Metanomics Transcript for October 14, 2009 with guest Bob Frank. http://www.metanomics.net/show/a_state_of_affairs_libertarian_welfare_and_its_role_in_virtual_communities/

1. METANOMICS: A STATE OF AFFAIRS:
LIBERTARIAN WELFARE AND ITS ROLE IN VIRTUAL COMMUNITIES
OCTOBER 14, 2009
ANNOUNCER: Metanomics is brought to you by Remedy Communications and
Dusan Writer’s Metaverse.
ROBERT BLOOMFIELD: Hi. I’m Robert Bloomfield, professor at Cornell
University’s Johnson Graduate School of Management. Today we continue
exploring Virtual Worlds and the larger sphere of social media, culture, enterprise
and policy. Naturally, our discussion about Virtual Worlds takes place in a Virtual
World. So join us. This is Metanomics.
ANNOUNCER: Metanomics is filmed today in front of a live audience at our studios
in Second Life. We are pleased to broadcast weekly to our event partners and to
welcome discussion. We use ChatBridge technology to allow viewers to comment
during the show. Metanomics is sponsored by the Johnson Graduate School of
Management at Cornell University and Immersive Workspaces. Welcome. This is
Metanomics.
ROBERT BLOOMFIELD: Welcome to Metanomics. Today we’re joined by Cornell
economist, Robert Frank, to follow up on our discussion of libertarianism we began
last week with Adam Thierer. But our topics will range pretty broadly because Bob is
such an interesting guy, and I should mention, for full disclosure, a colleague of mine
here at the Johnson School. Bob’s early research focused on labor economics, but
he quickly brought in an iconoclastic element by considering both behavioral and
evolutionary forces in economics.
It wasn’t long before he was writing books that appealed to both the popular and
professional audience, starting with Choosing the Right Pond: Human Behavior and
the Quest for Status. Then Passions Within Reason: the Strategic Role of the
Emotions, The Winner-Take-All Society, Luxury Fever, What Price the Moral High
Ground. His two newest books The Economic Naturalist and The Economic
Naturalist’s Field Guide. Let’s see. I think I missed one: Falling Behind: How Income
Inequality Harms the Middle Class. He’s even busier than you think because he’s
also a monthly columnist for the New York Times and co-author of a bestselling
textbook Principles of Economics, and his fellow author on that book is someone
you may have heard of, Ben Bernanke. Bob, welcome to Metanomics.
ROBERT FRANK: Yeah, nice to be on with you, Rob.

2. ROBERT BLOOMFIELD: I really appreciate it. Welcome also to all of you who are
watching on the web at metanomics.net or in Second Life at our Metanomics Sim or
any of our event partners. We’ll be tracking the text chat so keep those questions
and comments coming, and we’ll try to respond to them as we can.
Bob, last week we talked with Adam Thierer, of the Progress & Freedom
Foundation. He specializes in online speech privacy and child protection. He’s what I
think of as a traditional Libertarian, opposed to nearly all regulation, arguing instead
for parental and personal responsibility, empowering people by what he calls rules,
tools, schools and talk and keeping government out of it as much as possible.
Now I understand, Bob, that you’re writing a new book The Libertarian Welfare
State, and you argue in favor of a pretty long list of government programs and
regulations, including some restrictions on speech and laws protecting privacy. So
why do you call that libertarianism?
ROBERT FRANK: You know I think the purpose of all regulation really is to prevent
undue harm to others. That was John Stewart Mill’s criterion for running the
government. He argued that it was only legitimate for the government to intervene to
prevent undue harm to others and used the word “undue,” but I think you have to
understand the criterion to mean that. And some cases, it’s very easy to see when
preventing harm is clearly justified. We don’t allow people to hit one another over the
head with a stick, for example. If you do that the law will sanction you for it without
any question. Nobody denies that that’s legitimate. But then there are other areas
where it’s not so clear.
There was a great example that came up with an advice columnist. A guy wrote in
one day to say that 20 years ago when he’d been a high school senior, he had done
this horrible, cruel thing to a classmate. He and his friends had called her up one
night and told her that she had won the Ugliest Girl in the Senior Class prize. They
had gone through and selected her as the Ugliest Girl, and he said he remembered
to this day her anguished moan as she dropped the phone, and he said he wished
more than anything could turn back the clock and undo that. The fact is that girl was
probably injured more seriously by the words those boys spoke to her that night than
if she’d been hit over the head pretty hard with a stick. And yet we don’t allow the
stick injury, but we allow the words to injure.
I think if there were some practical way to separate out gratuitously harmful forms of
speech like those kids engaged in and restrict only them and not the beneficial acts
of speech we try to protect then we would probably do that, but it’s very, very difficult
to write the law that way. So yeah, you always get into difficult balancing acts, but
sometimes we’ve decided that it really is the sensible thing to do, to prevent certain
forms of speech. You’re not allowed to yell, “Fire!” in a crowded theater, no matter

