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An Economy of Desire
What economic theory says about the internet’s effect on society

Go to the profile of Zander Nethercutt

Zander Nethercutt
Mar 18
Destruction, part IV of Thomas Cole’s series: The Course of Empire. Photo by VCG
Wilson/Corbis via Getty

“Orwell feared that what we fear will ruin us. Huxley feared that what we desire
will ruin us.”
— Neil Postman, Amusing Ourselves to Death: Public Discourse in the Age of Show
Business
InBrave New World, Aldous Huxley argued that it was desire — not the hand of some
Big Brother-like figure — that would ruin us. Of course, traditional economic
theory says that the goal of economics is the allocation of scarce resources to
their highest-valued use, or connecting as many people as possible with what they
desire. A perfectly economical world, then, would be one in which everyone is
connected with their desires. And were it to be realized, so would Huxley’s
prophecy — that, or we transcend it (assuming we haven’t done either already).

So what’s stopping us? Well, for most of history, there has been one fundamental
check against the realization of that world: scarcity of physical resources. Market
power, then, comes as a result of controlling the supply of scarce resources. At
least it did, until the internet flipped this on its head by enabling the
production and distribution of virtual goods at zero marginal cost.

Consider Facebook, a company that incurred massive fixed costs in their infancy as
they invested in the infrastructure that gave way to infinite scalability. New
users do two things for Facebook: first, they minimize Facebook’s average fixed
cost (cost of servers, cloud storage, etc. divided by number of users). Second,
they improve Facebook’s advertising program, which generates the revenue that
covers Facebook’s fixed costs. Economic theory states that in the long run, firms
operate as close as they can to where their marginal cost, or cost of producing an
additional unit of a good (in Facebook’s case, digital information) equals their
average fixed cost. Facebook can never quite get there because their average fixed
costs will never equal their marginal costs (see graph below). But advertising
revenue covers Facebook’s fixed costs, leaving only their variable costs, or costs
that “vary” based on the number of users, behind. On the internet, variable cost is
equal to marginal cost. Thus, the information on Facebook is available for nothing
because its marginal cost on Facebook is zero.

The only factor that determines what we see on the internet is desire.
Like Facebook, the internet is a platform for the distribution of virtual goods at
zero marginal cost. Put another way, the internet is an “information market.” (From
here on, I use both terms — “internet” and “information market” — interchangeably.)
And since the price for a virtual good is its marginal cost, the “price” of
information in this market is zero. This means that demand determines the
equilibrium in the market for information. In more practical terms, the only factor
that determines what we see on the internet is desire.

So what do we desire? Data mapping our internet behavior — our Google searches, the
Facebook and Instagram profiles we linger on — can help answer that question. This
isn’t to say that data on our purchases from physical stores isn’t indicative of
our desires; it is, but it is not a pure expression of our desire the way our
internet searches can be. When we shop at a store, after all, we are experiencing a
sliver of a far broader spectrum; what we see in a store is not all there is, but
rather what is available and profitable in a world governed by scarcity.

In the information market, however, anything can be profitable. Scarcity is nothing

more than a bad dream; a relic of an era in which supply and median preferences
determined what we consumed. Now, ideas that were once considered heretical can
find an audience on the internet because it costs nothing to do so.

Once hailed as the mechanism that would unify society, the internet is at risk of
becoming the opposite. In his 1998 book, The Common Good, renowned author and
public intellectual Noam Chomsky criticized the liberal media for limiting the
spectrum of acceptable belief by not reporting — and thus drowning out — fringe
ideas that might otherwise have been worth considering. As he put it: “The smart
way to keep people passive and obedient is to strictly limit the spectrum of
acceptable opinion, but allow very lively debate within that spectrum.”

If what Chomsky describes is true, then the smart way to do the opposite — agitate
the masses and create conflict — is to the make the spectrum of acceptable opinion
infinitely broad, but allow little to no debate within the pockets on that
spectrum. The internet is extraordinarily adept at doing this.¹

If the perils of an information market were not already clear, they become so upon
analyzing them through an economic lens. Traditionally, demand curves — which
reflect people’s desire for goods via their willingness to pay for them at any
given quantity — slope downward. This reflects the law of diminishing marginal
utility, which states that people are willing to pay less for additional units of a
good. This holds true for virtual goods. It is also true, however, that our
willingness to pay for virtual content never quite reaches zero. Rather, it hovers
just above it, with a vertical asymptote at p (price) = zero. And since marginal
cost is zero, the market for information never reaches equilibrium because its
supply (marginal cost) and demand curves do not intersect. This idea — that the
internet will forever tend toward equilibrium without reaching it — explains much
about its effects on society.

