Douglas Rushkoff, Anvil Salesman

"Arguing in My Spare Time" No. 2.22

by Arnold Kling

May not be redistributed commercially without the author's permission.
Index

In one of my all-time favorite movies, "The Music Man," the protagonist is a con artist who sells band instruments and uniforms to the rubes living in small-town Iowa. His opponent is an anvil salesman, who tries to expose the fraud of "Professor" Harold Hill. But the "professor" triumphs in the end.

Douglas Rushkoff’s new book, "Coercion," represents the revenge of the anvil salesman. He provides a litany of examples of the ways that people are manipulated into buying. He alarmingly describes what I would call the exploitation of the information "have-nots" by the information "haves." Rushkoff’s depiction of the application of psychological research to the process of getting people to buy can be quite chilling. Reading it as an economist, I was forced to think about whether these examples undermine the theories of consumer choice that are central to our discipline.

The dictionary defines "coercion" as "restraint by force." It means the use of military power or government sanction. Rushkoff means something different. Although he waits until the end of the book to define it, he means by "coercion" something that I would consider closer to "manipulation." In his words (p. 303),

"Coercion seeks to stymie our rational processes in order to make us act against—or, at the very least, without—our better judgment. Once immersed in a coercive system, we act without conscious control. We act automatically, from a place that has little to do with reason."

Although most of his examples are compelling, not every phenomenon that Rushkoff describes is as awful as he makes it sound. One example that Rushkoff decries as a coercive system is what he calls the "MovieFone" syndrome (p. 290). Once enough people start using MovieFone to reserve seats at a movie, then everyone must pay a surcharge to MovieFone or risk having bad seats or no seats at all. He says that this demonstrates "the darker side of network externalities."

I think that most economists would argue that in fact this is an efficient outcome. Prior to the advent of MovieFone, you still faced the uncertainty about seat quality and availability. You dealt with it by standing in line. My guess is that for many people, paying $1.50 as a surcharge is less costly than waiting half an hour in line.

When there is a scarce resource to be allocated (in this case, seats in a movie theater), economists tend to prefer a monetary mechanism to a non-monetary one. For this reason, economists often argue in favor of ticket scalping.

Another instance in which Rushkoff overstates his case is when he argues that email spam, banner ads on the web, and consumer profiling all reflect a coercive system. As an economist, I believe that they reflect an inefficient pricing mechanism. With more efficient payment processes, we could eliminate all of these.

For example, with spam, suppose that you were charged 10 cents for every email message that you send, but that the recipient of a message could push a button that says "waive the charge." In that case, people who send unwanted email messages to millions of people would be charged hundreds of thousands of dollars, and people who only send email to friends and associates would be charged nothing.

Banner ads are an inefficient solution to the problem of paying for content on the Web. However, my guess is that the inefficiency is that they are over-valued by advertisers. Consumers probably are able to access content at less cost than would be possible if advertisers were to wise up.

The phenomenon of web profiling is troubling. In "Personalization, Portability, and Ownership," I argued that consumers should be the owners of our profiles, rather than giving control over profiles to interested parties. Instead, we see the opposite, where companies try to obtain profiles of us. However, this may be yet another case of stupid companies paying too much.

My guess is that the market for consumer profiles is highly inefficient. Some consumers give away personal information in exchange for very little in value. Other consumers, however, come out ahead in their exchange of personal information for content, discounts, and other enticements.

On balance, my guess is that consumers are winning the game right now. Investors are subsidizing money-losing Web sites in a frantic attempt to "capture eyeballs." A strong case can be made that it is the companies, rather than the individuals, who are making the largest sacrifices. The type of intermediary I want to see—a neutral third-party that holds my consumer profile on my behalf, the way that the bellboy stores my luggage until I am ready to go catch my plane—will not emerge as long as there are so many well-heeled fools out there willing to give me more for my profile than what it is worth.

Rushkoff has a chapter on "pyramids." He points out that pyramid schemes include an element of cult-like indoctrination. The multi-level marketing participant is inducted into a fanatical faith in the scheme and learns to tune out rational arguments.

Rushkoff views the high value of today’s stock market as an example of a pyramid. Rushkoff pinpoints the irrational faith in network externalities as a major element. Where I have argued that at a micro level this faith causes investors to over-estimate the value of market share at the expense of profits, Rushkoff highlights how the belief in increasing returns underlies the entire "long boom" theory. This theory says that because of increasing returns, we are going to experience unprecedented prosperity and growth. Thus, faith in network externalities raises all stock prices, not just Internet stock prices.

Indeed, I have read essays that are reminiscent of Professor Harold Hill saying that you don’t need to read music if you understand the "think system." For example, in an op-ed piece in the Wall Street Journal this past July 19, venture capitalist Andy Kessler wrote,

"Technology isn't supposed to make sense. The great technology engine works precisely because it is counterintuitive. . .You can sell products at or below cost, and still make money. . .You can lose money, show [an accounting] profit and build a business. . .Stock is more valuable than the same amount of money. Internet stock valuations may be gravity defying, nosebleed inducing and vertigo producing. But that doesn't mean they're too high."

This smacks of the phenomenon Rushkoff is describing: people at the top of the pyramid exhorting those lower down to substitute faith for reason. I would add that in addition to network externalities, "Internet time" is another refuge of venture capital scoundrels. See my essay on "Effective Tournaments."

From the perspective of social science, I find that Rushkoff’s work raises challenging questions. When are consumers getting what they really want? How can you tell the difference between a product you chose and a product you were manipulated into buying? How can you tell the difference between a group that you join of your own free will and a cult to which you have succumbed?

After all, I have not been sparing in my criticisms of the proponents of network externalities. Yet it never occurred to me to characterize McKinsey as a cult.

Indeed, a difficult question for social scientists is what constitutes cult-like behavior. George Akerlof, an economist for whom I rooting to get the Nobel Prize, once wrote an article called "Procrastination," in which he drew a parallel between becoming addicted to cigarettes and succumbing to a cult.

In the Akerlof model, the failure to act in our best long-term interest stems from making decisions on a day-to-day basis. You do not quit smoking today, because you compare the benefits of quitting smoking tomorrow with the benefits of quitting smoking today. It always appears to be more beneficial to quit tomorrow.

Similarly, if I come into contact with a group that may be a cult, I might compare the benefits of stopping now to evaluate the group with the benefits of waiting until I have undergone more experiences. It always appears to be beneficial to put off wrestling with my discomfort with some of the cult’s activities.

Part of my short-term mistake today is failing to realize that I will make the same mistake tomorrow. If I take into account today the fact that tomorrow I might once again postpone quitting smoking, then I am more likely to make the correct decision to quit today. If I take into account today the fact that tomorrow I might once again postpone questioning what is going on with a group, I am more likely to make the correct decision today to stop before getting sucked into a cult.

What Akerlof’s model gives us is a way to distinguish joining cults from voluntarily becoming involved in some group or activity. Suppose that we set a limit for ourselves. We say, "If ever I am asked to cross that limit in terms of behavior, I will stop everything and re-evaluate whether or not this is a cult." If we find ourselves crossing that limit without re-evaluating, then we have succumbed to a cult.

If the cult model is correct, then the prophets of the "long boom" are likely to become even more fanatical over time. "The Music Man’s" happy ending brings tears of joy to my eyes. But I have a feeling that in the real world, we are going to wish that we had listened to the anvil salesman.