3. how much you say you derive pleasure from doing that, it’s just too risky to other
people.
ROBERT BLOOMFIELD: Let’s take a look at something specifically on speech that
Adam Thierer had to say. This is such a big issue for virtual communities. It
becomes a pretty common focus of Metanomics’ free speech and privacy. We got a
tape of some comments Adam Thierer had, talking about the elitist roots of
regulations governing privacy and free speech together. Texas, if we can roll that
tape, let’s take a listen to Adam.
[VIDEO]
ADAM THIERER - OCTOBER 7, 2009
In a paper that a colleague and I at PFF wrote last year, called What Unites
Advocates of Speech Controls and Privacy Regulation, my colleague, Berin Szoka,
and I argued that many times what at root animates movements to regulate these
things is simply sort of an elitist belief that, one, people are sort of too ignorant or too
busy to be trusted to make wise decisions for themselves and/or for their children,
and, two, what also unites them in this elitist belief is that all or most people
essentially share the same values or concerns, and therefore, a broader community
standard or governmental standard should trump individual or household standards.
So I’ve already talked a lot about that. I won’t impact that any further since I’ve
already discussed it.
But the point is that we see our government today trying to aggressively regulate the
internet both for speech-related concerns and privacy-related concerns, and these
two themes come up again and again and again, the idea that people are too lazy or
too stupid to make their own decisions or protect their own privacy or safety, and
then secondly the notion that, again, someone else should make the decision for
them because there’s some broader public interests or national interest involved.
[END OF VIDEO]
ROBERT BLOOMFIELD: Okay. Bob, I guess as one Ivy League elitist to another,
what do you make of Adam’s argument?
ROBERT FRANK: Yeah, I think none of us is very willing to embrace the idea that
some bureaucrat knows more than we do, and he’s going to restrict what we say or
do or how we arrange affairs for our kids. That’s a realm of regulation where I think
most people are very uncomfortable for the state to intrude. The kinds of regulation
that have been in my focus have been really ones that I think are designed to
prevent [fairer?] _____ to third parties. In that case, I think we still have an interest in

4. restraining regulation to the extent possible. It’s way better to give people an
incentive to behave slightly differently and then let them choose than it is to say,
“Well, you have to do this,” or, “You have to do that,” or “You can’t do this,” or, “You
can’t do that.”
ROBERT BLOOMFIELD: You talk a fair bit when you make the case for a
libertarian welfare state indirect forms of harm become quite an issue here. I’m
wondering how far you want to press that issue. I guess the bottom line for me as I
look through a lot of the things that you propose, that are derived from trying to
reduce indirect harm, so the two of us might agree to do something, but it harms a
third person who isn’t party to the agreement, is hard for me to see the difference
between that view of libertarianism and the view of, say, an economically literate,
liberal Democrat or maybe a center-left European politician. Where do you see the
differences arising?
ROBERT FRANK: Well, I think, traditionally, liberal Democrats have been willing to
endorse fairly coercive forms of regulation. I think back to the early days of
environmental regulation. People didn’t have any problem at all telling the utility
companies that, in order to cut down on SO2 emissions, they had to buy coal from
specific regions, in the Midwest, that had low sulfur content. They couldn’t burn coal
from other regions. This, we now know, is just a horrendously inefficient way to
reach a given air-quality target. The government doesn’t know very much about
what technologies firms have available to them, what things might be invented, if
people had an interest in changing the outcomes that we see now.
I think what the government can do is give people an incentive to produce cleaner
air, in conjunction with what they make. And economists started proposing as far
back as the late 1960s that firms be forced to buy permits if they wanted to emit SO2
or other noxious gases into the air. I think many liberal groups were aghast at the
idea, “What? You’re going to let rich firms pollute to their heart’s content?” It’s a very
strange model of firm behavior implied by that comment, the idea that firms derive
pleasure from polluting the air. In fact, the real reason firms pollute the air is that it’s
cheaper to produce without a filter on your smokestack than to produce with one.
And, if we force firms to buy a permit every time they discharge smoke into the air,
they’re going to ask themselves, “Well, is there’s some cheap filter that I get to put
on the stack that will enable me to avoid having to buy that permit?” Some firms will
say, “Yes. The answer to that question is, there’s lots of good options available.”
Others will say, “No. We’re doing it the only way we can do it.” And, by requiring
permits, you automatically steer the task of filtering the smoke out to the firms who
can do it in the cheapest way. It’s never our goal to get pollution down to zero; it
would be way too costly to do that. So what we want to do is adopt a system of
regulation that lets the low-cost responders identify themselves, and that’s what the

5. pollution permit system does. We’ve got that same permit system proposed now in
the global warming debate; CO2 permits are one of the items on the table.
But I think by now liberal Democrats, for the most part, have come around to the
wisdom of that kind of proposal. You’ll see on the websites of environmental groups
laudatory praise for the effluent permit approach. But I think, from that lesson, we’ve
gradually learned that there are less heavy-handed ways to steer people’s behavior
in directions that will cause less harm to others. It’s not the firm’s goal to make the
Polar icecaps melt; they just try to produce as cheaply as possible, so we’ve got to
give them a little push to make them take the external costs on others that they’re
imposing into account when they make decisions.
ROBERT BLOOMFIELD: Whether we’re talking about pollution or free speech, one
of the things that has become more and more important is the internationalism, the
international nature of the challenges that we face, say, global warming and the fact
that so much communication now is international, that it’s hard to come up with
common standards.
The other part of Adam Thierer’s concern was not just handing the decision rights
over to some elite bureaucrats, but also the conceit of saying that there’s enough
commonality among everyone, among all these different communities, that one size
can fit all. Internationalism’s got to pose a challenge for this type of [welfare state?].
ROBERT FRANK: Yeah. I think a lot of the problems we face today is that there’s
really a global commons: the atmosphere of the planet belongs to everybody and
hence to nobody. And when people dump stuff into it, it affects everybody. If we
want to try to get people to stop dumping stuff into it, we’ve got to give incentives for
them to cut back on their air pollution, but with no world government with the power
to impose sanctions against people who dump pollution into the air it’s very difficult
to do that.
I think we’re going to be struggling to cobble together enforcement regimes that can
take actions like that. I think the trade treaties are likely candidates. You can’t
survive globally without access to the world trade network, and, if the community of
nations wants to slow global warming, I think we’ll probably have to use trade
treaties as a lever to get people to comply with the global warming agreements we
might try to push forward.
ROBERT BLOOMFIELD: Those will definitely be, I guess, much more status to the
Libertarian, I guess, since the trade treaties will be between nations.
ROBERT FRANK: The Libertarian I don’t think wants to say that we all have a right
to impose harm on everyone else. There are what I call in the United States

