Giant Tech Firms Plan to Read Your Mind and Control Your Emotions. Can They Be Stopped?

Author and law professor Maurice Stucke explains why the practices of Google, Amazon, Facebook, and Apple are so dangerous and what’s really required to rein them in. Hint: Current proposals are unlikely to work.

Google. Amazon. Facebook. Apple. We live within the digital worlds they have created, and increasingly there’s little chance of escape. They know our personalities. They record whether we are impulsive or prone to anxiety. They understand how we respond to sad stories and violent images. And they use this power, which comes from the relentless mining of our personal data all day, every day, to manipulate and addict us.

University of Tennessee law professor Maurice Stucke is part of a progressive, anti-monopoly vanguard of experts looking at privacy, competition, and consumer protection in the digital economy. In his new book, Breaking Away: How to Regain Control Over Our Data, Privacy, and Autonomy, he explains how these tech giants have metastasized into “data-opolies,” which are far more dangerous than the monopolies of yesterday. Their invasion of privacy is unlike anything the world has ever seen but, as Stucke argues, their potential to manipulate us is even scarier.

With these four companies’ massive and unprecedented power, what tools do we have to effectively challenge them? Stucke explains why current proposals to break them up, regulate their activities, and encourage competition fall short of what’s needed to deal with the threat they pose not only to our individual wallets and wellbeing, but to the whole economy -- and to democracy itself.

Lynn Parramore: The big firms that collect and traffic in data -- "data-opolies" you call them – why do they pose such a danger?

Maurice Stucke: People used to say that dominant companies like Google must be benign because their products and services are free (or low-priced, like Amazon) and they invest a lot in R&D and help promote innovation. Legal scholar Robert Bork argued that Google can’t be a monopoly because consumers can’t be harmed when they don’t have to pay.

I wrote an article for Harvard Business Review revisiting that thinking and asking what harms the data-opolies can pose. I came up with a taxonomy of how they can invade our privacy, hinder innovation, affect our wallets indirectly, and even undermine democracy. In 2018 I spoke to the Canadian legislature about these potential harms and I was expecting a lot of pushback. But one of the legislators immediately said, “Ok, so what are we going to do about it?”

In the last five or six years, we’ve had a sea change in the view towards the data-opolies. People used to argue that privacy and competition were unrelated. Now there’s a concern that not only do these giant tech firms pose a grave risk to our democracy, but the current tools for dealing with them are also insufficient.

I did a lot of research and spoke before many competition authorities and heard proposals they were considering. I realized there wasn’t a simple solution. This led to the book. I saw that even if all the proposals were enacted, there are still going to be some shortcomings.

LP: What makes the data-opolies even more potentially harmful than traditional monopolies?

MS: First, they have weapons that earlier monopolies lacked. An earlier monopoly could not necessarily identify all the nascent competitive threats. But data-opolies have what we call a “nowcasting radar.” This means that through the flow of data they can see how consumers are using new products and how these new products are gaining in scale, and how they’re expanding. For example, Facebook (FB) had, ironically, a privacy app that one of the executives called “the gift that kept on giving.” Through the data collected through the app, they recognized that WhatsApp was a threat to FB as a social network because it was starting to morph from simply a messaging service.

Another advantage is that even though the various data-opolies have slightly different business models and deal with different aspects of the digital economy, they all rely on the same anti-competitive toolkit -- I call it “ACK – Acquire, Copy, or Kill.” They have greater mechanisms to identify potential threats and acquire them, or, if rebuffed, copy them. Old monopolies could copy the products, but the data-opolies can do it in a way that deprives the rival of scale, which is key. And they have more weapons to kill the nascent competitive threats.

The other major difference between the data-opolies today and the monopolies of old is the scope of anti-competitive effects. A past monopoly (other than, let’s say, a newspaper company), might just bring less innovation and slightly higher prices. General Motors might give you poorer quality cars or less innovation and you might pay a higher price. In the steel industry, you might get less efficient plants, higher prices, and so on (and remember, we as a society pay for those monopolies). But with the data-opolies, the harm isn’t just to our wallets.

You can see it with FB. It’s not just that they extract more money from behavioral advertising; it’s the effect their algorithms have on social discourse, democracy, and our whole economy (the Wall Street Journal’s “Facebook Files” really brought that to the fore). There are significant harms to our wellbeing.

LP: How is behavioral advertising different from regular advertising? An ad for a chocolate bar wants me to change my behavior to buy more chocolate bars, after all. What does it mean for a company like Facebook to sell the ability to modify a teenage girl’s behavior?

MS: Behavioral advertising is often presented as just a way to offer us more relevant ads. There’s a view that people have these preconceived demands and wants and that behavioral advertising is just giving them ads that are more relevant and responsive. But the shift with behavioral advertising is that you’re no longer just predicting behavior, you’re manipulating it.

Let’s say a teenager is going to college and needs a new laptop. FB can target her with relevant laptops that would fit her particular needs, lowering her search costs, and making her better off as a result. That would be fine -- but that’s not where we are. Innovations are focused on understanding emotions and manipulating them. A teenage girl might be targeted not just with ads, but with content meant to increase and sustain her attention. She will start to get inundated with images that tend to increase her belief in her inferiority and make her feel less secure. Her well-being is reduced. She’s becoming more likely to be depressed. For some users of Instagram, there are increased thoughts about suicide.

And it’s not just the data-opolies. Gambling apps are geared towards identifying people prone to addiction and manipulating them to gamble. These apps can predict how much money they can make from these individuals and how to entice them back, even when they have financial difficulties. As one lawyer put it, these gambling apps turn addiction into code.

