3rd parties – us.

Defenders of advertising, including economists, point out that it has positive side-effects for consumers, including price competition and the funding of universal services like Facebook, Google and broadcast and online journalism. But their calculations generally neglect the costs to consumers' welfare of an excessive amount of advertising, and the possibility of alternative funding systems like taxes (the BBC) and philanthropy (Wikipedia).

The problem is not just that particular adverts are annoying and distracting and exploit our inability to escape, but the cumulative effect of having to wade through an endless stream of sugar coated crap. We seem to be drifting into a Terry Gilliam dystopia.

Avoiding dystopia does not require trying to eliminate all unsolicited advertising - that would create its own inefficiencies and also likely dig into intrinsically valuable forms of inter-personal free speech. However, there are multiple levers we can pull on to bring advertising back under control.

First, we should reinvigorate social norms and legal rules against the excessive exploitation of our attention. For example, we should firmly repudiate the idea that commercial speech has the moral status of human free speech. That will allow us to restrict advertising wherever it seems to do more harm than good for society, such as the talking billboards and popup windows which resemble the public nuisance of cars without mufflers.

We should also carve out large domains of our lives as ‘attention preserves', which would be off-limits to advertisers as nature preserves are off-limits to commercial development. Even when visiting a mall, you should still be able to take a break from being commercially targeted when you visit the restroom! Now, you might say that the market already provides attention preserves, since Gmail, Facebook or even old-fashioned print newspapers all have a clear power and incentive to keep the harvesting of our attention below unsustainable levels. But the way these companies prevent a free for all tragedy of the commons is by farming their users. A shift in social or legal norms would protect our attention from predation without treating us as farm animals.

We should also restore the principle that advertising requires at least tacit consent, meaning that we could realistically exercise our notional right to exit (not that there is a legalistic 20 page user privacy policy available somewhere on the website). That means certain physical spaces should be out of bounds, such as airplanes or police cells or schools. In digital space it means that ad-blocking technologies and ad-skipping TV recorders should be generally available and legal (though perhaps taxed).

Second, in some spaces we should embrace the ethic of market fundamentalism and then demand that advertising conform to it. The reason advertising is artificially cheap is that no one has to ask our permission to advertise at us. We are involved in the transaction only as the commodity that is being bought and sold, and therefore the value of our attention to us - the opportunity cost of being distracted and interrupted by all those self-serving spam messages - does not determine its price. Instead, the market price for our attention is just the cost of digging it out of us. That's the difference between the price of conscript labour and free labour. From this perspective, the problem is that our property rights regime does not reflect the ideal of consumer sovereignty at the heart not only of mainstream (neoclassical) economics theory but also the political ideology of market fundamentalism that actually determines economic policy.

What is needed is an effective property-rights regime that gives individuals the right to control where we direct out attention, and thereby bring the market price of this modern commodity in line with its true market value. Advertisers should pay us, not third parties. If you could assert your property rights to your attention you could sell it at a price that reflects its value to you. If advertisers had to negotiate directly with you, or at least your software agent, then they would have to start paying a price that would not leave you feeling violated. And at that price they would want to buy much less of your attention than they do at present. Capitalism being the wonder that it is, there are already some companies trying to make a business model out of this (e.g. Fluence). The increasing popularity of ad-blocking software is also leading some internet companies, such as the Guardian, to offer alternatives.

Third, we should reconsider more socially efficient ways of funding services that can be scaled up at almost zero cost. This is particularly important now, because zero marginal cost is what the internet is all about. Access to these digital services shouldn't depend entirely on the dominant commercial models of advertising vs subscriptions. Journalism for example is too important to be reduced to clickbait and abject dependence on Facebook and Apple. Other industries, like academic publishing, use a subscription model that excludes a vast proportion of possible readers at the profit maximising price.

From an economics perspective, this is idiocy. We are leaving social value on the table. We should be looking for alternatives, whether different funding models (like micro-payments, or a spotify for books and academic journals, or citizen voucher systems); different funding sources (like pledge drives and taxes); and different economic structures imposed by governments (such as restrictions on 3rd party sales of your information, eliminating the tax-deductibility of advertising, or democratising the governance of large social media companies like Facebook).

V. Summing Up

Terrestrial TV probably presents the best known example of the economic - and moral - case for advertising. It's the model many people immediately think of when this issue is raised. Other funding sources - taxes or pledge drives - come with their own significant limitations. Furthermore, consumers have easy exit rights, so their choice of how much to watch more or less tracks their personal level of dislike for advertising. Although consumers are not the customers of TV companies, they therefore have substantial influence over the transaction, and the quid pro quo for them is transparent.

But most advertising nowadays doesn't look like that. Advertising is just another revenue stream to be maximised by those with access to our attention. Whether it requires our tacit consent or a quid pro quo is entirely contingent. Since we are not formally - legally - part of the transaction, our influence over its terms declines in proportion to our inability to escape it. For example, lots of companies sell you things, and then go on to sell your attention (and all the information they can glean about you) to other companies as well. Like movie theatres, live sports events, cable TV, airlines, and so on. The digital subscription I bought from The Economist feeds me the same advert for the same MBA programme every couple of pages, a level of crassness that demonstrates just how little these companies value the attention even of their paying customers, and how little faith we can put in targeted advertising to improve things. It is hard to believe that advertising has much to do with providing information to aid rational economic agents make decisions. Advertising to children in America, for instance, has increased more than 150 fold since the early 1980s; schools are especially targeted exactly because the audience can't escape.

Our right to preserve our own attention and to make our own decisions about how we spend it and with whom our personal information is shared must become part of the political agenda. We need a legal and policy response to the market failures of the advertising industry, and we need it soon.

As long as either our attention or our personal information are traded by 3rd parties in markets that do not incorporate their value to us, they will tend to be underpriced and used in ways that are both against our wishes and detrimental to our well-being. That meets the definition of exploitation. Things that we find valuable and are quintessentially our own are being stripped away from us without our consent or adequate compensation. The state of the advertising industry is a gift to critics of capitalism as a whole, like Naomi Klein or Michael Sandel. And they have a point. Our expensively trained attention is the central productive resource of the 21st century. It's what all those shiny digital services and promises about the internet of things are ultimately made out of. If we don't own this resource then it belongs to no one and everyone, or, in other words, to whoever can grab it and marketise it first. This is the set up for a tragedy of the commons.

A shorter version of this essay was published on 3 Quarks Daily.
A version about this length was published on ABC.
A Portuguese translation has been published by Yann Lima Rodrigues on his blog, Além do Roteiro.

This version is under revision and subject to change.

Further recommended reading
Matthew Crawford on The Cost of Paying Attention.