6. Movement Libertarians, and that is pretty much their position. I think basically they’re
just crybabies. They want to do whatever they want to do without regard to effects
on others, but that’s not the way life is. You can’t say, “I really like driving 90 miles
per hour in a school zone. I have a right to do it.” You don’t have the right to do it.
The law has the power to prevent you from doing that.
But I think, if you want to be a Libertarian, I think your real interest in this debate is to
acknowledge that the community has the right to try to prevent people from harming
others and then argue as effectively as you can for the least invasive forms of
regulation to achieve your objective. There’s a great deal of difference between
requiring effluent permits and letting firms decide for themselves where to buy the
coal or what kind of filter to buy than there is for a panel of bureaucrats to specify in
great detail what everyone must do. We know that in the case of the SO2 permit
process, the cost of achieving the clean air target was about one-eighth what it was
forecast to be. Firms responded very flexibly and cheaply to the incentive system. It
was much, much more expensive when we tried to tell them what to do. I think the
Libertarian who really wants to get the state off his back, and better not deny that the
community has an interest in restraining harm to others. Rather, the focus should be
how to make attempts to restrain harm as un-invasive as possible.
ROBERT BLOOMFIELD: One direction that Libertarians often espouse is voluntary
associations that can help address issues like the tragedy of the commons; you
mentioned, for example, global warming. I’m wondering how far you see voluntary
associations, how successful can they be with some of the big concerns that we
face? And actually maybe just sticking with free speech for a minute, one possibility
is that the global internet becomes filled with numerous communities all with
different speech standards, some things might be extremely offensive to one group
and in one community, and they would simply leave that community. How successful
do you think voluntary association and voluntary organizations can be?
ROBERT FRANK: There’s a long history of trying to regulate behavior through
voluntary associations and rules that they impose. We see that in gated
communities, for example. And since you don’t have to join any particular gated
community, our tolerance for the kind of rules that are legitimate to impose in that
context is much greater. Gated communities tell people you have to paint your
house only a color from a limited palette that they provide. You have to plant only
certain kinds of flowers. There are all sorts of regulations on behavior that, if a state
tried to impose them, we would never accept, because it’s a private contract you can
opt out, if you want. It’s more palatable in the context of a gated community. It’s the
same with online communities. They’re developing rules now. If you don’t find
yourself willing to play by the rules, you can opt out. I think there will eventually be
problems along those lines.

7. We know that there are huge network economies. There was a time, fortunately it
seems to be receding, when if you didn’t have the Microsoft operating system, you
couldn’t participate in the network. And so if Microsoft were to say, “Well, we’re
going to impose all these restrictions on you if you’re going to be in our network,” the
cost of opting out under those circumstances would have been very high. I don’t
think we would be tolerant of regulations imposed in that manner.
ROBERT BLOOMFIELD: When we talk about, well, I guess, not so voluntary
associations in the Real World, then we’re often dealing with the problem of
secession, that a citizen or group of citizens could decline the social contract with
the state and basically say, “Thanks, but no thanks.”
ROBERT FRANK: I think that’s why it’s important to focus our attention on the least
invasive ways of changing people’s behavior. You don’t want people to secede. It’s
not efficient for people to secede. Generally, it’s a host of practical problems
associated with that. So we allow leagues to impose rules. Tom Schilling has a very
illuminating example, “Why is it,” he asked, “that hockey players, if they’re skating
without a rule requiring helmets, never wear one? Yet, at the same time, they’ll vote
unanimously in a secret ballot for a rule requiring them to wear helmets.” His
argument was that, if you take your helmet off, you gain a slight competitive
advantage that forces the other side to match your step, and so the equilibrium is,
nobody’s skating with helmets; everybody’s exposed to serious injury risk. Much
better to have everybody skating with helmets. There’s no competitive advantage
that way either, but it’s a balanced playing field.
You can’t get to the “everyone wearing helmets” equilibrium unless you have a rule
requiring helmets. The slightest competitive advantage is enough to get people to
take theirs off. Then people can say, “Well, that’s abridging my freedom,” but that’s
an interesting question: Is it abridging a freedom if everybody wants to have a rule?
It seems to me more coherent to say you’d be abridging their freedom if you didn’t
let them have the rule they want. Now you could say, “If you don’t like the rule, don’t
play in the NHL,” or, “Don’t play in the NCAA Division One or whatever league has
the rule.” But there aren’t that many leagues now that don’t have rules so you have
limited options if you’re not willing to abide by, but the rule makes sense. The rule
prevents harm to others. If one team takes its helmet off, it costs the other team
something that appears clearly about, which is a greater chance to win.
ROBERT BLOOMFIELD: I’m probably changing your wording a bit, but you talked
about in the case of hockey that this a rule that enforces what the players
individually actually want, and that’s sounding to me a bit like Thaler and Sunstein’s
libertarian paternalism or paternal libertarianism, now I can’t remember, but the idea
is that they are going to try to design the choices that we have, whether we are
opting in or opting out of privacy agreements and so on. And their goal, as I

