Congress can’t regulate privacy on Facebook until it understands what drives Facebook

In the movie Star Trek: The Undiscovered Country, the crew of the Enterprise had a dilemma: how to detect and destroy a cloaked Klingon ship.  After a few minutes of debate among its senior officers, Commander Uhura makes the observation, “Well. The thing has got to have a tailpipe?”

It was clear from the questions that a number of senators posed to Mark Zuckerberg during a hearing on Facebook’s privacy policies that Congress has not yet located Facebook’s tailpipe. Facebook’s tailpipe is comprised of its subscribers’ demand for and willingness to use the social media firm’s platform. What is it about Facebook that causes subscribers to ignore existing albeit confusing and vague privacy terms and fork over to Mark Zuckerberg, Sheryl Sandberg, and the rest of the Menlo Park posse our inner most personal thoughts, our rabid political stances, pictures of our kids, and videos of young women twerking?

I have concluded from my own personal observation of behavior on the medium that it has a lot to do with attention. As an entertainment medium, two billion subscribers take the opportunity emit ego energy by posting the aforementioned twerking videos and kiddie pictures in order to draw attention to themselves. “Look at me! Look at my kids! Look at the European vacation I’ll spend the next twelve months paying for!” Contribution of free content by subscriber A serves Facebook’s business model well by providing the company with free content. This free content is used to grab the attention of subscriber B and if the algorithms are working, provided in such a way as to hold subscriber B’s attention long enough to make her a target for advertisements.

Subscribers A and B may become aware eventually that they are fodder for Facebook’s advertisement machine. Selling advertisement is how Facebook generates almost all of its revenues. What is it about Facebook that causes the need for attention to outweigh the willingness to ignore Facebook’s privacy terms?

The professionals cite a number of reasons beyond my amateur observations for moths being drawn to Facebook’s fire. One post in Adweek sums up some of the professionals’ findings.  One reason that Facebook draws attention is fulfill a need to belong to a group. You have heard the adage, that humans are social animals and this need for community has people gravitating to group pages on Facebook.

Feel like expressing yourself and receive near instant approval of the “you” that you share? Facebook provides its users plenty of opportunity for that. I have often likened Facebook as the dorm that Zuckerberg never left with a user’s profile being a dorm room and the user’s “wall” a bulletin board on the dorm room door where people can drop by and leave a post-it message on the door or the occupant can leave some zany flyer announcing the next beer party.

For students, Facebook is probably used to relieve stress. According to Adweek, students are worried about grades, writing papers, and dealing with professors and going online looking for reassuring likes may be helpful.

Courtney Seiter shared in a blog post how use of Facebook has an impact on our “reward centers”. The more likes we get from our sharing on Facebook, the more our nucleus accumbens lights up.

Also, the “likes” we share on Facebook are currency. Forty-four percent of Facebook users share the love on the content their friends provide by liking it, according to Ms Seiter.

For information theory buffs, the Facebook “like” button carries more information beyond a “yes” or “no” difference. Ms Seiter cites research that found that mining a decision to “like” a post can reveal information about race, gender, political persuasion, or age of the user.

Another piece of information that data on Facebook user participation provides us is on the level of loneliness. Students felt more connected, less lonely when they engaged on Facebook.

This is just a small snippet of the literature out there on why people use a social network like Facebook. The takeaway that is important to me is given what appears to be an emotional or social connection between users of the platform and that this connection is the fuel to Facebook’s business where the connection is so strong that users are not paying attention to Facebook’s disregard for privacy, how best can Congress intervene in this space?

Uhura might say, “Facebook’s got a tailpipe. Are you willing to syphon the gas?”

The physics of capital

Is capital is fixed? Like energy can it neither be created or destroyed? In an hour from this writing financial markets in the United States will open up for trading. These markets act as the medium for converting cash into stocks or bonds. The law of energy would describe this conversion as the creation of a disordered state where the original form of matter, in this case cash, is turned into a more disordered state, in this case a security.

