A good paragraph on theory

From Hans Morgenthau’s classic text on international relations, Politics among Nations: The Struggle for Power and Peace:

The theory, in other words, must be judged not by some preconceived abstract principle or concept unrelated to reality, but by its purpose: to bring order and meaning to a mass of phenomena which without it would remain disconnected and unintelligible. It must meet a dual test, an empirical and a logical one: Do the facts as they actually are lend themselves to the interpretation the theory has put upon them, and do the conclusions at which the theory arrives follow with logical necessity from its premises? In short, is the theory consistent with the facts and within itself?

Here are a few posts I’ve done on theories, models, and evidence:

Nested markets

In the new Foreign Affairs, Felix Salmon reviews Darkness by Design: The Hidden Power in Global Capital Markets, by political scientist Walter Mattli. Salmon and Mattli share the view that more competition among stock exchanges has been bad for financial markets. Here’s Salmon:

Up until that point, the exchange was a mutual society: firms could buy seats, and the exchange was owned by its members. After 2005, it demutualized, stopped selling seats, and became just one among many exchanges, most of which were owned and operated by enormous global broker-dealers–think Credit Suisse, Goldman Sachs, and Merrill Lynch–that had spent limitless hours and dollars on lobbying the SEC to push Reg NMS through. Rather than being a utility owned by its members, the NYSE was now a profit-maximizing entity like all the other exchanges.

There’s a parallel here to today’s tech platforms. They’re big and powerful, and some argue that they should be broken up. But would more (but smaller) platforms be a good thing? Would competition help?

Salmon and Mattlie argue that having a marketplace (the stock market) competing in a market of its own (the market for trades) has lots of downsides. Whatever you think of that in the context of stock exchanges, it’s worth considering for tech. Would competition between mini-Facebooks shift power toward advertisers and, as a result, further erode privacy? What might the mini-Facebooks do in order to win the business of key publishers or to gain access to particular markets?

Of course, none of the tech platforms are currently run as mutual societies. And so the conversation tends to be about either breaking them up to encourage competition, or regulating them as utilities.

But, just for the fun of it, imagine what a mutual society model might look like. What if Twitter were run for the benefit of its users, with major publishers “buying seats” and individual users electing representatives to advance their interests? You can imagine all sorts of reasons that might not work. (A version of this has been proposed.) But as Salmon and Mattlie suggest, counting on competition between platforms isn’t always a good thing either.

Paying for the right to link

“The News Corp arrangement would allow headlines from properties in its Dow Jones unit… to appear in the Facebook news section, linking to the publications’ sites. For nonsubscribers, links to Journal stories that are behind the site’s paywall would trigger a prompt for the reader to sign up.”

Facebook is apparently paying publishers for the right to link to their stuff. Is that a good thing? Of course, it’s good for publishers to get revenue from quality reporting. But since when do you have to pay to link to content? Why would Facebook suddenly do that? One theory is they’re simply paying for reputation. They want the media to think better of them and trying to undo the damage they’ve done to journalism’s business model is one way to do that. But the alternative is scarier. If paying to link became the norm, Facebook is one of the few organizations well-heeled enough (and with enough bargaining power) to pull it off. The blogger, the independent newsletter writer, the small-time magazine — none of them can afford to pay to link to The Wall Street Journal.

I’d love to see Facebook paying news organizations for syndication rights to the content itself. But there’s a reason we don’t require payment to link (in the U.S. at least). It’d be bad for the internet, good for Facebook, and it’s unlikely to solve journalism’s business model problem.