Matt's Thoughts In Between - Issue #50

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It’s been another bad week for Facebook, which seems rapidly to have become the most scandal-prone of the tech giants. This time the big story is Facebook paying users, including minors, and circumventing the app store to track what they do on their phones. Arguably this is no different to what hundreds of other companies do, but it’s a sign of how strong anti-Facebook feeling has become that the story has gained real traction.

Whenever a narrative becomes dominant, I’m always intrigued to look at the other side - and it’s fascinating how powerful the pro-Facebook narrative could be and yet so rarely articulated. Take this paper, published this week by a group of economists, on Facebook use. There are a number of negative results for Facebook in here - most notably that people who stop using Facebook report increased well being! - but buried in there are some startling positives:

I’ve written a lot about the potential negative externalities of GAFA, but this is the other side of the story: enormous customer surpluses that far exceed their profits.

The US is in a jobs boom, but alongside a secular decline in “labour force participation” (LFP). Almost everyone looking for work can get a job, but many fewer people are looking than 20 years ago. Many explanations have been offered (see this superb summary essay), but one suggestion is that video games and digital entertainment have become a preferred alternative to work for some, especially young men.

This week I came across this fascinating post on the topic. It tries to explain the observed data - lower LFP among young men, but also higher reported happiness - with new economic theory. The authors suggest two trends have contributed to rapidly diminishing returns to income. First, unlimited online content and/or gaming: if you can afford an internet connection, you can get a huge amount of utility with little additional spend. Second, people now have to compete with the global social media population to signal status, so the cost of status-enhancing conspicuous consumption has risen rapidly. Once you can afford an internet connection, you have to earn a lot more before you can significantly increase your quality of life.

Hence, video games become preferable to work. Arguably this lowers employment, wages and economic output - so what can be done? The authors propose (tongue-in-cheek, I think?) a tax paid by digital entertainment providers for each hour of the population’s time they render unproductive. That’s probably a very bad idea, but it’s interesting to see Keynes’ prediction of 90 years ago coming true…

The Bank of England’s refusal this week to allow Venezuela to withdraw $1.2bn of gold it was holding there is a striking example of the geopolitical danger of relying on systems controlled by others. This was, of course, one of the original arguments for Bitcoin - and may yet prove to be an important use case.

In November, I referred to Henry Farrell’s idea of “weaponised interdependence” and said it would be increasingly important in geopolitics. The basic idea is that the US (and increasingly China) can exert power through their control over networks and standards on which other countries rely. Farrell has an interesting column this week on how the US and Europe are clashing on the US’s use of SWIFT, the global banking messaging system, and the dollar clearing system to bring Iran and others to heel.

Europe has started to create its own “Special Purpose Vehicle” to allow some of its companies to circumvent the US and trade with Iran. This is initially only for humanitarian trade, but lays the groundwork for expansion into other areas. I predict we will increasingly see countries and regions (attempt to) opt out of interdependence to assert sovereignty. From AI standards to financial technology, it’s a trend to keep an eye on.

Thanks for reading. TiB is one year old next week and I’d love to add new readers. If you enjoy it, please forward to a friend or two. And if you have feedback or suggested links, always feel free to hit Reply

Until next week,

Matt