The market process does not follow the law of energy precisely. Whereas after converting matter into a disordered state means that the resulting products cannot be recombined into the original form, the stocks and bonds purchased with cash can be sold in the markets with the result being the original form, cash.

The market provides a conduit for energy transfer, the transfer between cash and securities. I consider the energy transfer that we see in the financial markets as an echo of the original and most important form of capital: information and knowledge. Information and knowledge are the “big bang” of our capital universe. The information that we derive about and from the land allow us to create and use knowledge about farming, mining, fishing. As the land becomes increasingly valuable as a source of goods and services, we use this knowledge about productivity as leverage for creating banks and banking and payment systems. Through lending and borrowing money is created and these funds can be used to expand productive capacity or invest in stocks or bonds.

Information isn’t the capital of the 21st century. It has been the premier capital of human existence. All other substance we refer to as capital emanates from this origin and is a reflection of the value of information.

I would argue that knowledge and information represent another divergence away from the laws of energy. Knowledge and information are not fixed. Man is always discovering something new whether about himself as a sovereign or about the universe around her. The more she discovers and the better she is at communicating her discoveries, the more capital in the form of currency that she can accumulate.

Currency transmits to the markets the value its holder has. It should also signal us to look behind the currency to determine who the holder is.  The rapper who has $300,000 in currency but owns no productive property and has no prospects for another hit album in a year has low value. The markets will not want to trade with him on a continuous basis versus a writer with $50,000 in coin but also owns land that she rents out for farming and is able to write software apps when not writing music. The market will see her as high value and will trade her currency.

This creates a political dilemma for politicians who claim to represent the interests of the poor. They must now come to terms with an information gap spurred on by a lack of critical thinking skills in America. Solving real world problems not only benefits the individual but benefits communities overall as solutions are distributed throughout communities. The ability to bring solutions to real world problems enhances value and creates currency. For the poor access to quality education or other resources that provide a conduit to knowledge should be at the top of the policy agenda if they are to survive an economy that asserts a greater need for knowledge and information talent.

Capital may, after all, not be fixed and can be created. Information is the most important source of capital and like energy needs an infrastructure that allows its generators to signal and transmit value.

 

Political intelligence that matters to markets

A business or an investment fund is simply a betting pool for people who have coin or credit. The bet represents all the information that the investor has acquired over some period and the dollar amount of her bet represents the minimum cost of the information acquired. This means that the actual cost of creating the investment fund, asset, or business means nothing to the investor.

All that matters is an outcome that recovers her cost for accumulating information that helps her determine whether her preferred outcome-a return of and on her capital-will be realized. Information on sunk costs mean nothing to her (much to the chagrin of the run-of-the-mill economist).

For information traders entering information markets what should matter is providing information that addresses existential threats to profits and revenues. The information trader must have awareness of the outcome the investor is interested in.

Investors watching political markets are interested in whether a decision poses an existential threat to a firm or a firm’s profits or revenues. Existential threats posed by government come in the form of a revocation of a license, denial of access to natural resources, or denial of access to financial capital. The investor wants to know the likelihood of the occurrence of these events.

In hind sight this is why the Trump Effect became vacuous. The expectations surrounding the Trump administration’s impact on investment never took into account government’s prime operational mandate which is to exploit the natural environment of a physical area. It does this by managing the extraction of resources from that physical area. In the case of American government, it has determined that extraction would best be carried out by a private sector driven by a profit motive.

Businesses provide efficient methods for extracting resources and converting the resources into “taxable events” i.e. goods and services for sale. Businesses convert human resources into taxable events by employing labor thus making humans available for taxation by government.

The subsequent uncertainty experienced by the financial markets post Mr Trump’s inauguration was the result of investors listening to the “emotional marketing” of the 2016 campaign. Rhetoric regarding bringing back manufacturing jobs into a political economy that favors information as its primary resource or building more bridges to nowhere via infrastructure knowing that the multiplier effect is limited by a project’s termination date was baseless but pulled on enough heartstrings of investors that they forgot or were forced to overlook even further government’s prime mission.

