It was suggested to me to create an age-adjusted version of my economics blog ranking. To do this I needed to figure out when each of the 140 blogs in my list started. I did this by going to each blog and looking at the archives for the date of the first post (tedious work). By this measure, the oldest economics blog must be Brad DeLong’s, which has posts from the 1980s. Hang on … I didn’t think blogs existed back then. Did Professor DeLong invent blogging?! No … closer inspection reveals that these older posts on his blog are academic papers that he wrote. I decided they didn’t count, so it seems he started blogging for real around January 2004.

As far as the oldest blog goes, it seems like ArgMax has genuine posts going back to 1997, although they could be articles reposted to the blog, it’s hard to tell. Anyway, this graph shows the trend of the starting month for the 140 blogs in my list. Around 2004 seems like when economics blogging really took off.

As I said, now that I have this data, I plan on producing an age-adjusted ranking. Since my ranking is based on Technorati data, which is based on links between blogs, it could be that older blogs have more links and therefore rank higher, just simply for being old. It’ll be interesting to see how the ranking changes after controlling for age.

I’ve read Freakonomics and I didn’t really like it. I mean, it’s written well and Steven Levitt is obviously really smart, but the book didn’t impress me so much. To me, it just made economists seem like smart-asses who like to point out clever explanations for interesting but not especially important things. Plus, maybe it’s my antipodean sensitivities, but I really didn’t like the bits of the book praising Levitt as some sort of econo-god. What was the point of that?

Anyway, I don’t want to talk about Freakonomics. I want to talk about Tim Harford’s book, The Undercover Economist. I know, I’m really behind the times, this book came out and I read it last year. Everyone is probably buzzing over Tyler Cowen’s Discover Your Inner Economist, which I haven’t read yet. But I have to say that I really liked Harford’s book. He doesn’t deal with trivial things like behaviour of drug dealers or some such junk. He talks about some of the really big and deep ideas in economics, only he does it in such a gentle way that you don’t really realise it. Harford writes very well and clearly, and can explain things like the first and second fundamental welfare theorems while making you feel like you’re reading Harry Potter. In fact, The Undercover Economist is much less confusing than Harry Potter. The other thing that really stood out for me in Harford’s book is his understanding of what a market is and what it does.

After reading The Undercover Economist, you will realise that markets are really like computers. They exist to extract and process information. To illustrate, imagine that you live in a communist dictatorship, and the good dictator put you in charge of pencil production. He is a benevolant dictator, so he genuinely cares about the welfare of his people. This means that resources should be used to produce pencils as efficiently as possible (without wasting any), and the pencil production should go to those people who value pencils the most. Now think about the information you would need to do this job. You’d need to know how to produce a pencil, what raw materials are required in what quantities, who wants pencils how badly, where these consumers live, their preferences for HB, 2B etc pencils, and so on.

As you can see, the problem of organising pencil production is a problem of information. In priciple it can be solved, but it would be really difficult. On the other hand, as Harford explains, markets can achieve this transparently. If the market for pencils functions properly, the incentives inherent in the system will ensure that pencils are produced efficiently, and that the supply of pencils is allocated to those who value them the most. The market extracts the necessary information and processes it. From this, it’s easy to see that prices in well-functioning markets are signals that convey information about what it costs to produce something and how badly people want that thing compared to the other things that they could consume. Harford explains these powerful ideas, and more, in a highly readable format.

Overall, I highly recommend this book to anyone interested in economics.

Brad Fitzpatrick, creator of LiveJournal, has an interesting blog post about portability of the ’social graphs’ of social networking sites like Facebook and MySpace. What is a social graph? In maths, a graph can refer to a network of ‘nodes’ and the connections between these nodes. That’s what social networking sites create, through the networks of friends that people build up. The members of the sites are the nodes, and they’re linked to other members through their sets of friends, and the whole thing is the ‘graph’ of the site. This graph is the basic asset of social networking sites, since belonging to such a site is next to useless if it doesn’t allow you to ‘connect’ to people.

As Brad explains, it’s a pain for people to have to build up their networks on many different sites. It’s tiring to add all my friends on Facebook, and then have to add them again on some other site for some other purpose. Brad suggests that this is preventing new social networking sites from getting established, because the cost to build up a network on multiple sites is too high for users, and because a site with a small graph (ie few members) isn’t very attractive to new users.

In economics terms, social networking sites are classic examples of services that exhibit ‘network effects’, where the value of the service increases with the number of its users. In such markets, entry by new firms can be difficult, because established firms have already built up their networks, making them more attractive to users. The newcomers can try to overcome this barrier by providing a superior service, or differentiating themselves from the existing firms in some way, but everything else equal it’s arguably going to be more difficult to enter the social networking market than, say, the market for pencils.

What Brad is really talking about is making the networks that the sites have established ‘compatible’ between sites. So if you join one site then you’ve effectively joined them all. This removes the size of the network as a differentiating factor between sites and will make it easier for newcomers to enter. There are a couple of economic effects that will underlie the decisions of the social networking sites to go along with this or not.

