Feb 272009

Re blogged from Wednesday, August 30th, 2006 with very slight changes:
This blog focuses on the coming of the Attention Economy. Every so often, I shall remind new (and even old) readers of what I mean by this term.

The basic idea is that we are moving toward a new kind of economy, wildly different from any before.

An economy in this sense is system of actions and transactions of some kind involving scarce but desirable or necessary entities, with the multiplicity of such transactions intricately tying an entire society or several societies together.

Attention here means attention from other human beings. Because we each have limited capacity to pay attention, the amount available is inescapably scarce. The more some have, the less others must have. This is so even though attention is really quite difficult to quantify with any precision.

Attention is necessary for all humans. It is also desirable, with no limit to how much a person can actually want. As long as it seems possible to garner additional attention through the Internet and related technologies, more and more people will go after it, increasing the level of competition for it and thus the overall scarcity. This leads to a vicious circle in which attention becomes more and more sought after. Its pursuit more and more fully comes to occupy most people’s efforts.

So far, to a considerable extent we have moved toward this new economy without any real consciousness of it. We largely analyze our affairs in the increasingly misleading terms of the old economy, in which such measures as GDP, employment and wage rates, inflation rates and the like are the key indicators. But these terms came into use in an economy dominated by the industrial manufacture of standardized goods.

One of the first such standardized manufactured goods was money itself (in the form of coins). Now, increasingly, money tracks attention. Those with a great deal of attention can easily obtain money, should they want it. Those with little attention will have a much harder time obtaining money. But this relation between attention and money may itself be transitional. When and if we fully enter into the attention economy, money may lose any significant role.

The attention economy, like any economy historically different from the industrial, market-based economy in whose terms we are all used to thinking, will have its own different implicit rules, roles, cycles, values, etc.

Feb 192009

[Note: this is another entry in my attempt to make sense of the crash and see how it is tied to the Attention Economy. Some earlier entries are here, here, here, here and here.]

I attended an informative, thought-provoking and amusing talk by Prof. Brad DeLong of UC Berkeley on Tuesday on the financial crisis “of 2007-2009” (he expects the crisis to have diminished by the end of this year). (The talk was part of the OLLI series on the crisis).

DeLong is primarily an expert on finance, and perhaps for that reason I felt his focus was a bit off. Along with most economists he seems to assume:

1. Nothing has fundamentally changed; industrial capitalism will go on much as it has “once the crisis is over”
2. There is no problem with the assumption of endless growth and endless increases in productivity, and no contradiction between these and full employment
3. The source of the crisis is fundamentally financial in nature.

I disagree with all three of these assumptions. (Of course, finance is far from my specialty. )As DeLong made clear, unlike most recessions since 1950, this one was not caused the Federal Reserve’s raising interest rates in order to dampen inflation. Further, a graph at the beginning of his talk, showing employment as a percentage of adults  (I assume from 18 to 65 years old) revealed that while employment ratios grew tremendously from 1970 on as a result of feminism and women’s  entering the workforce in droves (voluntarily or not), the employment ratio fell sharply in 2000-2002, and did not recover at all completely before this current sharp downturn.

In my view the unwarranted growth of the financial sector over recent decades, and especially more recently, covered up declining incomes among much of the populace. Further, the issuance of low cost and even poorly vetted mortgages and other forms of credit, including home equity lines, covered over the reduced buying power of ordinary workers. That arose from the more intense international and automation-related competition of the past decade and a half. Construction work cannot easily be off-shored, but it was eventually bound to come to a halt or at least sharply slowed down. So the lowered purchasing power, which  was hidden by too-great credit expansion and construction work combined, is now visible. Increasing credit and even a stimulus package, unless it is to be repeated again and again, cannot prevent this buying power reduction. Also, as labor productivity continues to rise, barring hugely increased government spending (on what?) consumption cannot reasonably be expected to rise at a rate that will allow full employment.

What of the financial  sector itself, with its rich profits in recent years and high wages and other remuneration? To be sure, capitalism requires a financial sector to move credit to new areas, etc. But how big should it be? Just as computer-based automation has cut jobs or lowered wages in other sectors, it should have done this even more dramatically in finance.  Given any fixed set of financial transactions, most steps are routine and can easily be turned over to computers, as anyone engaged in personal online banking, purchasing and bill paying should be well aware.

