The Rohingya and Facebook: A Case Study about hate

“Power and Progress,” the book recently published by Acemoglu and Johnson (AJ), should not be promoted as a book on technology written by two economists, but as a book about the battle for political and economic equality in times of technological change. It is an important book.  I look forward to reading reviews of it by other scolars in the forthcoming months and years. I hope that the debate that the authors try to encourage expands and at least awareness is raised about the importance of directing technological progress at the service of humanity and not the richest and powerful small minorities.

One of their messages is that the economic model of privately owned social media encourages the transmission of hate. We see that in developed democracies, every day. Grievances, ridiculous exagerations, insults, lies, whataboutisms… find a fast motorway in Facebook and Twitter. I am only in the latter, and the protections against hate there (which I try to use) seem to me like an umbrella to contain a nuclear attack. Worse: they are part of the problem, pretending they do something when the business model from which they profit is the engine of the problem.

AJ address the case of the abuse against the Rohingya minority in Myanmar in pages 356-359. By 2017 there were 22 million Facebook users in Myanmar out of a population of 53 million. In a “combustible mix of ethnic tension and incendiary propaganda,” Facebook employed only one person who monitored Myanmar and spoke Burmese but not most of the hundred or so languages used in the country. According to Acemoglu and Johnson and the independent sources they quote in their long bibliographic essay, “the platform had become the chief medium of organizing what the US would eventually call a genocide” against the Rohingya Muslim minority. 

What these economists say about Facebook’s business model had a dramatic, violent expression in Myanmar, but is applicable also in communities where at the moment there is now less (or no) violence: it was “based on maximizing user engagement (to enable the company to sell more individualized digital ads), and any messages that garnered strong emotions, including of course hate speech and provocative misinformation, were favored by the platform algorithms because they triggered intense engagement from thousands, sometimes hundreds of thousands, of users.”

It’s the supply side of politics, stupid!

Larry Bartels is an essential author in the frontier between economics and political science. In his previous books, he established quite convincingly that the rich’s preferences have more weight in democratic collective decision making than the poor’s, and he debunked the “folk theory of democracy,” by which the solution to many democratic political problems would simply be more democracy, because, according to such folk theory voters are always right. And no, the solution is not less democracy, but lower expectations and better democracy.

I learned yesterday from a very good article in the Financial Times by Jan-Werner Müller –an author from whom I learned a lot in his book on populism- that Bartels had just published a new book, “Democracy Erodes from the Top.” I bouhgt it on Kindle, and after a first quick reading, I encourage anyone interested in European populism to get a copy.

In his new book, Bartels analyzes the recent evolution of populist parties in Europe and assesses the supposed crisis of democracy that results from it. After analyzing European public opinion in the last decades until 2019, the author challenges the idea that the surge in populism comes from the demand side of politics, from voters’ attitudes that would be more skeptical today about democracy and the European integration. That’s not what the data says.

What is more consistent with the historical data is that there’s always been a minoritary reservoir of extremist voters, but the size of this reservoir has not changed much over time, and especially it has not after the global financial crisis of 2008. The increasing influence of right wing nationalist populist forces is the result of supply side movements, by which conservative elites make choices that give more weight to destabilizing populists.

That is, Trump and Johnson are endogenous, and the result of their parties resorting to them to reach or keep power in particular historical moments. It is difficult not to think in the same terms in the local cases that are closer to me.

In Catalonia, it was the decision around 2012 of the conservative traditional nationalists of Jordi Pujol and Artur Mas to get hold of the secessionist banner, which increased the political relevance of national-populism in its most destabilizing form. They were surrounded by corruption allegations and criticism of their local version of austerity policies, and they decided to scapegoat “Madrid” for their problems, tapping on a reservoir of discontent based on some real and invented grievances.

The same now with VOX in Spain. The far right is obviously not new in Spain, actually the mainstream Popular Party was founded by a Francoist fromer minister. Now the PP is reaching regional and local agreements with VOX, raising the spectrum of a VOX-PP national coalition after the snap election on July 23rd. There are no more fascists in Spain now than 5 years ago, it’s just that the PP and the social and economic sectors that support it, may need them now more.

Inequality, fascism and populism in Italy and Spain

The current Italian government presided by Post-fascist politician Giorgia Meloni will organize a state funeral in the cathedral of Milan in honour of Silvio Berlusconi, arguably the founder of modern populism. He vertically integrated politics into his business, tried to subvert justice and allegedly had links with the Mafia. His ascent to power had to do with the disintegration of traditional political parties that colluded in a system to keep a strong (but moderate) Communist Party out of power in the times of the cold war.