8. understand it, is to make the architecture of decisions help people make the
decisions that they truly want to make, but sometimes don’t, due to a lack of
attention, effort or knowledge. How do you distinguish yours from theirs?
ROBERT FRANK: I think what they’re doing is really focused on the social science
research that documents the fact that people make systematic errors in their own
decisions. People don’t save enough. People don’t eat the mix of foods that will
promote their health in the long run. There’s a lot of decisions people make that you
could argue, from a strict self-interest perspective are really strongly contrary to their
own narrow self-interest. Everybody objects to the nanny state prescribing what you
have to eat and how much you have to save, and so their solution, which I think
makes perfect sense for problems of that ilk, is to say, “Let’s change the
environment so that the default option that you’re presented with is the one is most
likely to promote your own interests.”
So your default option is to be in the 401(k) plan at work, not that you have to take a
specific step to enroll in it. You can get out of it if you want to. You can go fill out a
form and say, “I don’t want to be in the 401(k) plan,” but most people, if the default
option is to be in the plan, they’ll just stay in the plan. There’s a lot of inertia in
behavior that’s a systematic tendency that leads to bad outcomes for people. So
they just recommend structuring the environment in a way that will make the default
options or the thing you see first in the food line be the thing that, on average, will be
better for people than the way it is arranged currently. I don’t see how you could
really object to that. You can still do whatever you want.
That kind of proposal though doesn’t solve all the problems. It would not, for
example, solve the hockey helmet problem, just to post an information remedy in the
players’ locker room, saying, “Warning: Skating without a helmet could cost you
serious injury.” The players know that. That’s not why they’re not wearing a helmet.
They’re not wearing a helmet because they face a collective action problem, and
they need a rule to solve that particular collective action problem.
I think in other domains we can do it without a rule. Take the motorcycle helmet laws
that many states have. A lot of people are deeply offended by them, but I think
there’s a rationale for them nonetheless. There’s a collective action problem there
too. Young males, in particular, are reluctant to wear a helmet because they don’t
want to seem like a wimp. Their friends will tease them if they wear one. If you take
your helmet off, you endure a social cost. Many young men don’t wear a helmet.
The helmet rule solves that problem for them. They can say, “Well, I’m not a wimp
for wearing a helmet. A cop would give me a ticket if I don’t wear one. If it were my
choice, I wouldn’t wear a helmet,” they can say.
I think better still would be to have a fee, if you’re willing to pay the fee, if you’re one

9. of those people who says, “Truly, the only reason I enjoy riding my motorcycle is to
experience the feel of the wind in my hair,” then pay a fee $300 or $500 a year, and
get the medallion that you can display on your gas tank, and that permits you to ride
without a helmet. That solves the problem for 99 percent of the people who can say,
“Well, I’m no chump. I’m not going to pay a fee just to ride without a helmet.” So
you’ve solved the collective action problem for the people who suffer from that. And
the people who really care have an out. They’ve got an escape valve.
ROBERT BLOOMFIELD: You talk in your proposal for The Libertarian Welfare
State, you mention that people place different values on personal autonomy. So the
idea here is, if you really feel like you need to be free and feel the wind through your
hair, then you’d be willing to pay for it?
ROBERT FRANK: Exactly. You might say, “Well, why should I have to pay? What’s
the harm to others?” Every person who doesn’t wear a helmet helps create a climate
that makes it more difficult for others to wear one. It’s the same exact structure of
incentives as we see in the hockey helmet rule. When one team takes its helmets
off, they make it more costly for the other team to achieve its goal. So we’re not
saying you can’t ride without a helmet. We’re just saying you cause harm when you
do that, and we have to tax something in this world so why not tax those activities
that cause harm to others? Just as in the effluent permit case, some people have a
hard time reducing pollution, but those people pollute and buy a permit. Some
people have a hard time wearing helmets. Let those people pay a fee and get a
medallion that entitles them to ride their motorcycle without a helmet.
ROBERT BLOOMFIELD: I don’t know if you’re following the text chat, but this
helmet law seems to be getting people’s attention. First, I’ll mention Buffy Beale
says a helmet saved her noggin once. But the other thing I’m seeing is a resistance
to the idea that, as a Metaverse engineer puts it, “So we should pay fees for our
freedoms?”
ROBERT FRANK: Not for your freedoms, no. Again, to say you have freedom is
just to avoid the question. You have freedom to do whatever causes no harm to
others. If what you do causes harm to others, there’s no a priori presumption that
you have the freedom to do it. We have to do an analysis in that case of whether the
value to you of doing it outweighs the harm you caused others from doing it.
I had a personal experience with this one too. My son, Chris, whom you know, came
home one evening. He was in obvious pain. He was bent over. He’d been riding his
bike and had taken a terrible spill, was knocked out and had broken his collarbone
and injured his shoulder. We spent three or four hours at the emergency room. The
physician who treated him told me that, if he hadn’t been wearing his helmet which
was completely smashed on the right side, he would have been killed. We would

10. have been preparing for his funeral rather than putting a pin in his collarbone.
And so I thought, “Wow!” It was really hard to get him to wear a helmet, but the fact
that the Legislature in New York has a requirement that kids under 16, who ride
bikes have to wear one, made my task a lot easier. And so hats off to the legislature
who voted for that law, as far as I’m concerned. Chris is still alive. He’s writing
songs. He just won the Battle of the Bands competition at NYU for the second year
in a row. He’s a delightful human being.
ROBERT BLOOMFIELD: Congratulations!
ROBERT FRANK: And he’s alive because of that law. So that’s a law that prevents
harm to others, for sure.
ROBERT BLOOMFIELD: We’re coming up on our break halfway through the show.
But before we get there, when you were talking about Thaler and Sunstein’s
libertarian paternalism, you said that you didn’t see much to object to, to just making
the default be something that would be a socially useful outcome and an outcome
people would probably choose on their own volition. Now Adam Thierer last week
actually did have a problem with that view, and he gave a particular example, which
is that I guess there is some movement in Congress, or was at some point, to force
makers of game consoles that the default would be that it could only play games
rated E for everyone. And so if you wanted to go online, if you wanted to play a
game for a teenager or a mature game, you would have to go through a great deal
of work to make that happen, and he thought that was terribly inappropriate. I’m
wondering what your take on that is.
ROBERT FRANK: Well, I mean there are some people who think that any behavior
whatsoever ought to be permitted. There shouldn’t be any attempt to regulate any
behavior. I take a more pragmatic view about behavior in general. I say don’t
regulate behavior unless there’s a pretty clear showing that the behavior causes
more harm to others than the value it holds for the person who’s engaging in the
behavior. That’s a practical test. I really don’t know the literature on how much harm
is caused by games rated at different levels so I really don’t think I have any
informed opinion about whether it makes sense to put hurdles in the way of people
who want to play mature games. I don’t know whether they cause harm to other
people.
ROBERT BLOOMFIELD: Okay. So that would be the way that you would approach
it.
ROBERT FRANK: If they did, then let’s look at the numbers.