Also, the financial markets can’t risk forgetting that the U.S. is a federal system and states have to be considered when assessing the American economy. States have to be on board with any policies that address contraction or expansion of licensing or access to natural resources. For example, it is one thing for the federal government to increase access to radio frequencies by mobile telephone companies. But if the states do not put in place rights-of-way policies that allow mobile phone companies to deploy tower facilities, then having a license to transmit wireless signals is meaningless and the firm faces a scenario of less revenues.

When discerning what information matters, the focus should be on political information that threatens the continued existence of a firm or threats to its revenues and profits. Investors need to discern between the emotional or campaign marketing noise and substantive political intelligence that addresses a firm’s existence.

Donald Trump and James Comey: Does uncouth equate to bad morals and impeachment?

In my best Heath Ledger/Joker voice, “Batman has no jurisdiction.” I think of this line today after reading a report in Reuters about former Federal Bureau of Investigations director James Comey’s assessment of the morality of current president Donald Trump. The book, set for release tomorrow, will detail Mr Comey’s four month tenure in the Trump administration. Mr Comey asserts that Mr Trump is morally unfit to sit in the Oval Office.

The assertion is likely to lift the spirits of many anti-Trump voters who have been hoping that the President’s alleged links to the Russian government will turn into a political noose and lead to an early exit from the White House. Mr Trump has been relatively out of the media spotlight for the past week given the Congressional hearings that were held regarding Facebook’s privacy shenanigans. He has managed to reassert himself quickly into the headlines with last Friday’s missile attack on Syria’s chemical weapon facilities. I suspect that attention will be diverted away from Syria long enough for Democrats to push their talking points and roil up their base.

So far the most tawdry event noted in Mr Comey’s assessment of Mr Trump is an alleged incident involving Mr Trump’s presence in a Moscow hotel room where two prostitutes were allegedly urinating on themselves. Being in the presence of this type of behavior would be off-putting to most Americans. Mr Trump has denied witnessing the event and Mr Comey admits he has no firm evidence the event happened or that Mr Trump was even present if the event happened at all.

One question that comes to mind is, assuming that the event occurred, should the event give buoyancy to arguments from the left that Mr Trump be impeached? My answer is no. Article II, Section 4 of the United States Constitution reads:

“The President, Vice President and all civil Officers of the United States, shall be removed from Office on Impeachment for, and Conviction of, Treason, Bribery, or other high Crimes and Misdemeanors.”

The event is alleged to have happened in 2013, almost four years before Mr Trump took office. In addition, if watching prostitutes pee on themselves in Moscow is legal, I see a very weak argument for convicting him of a crime. “Batman” has no jurisdiction in Moscow.

Another question I have is, what is immoral behavior and does such behavior disqualify a president? Morals are defined as standards of behavior or beliefs concerning what is and what is not acceptable for a person to do. Morals are personal codes until society expresses its disagreement with them and codifies that dissatisfaction in law or statute. As head of a democratic nation-state, Mr Trump is expected by many Americans to manage his personal code within the parameters of community expectations. For a man who reportedly has no problem expressing a tough guy Queens personality, being a boar may not go over well with a progressive socialite from San Francisco. Such behavior, whether it occurred prior to or during the presidency may considered disqualification as head of state, if not head of government.

Going forward, the allegations will not mean much for capital markets. They do not speak to Mr Trump’s management of public capital or the institutions that manage or influence the allocation or distribution of capital. The allegations do put a further dent in Mr Trump’s ability to persuade, probably the most important power a president has. And in the political marketplace, bad optics drives down a political actor’s brand and market value.

Facebook’s challenges demonstrate it is time to level the regulatory playing field

This week’s joint senate hearing on Facebook’s privacy and transparency policies raised the question, does the public expect Facebook to act like a information utility? Reactions on Facebook to Mark Zuckerberg’s testimony before the U.S. Senate’s commerce and judiciary committees ranged from calling the 33-year old CEO a “shitbag” to praising him for confidently addressing questions from a 44 senators, a significant number of whom gave the impression that they had no clue as to what Facebook’s model is.

