Policy by Ponzi

by the Sandwichman

Is change.gov's Citizen's Briefing Book the best thing since SinceSlicedBread.com? Is it a matter of good intentions thwarted by (abysmally) bad design? Or is it a timely and revealing demonstration of the principle of "positional economic goods" and thus an illustration of why economic growth is likely to disappoint our aspirations?

Three years ago, the Service Employees International Union held a contest seeking ideas on how to "strengthen the economy and improve life for working men and women and their families." People were encouraged to submit ideas and vote for their favorite ideas. The most popular ideas then became finalists from which the contest winners were selected by a panel of judges.

The functional design of the website was hideous. The most evident flaw was that the early leaders were displayed on the sites front page, giving them a formidable advantage. It was also possible to game the system by registering multiple times and voting repeatedly for your own idea. Once a gamester had elevated their idea to the top five, they could sit back and let it accumulate innocent votes.

It's hard to believe that no lessons were learned from the SlicedBread fiasco and no further developments have been made in online participatory software. The cynic might argue that these things are strictly public relations exercises and that thus there are no lessons to be learned or improvements that need to be made. But even in terms of p.r., the ersatz quality of the participation might just piss thoughtful people off instead of giving them the satisfaction of having had their say.

This is an example of the kind of situation Fred Hirsch identified as a feature of the "positional economy" in his Social Limits to Growth.

"The positional economy... relates to all aspects of goods, services, work positions, and other social relationships that are either (1) scarce in some absolute or socially imposed way or (2) subject to congestion or crowding through more extensive use."

With tens of thousands of "ideas" submitted, each one only gets a few seconds of front-page exposure before being buried in the database. However, ideas that grab an initial advantage continue to get exposure as "most popular" and thus continue to obtain even more votes. In the end, the highest-ranked ideas will not necessarily be the best ideas or even those that might have been ranked highest if all participants had somehow indefatigably viewed and voted on each idea.

Hirsch's point was that the presence of these scarce or potentially congested goods or services undermined the ideal that economic growth could lift all boats. Improvements in the material economy would tend to raise the relative demand for -- and cost of -- scarce positional goods and thus lead to disappointment. Hirsh's prime example of crowding is in the demand for prestige jobs. College education once offered access to such employment but with the democratization of higher education, the screening of job applicants became more intense and required higher credentials for entry to any given level of employment.

Although Hirsch doesn't consider Ponzi schemes, his concept could equally explain the role of such episodes in the saga of economic growth. A Ponzi scheme rewards early participants with the proceeds from later entrants. In crude outline, it is little different than the employment/education credentials story except that it cuts out the "waste" of actually acquiring the subsequently-devalued credential. In an economy that increasingly values positional goods, the Ponzi is a strictly positional investment. One might even suggest that as the "real economy" of work, employment credentials, production and income acquires a greater element of positional distribution of wealth, the lessons learned there translate into a greater propensity to engage in Ponzi-like speculative bubbles.