Innovation: The Good, the Bad, and the Ugly
If you were to translate the modern economy into music, it would be written in the key of C major. Its songs in praise of the free market sound much like a congregation rising in church at Christmas to sing “Hallelujah!” The goal of this book is to make economics more understandable for you. Recognizing the advantages of the free market doesn’t mean ignoring its flaws. We want the music of economics to sound more like a minor key: more like Dvořák’s “New World Symphony” than “Hallelujah.” In previous chapters, we gave many examples of how phishing undermines stable economic equilibrium; in this chapter, we’ll analyze its impact on economic growth as understood by economists. First, we’ll briefly outline modern economic growth theory, then see why it must also account for phishing tactics.[1]
Foundations of Economic Growth
There’s another, perhaps even more important, dimension to the free market: new ideas, which lead to new products and services, further expanding our choices. In a free market, new products and services that can generate higher profits are actively discovered and implemented. Over the past century, one new idea per month has led to more than three trillion new ideas generated by adults worldwide.[3] The consequences are staggering: over a typical lifetime in a developed country, per capita output increases sixfold.[4] Our senior citizens were born in a country much poorer than modern-day Mexico.[5]
The critical role of new ideas as drivers of economic growth has been discussed for decades, but it was finally formalized in 1957 by a simple yet clever calculation. Robert Solow, a 32-year-old economist at MIT, used Sherlock Holmes’ logic of elimination to find the answer.
This small, straightforward calculation forever changed economists’ views on economic progress. Rising living standards were no longer tied solely to building bigger factories and hiring workers under harsh conditions (like Manchester’s textile mills in the 19th century or modern-day Bangladesh). This one-line calculation created a new understanding of the sources of economic growth, which, in the 1950s, were summed up by DuPont’s slogan: “Better things for better living… through chemistry.” For later generations, Silicon Valley became the symbol of economic growth—a name that gained fame about two and a half decades after Solow’s discovery. From this perspective, free-market capitalism not only provides us with today’s abundance of goods and services through trade among people seeking to use their comparative advantage, but also increases abundance by introducing new ideas.
The Solow Residual and the Hunt for Suckers
There’s no doubt that Solow’s calculations and conclusions contain a lot of truth. But we still live in an “Hallelujah!” economy, innocent as it was in the 1950s. Americans—and much of the rest of the world—have gradually adopted a more skeptical view of the economy than Solow’s vision of endless progress through new ideas. American history has always had a dark side, especially regarding Native Americans, women, LGBTQ people, African Americans, Hispanics, and Asians. We began this chapter by mentioning the “New World Symphony.” Its composer, Antonín Dvořák, intentionally borrowed ideas from African American spirituals and Native American dances for the piece.[8] American history no longer resembles a continuous crescendo ending, as it did in 1959 during the Nixon–Khrushchev debates, with the recognition of American kitchen superiority over the Soviet one.
Curiously, this allows us to draw an elegant but mistaken conclusion from Solow’s calculations: that progress is achieved mainly through new ideas, and that new ideas inevitably lead to economic progress. This is logical if you consider only technological ideas—those that allow us to produce more with less labor. But not all ideas, or even all our thoughts, are about material goods. Many ideas—perhaps even the most fundamental—concern our relationships with others. Mentally healthy people have limited abilities to read others’ minds; they have a “theory of mind.” This is one of humanity’s most attractive features and underlies mutual sympathy. However, “theory of mind” also has its downsides.
In other words, we can figure out how to get people to do things that serve our interests, not theirs. As a result, many ideas aren’t about technology or “win-win” solutions. Instead, they’re new ways to use “theory of mind” to answer the question: how can I benefit myself by harming you? New ideas of this kind have appeared in every chapter of this book. For example, we’ve seen addictive Las Vegas slot machines; rating agencies giving their seal of approval to “rotten avocados” (bad securities); the sale of “the man in the Hathaway shirt” and the senator on a garden tractor; a puppy deliberately displayed in a shop window. The list goes on. Thus, our understanding of economic progress is not as clear-cut as it seems. Economic growth indicators (like per capita income) reliably reflect changes in the economy, but not all such changes are beneficial. It was simply an implicit assumption, reflecting the stereotypes of the time, that the “residual” in Solow’s formula showed the impact of technological progress. Now we can look at the problem of economic growth more closely and globally.