11. ROBERT BLOOMFIELD: Okay. Great. Well, that gets us to the end of the first part
of our discussion. We’re going to be back in just a couple minutes to continue talking
with Bob Frank, and we’ll be discussing wages and the tradeoff of status and
money. So I think people, especially in Second Life, who know the low wages
associated with work, will be quite interested in that. But right now what we’re going
to do is spice up our third year of broadcasting a little by splicing in excerpts of
discussions from our archives. So we will be right back with Robert Frank after this
quick stroll down memory lane.
[VIDEO]
ROBERT BLOOMFIELD: With Metanomics now in its third season, we thought it’d
be fun to take a look back at some of our past shows and guests since September of
2007. With over 80 episodes to choose from, we chose some of the most
interesting, engaging and occasionally contentious discussions. As always, you can
see the complete episodes at metanomics.net or on our iTunes channel.
ARCHIVE:
DMITRI WILLIAMS - OCTOBER 27, 2008
DMITRI WILLIAMS: And Oldenburg has this list which says, "Do these things fulfill
the function of a third place? First place is home. The second place is work." And so
we spend a lot of time in each of those two.
But the thing is, if we spend all our time at those two places, we actually have pretty
lame social lives because, even though we find mates that work and have friends at
work, it's not really enough to make us well-rounded human beings. So what
everybody really wants is that idyllic space where you go and you have these people
who are a little bit of an outlet to the rest of the world. A classic case of this for
Americans is pretty well embodied by the sitcom Cheers. Right? You walk in.
Everybody knows who you are. Everybody knows your name. And you have this
mixing experience.
ROBERT BLOOMFIELD: My god! It sounds like you're about to break into the
theme song.
DMITRI WILLIAMS: I know. I'm ready. But I mean who doesn't aspire to that. The
show was on for over ten years. It's no accident that it appealed to something in the
American psyche. In a country where we're more and more splintered and more and
more atomized in the suburbs where we don't actually run into each other, we need
these third places so that we can interact with people that we don't see all the time,
and more important, that we can interest with people who aren't necessarily like us.
Where we can go and relax and have a little bit of fun, where nobody's in charge,
where it's all about a regular group of people, and there's no sense of hierarchy or

12. as much status.
If you're playing darts in a bar, it doesn't matter if you're the CEO of a company or
you're a drunk or a burnout, what matters is can you talk a good game and can you
hit the damn bull's eye. And that's just one of the nice things about third-place
functionality. And it's just this important outlet for really expanding your social
network. Ask people who don't look just like you, and therefore, don't just think like
you, which is one of the problems we have with some social networking. And we
found that MMOs fulfill most of these criteria so it doesn't mean that, if you go into
Lineage or World of Warcraft or Second Life, suddenly you're going to have this
amazing social life. There are a lot of good and bad, but we were saying, "Okay, it
fulfills the necessary conditions that at least could be an outlet for those people who
think that nothing good could ever come of going online."
[END VIDEO]
ROBERT BLOOMFIELD: This is Rob Bloomfield back on Metanomics, with
Robert Frank. Bob, the first book I ever read of yours was Choosing the Right Pond:
Human Behavior and the Quest for Status. One of the things you do in that book is
provide evidence that there’s wage compression in companies, with the
highest-status people making only slightly more than those below them. And your
explanation is that the top workers are basically taking status instead of money, and
they could switch jobs, go to another firm where they would have lower status, but
more money. I’m wondering if you’d be willing to take a stab at applying this to
virtual communities.
Certainly, in the blogosphere, we see extremely popular bloggers making little or no
money, but getting a lot of visibility and often respect. And certainly, in Second Life,
the going wage is far lower than minimum wage. There are a lot of people who are
working very hard and building themselves up in the community, but not making
much money. Do you see the same status-wage tradeoff at work here?
ROBERT FRANK: Yeah, I think this is really not so much an instance of the
argument in Choosing the Right Pond as an argument I made elsewhere in the What
Price the Moral High Ground book that you mentioned at the introduction. It’s true
that you see people with the same training and ability and effort levels earning vastly
different salaries in different domains. So just a familiar example is the not-for-profit
sector typically pays much, much lower wages than the for-profit sector, even when
the workers are doing what look to be identical jobs requiring identical effort and so
on. I think the typical explanation there is that well people care more than just about
the wage, they care about the satisfaction they get from the job.
If you’re working in a nonprofit, whose mission you approve of, you go home at the

