Bridges and Phones – Social Media Economics

In microeconomics, economists like to talk about substitution goods and complementary goods. A classic complementary good to peanut butter is jelly: both are usually consumed together in that delectable sandwich known as PB & J. Economists care about this, because when consumption goes up in peanut butter, you’ll likely see an increase in jelly too, if the goods are tightly complementary. Price changes in one will likely lead to price changes in the other.

A substitute good, well that’s kind of obvious, it’s a good that can easily substitute for another. Soy drink is a substitute for milk – at least, if you’re in my household. Natural gas is a substitute for electricity, when heating your house. If the substitute is easy to switch, a price increase in one will lead to increased demand in another – a nice, easy economics predictive tool.

Early 20th century economists watching the rise of new technologies took an increasing interest in communications technologies, and tried to predict their impact. Communications and transportation, they observed, are substitute goods, so increased use of communications, such as telegraphs or the newfangled phone, would lead to decreased use of transportation. Since you can now call the store with a question, you don’t need to visit them as often. With telecommuting and video conferencing, business travel will decrease as offices run more efficiently with new communications options.

However, the predictability of this substitution effect has often been way off, and it’s for a simple reason: ceteris paribus. Everything else has to remain the same in order for predictions about increased supply of substitute goods to be accurate. What’s missing is the increased consumer options that these new goods may supply. Technological innovation has often been seen as an entrepreneurial/producer function, but consumers can also innovate, in how they consume/use new technologies. This often leads to very unpredictable results.

I wish I could find this article, but it’s lost somewhere in my files (created in pre-browser bookmark days). The article was about a study on the impact of a new bridge being built, back at the beginning of the 20th century. I think it may have been Brooklyn, but I’m not sure – maybe it was a section of London instead. Well, when the bridge opened, some economists predicted that telephone use would go down between the two connecting boroughs, as there’d be less need to call family and businesses across the river (mind you, not everyone had a phone, and it was a rare and expensive endeavor to have or use a phone then). Instead, telephone use went up – dramatically. People made new friends, new business connections, and new uses for their increased connectivity, and demanded more phones to keep these connections going.

The USPS has for long been concerned about email, and how it’s cutting into their business. Certainly email is a great substitute for regular postal mail: why have to haul a piece a paper around the country just to get a message across? And indeed, first class mail volume has dropped in the U.S. over the last 20 years.  But, look what the web in general has done for the postal service: Ebay, Netflix, Blurb … they have all greatly increased demand for shipping services, keeping the USPS (and competitors) very busy.

“Cyperspace” has introduced us to a nation of online users, many spending hours of every day online, stuck in front of a computer. “Everyone’s becoming anti-social” has been a popular concern. There’s been some interesting counter trends though. Back in the early 1990s, I was part of a study of chat room use in AOL. It was eyebrow raising: people were spending several hours every day inside these chat rooms, talking about … whatever. However, here was something surprising: these chat room groups started organizing real parties, where they could meet face to face with their new online friends. ‘Cept, the friendship base was now nationwide, so the parties were organized some place central and easy to access, like Atlanta, and everyone would fly in for a weekend of meeting and partying. Talk about increasing transportation demand!

You might be a stranger to your own neighbor, but know 100 people across the nation most intimately. You might not share a table with a  stranger at a restaurant, but you’ll twitter your newfound online friends to come join you. These tendencies may be due to part to something I’ll call “the oppressiveness of neighbors“, of which I need to expand up later. In any case, “social media” will continue to throw economists for a loop when trying to predict consumption changes due to increased use of the Web. Mashups and other consumer innovations will continue to surprise us and our predictions.

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I'm the founder of Agoric Source, co-organizer of the Houston Python Meetup, director of technology at Newspaper Subscription Services, LP, technology advisor to InstaFuel, active board member of the Houston Area Model United Nations, and occasional volunteer to the Red Cross (during hurricanes or other local emergencies). I'm first and foremost still a software hacker, but with my economics background and business experience, I serve well as a project or program manager, technical visionary, etc.