Consumers have been bitching and moaning about Facebook for years, expressing displeasure whenever the company changed the configuration of its pages, added or subtracted icons, or changed its algorithms in order to present what it thinks is more pertinent information to its users. Most users access Facebook’s content at no out-of-pocket cost to them and I personally know of no one who clicks on the ad links that pop up along the right hand side of our timelines. Yet, a significant number of users have expectations about how Facebook treats them, especially when they get put in “Facebook jail” for stating positions that may not be in keeping with the Facebook’s “righteousness police squad.”

If any senator yesterday came close to summarizing my personal sentiments on Facebook it was Orrin Hatch, Republican of Utah. The 42-year senate veteran, in the five minutes allotted to each senator, was able to get across that Facebook was not a utility; that if people were not satisfied with the product that they could go elsewhere on the internet. I don’t view Facebook as a necessity although I admit I probably spend too much time posting there albeit not as much eleven years ago when I was invited to join the Facebook community.  It can see where it can be addicting, but in the end it is not a utility.

With a utility there is an understanding that in exchange for a service generated with the use of natural resources purchased by the utility, you the consumer will compensate the utility for the generation and distribution of said service. And if that utility is regulated, the regulator is following a mandate to balance the consumer’s interest in fair and reasonable rates and consumer protection with the utility’s interest in maximizing its shareholders’ wealth. The senators that seemed adamant about Facebook not being considerate of its user community seemed to come very close to wanting to treat Facebook like a utility, but were very far from considering Facebook’s investor needs.

If Congress wants to regulate Facebook like a utility, it will have to come to terms with the fact that Facebook has only one set of consumers; the firms that purchase its advertising services. The users that Congress is so concerned about are the fuel for Facebook’s advertising platform, specifically the information attached to each user. The user is extracted, organized, and packaged as a fuel cell for advertisers, creating the eyeballs to which company advertising is targeted.

Unlike coal, oil, or natural gas, the fuel for Facebook delivers itself voluntarily over broadband access infrastructure. Whether by wired or wireless access, these transmission pipes are a necessary part of Facebook’s “information utility” business. No fuel, no eyeballs for advertisers. As former Federal Communications Commission chairman Tom Wheeler argued, the consumer experience on the internet should be seamless. Consumers should be able to access websites like Facebook without broadband access providers throttling speeds or otherwise determining which websites would get access to the consumer at certain speeds and vice versa. Also, to create the seamless experience, broadband access providers had to exercise a great degree of transparency regarding their management practices while protecting the privacy of data used to fuel the information utilities, such as Facebook, that deliver services on the edge.

The problem with the Wheeler approach is that the framework balkanized regulation of the internet. Wheeler and other progressives favored archaic transparency and privacy of information rules based on the Communications Act of 1934 applied to broadband access providers. Edge providers, like Facebook, Google, and Twitter, were to remain outside of this regulatory framework where they would be allowed to innovate and not have their information utility business model threatened by AT&T, Comcast, or Verizon. But Facebook’s current dilemma, Russian use of its platform and the trade in its user private data by unauthorized third-parties, demonstrates that if policy makers and elected officials want a seamless internet that projects transparency, all stakeholders will have to be placed on a level regulatory playing field.

Transparency can’t end at a broadband access provider’s point of presence and then enter an edge provider’s black hole.  If consumers want their data to stay private and advocate for policies that keep that data private along and throughout the internet, policymakers will have to ensure that privacy policies extend from the modem in the consumer’s home to the servers that store the data that social media collects on its users. If Congress cannot deliver seamless regulation, then yesterday and today’s hearings will equate to the mindless twerking we see on Instagram.

When local government meets high tech sovereigns

Sometimes I think city government is sleeping at the wheel when it comes to technology and capital flows. During its lucid moments, government will fall back on its 1960s playbook of economic development by announcing plans to bring back manufacturing jobs that pay better wages than the service sector jobs that replaced factory work and eviscerated wages. This narrative may have worked in a locality that was created to take advantage of proximity to a local natural resource where factories could then convert the resources into goods for local and other markets, but for a city like a 21st century Atlanta, that narrative is disingenuous.