But rapid computation and rapid money transfers via the Internet, etc., have allowed a new  kind of financial activity, including all the vaunted derivatives. While some minimal level of trade in such things may have had beneficial effects outside the confines of finance itself, to a large extent it has become a sector that operates completely in its own sphere. The only actual connection to the rest of the world are the dividends to bank-holding-company shareholders, returns to hedge-fund investors, and the super-high bonuses paid to many finance-sector workers. Many of these gains, of course, were reinvested, and have now partly or wholly disappeared, but others were spent on various luxuries, which did create considerable employment outside the pure financial sphere.

The essential activity of this sector, however, amounts to the equivalent of shaving the coins passing through, but, using electronic funds transfer and operating digitally, the returns per finance worker appear much larger, and there are no tell-tale shaved coins to be seen. To the extent the financial activity encourages investment by outsiders in the stockmarket or other kinds of instruments, it also appears to create wealth by inflating purely financial prices, such as the prices of bundled mortgages or of many common stocks. But that mythical wealth simply disappeared in the downturn.

Risky financial shenanigans, as DeLong eloquently argued, are hard to prevent or regulate, but they can be seen as adding only mythically to the GDP. When the balloon is punctured, the more accurate state of affairs returns, though very much to many people’s discomfort.

My uses of terms such as “mythical” and “accurate” in the preceding two paragraphs is perhaps slightly slanted. If prices are what people will pay, these inflated values are no less accurate or no more mythical than any others. So let me instead suggest that in addition to what may be called industrial-product value and what might be referred to as attention value, the finance sector creates an additional sort of value of its own, call it “transactional value”, that has little basis in either of the others and has a balloon-like quality of growing until it bursts, which describes what happened recently and what can happen again. But the underlying question as to why it happened now is not fully explained by that description.

Further into his talk, DeLong presented a slide stating that, of 80 trillion dollars of financial assets before the meltdown, only one trillion had been invested in bad mortgages. Nonetheless net financial assets have declined by 25%.  The other 19 trillion were, according to him, reduced because too many assets have been discounted either because of risk or because of lack of information. I see it somewhat differently. Assets, such as stocks, were overvalued before the crash on the same basis as mortgages, that is with the assumption of endless growth. For example, stocks are priced to reflect prevailing assumptions not about present profit levels continuing but about future growth of profits. In most cases these assumptions were just hopeful and not fully warranted. Because there was so much money floating around, it had to go somewhere and ended up in the stock-market, driving prices up. Anyone who had invested in a typical stock earlier saw the asset growing in value, even if there was nothing besides these more recent stock purchases underlying that appreciation in price. Similarly, new inventions and commercial real estate, as well as other sectors, had gained because of unwarrantedly rosy assumptions. Now that  it is evident that Americans are in debt and have no further home equity to draw on, they are on the whole in a much worse position to purchase anything, or even to pay off loans. Thus the current credit crunch and reduced spending are not due to jitters beyond the mortgage crisis but directly related to it.

In the question period, someone asked DeLong whether the crisis was partly caused by flat average wages since 2000. Pausing to consider this question, as if for the first time, DeLong opined that that was not a very significant factor in the current troubles. Had the questioner asked whether the growing inequality of incomes and wealth between the rich and everyone else were  partially at fault, would the answer have been the same? Had wages risen as in earlier periods, keeping pace with productivity growth, the need for borrowing would have been much less, so either ordinary people would have been able to save, or consumption would have been at a higher level. The financial sector would not have gotten so far out of balance. So a key question is, just why did wages not grow?

One answer is that the existence of home equity and easy borrowing lowered labor pressure on wages, but I doubt that is the whole answer. Workers were afraid to ask for  wage increases, because the more they took home, the greater the danger that their work would somehow be off-shored or automated. If, as I have suggested repeatedly, we are moving towards an attention economy,we are the stage in which income crudely speaking tends to reflect the attention a person gets. DeLong gets paid more than a typical factory worker, for instance, because he gets more attention. Still, he get not nearly as much attention as Alex Rodriguez, and that is reflected in the difference in their emoluments. Higher productivity would increase incomes only to the extent that the workers in the automated factories impart some essential aspects of themselves; if they are fully replaceable, they remain pretty much invisible. Within the ordinary manufacturing and services sector, only the designers of processes and products have much chance to get attention, however indirectly. But even they must compete for attention. That leads to a limit to growth. All acts of consumption are acts of attention paying, and there is only so much attention to go around.

