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The Price of Everything

The internet is made of cats – and you can blame economists

in the bag solutions

Economics sometimes has surprising applications. One example is the Alchian-Allen theorem, an observation that came from a footnote in an economics textbook in the 1960s about how quality demand is affected by transport costs.

You may think this has nothing to do with you, but it does, because it explains why you consume so much internet animal hilarity and so little Shakespearean seriousness. It comes down to economics. Seriously. Smart people make these choices and it is fascinating to understand why.

The Allen-Alchian theorem explains why places with high-quality produce (Allen and Alchian had in mind apples in Seattle, which is where apples come from in the US) nevertheless do not always get to consume that same high quality (they pointed to the market for apples in New York city, where no apples grow) because of the relative costs faced by consumers in each case (for New York consumers, a high-quality apple, once you account for transportation costs, was actually relatively cheaper than a low-quality apple compared to relative prices in Seattle). Hence the market sent the high-quality apples to New York.

You’re still with me? It’s all about relative costs. When you move something, or impose any fixed cost, the higher-quality item always wins, because it now has a lower relative cost compared to the lower-quality item.

The interesting idea is that this also applies in reverse – namely when we remove a fixed cost. The internet does this: it removes a cost of transport, and it does so equally for high quality and low quality content. Following the Allen-Alchian theorem, this should mean the opposite. Low-quality items are now relatively cheaper and high-quality items are now relatively more expensive. This idea was first explained by Tyler Cowen, but the upshot is that the internet is made of cats.

I want to give you some time to go away and read that paper, and maybe peruse the entire journal. This video of cats and vacuum cleaners should make for perfect background music:

Done that? OK, let’s continue. The internet isn’t really made of cats, obviously, it’s made of HTTP-HTML. But why do we choose so many cats?

The internet lowers the cost of “transport” for every idea, high and low quality alike. It’s the opposite of the apples situation. It means that low quality apples are now relatively cheaper. It means that cats-doing-funny-things is now relatively cheaper than say German Opera. Economics insists that when demand curves look like this we can expect more cat watching, and less German opera watching.

This theorem means that we expect a lower quality, “bittier” consumption to proliferate on the internet (as a technology that lowers transport costs of high-quality and low-quality ideas alike). Which is what we observe. So that’s a win for micro-economic demand theory.

But is that what’s just happened? Have we all just gotten dumber?

The case for no is because this bittier world is now the new condition for entrepreneurs to seek to discover new ideas and angles. Shorter attention plays out in particular ways and different ideas are required to capture it. This also means more concentrated attention.

It’s unclear what the winning formula will be for arts and cultural producers. The best bet is probably that we should try a lot of things and just see what works. It’s old school, but it’s also increasingly the cheapest option as the Allen-Alchian theorem explains.

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