Atlanta’s “natural resource” today is information. Workers who know how to find, extract, organize, and distribute information are going to be the one’s who obtain employment and the higher wages that come along with work in the information sector. This demand for an information-centric political economy, I believe, is being driven by the changing tastes of capital. Capital wants its goods and services delivered conveniently and its production customized.

Information technology allows capital to target funds directly to high-value driven information entrepreneurs that can deliver a product that was designed, manufactured, packaged in, and delivered from multiple jurisdictions. Capital has no love for mass appeal. Why deal with crowded banks, malls, car dealerships, or grocery stores when extra minutes of leisure can be carved out by the manufacturing and service delivery efficiencies provided by Tesla, Uber, Grubhub, and Insta-cart.

Along with these efficiencies in product manufacturing and delivery come smaller work forces or work forces outside of the jurisdiction of local governments. Local governments have been the front line defense of investor capital from disgruntled labor. They regulate labor union speech during strikes. Where there is violence they arrest the rowdy. However, in an information age where there are a greater number of tech shops employing smaller numbers of non-unionized information workers versus a handful of large factories employing thousands of unionized lower-skilled workers, there is less demand for the police powers of local government. Disgruntled employees at today’s tech shops simply take their information knowledge somewhere else or create their own firm.

Eventually government starts tossing and turning in its sleep. It sees its “labor clamp down” requests severely diminished. Higher incomes start translating into reduced need for government services from garbage removal to security. Higher income earning citizens may consider pooling resources to support campaigns of candidates who agree to reducing tax burdens are, too the extreme, support carving out or “leasing sovereignty” to higher income communities.

Question is, how will those with no capital react to the erection of this wall of individual sovereignty?

When local government meets high tech sovereigns

Sometimes I think city government is sleeping at the wheel when it comes to technology and capital flows. During its lucid moments, government will fall back on its 1960s playbook of economic development by announcing plans to bring back manufacturing jobs that pay better wages than the service sector jobs that replaced factory work and eviscerated wages. This narrative may have worked in a locality that was created to take advantage of proximity to a local natural resource where factories could then convert the resources into goods for local and other markets, but for a city like a 21st century Atlanta, that narrative is disingenuous.

Atlanta’s “natural resource” today is information. Workers who know how to find, extract, organize, and distribute information are going to be the one’s who obtain employment and the higher wages that come along with work in the information sector. This demand for an information-centric political economy, I believe, is being driven by the changing tastes of capital. Capital wants its goods and services delivered conveniently and its production customized.

Information technology allows capital to target funds directly to high-value driven information entrepreneurs that can deliver a product that was designed, manufactured, packaged in, and delivered from multiple jurisdictions. Capital has no love for mass appeal. Why deal with crowded banks, malls, car dealerships, or grocery stores when extra minutes of leisure can be carved out by the manufacturing and service delivery efficiencies provided by Tesla, Uber, Grubhub, and Insta-cart.

Along with these efficiencies in product manufacturing and delivery come smaller work forces or work forces outside of the jurisdiction of local governments. Local governments have been the front line defense of investor capital from disgruntled labor. They regulate labor union speech during strikes. Where there is violence they arrest the rowdy. However, in an information age where there are a greater number of tech shops employing smaller numbers of non-unionized information workers versus a handful of large factories employing thousands of unionized lower-skilled workers, there is less demand for the police powers of local government. Disgruntled employees at today’s tech shops simply take their information knowledge somewhere else or create their own firm.

Eventually government starts tossing and turning in its sleep. It sees its “labor clamp down” requests severely diminished. Higher incomes start translating into reduced need for government services from garbage removal to security. Higher income earning citizens may consider pooling resources to support campaigns of candidates who agree to reducing tax burdens are, too the extreme, support carving out or “leasing sovereignty” to higher income communities.

Question is, how will those with no capital react to the erection of this wall of individual sovereignty?