Spain risks giving itself a government similar to the Italian, if the left and the center-left do not mobilize strongly in the snap election called for July 23rd. Although the current government of Pedro Sánchez is praised by the European Commission and the international media, and has managed the economy satisfactorily, the traditional conservative party, PP, founded by a minister of the military dictator Franco, allied with the far right party VOX, may win a majority. The right in Spain is unfortunately very different from the center-right in Germany, because the agreements that made the transition possible in Spain to lower the stakes of democracy (in the words of Stanford scholar Barry Weingast) kept almost intact traditional institutions such as the Monarchy, the Catholic Church and the economic and judicial elites. VOX is allied with Meloni, sympathises with Trump, questions climate change and is openly anti-feminist. The PP has no problem in sharing regional governments with them.

In my previous post, I listed the possible reasons why democracies such as Italy and Spain are compatible with high levels of inequality. All the reasons are applicable in our countries, as are applicable in other capitalist democracies. But a conservative movement and conservative elites that have had for different reasons a historical advantage make capture, lobbying and corruption (more affordable for the rich) especially present, to the extreme of vertical integration in the case of Italy. I mentioned in my previous post “Agenda-setting and mobilization of non-distributive agendas by the rich (strategic political supply, eg plutocratic populism).” Nationalisms feeding each other, anti-immigration feelings and cultural battles are clearly present in the two countries. Trumpian techniques such as lies and de-humanizing insults to the political rivals are also part of the tool-kit.

Globalization, inequality and democracy in class

The CORE Project’s e-book “The Economy” (it's free, read it!) starts with inequality (Unit 1) and finishes with politics (Unit 22). So I thought it would be fitting to end the course discussing with the students how is it possible that democracies are compatible with inequality, and in particular the concentration of the benefits of economic growth on the richest 1%.

To discuss the answer to this question, at the end of the 16 main units of “The Economy,” we discussed a selection of the “capstone” chapters 17-22. After showing them a graph with the historical ups and downs of globalization since the end of the XIXth century and the graph of “Milanovic’s elephant,” we discussed Rodrik’s trilemma (Unit 18), and redistributive preferences (Unit 19). Then I presented the Median Voter model (Unit 22) as a benchmark with which we can compare more realistic polities. Using additional material, I proposed an exercise with three type of voters and 3 alternatives, showing that different voting systems may yield different collective outcomes (without changing the individual preferences) and none of these voting systems is perfect (echoing Arrow’s Impossibility Theorem).

Based on “The Economy” models, on the article of Bonica et al. in the Journal of Economic Perspectives, and my own thinking in discussion with the students, I came up with this list of non-exhaustive answers to the question of “why democracy is compatible with increasing inequality?:”

-Objective constraints to redistribution at the national level due to (hyper)globalization.

-Incentive reasons: Higher rates of taxation reduce labor supply and effort provision.

-Prospect of upward mobility (P.O.U.M.).

-Unequal turnout and political participation: the rich participate more (not only by voting).

-Ideological shift (persistent belief in “trickle down” economics) and cultural reasons (believe in “incentives” and “merit”, preferences for the extremes).

-In some cases, a voting system may eliminate the option preferred by the MedianVoter if there are more than two relevant alternatives (France 2002?)

-Capture, lobbying, campaign contributions, corruption (more affordable for the rich).

-A combination of electoral and ideological polarization, and institutions that are slow to change or evolve, and which reduce the accountability of oficials to the majority (“gerrymandering” in the US, non-proportional electoral systems).

-Agenda-setting and mobilization of non-distributive agendas by the rich (strategic political supply, eg plutocratic populism).

I challenged them to complement or correct the list, not necessarily on the spot in class, but as food for thought for their hopefully productive lives as social science students and graduates.

(Class slides available upon request)

Public ownership or regulatory reforms

I started doing research on the ownership and regulation of network utilities in the early 1990s. Then in 1995 I went to the European University Institute to do my PhD and in 2000 I defended my thesis on “Privatized Utilities: Regulatory Reform and Corporate Control,” which you can read here if you are interested. After that, I spent two years and a half in the Regulation Initiative of the London Business School.

I see that the debate around these issues has not lost interest, although today there are new issues like climate change. A key topic today, like then, is whether the nature of ownership (public or private) is crucial to obtain good social results, or these can be achieved with regulation, one that can coexist with several ownership models.

Since the XIXth century until today, there has been a lot of diversity in the ownership structure of network utilities over the world. Public intervention in these industries, given the presence of naturally monopolistic segments, is widely accepted. Several authors in the economics literature have addressed the comparative advantages and disadvantages of private regulated network utilities vs publicly owned ones. The debate is about how best to correct or alleviate a market failure (natural monopoly) or achieve other social objetives (such as universal access), while at the same time securing necessary investments and providing incentives for efficient operation.