The arrows note two separate tendencies: first, that of the firm towards an
infinite number of users, and second, that of the quantity of information demanded
in the information market to increase forever. Both are tendencies towards non-
existent equilibria. Image courtesy of author.
Markets tend toward equilibrium. If we accept this as fact, it follows that the
quantity of information demanded from the internet will increase over time to move
the market for information closer to equilibrium. But because that equilibrium does
not exist and can never be reached, it also follows that the quantity of
information demanded from the internet will continue to increase, effectively
unabated, forever. Finally, the zero marginal cost model of the internet means that
the supply will always exist to meet the quantity of information demanded, in
whatever form required. It follows, then, that the tendency of users to binge on
internet-based, virtual content is an emergent property of the internet. All of
this should scare us.

The consequences of Netflix’s subscription-based model — aside from being a

microcosm of the internet — are a case study in the perils of the internet-abetted
economy. Those who use Netflix pay an upfront cost to enjoy limitless content at
zero marginal cost. Systems like Netflix are undeniably popular; they are also
addictive.² Our consumption of physical goods, after all, has always been curbed by
relative scarcity and subsequent price, as well as the acute understanding that
overconsumption — take alcohol, for instance — has real-world consequences. On the
internet, however, none of these realities exist. And thus on Netflix, we “binge”
for two reasons: first, because there is no end to the high-quality,
algorithmically-likely-to-keep-us-watching-content we can consume, and second,
because there are no immediate physical or monetary consequences for doing so.³ To
binge is simply to fulfill our duty to move the information market closer and
closer to equilibrium, even though equilibrium will always remain slightly out of
reach.

This is the internet in a nutshell: a massive flywheel equipped with the tools to
distill our behaviors into an understanding of our desires, and then return those
desires back to us in the form of virtual content.
Unlike bingeing in the physical world, where a patron might drink $100 worth of
mimosas after paying $20 for the “bottomless experience,”⁴ Netflix actually
benefits from users that binge because the extra data allows them to better
determine what that user might want to watch in the future. This in turn increases
Netflix’s ability to keep that user engaged and decreases the likelihood that
they’ll cancel their subscription.⁵ This is the internet in a nutshell: a massive
flywheel equipped with the tools to distill our behaviors into an understanding of
our desires, and then return those desires back to us in the form of virtual
content that, if we actually took the time to look, would give us our best idea yet
of who and what we truly are.

Were Huxley alive today, he would likely be equal parts fascinated and terrified by
the Internet, clear as it would be to him that its desire-driven nature could only
lead to one eventuality: ruin. It is not clear that the internet is ruining us, but
it is clear that it has given us unprecedented access to our desires, unfettered by
gatekeepers. This guarantees that the internet is the mechanism by which we will
either fulfill Huxley’s prophecy or transcend it. For our own sake and our own
sanity, let’s hope for the latter.

Originally published on my blog.

Footnotes:
¹ Historically, religion has been as well.

² This could be a new definition for addictive: something that promotes the
tendency for a system to seek out an equilibrium that does not exist.

³ The immediate physical consequence of consuming alcohol is drunkenness. This same

type of consequence does not exist with virtual content, though admittedly, the
lifestyle conditions correlated with consistent consumption could give way to
chronic health issues such as obesity, etc.

⁴ Every time we go out to bottomless brunch, my roommate reiterates his strategy:

“My goal is to make them lose money.” On Netflix, of course, this strategy would be
counterproductive.

⁵ Why else would Netflix — and literally every other platform offering access to
similar content — be so intent on promoting the “binge-worthiness” of their
content?

Go to the profile of Zander Nethercutt

WRITTEN BY
Zander Nethercutt
Mistaking correlation for causation since '94. Appearances in TNW, MediaREDEF. San
Rafael, CA. Kenyon College '16. Chicago, IL. ✍@ zandercutt.com.

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