Why has this not always been so? Because the competition for attention has kept heating up of late. Thus attention inequality and wealth inequality partly track each other. The financial wealth that is now disappearing was somewhat outside that, so attention and wealth May be even more fully aligned in the future. Insofar as this is an industrial depression, more off-shoring and faster productivity growth will coincide with further downward wage pressure and more invisibility for ordinary workers and for many corporations that do not have compelling visions at their heart.

Finally, let me add some thoughts about the stimulus and its likely effects. I’ve long been a Keynesian as far as the standard economy, so I do welcome a stimulus, and wish it were even larger. DeLong didn’t say much about it in  his talk, although generally agreeing with me so far. But he does say more on his blog. He suggests there that the ‘multiplier” could be greater than one. In other words, for every dollar the government spends in stimulus, more than dollar’s increase in GDP could result. DeLong cites studies of various American wars to argue that in the past the multiplier was about 0.8. I must say I would have thought it would have been larger. To some extent the multiplier must depend on how rapidly money turns over, that is how quickly money can move from pocket to pocket. It also depends on how  many times the money is spent in the community in question as opposed say to leaving the country. As a crude guess, we should now expect some of the money to be put into savings or to pay off existing loans, but since banks are unwilling to lend, those payments may not help create further employment. Also, money spent on standard consumer goods will partially leave the country, probably at a higher rate than in the past. Thus the stimulus will certainly put people to work but not do quite as much as is hoped.

But the idea of the stimulus package is also to help in other ways, by preparing the US capitalist economy to work better, so that further stimuli are not needed. Of that, I am skeptical. On its own, the stimulus will not do much to create greater equality. It also can do little to redirect rising attention inequality which will be of increasing importance. It will not prevent off-shoring of industrial jobs in both manufacturing and services, nor prevent increases in productivity. While I am an ardent supporter of good education, I also do not believe that increased education or even better eduction necessarily translates into high-end jobs for everyone. (See also here , third graf from the end). Some people will be able to turn their educations into getting more attention for themselves, but others probably won’t. One can hope that educators will instill a necessary sense of community, but at present that seems like a long shot.

I think we are entering a new stage of history, and we don’t yet see how it will play out well for most people.

Feb 132009

Item: In certain places, bar and bat mitzvah celebrations had become intensely competitive, with parents generally responding to kids’ needs to up the ante by spending ever-more money on more lavish and far-out parties. According to a recent report on the public radio program, Marketplace, that included having the celebrant jump through a hoop of fire or be escorted thorough a Polynesian -themed entrance by scantily clad dancing girls. In this competition for attention, the rising sensationalism meant on average no kid would get more attention than before, but the arms race was hard to stop.

And all that spending, mostly on locally provided services, was stimulative to the American (money) economy. Now, however, just when more stimulation is apparently needed, it has become more attention-getting to desist from the arms race and offer an obviously less lavish and expensive and altogether more sober sort of event, one that seems to fit the down-sized times. It just does not do to be too ostentatious in spending in the current recession (or depression). From the point of view of the capitalist economy, this is too bad. Now is when a stimulus is certainly most needed, and people who can spend, it could be argued, have a good citizen’s responsibility to do so.

Item:As the shenanigans in Washington over the stimulus package reveal, plenty of people still can’t get their minds around the idea that spending is needed to revive the economy — assuming it can be revived. President Obama, in my estimation, is himself only partially convinced of this necessity, and therefore has yet not done an effective job of convincing the wider public. He keeps appointing people who also are more culpable than corrective in changing the tide. The dual (if absurd) messages that people on Wall Street deserve high pay for their hard work —much higher of course than many other hard workers — and that saving is better than spending, that in fact too much spending seems to be what got us into this mess, collide and produce cognitive dissonance that leads to fear and inaction.