To prove that not all inventions that expand choice are beneficial—or at least that some bring harm along with benefits—let’s look at three examples.
Three Inventions
One of the best inventions related to electric lighting is the switch, because it lets you turn the light on and off. You can also turn off Facebook at any time, but according to Yale students we interviewed, users of this social network don’t always have the self-discipline to do so, even if they know it would make them happier.
All our interviews followed the same pattern. Respondents would first give a superficial reason for using Facebook, saying things like, “I just keep in touch with friends.” They thought they were getting “information” from it. But at a critical moment, like in an Ibsen play, emotions would rise, revealing a love-hate relationship with Facebook. Its main purpose wasn’t just to connect with friends, as initially claimed; rather, it was seen as a tool for “creating an alternative universe.” There, our interviewees felt a sense of “social worth” they couldn’t get elsewhere.
Yale freshmen live in a highly competitive environment. For example, a member of the admissions committee told the class of 2009 that there were so many talented applicants that they could have formed two freshman classes without lowering standards. So even at an elite university, intense competition doesn’t eliminate the need for recognition. It’s possible that Facebook, as an alternative virtual universe, is a way to adapt to this reality. It has its own alternative currency of “tokens of respect”—likes from friends, shares. The same factors underlie the love-hate relationship with Facebook and the drive to get likes. One interviewee explained: “You can’t keep posting pictures of your dog, because that’s boring. So you become obsessed with seeming either funny and original or really attractive to your friends.” Another respondent was nostalgic for the “good old days”—a year or two ago—when likes weren’t an obsession. He regretted the “rat race” that the chase for likes had become.
We also heard about another side of Facebook, which dominated before the like craze. One Yale student explained that regular Facebook users only post photos of the best, most enviable moments of their lives. But this only makes life harder for their followers. “Sometimes I… hate Facebook… especially at times like now, when I’m sitting in snowy New Haven and all my friends are enjoying the sun somewhere warmer… I’d like to forget about it, but I keep looking at pictures of happy people on beaches and imagining myself there.”
Our Yale interviews confirm the results of a Humboldt University survey on “Facebook user emotions.” When asked why others might feel “emptiness or disappointment” from Facebook, about 60% of respondents (out of 86% who answered) cited social reasons like “envy,” “not enough likes,” “social isolation,” or “not being invited to events.” “Envy” was mentioned in 30% of cases, which contrasted with the fact that only 1% admitted to feeling it themselves when asked about their own Facebook use.[9]
So, is Facebook good or bad? Clicking “Like” expresses a positive attitude. Interestingly, none of the respondents mentioned enjoying giving likes to friends. Yet every like on Facebook is an act of kindness, a way to show recognition and respect. Respondents also noted that Facebook’s virtual universe is closely and usually positively connected to reality. Friends on the social network were often friends in real life. In fact, the need for friendship played a leading role in their Facebook popularity. If all your friends are on Facebook, not using it is like skipping a party everyone else is attending.
Facebook isn’t without its downsides (as our respondents noted). Where negative aspects dominate, another innovation has emerged. Two MIT Media Lab students, Robert Morris and Daniel McDuff, developed a device called Pavlov Poke, which can be programmed to give your keyboard an electric shock if you spend too much time on Facebook.[10]
Universal Ranking
Another example of innovation (an economist would call it “technological change”) is the method United Airlines uses to board passengers. Like a 19th-century duchy, United Airlines has created a whole system of honors and social status badges. On a large plane, boarding order depends not only on seat class (first, business, economy plus, and economy),[11] but also on special statuses granted by the company: Global Services, 1K, Premier Platinum, Premier Gold, and Premier Silver. Since people are naturally sensitive to all kinds of rankings—both their own and others’—the company has invented a great lure for suckers. Just sit in the back rows and watch passengers dutifully participate in the mass obstacle course of earning miles and pulling out their United Airlines Visa cards to record their newly acquired statuses.
Of course, boarding rankings aren’t as important as the Scholastic Aptitude Test (SAT), administered by the Educational Testing Service (ETS), which journalist Nicholas Lemann wrote about fifteen years ago in his book on the ranking system.[13] In the 1930s and 1940s, just attending a prep school like Exeter or Groton and having a home on Beacon Hill (Boston) was enough to get into Harvard. Reformers who created ETS and introduced the SAT wanted to broaden the applicant pool and attract smarter kids, whose intelligence could be measured by such a test.[14] Their innovation caught on; according to Lemann, these rankings replaced parents listed in the “Social Register,” but weren’t free from internal flaws.