Laffont & Tirole (in their classic 1993 book on regulation, ch. 17) criticized the conventional wisdom at the time about the advantages and disadvantages of public vs private regulated ownership. They argued that the disadvantages of i) absence of capital market monitoring, ii) soft budget constraints, iii) risk of expropriation of investments, iv) lack of precise objectives and v) presence of lobbying,  are not universal in, or exclusive of, full public ownership. Similarly, the advantages of i) consideration of social welfare objectives and ii) centralized control, can be attained with appropriate contracts or regulation keeping private ownership.

Instead, they proposed to focus the discussion in one particular trade-off that arises from asymmetric information and incomplete contracts. Namely, on the one hand private regulated firms suffer from the conflict of interest between shareholders and regulators. For instance, each principal fails to internalize the effect of contracting on the other principal and provides socially too few incentives for the firm’s insiders. On the other hand, the managers of a private regulated firm invest more in noncontractible investments because they are more likely to benefit from such investments. Public Enterprise managers are concerned that they will be forced to redeploy their investments to serve social goals such as containing unemployment, limiting exports, or promoting regional development. The authors concluded that “taken together, these two insights have ambiguous implications for the relative cost efficiency of the public and private sectors; theory alone is thus unlikely to be conclusive in this respect.”

David Newbery (1999), in another important book, surveyed the history of network utilities in several regions of the world, and concluded that there is not much difference in terms of performance between a publicly owned monopolistic utility and a privately owned regulated monopolistic utility. 

Similarly to Laffont and Tirole (1993), Newbery (1999) pointed out that both private and public sector owners delegate operations in a board and a managerial team, which enjoy a degree of discretion. Government intervention is generally less costly under public ownership, but a promise not to intervene may be more credible under private production and may have positive incentive effects. But achieving this credibility is not straightforward: “The real case for privatization  must be that it is easier to sustain eficient pricing under private ownership in the face of political and populist pressures, and that privatization will generate additional efficiency gains.”

The differences in performance may come more from changes in the industrial structure, especially when some segments of the value chain can be opened up to competition: “Privatizing public utilities is primarily about ownership rather than control, since utilities can face remarkabky similar regulation under public or private ownership. Liberalization, in contrast, subjects utilities to market forces; it can induce more dramatic changes in performance than privatization alone.”

Tirole (2016) in his post-Nobel prize book on “The Economics of the Common Good” goes beyond his statements in Laffont and Tirole (1993) to argue that ”the conception of the State has changed,” from one of Producer of goods and services through public corporations, to a modern one focused on fixing the rules of the game and correcting market failures. Modern public finance textbooks reflect this evolution. Early editions of these textbooks or handbooks had chapters on “pricing in public enterprises,” which have now become chapters on natural monopoly pricing, admitting that regulated firms may be owned by private investors. 

Private firms in regulated sectors may deliver positive social outcomes, but only if some conditions are in place, mainly regarding adequate regulation. But beyond the objective empirical evidence, there has been a “backlash” in the public opinion of many countries. The late historian Tony Judt, in his celebrated last book “Ill Fares the Land” captures the discontent with privatization also in Britain when he criticizes the business oriented mentality of the new operating companies. Although countries like Chile, the UK or Spain were among the ones that privatized more firms in the 1990s, three decades later the controversy about the ownership of network utilities, and of water operating companies especially, has not disappeared. In an article in the Financial Times just yesterday, the prestigious columnist Martin Wolf echoed this controversy, and mentioned the interesting proposals made by an important expert, Dieter Helm, who has suggested radical regulatory reforms that are not mainly based on a focus on ownership.

Will God save the king?

I was shocked yesterday to hear the prestigious historian Simon Schama express in the BBC his optimism about the reign of Charles III. I have a higher opinion of the former than of the latter, and that enthusiasm improved (just a little bit) my opinion of the new King and worsened it of the scholar.

After watching parts of the coronation ceremony on TV, I tend to agree with Martin Kettle in The Guardian. I am not so sure that there is any opportunity for reform and modernisation without basically scrapping or at least radically downsizing the institution, but if any existed it has certainly been squandered. Kettle emphasizes the contradiction between the religious statements made in the ceremony and the fact that Britain is a diverse and multiethnic country –with probably a majority of atheists, like probably most European countries. 