Item: workers of all kinds in China will work for much less than their US counterparts. Why shouldn’t the banks set up all their operations in China, and why shouldn’t President Obama hire Chinese economic advisors? I’m sure the latter can give just as mediocre advice as he’s getting at higher prices now.

Item: as I just said, workers of all kinds, including high qualifications are available in China and can do anything American workers can do. It’s great for the Chinese if they are employed even at their low wages, but it would be horrible and impossible for Americans to try to get by on such small wages. This is the folly of globalization. It wouldn’t be folly if there were an unlimited need for workers, but rising productivity means that is not so.

One of the things that makes the typical American economist so mediocre is the assumption that we can “get back” to steady growth for all infinity, if we only correct for ecological problems (that part’s ok). This hope ignores that we cannot sensibly consume infinitely much, so that rising productivity eventually has to cause problems. Even in a world in which everyone has a good income, in which institutions and cultural preferences and technical limitations do not limit consumption, the scarcity of attention eventually would do so. But in the real world, where incomes are already decidedly unequal, where most of the world has in fact lost ground as a result of the breakdown of ordinary agriculture as more productive western agriculture has replaced it, and where factories , etc,. get more highly productive all the time, the limiting consumption point has quite possibly already been reached. The average Chinese probably would not want to consume at the American level, or even imagine doing so, and all sorts of barriers anyway prevent that. For the world’s devalued peasants, the idea of huge consumption is still further off scale.

Actually, the turning point was some time ago, I suspect. What kept us from noticing was precisely the overheated financial sector here in the US. The Internet and the like have greatly speeded the rise of the attention economy (in my sense) but it has also made possible a vastly overheated financial sector in which large volumes of money running through could be slightly diverted in order to set up apparently substantial profits that were little more than gimmicks, even if unintentional ones, but these gimmicks for awhile were also justified in issuing mountains of loans that allowed the average person to buy much more than the average declining income would have made possible. That fed, for instance, the credit card binge and the mortgage binge that led to ever higher home prices, leading to ever more toxic mortgage deals, etc. But the collapse of that house of cards just reveals the deeper underlying problems of a bereft capitalist economy. As US consumption was what kept the entire world economy afloat at the level it was, our fall now cascades into others’ economies as well. Pulling the whole world out of it is going to take much more than has ever been seen before, and I don’t see how that more can be more capitalism as usual.

As stock prices sink and profits plunge, the firms that survive will be the ones that continue to increase productivity the fastest, which means shedding even more jobs.

Item: The bailed-out banks have been loathe to lend money to ordinary consumers, because most of them are maxed out on their credit anyway. But the same banks were willing to form a consortium to lend bailout money to Pfizer to buy Wyeth, which will lead to 14,000 layoffs, and that fact might be just waht gave the banks the confidence to lend. So much for the bailout helping keep jobs.

Many economists cheerfully believe that the US can recover its former more advantaged position by developing a more educated workforce which will more design rather than produce goods. However if the idea is that these designers will be able to command a premium for their services on the world market, that can only come about if their designs all get attention from a large part of the rest of the world. In other words, to have what passes for a high material income in an attention economy you have to rreceive a good deal of attention, in this case thorugh your designs or for your share of whatever project you are involved in designing. And there may not be (or, rather, isn’t) enough attention to go around, doing that). Actually, of course these high attention-receiving workers need not be designers; they can be novelists, movie directors, singers, sports stars, and so forth, just as well. But still, comparatively very few of these will get the bestseller kind of attention that is needed.

And other countries’ citizens will be good at starring in these ways too.

The more the old economy sinks under the weight of too high productivity and thus tremendous overcapacity, the faster will be the move towards the attention economy, as more and more people make use of the Internet to vie for attention in new ways. The vast majority of people will find themselves, in effect, to be fans, if they are not chiefly that already. But they will sink in to despair even as fans unless they feel the stars will somehow take care of them. So it is incumbent upon stars who want any kind of a stable world to worry about a pattern of goods distribution that continually improves life for those at the bottom, and does so in more or less sustainable ways. This is what we must try to flesh out, I think, if there is going to be any sort of desirable human future.