Tuesday, October 13, 2009

Economics Nobel prize supports social networking

Elinor Ostrom

Social network people should applaud a few dismal academics for appreciating their importance in participating in decision making. A surprising choice in Nobel prize winners was made this year (no, not Obama) that you may not have heard much about but was most certainly earned. Social scientists Elinor Ostrom and Oliver Williamson won the economics prize for work that advanced the cause of economic governance by saying that voluntary associations work well to solve real problems. A social network is a voluntary association.

Typical topics of economic discussion are vertical integration and horizontal mergers. Let’s take Facebook’s recent acquisition of Friendfeed as an example of a horizontal merger. It doesn’t look like it makes sense since Facebook could just build the same thing instead of buying and merging the odd culture of those lifestreaming folks. The traditional view would be to assume that Facebook was increasing their market power even if the customer was forced to support the purchase by viewing more ads. But Mr. Williamson would call it a move to greater efficiency since the merger would reduce costs and create more value in the overall economy than what the increase of price would cause the consumers.

One of the more important themes in Mr. Williamson’s work is trust. Social networks, as well as Williamson’s coal purchasing networks, are underpinned by these types of relationship specific contracts.  I’m sure that Chris Brogan would agree.

Then there is the overwhelming dominance of Twitter in the social world even though Compete stats seem to show it peaking right now. It’s more of a vertical integration as it adds functionality it needs control over instead of working with the smaller sites that have developed piecemeal solutions. Traditional economists would have a problem with the free service, citing the late Garrett Hardin’s work on “the commons” or a collaborative owned goods, saying that it will become overused since everybody wants to get in before others do. This usually leads to recommendations to put more controls on the resource or let the government manage it.

But Ms. Ostrom, the first woman to receive a Nobel prize in economics, would say that this collaborative sharing of the resource, in this case the microblogging conversation, has worked and will work. The success of the platform depends on several high-level governance decisions. She recommends that the resource must have a policy of who gets to do what, how to resolve problems, administrative rights privileges based on the benefits they get, peer users administration or using staff that listens closely to users, and peer users who participate in the governance process.

Twitter isn’t in danger of running out of goods but it is in danger of being diluted in value as a service which in my mind is the same as having an attribute of easy exclusion. To combat this, Twitter needs more governance to keep it a common-pool type resource instead of a private good that no one wants or can control.

Ms. Ostrom doesn’t like top-down control and that has been obvious as the corporate world flails around when they try to push a message down through traditional PR channels when the social world has been confirming Ms. Ostrom’s theories about collaborative control. Her message is that privatization and over-regulation work to decrease value in the economic system. If ownership of a valuable public resource like the elephants in Namibia that are now seeing a reduction in poaching because the local residents share in the financial benefits, I think that the  decision making efforts of Twitter, Facebook and the like should look more to their users for how to manage their valuable services.

Business has been hearing this message over and over in the form of listening to your customer. But now the message is more than just paying lip service. It means letting the control of the resource be in the hands of the collective. But Mr. Williamson’s research makes sure to not let this dissolve into a complete bland democracy as he supports the secrecy of the board room decisions as a governance necessity in some cases as well. This surprising choice for Nobel economics is a welcome move from the mathematical into the real world which is where we are using our social networks.

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