The simple economic paradox wrecking the news
What the Grossman-Stiglitz Paradox tells us about 21st century media.
The “media,” and all of us interested in it, are like travelers on a huge, busy freeway. It’s a secular communion of strangers in the same place at the same time, but who took different on-ramps and are driving to different exits, usually at different speeds. Some of us are in sedans, SUVs, motorcycles, Ferraris, and buses; some are just walking along the side of a busy road hoping to hitch a ride. Some are going to work, some to the hospital, some are just joyriding for fun. It’s a big road that delivers knowledge, entertainment, and, somehow, democracy. There’s no speed limit, and there are many accidents.
I often ride in the big rig with “ECONOMICS” painted on the side because — say what you will about the dismal science — it has pretensions of quantifying the most important segments of human activity and providing tools to diagnose when the math doesn’t quite line up. (You might notice there are no blustery speeches from the CEO in a profit and loss statement.) And within the subfield of information economics, if there were a single equation that explains why people seem so miserable on our information superhighway, I’d point to the Grossman-Stiglitz Paradox.
In a famous 1980 paper “On the Impossibility of Informationally Efficient Markets” I’ve visited in recent months, Sanford J. Grossman and Joseph E. Stiglitz puzzled over a theoretical contradiction in how valuable information is produced and disseminated in a marketplace.
The Grossman-Stiglitz Paradox goes like this, highly simplified: Important or valuable information can be costly to obtain or produce, so not everyone does it. However, the information gets transmitted to the rest of the marketplace when the information producers can exploit a market opening and recoup the costs of information production. But the more widely distributed information becomes in a marketplace, you’re likelier to lose your money if you keep investing in producing high-quality information. So everyone stops producing new information, and strange scenarios emerge: Everyone is either perfectly informed — or perfectly uninformed. Ultimately, Grossman and Stiglitz concluded: “There is a fundamental conflict between the efficiency with which markets spread information and the incentives to acquire information.”
The Grossman-Stiglitz Paradox, although stated with the lofty equilibria of abstract economic theory, is easy enough to understand when applied to the practical mysteries of media:
Why was it the case that the explosion of information technologies that drove down distribution costs over the past two decades coincided with a massive decrease of journalist employment?
Why didn’t the opening of massive new consumer markets sustain massive investment in more high-quality information production to supply the digital world?
Why is it that the social media platforms that have so efficiently aggregated human attention, whose data-mining and recommendation algorithms can so efficiently connect information providers with information consumers, have been far more effective at spawning opinion commentators than quality news providers?
Why have the most successful and stable commercial news businesses of the 21st century (the New York Times, Wall Street Journal, Bloomberg) erected paywalls that limit the shareability of their product when the goal of any news organization is to attain the largest audience possible?
Why do these investors in original news production, who depend on fair use doctrines of copyright to exist, act existentially threatened by companies like Google and non-investing AI companies that seek to scrape news under the same guise of fair use?
Why are so many other news outlets increasingly reliant on subsidization by billionaires, philanthropy and the government?
Because “there is a fundamental conflict between the efficiency with which markets spread information and the incentives to acquire information.”
Of course, theories are just theories, and there is so much more texture and narrative to more closely explain what has happened to the news media over the past two decades, including some nice exceptions to the rule. But theories of economic equilibria don’t say there can’t be exceptions to the rule — they rather offer an explanation why the exceptions are not the norm.
A better-off society will be one that maximizes the dissemination and production of high-quality information, to increase what the economists call social “welfare.” Unfortunately, in economics terms, quality news acts like a non-excludable, non-rivalrous public good — like a freeway — which is to say it’s something that a lot of people freely benefit from, but which any one benefiting person or entity may not be motivated to pay for. Too many unpaved potholes will stop people from driving, and then everybody’s lives start getting worse. To avert disaster, the public has to either pay to repave the asphalt or change the rules of the road.
It's not clear to me why journalism doesn't enforce its copyrights. Clearly, many outlets often issue reports on the same thing (e.g. coverage of a press conference). Still, the act of writing up the event yields a unique product (just as a novel about a UFO invasion is unique, regardless of how many other UFO invasion novels there are).
To protect journalism copyrights, scraping by aggregators must end. Doing so preserves the value of original journalism, since consumers do not have access to free news anymore.
Given the expenses associated with copyright enforcement, it might occur on a spectrum, with exclusives and investigations being protected more aggressively than 'press conference' content. Too, different companies could take different approaches to enforcement (the Disney approach vs the Sriracha approach).
And, newspaper/magazine/TV news shows could/should protect their overall organization and design as unique. For instance, the LA Times can argue that its combination of comics and puzzles is unique, as is its weighting of 'hard news' and 'soft news', editorial content, graphics, etc.
What's wrong with this?
We appreciate the connection between informationally efficient markets and the current state of our media ecosystem. It's an important connection to make, since observing the underlying incentives that drive information discovery and distribution can tell us a lot about why we face the issues we currently face.
With the Grossman-Stiglitz Paradox, the assumption is that participants are only profiting by exploiting an informational advantage (as they do in financial markets by trading assets with inaccurate prices that don't yet reflect all information). The difficult work of acquiring an information advantage was rewarded by being able to exploit that advantage through trading, but more informed participants means it is more difficult to gain the advantage and the reward is smaller, so the work is not worth it.
In both traditional and social media, the difficult work of information discovery is rewarded with distribution (ad-supported revenue based on engagement metrics, as well as direct subscriptions). The more engagement with a piece of information, and the greater its reach, the more you could expect to earn from its consumption. As the internet and digital media democratized the distribution of information away from the hands of the publishers, the reward for distribution fell. The professional newsrooms that were doing the difficult work of high-quality reporting now had to compete with free-to-use social media platforms.
To reduce costs of professional journalism, newsrooms consolidated in an effort to achieve economies of scale, laying off staff and decreasing the number of voices contributing to the information environment. With less nuance in original reporting, the second-order commentary across social media also lost nuance. The health of our overall media environment deteriorated because the reward of distribution decreased. It doesn't make economic sense to do the hard work of discovering accurate information.
This is what we refer to as the paradox of abundance and distrust. With greater access to cheaper information, we would expect there to be a clearer picture of consensus reality. Yet, we have fragmented into distinct ideological communities that operate within their own bespoke realities, and distrust in the information shared across these groups has only increased since the 70s.
Fortunately, we no longer have to rely on distribution as the reward for producing high-quality reporting. Instead, we can now incentivize reporting based on its quality, accuracy, and merit, so journalists are actually rewarded fairly for the work that they produce. Without relying on distribution as the driver of earnings, we don't need to gatekeep access to information and paywall each individual source. Readers can pay a single subscription to the environment as a whole, and community-governed payout algorithms can determine how journalists are compensated for their work.
The only way to change an equilibrium outcome is to change the underlying incentive structures that produce it. We have discovered what the equilibrium is for our current media business models. It is time we address the fundamental problem at hand and create a new incentive structure entirely. One where the equilibrium is maximal informational efficiency.