First, compatibility may be desirable because it weakens competition between networks, resulting in higher profits. Social network sites don’t (at the moment) charge prices for membership, but the way they compete is in the features that they provide to users. It’s expensive for the sites to develop nice user interfaces and other features that people want. More features equals a lower price, in some sense. Reducing features will result in losing some users, but will save the site some money. With compatibility, if a site reduces its features and loses some users to a competing site, its remaining users will still be able ‘connect’ to those who switched, and so the value of the site to the remaining users doesn’t change. Thus the ‘punishment’ that the site faces for reducing its features is weaker with compatibility. This will lead to compatible sites implementing fewer features, and presumably making higher profits. That’s not necessarily bad for users though, as the benefits of being able to connect to a larger network that compatibility brings might outweigh the losses from reduced features.

So compatibility may be desirable to existing competitors. On the other hand, an existing firm may not want to make its network compatible with a new entrant. Compatibility will weaken the competition as described above if the new firm does enter the market, but no entry may be an even better outcome than entry of a (weak) competitor. However, it’s not always desirable to keep competitors out, if they provide innovative products that expand the size of the market as a whole. In a different context, this perhaps explains why Adobe chose to make the PDF format an open standard and allow competitors to produce PDF-compatible software.

Overall, Brad’s proposal may be a good idea from the point of view of users of social networking sites, provided that the benefits of belonging to a bigger network outweigh any losses from reduced intensity of competition in terms of the features provided to users. But I’m sceptical whether the larger sites like Facebook will accept it. They’ve spent effort and money building up their networks, and unless they see big benefits from market expansion then I doubt they’ll want to establish compatibility with new competitors.

Many people are familiar with the “tragedy of the commons”. This is the idea that a common resource will be overused by its users, to their detriment. The classic example is a common field in a village that farmers can use for grazing sheep for free. When deciding how many sheep to graze on the field, each farmer will ignore the negative effect that his sheep have on the sheep of the other farmers that use the same field. Too many sheep on a fixed amount of grass means skinny sheep, which is bad for the farmers. Unless they can somehow coordinate their actions, the joint value to them of the field will be less than its maximum possible value. They could solve this problem by getting together and allocating quotas for using the field, or given ownership of the field to someone and let them charge a price for using it. Either way (in theory) it’s possible to achieve the optimal usage of the field, to the benefit of all.

The tragedy of the anticommons doesn’t get as much airtime, but it’s equally important, especially in high-tech industries. This is where a common resource has too many owners. Imagine the farmers’ field had three separate gates that you have to pass through to access the field. Each gatekeeper sets his own price to use the field independently of the other gatekeepers. When setting prices, each gatekeeper will realise that if he raises his price, fewer sheep will be grazed on the field. This is the normal demand response, and how strong it is will determine whether it’s profitable to raise his price or not. What he fails to take account of, however, is the fact that raising his price reduces the demand that all the gatekeepers receive. Since all will behave in this way, each will have a tendency to set a higher price than would prevail if all the gatekeepers got together and set a single joint price for grazing.

Thus the tragedy of the anticommons has the opposite effect of the tragedy of the commons. With a commons, a lack of ownership means it is over-used. With an anticommons, too many owners means the resource is under-used. Why is the anticommons important in high-tech industries? The answer is intellectual property rights. Many high-tech innovations, as well as standards, are based on multiple intellectual property rights, like patents. If the patents have different owners, an anticommons problem can result. In that case, the ‘field’ is the innovation that makes use of the patents, and the ‘gatekeepers’ are the patent owners. Each patent owner effectively controls access to the innovation, and so there are multiple ‘gates’ that have to be passed through to use it.

This problem can easily come up in the process of standards formation. For example, the patents that define the DVD format standard are owned by a number of different firms. Without some sort of coordination, it’s likely that royalties for DVD technology would be very high. The way around this problem is joint setting of the royalties by the relevant patent owners. In this case, ‘collusion’ among patent owners is actually beneficial. Without coordination, royalties end up being too high which hurts not only the patent holders but the downstream users of the technology. Joint royalty setting will result in lower royalties that are beneficial for all.

As innovation progresses and the number of patents or other intellectual property rights increases, it becomes more likely that further innovations or standards will depend on multiple rights held by different owners. Thus centralisation and coordination of royalties will become more important considerations in standards-setting processes and other forms of innovation.

Thanks to everyone who sent feedback about my ranking of economics blogs, and thanks to Greg Mankiw for mentioning it on his blog. I’ve made a few minor adjustments. I removed paidContent.org which was ranked highly but not really about economics and I also included some other economics blogs that I missed.

I used Technorati rankings because they make their data easily available to anyone. Their ranking is based on counting links between blogs, which they call ‘authority’. Another way to rank blogs would be based on traffic or visitors. This data is harder to get, but Brian Gongol has done it for some sites. A third alternative would be a reader-based voting system, which I don’t think anyone has tried yet for economics blogs, but I’ve seen it for other categories of blogs.

It was also suggested to me that rankings could be adjusted based on blog ages. I think that’s a nice idea, and it’s easy to find the date of a blog’s first post to work out its age. When I get some free time I’ll do that and create an age-adjusted ranking alongside the raw rankings.