13. end of the day and say, “I did something useful today.” If, on the other hand, you’re
writing ad copy urging teenagers to start smoking, you go home at the end of the
day and maybe don’t feel so great about what you did all day. So we expect the
wage of the ad copywriter for RJR Nabisco to be much higher than the wage for the
ad copywriter for the American Cancer Society, who’s trying to write copy to urge
teenagers not to start smoking. So there is that.
If you look at Huffington Post, for instance, you’d see there that they’ve got many
people whose opportunity cost of time seems reasonably high. Why are they writing
for free on Huffington Post? The simple explanation, to my eye, is that they really
value the visibility they get by getting their words in front of a big platform like that.
You do see compression within each platform too. Yeah, and I think that’s explained
by the top dog, values being the top dog. Why should you get to be the top dog for
free? The only way you can be the top dog within a group is if somebody’s the
bottom dog. Why should anyone agree to be the bottom dog unless you get a little
extra pay for doing it? It’s a little bit of socialism in the private sector that we see
there. Progressive income tax schemes implicitly levied within each work group in
effect.
ROBERT BLOOMFIELD: Now Choosing the Right Pond book is from the ’80s, I
think.
ROBERT FRANK: In 1985, that was published.
ROBERT BLOOMFIELD: In 1985. So since then, one of the things that’s been in
the news so much is the huge wage disparity between the very top dogs, the CEOs
of large corporations and their workers, with the ratio of income having skyrocketed
over the last 30 years or so. And so I’m wondering, does that go against the notion
that there’s salary compression and that people trade wages for status?
ROBERT FRANK: Yeah. At first glance it seems to, but, in fact, no it doesn’t
contradict the earlier pattern at all. The earlier pattern refers to how much wages
differ for people who are all doing the same job: the accountants at General Motors,
for example; the assistant professors at Cornell, in a given department, where
there’s just a group of more or less similar people doing the same task. There you
see a lot of wage compression. I think it’s explained in part by compensating
differential for rank within the group.
When you look at CEO pay, you’re not really comparing the wages of CEOs within
the group, you’re looking at how CEO pay differs relative to the pay of the average
worker in the firm, and there you really have seen an explosion. It’s over 500 times
as much at the CEO level as the average American large-company average worker

14. now. It was only 42 times as much as recently as 1980. So that explosion, I think, is
accounted for in part by the fact that there’s really been a profound change in the
structure of markets.
There are many more markets that have the kind of structure we used to think was
observed only in entertainment and sports. So if you look at the music industry, for
instance, in the old days, if you wanted to hear music, you had to go to a live concert
hall to do it so there were really jobs enough for 10,000 tenors on the tour.
Everybody wanted to hear the best one, but you couldn’t. Maybe the best one
couldn’t get to all the venues. Now most of the revenue comes from the sale of
recorded music, although that’s under attack now too. So the recording companies
need only a handful of tenors. They bid like mad to get the ones that everybody
thinks are the best or at least the most familiar ones. Those people are in
seven-figure salaries in an instant. Others who are almost as good end up teaching
music lessons to fourth graders. It’s a very explosive increase in the quality that we
have seen.
The upside of that is that more people are buying what they buy from the best
performer in the market now. If you’re a CEO, you’re making decisions for market
that spans the globe now. A bad decision is much costly than it used to be. If you’re
a CEO and you make a good decision, on the other hand, it’s a much more valuable
good decision because the market reach has extended so much.
And it’s really much more a free-agent market. That’s the other big change we’ve
seen. It used to be that, to get to be the CEO of a big company, you had to come up
your whole career within the firm. That idea went out the window about 25 years
ago, and many, many CEOs are hired from the outside now, and that’s had the
effect very similar to what we saw in the free-agent breakthrough in professional
sports. Players got more valuable when TV came, but their salaries didn’t start going
up dramatically until the court decisions that gave them the right to sell their services
to the highest bidder. Now, de facto, we have a free-agent market of CEOs [in the
market realm?] too, and salaries just exploded as a result of that.
ROBERT BLOOMFIELD: These sound like the arguments you make in another one
of your books The Winner-Take-All Society, why the few at the top get so much
more than the rest of us. That book was published in 1995, I believe.
ROBERT FRANK: Yes.
ROBERT BLOOMFIELD: And that was before the advent of the internet. One of the
things that people have talked about a great deal with the internet is the notion of the
“long tail,” that there are so many niche markets so you can end up with a lot of
small winners. I’m wondering, how would you update the arguments you just made

15. to account for the internet age?
ROBERT FRANK: Yeah. I think that’s one of the really encouraging possibilities that
technology has put in front of us. The Backlist Book Titles used to just died quickly,
never to be seen again. Chris Anderson explained in The Long Tail that now we
have Amazon and other online marketing distribution channels that keep those titles
alive. You can’t show a Hindi movie in Ithaca because there aren’t enough people to
go see it, but you can rent a Hindi movie, any Hindi movie just about, that’s ever
been made on Netflix and watches it in Ithaca whenever you want. So there’s an
active market now for those niche players that would have been washed out to sea
in the old days.
That said, though, if you follow the aggregate numbers and look at book sales, for
example, year by year, even though the Backlist Titles have a life now, [that they
didn’t used to?], if you look at the fraction of total titles sold in a year, a much greater
fraction of that total is accounted for by the top 30 books sold that year than ever
before. So we’re seeing further and further concentration at the top of the pyramid at
the same time we’re seeing a revival of possibility at the bottom of the heap.
ROBERT BLOOMFIELD: That leads into a related question, which is just looking at
the economics of internet businesses and especially virtual products and services.
Virtual products and services are notable because marginal costs, you know, the
cost of having one more user or making one more copy drop almost to zero. And,
since the goods can be copied, they’re effectively non-rivalrous, that letting one
more person use it doesn’t really take away value from the others. As someone who
teaches principles of economics, how do you see these changes in cost structure
affecting markets in competition?
ROBERT FRANK: From the economist’s perspective, the right price to charge for
any good or service is the marginal cost, and, as you say, if all your costs are
up-front development costs and you can stamp out copies for free, then marginal
cost is literally zero, and that’s the right economic price to be charging. The problem
with that is that, if you charge everybody zero, how do you pay for all those
development costs? And so companies are fairly ingenious figuring out ways to do
that.
Apple came out with a new laptop. They had it in black and in white. They charged a
couple hundred dollars extra for the black one, even though it was essentially the
same machine. They throw little options out for people who really care about the
cool features and aren’t worried that much about price to pay extra. The people who
are price-sensitive, they get to come in by jumping a few hurdles. So that’s a
standard method that firms use.

