Why the Internet Is An Economy of Desire

The internet encourages the expression of desires, through the capture of data about search.

It then encourages the sale that information to refine and reward both the seller and the consumer, reinforcing social behavior - and an efficient market. JL


Zander Nethercutt reports in Medium:

Purchases from physical stores (are) not a pure expression of desire the way internet searches can be. The internet is an “information market.” The “price” of information in this market is zero. This means that demand determines the equilibrium in the market for information. The only factor that determines what we see on the internet is desire. The internet distills behaviors into an understanding of desires, and then returns those desires back to us in the form of virtual content that give us our best idea of who and what we truly are.

Orwell feared that what we fear will ruin us. Huxley feared that what we desire will ruin us.”

— Neil Postman, Amusing Ourselves to Death: Public Discourse in the Age of Show Business

InBrave New World, Aldous Huxley argued that it was desire — not the hand of some Big Brother-like figure — that would ruin us. Of course, traditional economic theory says that the goal of economics is the allocation of scarce resources to their highest-valued use, or connecting as many people as possible with what they desire. A perfectly economical world, then, would be one in which everyone is connected with their desires. And were it to be realized, so would Huxley’s prophecy — that, or we transcend it (assuming we haven’t done either already).

So what’s stopping us? Well, for most of history, there has been one fundamental check against the realization of that world: scarcity of physical resources. Market power, then, comes as a result of controlling the supply of scarce resources. At least it did, until the internet flipped this on its head by enabling the production and distribution of virtual goods at zero marginal cost.

Consider Facebook, a company that incurred massive fixed costs in their infancy as they invested in the infrastructure that gave way to infinite scalability. New users do two things for Facebook: first, they minimize Facebook’s average fixed cost (cost of servers, cloud storage, etc. divided by number of users). Second, they improve Facebook’s advertising program, which generates the revenue that covers Facebook’s fixed costs. Economic theory states that in the long run, firms operate as close as they can to where their marginal cost, or cost of producing an additional unit of a good (in Facebook’s case, digital information) equals their average fixed cost. Facebook can never quite get there because their average fixed costs will never equal their marginal costs (see graph below). But advertising revenue covers Facebook’s fixed costs, leaving only their variable costs, or costs that “vary” based on the number of users, behind. On the internet, variable cost is equal to marginal cost. Thus, the information on Facebook is available for nothing because its marginal cost on Facebook is zero.

The only factor that determines what we see on the internet is desire.

Like Facebook, the internet is a platform for the distribution of virtual goods at zero marginal cost. Put another way, the internet is an “information market.” (From here on, I use both terms — “internet” and “information market” — interchangeably.) And since the price for a virtual good is its marginal cost, the “price” of information in this market is zero. This means that demand determines the equilibrium in the market for information. In more practical terms, the only factor that determines what we see on the internet is desire.

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So what do we desire? Data mapping our internet behavior — our Google searches, the Facebook and Instagram profiles we linger on — can help answer that question. This isn’t to say that data on our purchases from physical stores isn’t indicative of our desires; it is, but it is not a pure expression of our desire the way our internet searches can be. When we shop at a store, after all, we are experiencing a sliver of a far broader spectrum; what we see in a store is not all there is, but rather what is available and profitable in a world governed by scarcity.

In the information market, however, anything can be profitable. Scarcity is nothing more than a bad dream; a relic of an era in which supply and median preferences determined what we consumed. Now, ideas that were once considered heretical can find an audience on the internet because it costs nothing to do so.

Once hailed as the mechanism that would unify society, the internet is at risk of becoming the opposite. In his 1998 book, The Common Good, renowned author and public intellectual Noam Chomsky criticized the liberal media for limiting the spectrum of acceptable belief by not reporting — and thus drowning out — fringe ideas that might otherwise have been worth considering. As he put it: “The smart way to keep people passive and obedient is to strictly limit the spectrum of acceptable opinion, but allow very lively debate within that spectrum.”