The coronation of the new King can be criticized from other perspectives. Spending a big amount of public money on one of the richest families of the world is one of them. The Tax Justice Network issued a letter asking the new King to support its campaign for an elimination of the tax havens that populate the former British Empire, under the support of the British Government. Rachel Etter-Phoya has argued that “While Britain’s overseas aid has dwindled in recent years, unwinding the web of tax havens instead would help many governments fulfill the rights of their citizens. If we were to reverse the tax revenue losses caused by the UK spider’s web, there would be 36 million more people with access to basic sanitation, 18 million more people with access to basic drinking water, and almost seven million children could attend school for an extra year.” 

It is a good thing that the new monarch is concerned about climate change, and hopefully he can make a contribution to that cause, but that is no excuse to keep giving a political role to a medieval institution that is not based on merit or any democratic principle. That applies to any monarch. This one, in addition, is a symbol of an empire that was based on colonialism and slavery. Charles has expressed recently his willingness to cooperate in an investigation of his familily’s direct links with the slave trade. If he follows this to its inevitable conclusion, I don’t know what could be the moral justification for the continuation of the institution that he represents. 

In addition, in a world where people are becoming used to having a voice on everything and a vote on many things, it is increasingly awkward that electorates have to tolerate the lifestyles of the likes of Harry and Andrew Windsor.

On many issues, I am an anglophile, but on the monarchy, my view is that this is an extreme example of the many institutions that are remnants from a time of darkness and irrationality. There are certainly other examples. But I see them with the same discomfort that I feel with slavery, witch hunting and burning, or racial and gender discrimination.

The British Monarchy will try to find a role in post-Brexit times. But it was part of the narrative and the imperial mentality that made Brexit possible. But Brexit has failed. The British should extract all the logical implications and join all the others who want to live in a modern and secular world of equal rights and cooperation, where nationalist pre-democratic institutions like the monarchy are, at least, reduced to a symbolic and minimal role.

Why organizations fail. The case of FCB

The Spanish economist Luis Garicano, who had a short-lived political experience in the failed political party Ciudadanos, has an excellent academic article in the Journal of Economic Literature with the title “Why Organizations Fail.” The title is an analogy with the famous book “Why Nations Fail,” previously writen by Acemoglu and Robinson.

Certainly, not only nations fail, organizations also fail. It is common among economists to study market failure, but it was less common to study the failures of whole nations or organizations. Governments also fail, as communities do. Needless to say, all these mechanisms of resource allocation may also succeed. Good economists, like Garicano or Acemoglu, are good at identifying reasons for success and failure.

In his article on organizational failure, Garicano mentioned among others two usual reasons for it, namely shortcomings in the allocation of talent and mistakes in allocating resources among the short run and the  long run. Good organizations allocate well their scarce talent, and do a good job at attracting and retaining it at the relevant jobs. They also manage well short run problems, at the same time that they devote resources to innovation and to thinking about their future.

These two basic ideas have come to my mind recently on occasion of the decline of FC Barcelona, my soccer team, arguably the best team in the world between 2005 and 2015, the years of Leo Messi, Andrés Iniesta and others. The rise and fall of the club are very well described in the book by Simon Kuper about it. But this distinguished journalist left the story before it emerged that the club had been paying more than 7 milion euros to the vice-president of the committee in charge of allocating referees to games and to categories, and the subsequent PR campaign of the current President, Joan Laporta, to reject any responsibility and couter-attack with a populist campaign blaming rivals Real Madrid and the Franco regime (yes, that military dictatorship that finished almost 50 years ago).

Barça does a very bad job at allocating talent. The president is elected by the members and operates in a framework of no checks and balances. The current one lacks any management skills and any self-discipline. The club officials around Mr. Laporta are their friends or even relatives, and there is currently no professional structure of experts in organizational turnarounds. However, there is no shortage of experts in communication, starting with Laporta himself, who takes any problem, not as a management challenge, but as a communication challenge, not unlike Boris Johnson or Donald Trump.

The club not only has failed to prepare for the future in its good years, but is now obsessed with the past, blaming the Franco regime, and trying to revive the recent good cycle by trying to sign again an ageing Leo Messi. And it is basically giving up on the future, by paying for current signings with the revenues obtained by selling money-making assets.

This (and Garicano’s reasons for organizational failure) begs the question of what are the factors that facilitate organizational failure. In this case, the populism of a democratic club with no checks and balances plays in my view an important role. Barça is too important to fail, and like many top football clubs it will be bailed out before it disappears (football clubs do not disappear, as explained by Kuper and Szymanski in Soccernomics). A consequence of this is moral hazard in the behavior of club officials, as they don’t face the full consequences of their incompetence (or worse). Other clubs have similar characteristics, but for reasons that deserve further study, the case of my club is an extreme one. However, since the team will not disappear, we can always hope that another lucky shock is around the corner, in the form of another generation of great players.