16. In media, it’s not clear how it’s going to shake out. My employer, the New York
Times, has been losing money hand over fist, even though, if you had to predict who
would be the big winner in the new media environment, I think, by almost any
reckoning, most people would have picked the New York Times. They’ve got a
commanding position. More people come to their website than any other newspaper.
They’ve got still the best talent on their staff. Everybody wants to read it, but
nobody’s willing to sign up to pay for it or not enough people are. So that’s the
difficulty. And I think they’ll find a way. It’s going to require some additional tinkering
and experimentation.
ROBERT BLOOMFIELD: I guess related, since you’ve published so many books,
how do you see book publishing playing out? Are your books available on the
Kindle?
ROBERT FRANK: Some of them are. Not all of them, but some of them are. Some
of are in audio book format. And what you see basically is that, for the textbook
market, it’s getting harder and harder each year. The competition seems to have
driven product development the same way the operating system competition did with
computers, just more and more features larded onto the Xbook package. More and
more expensive, but they’ve now got the offerings to the point where more and more
people just aren’t buying them. They’re figuring out ways to share them and get by. I
think we’re still fishing for the model. The way to price goods whose marginal cost is
zero hasn’t been come up with as of yet. eBooks, they’re growing in popularity, but
most people don’t want an eBook. They still want a book they can cart around and
turn the pages of.
ROBERT BLOOMFIELD: Tying this back to the earlier part of our discussion, I’m
wondering, as we see all of these industries struggling and unable to turn free into
“freemium” or any other form of income, do you see a role for governmental
regulation? Or do you think this is a case where the states just need to step back
and let the industry shake out?
ROBERT FRANK: Yeah, I think the problem with state funding of media is the same
as the problem with state funding of the arts. Do you really want the government
bureaucrats deciding which art gets produced? Once art is produced, the marginal
cost is zero. Maybe they’re struggling artists, but most people I think, yeah, neither
solution is perfect, but I’ll take the struggling artist model if I have to choose.
With media, I think if we saw another ten years and all newspapers went out of
business and nothing came along that could do the investigative journalism function
anywhere near the standard that we’re used to seeing, might we be willing to
consider a model where there are public grants, competitive grants to institutions
that would do investigative journalism? Yeah, possibly we would consider that, but I
don’t think that would be the first choice. That would be the last resort.

17. ROBERT BLOOMFIELD: We have time for one more question, and I’m going to let
that one be from Mitch Wagoner of Information Week, just because you have really
made a name for yourself blending psychology and economics. Mitch notes,
“Studies show that once you hit middle class, more money doesn’t make you
happier. I think the problem is that middle class seems like a precarious place to be
for the last generation or so. Even if all you want is to be in the middle class, you’re
still racing to stay in the same place, like the Red Queen.” I’m wondering if you have
thoughts on money and happiness and any recommendations.
ROBERT FRANK: Yeah, that’s actually the area I study most. And it’s true, you see
some really vexing collective action problems in consumption decisions. How much
you spend on a house has clear implications for where your kids go to school. A
good [AUDIO GLITCH] better than other schools, a quintessentially relative concept.
And the good schools in this country and in most countries, in fact, are located in the
good neighborhoods, which is to say the neighborhoods where house prices are
higher.
Everybody wants to send their kids to good schools. There are only so many to go
around. You’ve got to buy a house in an expensive neighborhood to get access to
them. And so if people have more money, if the banks let them borrow more to bid
for houses, some people are going to bid more, and then, if you don’t, it’ll be your
kids who go to the schools where the kids score in the twentieth percentile, and they
have metal detectors at the door. So you’ve got to match the spending of your peers
in a domain like that, but it’s a guaranteed frustration. If everybody stands to get a
better view, nobody sees any better than before.
I think really giving some serious thought to how you might change people’s
incentives about how to spend. Not allowing people to borrow so freely in the
housing market would be an idea that would have much commended. I’ve proposed,
in many venues, a progressive consumption tax. Report your income to the IRS the
same as you do now, but also your savings, as you would for a 401(k) plan. And the
difference in those two numbers is how much you consumed this year, and then
subtract off a big standard deduction, and that’s taxable consumption. Tax that at a
steeply progressive rate, and then less money will be spent making bigger mansions
that don’t seem to make anyone any happier, and you’ll steer more money into
investment, which will improve our standard of living, in the long run.
Don’t do it now. Do it after the economy’s back to full employment. Don’t do it all at
once. Phase it in gradually so you gradually shift spending from consumption to
investment, and you’ll get higher growth in income. Eventually consumption will be
higher than it would be if we spent with the same trajectory we’re on. So that’s, I
think, [AUDIO GLITCH] proposal that could be adopted. It was proposed in the