If what Chomsky describes is true, then the smart way to do the opposite — agitate the masses and create conflict — is to the make the spectrum of acceptable opinion infinitely broad, but allow little to no debate within the pockets on that spectrum. The internet is extraordinarily adept at doing this.¹

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If the perils of an information market were not already clear, they become so upon analyzing them through an economic lens. Traditionally, demand curves — which reflect people’s desire for goods via their willingness to pay for them at any given quantity — slope downward. This reflects the law of diminishing marginal utility, which states that people are willing to pay less for additional units of a good. This holds true for virtual goods. It is also true, however, that our willingness to pay for virtual content never quite reaches zero. Rather, it hovers just above it, with a vertical asymptote at p (price) = zero. And since marginal cost is zero, the market for information never reaches equilibrium because its supply (marginal cost) and demand curves do not intersect. This idea — that the internet will forever tend toward equilibrium without reaching it — explains much about its effects on society.

The arrows note two separate tendencies: first, that of the firm towards an infinite number of users, and second, that of the quantity of information demanded in the information market to increase forever. Both are tendencies towards non-existent equilibria. Image courtesy of author.

Markets tend toward equilibrium. If we accept this as fact, it follows that the quantity of information demanded from the internet will increase over time to move the market for information closer to equilibrium. But because that equilibrium does not exist and can never be reached, it also follows that the quantity of information demanded from the internet will continue to increase, effectively unabated, forever. Finally, the zero marginal cost model of the internet means that the supply will always exist to meet the quantity of information demanded, in whatever form required. It follows, then, that the tendency of users to binge on internet-based, virtual content is an emergent property of the internet. All of this should scare us.

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The consequences of Netflix’s subscription-based model — aside from being a microcosm of the internet — are a case study in the perils of the internet-abetted economy. Those who use Netflix pay an upfront cost to enjoy limitless content at zero marginal cost. Systems like Netflix are undeniably popular; they are also addictive.² Our consumption of physical goods, after all, has always been curbed by relative scarcity and subsequent price, as well as the acute understanding that overconsumption — take alcohol, for instance — has real-world consequences. On the internet, however, none of these realities exist. And thus on Netflix, we “binge” for two reasons: first, because there is no end to the high-quality, algorithmically-likely-to-keep-us-watching-content we can consume, and second, because there are no immediate physical or monetary consequences for doing so.³ To binge is simply to fulfill our duty to move the information market closer and closer to equilibrium, even though equilibrium will always remain slightly out of reach.

This is the internet in a nutshell: a massive flywheel equipped with the tools to distill our behaviors into an understanding of our desires, and then return those desires back to us in the form of virtual content.

Unlike bingeing in the physical world, where a patron might drink $100 worth of mimosas after paying $20 for the “bottomless experience,”⁴ Netflix actually benefits from users that binge because the extra data allows them to better determine what that user might want to watch in the future. This in turn increases Netflix’s ability to keep that user engaged and decreases the likelihood that they’ll cancel their subscription.⁵ This is the internet in a nutshell: a massive flywheel equipped with the tools to distill our behaviors into an understanding of our desires, and then return those desires back to us in the form of virtual content that, if we actually took the time to look, would give us our best idea yet of who and what we truly are.

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Were Huxley alive today, he would likely be equal parts fascinated and terrified by the Internet, clear as it would be to him that its desire-driven nature could only lead to one eventuality: ruin. It is not clear that the internet is ruining us, but it is clear that it has given us unprecedented access to our desires, unfettered by gatekeepers. This guarantees that the internet is the mechanism by which we will either fulfill Huxley’s prophecy or transcend it. For our own sake and our own sanity, let’s hope for the latter.

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Footnotes:

¹ Historically, religion has been as well.

² This could be a new definition for addictive: something that promotes the tendency for a system to seek out an equilibrium that does not exist.

³ The immediate physical consequence of consuming alcohol is drunkenness. This same type of consequence does not exist with virtual content, though admittedly, the lifestyle conditions correlated with consistent consumption could give way to chronic health issues such as obesity, etc.

⁴ Every time we go out to bottomless brunch, my roommate reiterates his strategy: “My goal is to make them lose money.” On Netflix, of course, this strategy would be counterproductive.

⁵ Why else would Netflix — and literally every other platform offering access to similar content — be so intent on promoting the “binge-worthiness” of their content?