Book review: Reinventing Capitalism in the Age of Big Data

One of the books I recommended for the Prime Minister's summer reading list was Reinventing Capitalism in the Age of Big Data, by Viktor Mayer-Schönberger and Thomas Ramge. At this time, I thought it would be good for understanding the current period of creative destruction. However, I'm not so sure now.

The premise of the book is to promote the idea of 'data-rich markets', which rely on three elements: (1) Improvements in data ontology (the way we organise data); (2) Advances in matching algorithms; and (3) Machine learning systems to observe us and identify our preferences. To many of us, that probably sounds dystopian and maybe a little tone deaf given the current debates over data and privacy.

Mayer-Schönberger and Ramge are well-intentioned - they suggest that data rich markets will increase efficiency. Which is probably true, but does not come without cost. In my ECONS101 class, we talk about perfect price discrimination, where every consumer pays a different price. If executed perfectly, with full knowledge of what consumers are willing to pay, every consumer will pay the maximum that they are willing to. Ironically, that approach maximises economic welfare - it is perfectly efficient. However, it involves a substantial transfer of welfare from consumers to producers, and whether that is ideal may be debatable.

Mayer-Schönberger and Ramge argue that we make decisions on the basis only of price. They note that:

Price greatly reduces the amount of information that needs to flow through the market; the information is compressed into a single figure for which traditional communications channels are sufficient.

However, to make such a claim is to ignore the fact that, from the consumer's perspective, price is only one element of the decision. Again, thinking about ECONS101, our model of consumer choices demonstrates that a consumer's choice to purchase depends also on the price of all other goods, the consumer's income, and most importantly of all, their preferences. The consumer's preferences are not collapsed into a price. The price may collapse the information for the other side of the market (i.e. for sellers), but not for buyers.

This isn't the only place where Mayer-Schönberger and Ramge betray a misunderstanding of key economic principles. They also have an idea that, in the future, money will become irrelevant, and that we will transact using data. For example, they argue that corporations might pay their taxes in data. However, money has several functions, of which being a medium of exchange (e.g. for paying taxes) is just one. Importantly, money is a unit of account - you can measure the value of things with it. Data can't easily replace money's function as a unit of account. To use their own example, how would the taxes that a corporation needs to pay be measured? No doubt in dollars, i.e. money as a unit of account.

There are some interesting examples in the book, but sometimes they haven't been thought through well enough. For instance, shortly after claiming that banks' business models are doomed to failure (my words, not theirs), they present the example of Robinhood Markets, which allows people to trade stocks on US exchanges with zero commission. They can afford to do that because they "depend on interest generated from deposited but not yet invested funds". But wait? If banks are doomed to failure, then where is this business going to get its interest income from in the future? Isn't it doomed to failure as well? Similarly, based on my experiences, I'm not convinced that Amazon's product recommendation engine is an exemplar for anything (e.g. when will it stop recommending books that I have already bought... from Amazon?).

When I bought this book, I thought it was going to challenge the current market model and present a potential alternative. It does that, but in the opposite direction of what I expected! I'm not convinced that we need more freedom for markets. The book fails to engage with some of the obvious critiques that it will engender. First, how does would data-rich markets prevent or mitigate a new Global Financial Crisis? It seems to me that, if anything, the risks would be greatly increased. Second, although the authors argue the opposite, won't data-rich markets simply embed decision-making biases further into decisions through their extensive use of algorithms? Cathy O'Neil's book Weapons of Math Destruction (which I reviewed here) seems very relevant.

In short, I'm kind of glad this book didn't make it onto the Prime Minister's summer reading list. I recommend that you avoid it too.