18. Senate in 1995, with bipartisan sponsorship. Milton Friedman has endorsed a tax
like this. He sent me a nice reprint of a paper he’d published in 1943, urging the
adoption of that tax as the best way to pay for the war effort. So I think we could
steer consumption in more productive ways, if we wanted to turn to that question. A
lot of waste in that domain.
ROBERT BLOOMFIELD: Great! Well, thank you so much for joining us and sharing
your views on a variety of matters. It was really a pleasure. I’m sure everyone will
rush out to buy your newest book when it appears on the shelves: The Libertarian
Welfare State. So thanks a lot.
ROBERT FRANK: Good to be with you, Rob.
ROBERT BLOOMFIELD: Now we close every segment with a short opinion piece:
Connecting The Dots. Last week on Connecting The Dots, I argued against simple
claims in policy debates. Well, I’m glad to report that the committee that awards the
Nobel Prize in economics clearly listened to my commentary and selected
Elinor Ostrom as one of this year’s winners. Elinor has consistently argued against
simple solutions to some of the most fundamental problems in economics involving
the tragedy of the commons. The committee obviously follows Metanomics very
closely also because Ms. Ostrom’s work has important applications to virtual
communities, which have been our focus all season. In fact, her book Governing the
Commons: the Evolution of Institutions for Collective Action should probably be
required reading for anyone interested in virtual communities.
I’m going to illustrate my points talking about over-fishing. Over-fishing is one of the
most obvious manifestations of the tragedy of the commons. A fishing ground can
support only a limited catch. You catch more, and the fish can’t repopulate for the
next year. But each individual fisherman has an incentive to catch as much as he
can, crashing the fish population and making everyone worse off.
So Libertarians often argue for one simple fix: avoid the tragedy of the commons by
having the ocean be private property, and whoever owns it has an incentive to
maintain a sustainable harvest. Now liberals often argue for another simple fix: let
government establish laws that restrict the freedom to fish. But these simple
solutions are often impossible just because of the internationalism of many of these
problems.
So Ostrom argues for complexity. She writes, “Instead of there being a single
solution to a single problem, I argue that many solutions exist to cope with many
different problems. Instead of presuming that optimal institutional solutions can be
designed easily and imposed at low cost by external authorities I argue” (I, that’s
Ostrom) “that getting the institutions right is a difficult, time-consuming,

19. conflict-invoking process.”
Well, Ostrom’s work is also surely a difficult and time-consuming process. She’s
documented in great detail how communities have developed their own complicated
institutions to manage common resources, sometimes successfully, sometimes not.
So Ostrom learned from these studies that success requires a number of conditions
spelled out in a paper published by Science Magazine. The community needs to be
able to monitor people’s use of the common resource and have broad support for
enforcing the community rules.
The community also needs to have a high level of trust and communication, and, as
part of that, it needs to be able to limit entry. The problem is that, if new people
come into the community too quickly, there’s a loss of social cohesion at the same
time that you’re putting additional pressure on the common resource that you are
trying to protect. And so together that makes it very hard to maintain effective rules
protecting the common resource, and you end up with the tragedy of the commons.
Now, to see why this is so important to virtual communities, let’s look at one of their
most important common resources: attention. Everyone who posts a comment,
chats during an event like Metanomics, updates their Facebook page, sends out
Twitters or Plurks or writes a blogpost or, hey, hosts a talk show, they’re all fishing
for attention. Now I don’t want that to sound like a bad thing. Drawing attention to
issues of interest to the community is a public service, whether it is to educate, to
entertain or simply to forge stronger social community bonds. But, just like fishing for
food, there are individual benefits to fishing for attention.
And, to see the dire outcome that results when everyone starts over-fishing for
attention, just take a look at the state of cable news in the United States. The easy
ways to get attention are to sensationalize scandals and disputes, and that’s made
all the easier by partisans who are willing to say and do anything to make their side
look good and the other side evil incarnate. So actually I should mention an extreme
example of this is Bob Frank’s appearance on FOX News, in which the talk show
host Stuart Varney feigns outrage to Bob’s rather unremarkable claim that luck is an
important element of success. I’ll be sure to paste that link into chat after the show,
and you can all have a good laugh. Bob handled himself wonderfully, I should say.
Now I think we all have reason to feel quite pleased with the level of discourse we
see in the Second Life business and educational community. Not just Metanomics,
but other business groups like ThinkBalm and educational groups like ISTE, say.
You don’t see much in the way of over-fishing through sensationalism or
partisanship, scandal and so on. Comments on Dusan Writer’s blog are generally
very thoughtful and sincere, as is the chat during Metanomics broadcasts.
So why is that? I think Elinor Ostrom is onto something because the conditions for
successfully maintaining a common resource are all here. We have a relatively

20. stable community, with strong social ties. Over-fishing for attention is easily
monitored. And, for the most part, we support policies that discourage the kind of
snark cynicism and extremism that make thoughtful discourse so difficult in many of
the largest virtual communities.
So what can virtual communities learn from this new Nobel Laureate? For most, that
growth in virtual communities is a tricky matter. Wagner James Au has a post on his
blog today, New World Notes, explaining that mainstream adoption is a cure to most
of Second Life’s problems. Sure, we’d love to see our community grow, and there
would surely be many benefits, but, if we grow too quickly, we risk losing the
cohesion and the norms that allow us to maintain our precious common resources.
We can handle growth by devising new ways to manage our community and its
conversations when it’s larger, or we can find ways to divide into smaller and more
manageable sub-communities. But, either way, when I compare the level of
discourse in Second Life with what I see on cable news and talk radio, I look at
growth with mixed feelings. I’m thankful that Elinor Ostrom has helped me
understand why that is.
Okay. That’s all I have to say today. Join us next week when we’ll be switching
gears and looking at enterprise adoption of Virtual Worlds. Our guest will be
Leslie Jarmon, who has brought the University of Texas into Second Life. Not just
one campus, but the entire state system. So if you’re wondering what the future of
education looks like and how immersive media fit in, join us next Wednesday, noon
Pacific Time. And don’t forget, you can see over 80 hours of Metanomics in our
archives at metanomics.net and on iTunes. See you next week. Bye bye.
Document: cor1068.doc
Second Life Avatar: Transcriptionist Writer
Transcribed by: http://www.hiredhand.com
http://www.hiredhandtranscription.org