The new meritocracy filled the void, and soon, future jobs and salaries increasingly depended on a college degree. Without it, new Abraham Lincolns, Harry Trumans, or Sidney Weinbergs among us would hardly get a chance. The SAT itself plays a crucial role, determining not only if young people get into college, but which one. Today, rankings in education are all-encompassing. Even at a very young age, students start what Garey and Valerie Ramey called the “rug rat race.”[15] But even after taking the SAT and finishing high school, rankings don’t leave our lives. Universities have their own rankings,[16] as do students (especially if they plan to continue their studies); academic journals have rankings,[17] and so do professors (based on where and how often they publish).[18]
As with Facebook, we have mixed feelings about educational rankings. We’d probably prefer a society where college admissions are based on rankings to one where it depends on whether your parents are in the “Social Register.” But we have doubts about an education system that creates a certified “elite” who feel entitled to look down on those with lower status. Our ambivalence reflects the overall ambiguity that is the main theme of this book. Do we like the free market? Yes. But…
The Cigarette Machine
Bizet’s opera “Carmen” is set in Seville, Spain, in the 1820s. The main character, Carmen, works at a cigarette factory.[20] If Bizet had written his opera eighty years later, Carmen would likely have had a different job. In the 1880s, James Bonsack of Virginia invented the mechanical cigarette machine, which virtually eliminated the need for manual labor in cigarette production.[21] In the next chapter, we’ll discuss the negative impact of this invention on people’s quality of life and health.
[1] Dvořák’s last symphony (No. 9, E minor), written in 1893 while he was in the USA.
[3] Based on an average adult world population of about 3 billion. In 1915, it was 1.8 billion; using today’s adult share and population growth rates over the period.
[4] This matches per capita income growth rates just above 2.2% with an average life expectancy of 80 years in developed countries.
[5] According to Angus Maddison, US GDP per capita in 1940 was $6,838 (1990 Geary-Khamis international dollars). In Mexico in 2008, it was $7,919. Maddison, “Historical Statistics of the World Economy: Per Capita GDP,” accessed Nov 26, 2014. From 2008 to 2013, Mexico’s per capita income in US dollars, adjusted for inflation, changed very little. World Bank, “GDP Per Capita (Current US$),” accessed Nov 26, 2014.
[8] See Joseph Horowitz, Dvořák in America: In Search of the New World (Chicago: Cricket Books, 2003).
[9] Hanna Krasnova, Helena Wenninger, Thomas Widjaja, and Peter Buxmann, “Envy on Facebook: A Hidden Threat to Users’ Life Satisfaction?” Wirtschaftsinformatik Proceedings 2013, Paper 92.
[10] Steve Annear, “The ‘Pavlov Poke’ Shocks People Who Spend Too Much Time on Facebook,” Boston Daily, Aug 23, 2013.
[11] United Airlines describes boarding as follows: after priority boarding (for people with disabilities and active-duty military), Global ServicesSM and military board first. Then, listen for your group number. Families with infants and children under 4 may board when their group is called. “Arriving at a Single Boarding Process,” Apr 22, 2013.
[13] Nicholas Lemann, The Big Test: The Secret History of the American Meritocracy, 1st rev. paperback ed. (New York: Farrar, Straus and Giroux, 2000).
[14] Ibid., pp. 7–8.
[15] Garey Ramey and Valerie A. Ramey, “The Rug Rat Race,” Brookings Papers on Economic Activity (Spring 2010): 129–99.
[16] See US News and World Report: http://colleges.usnews.rankingsandreviews.com/best-colleges.
[17] SCImago Journal and Country Rank, “Journal Rankings,” accessed Nov 26, 2014.
[18] For example, the “h-index” ranks professors by the number of citations of their work.
[20] Prosper Mérimée, Carmen and Other Stories (Oxford: Oxford University Press, 1989).
[21] Allan M. Brandt, The Cigarette Century: The Rise, Fall, and Deadly Persistence of the Product That Defined America (New York: Basic Books, 2007), p. 27.