Saturday, December 18, 2004

Congestion and Anonymity

At Dartmouth, as at many other institutions, incoming first-year students are assigned an optional reading assignment over the summer. In the spring of 2002, the Dean of First-Year Students asked me if I would assign the book and give a public lecture on it during Orientation Week in September. I was happy to oblige, and, being an economist, I naturally thought of Capitalism and Freedom by Milton Friedman as the one book from my field that I would have all college students read. But I figured that Free to Choose, which was co-authored with his wife, Rose, and covers many of the same insights, would be a more inviting title. So that's what I assigned to the Class of 2006--a primer on how to use basic economic insights to study all manner of social interactions. The slides from the presentation are here.

Of the many topics in the book, the Friedmans' discussion of educational reform in general, and vouchers for primary and secondary school in particular, generated the most interest from the students. I'll share my views on that topic in a later post. To end the lecture, which took place a little over a year after 9/11, I tried to think of how to use the insights from the book to think about the War on Terror.

The core of economics is optimization under scarcity--it is the science of tradeoffs and how markets dictate the relative prices at which those tradeoffs can occur. An economist's analysis of the world after 9/11 would begin by asking, "What aspects of the way our society exists have seen their relative prices increase?" I offered two:

  1. Congestion: Economies of scale often dictate that congestion is efficient. Examples include densely populated cities, tall office and residential buildings, busy highways, and transportation and communication hubs with near universal access. That same efficiency now makes them vulnerable as targets. A strategically placed assault can cripple many systems or kill many people all at once.

  2. Anonymity: This has historically been one of the best protections afforded by large, competitive markets. I can purchase the goods and services that I need and sell my services without having to introduce myself personally to the other parties in the transaction. Very few of these counter-parties collect anything more than rudimentary information about me. In other contexts, I routinely drive on roads near cars whose drivers I do not know and travel on planes with people I've never met. I agree that some of the best transactions are the ones that are not anonymous, but the option to transact anonymously makes a lot of interactions more efficient. It also allows terrorists to strike with a greatly reduced risk of apprehension or reprisal.

After 9/11, we would have to find ways to go about our business with less congestion and less anonymity. Not zero--but definitely less. To become less congested, we would need to spread out our people and assets more evenly in the country and add some redundancies in our networks. Managing this process would be a job primarily for planners and engineers. I don't follow the relevant sectors well enough to know whether there have been changes in residential and commercial planning since 9/11, nor do we yet have good information on whether there has been a change in migration from more to less densely settled parts of the country.

To become less anonymous, we would need to increase our collection of real-time data and develop stringent privacy standards for how it is handled. Managing this process would be a job primarily for those who manage the access points to networks--whether for electronics, communications, transportation, or finance. And, appropriately, many of the most contentious issues would be adjudicated in courts. The Patriot Act, the creation of the Department of Homeland Security, and the recently passed Intelligence Reform are all attempts, at least in part, to redefine the concept of anonymity.

Some of what we are discovering in this ongoing process is that people differ in how price sensitive they are to changes in the relative prices of congestion and anonymity. Some people are very price sensitive--they would do with quite a bit less of each in response to small increases in their costs. Others are hardly price sensitive at all--they wouldn't change their behavior at all even in the face of large increases in their costs. For ordinary things we consume, a market would accommodate our different preferences. This is possible to some extent with congestion and anonymity, but because we are all interconnected in at least some of the things we do, a large amount of it must be negotiated in the political environment.

Thanks to Roland Patrick for suggesting that the lecture might make for a good post to the blog.

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