This is very concerning, and it’s going to get even worse. Data-opolies are moving from addressing preconceived demands to driving and creating demands. They’re asking, what will make you cry? What will make you sad? Microsoft has an innovation whereby you have a camera that will track what particular events cause you to have particular emotions, providing a customized view of stimuli for particular individuals. It’s like if I hit your leg here, I can get this reflex. There’s a marketing saying, “If you get ‘em to cry, you get ‘em to buy.” Or, if you’re the type of person who responds to violent images, you’ll get delivered to a marketplace targeted to your psyche to induce the behavior to shop, let’s say, for a gun.

The scary thing about this is that these tools aren’t being quarantined to behavioral advertising; political parties are using similar tools to drive voter behavior. You get a bit of insight into this with Cambridge Analytica. It wasn’t just about targeting the individual with a tailored message to get them to vote for a particular candidate; it was about targeting other citizens who were not likely to vote for your candidate to dissuade them from voting. We’ve already seen from the FB files that the algorithms created by the data-opolies are also causing political parties to make messaging more negative because that’s what’s rewarded.

LP: How far do you think the manipulation can go?

MS: The next frontier is actually reading individuals' thoughts. In a forthcoming book with Arial Ezrachi, How Big Tech Barons Smash Innovation and How to Strike Back, we talk about an experiment conducted by the University of California, San Francisco, where for the first time they were able to decode an individual’s thoughts. A person suffering from speech paralysis would try to say a sentence, and when the algorithm deciphered the brain’s signals, the researchers were then able to understand what the person was trying to say. When the researchers asked the person, “How are you doing?” the algorithm could decipher his response from his brain activity. The algorithm could decode about 18 words per minute with 93 percent accuracy. First, the technology will decipher the words we are trying to say, and identify from our subtle brain patterns a lexicon of words and vocabulary. As the AI improves, it will next decode our thoughts. Turns out that FB was one of the contributors funding the research -- and we wondered why. Well, that’s because they’re preparing these headsets for the metaverse that not only will likely transmit all the violence and strife of social media but can potentially decode the thoughts of an individual and determine how they would like to be perceived and present themselves in the metaverse. You’re going to have a whole different realm of personalization.

We’re really in an arms race whereby the firms can’t unilaterally afford to de-escalate because then they lose a competitive advantage. It’s a race to better exploit individuals. As it has been said, data is collected about us, but it’s not for us.

LP: Many people think more competition will help curtail these practices, but your study is quite skeptical that more competition among the big platform companies will cure many of the problems. Can you spell out why you take this view? How is competition itself toxic in this case?

MS: The assumption is that if we just rein in the data-opolies and maybe break them up or regulate their behavior, we’ll be better off and our privacy will be enhanced. There was, to a certain extent, greater protection over our privacy while these data-opolies were still in their nascent stages. When MySpace was still a significant factor, FB couldn’t afford to be as rapacious in its data collection as it is now. But now you have this whole value chain built on extracting data to manipulate behavior; so even if this became more competitive, there’s no assurance then that we’re going to benefit as a result. Instead of having Meta, we might have FB broken apart from Instagram and WhatsApp. Well, you’d still have firms dependent on behavioral advertising revenue competing against each other in order to find better ways to attract us, addict us, and then manipulate behavior. You can see the way this has happened with TikTok. Adding TikTok to the mix didn’t improve our privacy.

LP: So one more player just adds one more attack on your privacy and wellbeing?

MS: Right. Ariel and I wrote a book, Competition Overdose, where we explored situations where competition could be toxic. People tend to assume that if the behavior is pro-competitive it’s good, and if it’s anti-competitive, it’s bad. But competition can be toxic in several ways, like when it’s a race to the bottom. Sometimes firms can’t unilaterally de-escalate, and by just adding more firms to the mix, you’re just going to have a quicker race to the bottom.

LP: Some analysts have suggested that giving people broader ownership rights to their data would help control the big data companies, but you’re skeptical. Can you explain the sources of your doubts?

MS: A properly functioning market requires certain conditions to be present. When it comes to personal data, many of those conditions are absent, as the book explores.

First, there’s the imbalance of knowledge. Markets work well when the contracting parties are fully informed. When you buy a screw in a hardware store, for example, you know the price before purchasing it. But we don’t know the price we pay when we turn over our data, because we don’t know all the ways our data will be used or the attendant harm to us that may result from that use. Suppose you download an ostensibly free app, but it collects, among other things, your geolocation. No checklist says this geolocation data could potentially be used by stalkers or by the government or to manipulate your children. We just don’t know. We go into these transactions blind. When you buy a box of screws, you can quickly assess its value. You just multiply the price of one screw. But you can’t do that with data points. A lot of data points can be a whole lot more damaging to your privacy than just the sum of each data point. It’s like trying to assess a painting by Georges Seurat by valuing each dot. You need to see the big picture; but when it comes to personal data, the only one who has that larger view is the company that amasses that data, not only across their own websites but in acquiring third-party data as well.

So we don’t even know the additional harm that each extra data point might be having on our privacy. We can’t assess the value of our data, and we don’t know the cost of giving up that data. We can’t really then say, all right, here’s the benefit I receive – I get to use FB and I understand the costs to me.

Another problem is that normally a property right involves something that is excludable, definable, and easy to assign, like having an ownership interest in a piece of land. You can put a fence around it and exclude others from using it. It’s easy to identify what’s yours. You can then assign it to others. But with data, that’s not always the case. There’s an idea called “networked privacy” and the concern there is that choices others make in terms of the data they sell or give up can have then a negative effect on your privacy. For example, maybe you decide not to give up your DNA data to 23andMe. Well, if a relative gives up their DNA, that’s going to implicate your privacy. The police can look at a DNA match and say, ok, it’s probably someone within a particular family. The choice by one can impact the privacy of others. Or perhaps someone posts a picture of your child on FB that you didn’t want to be posted. Or someone sends you a personal message with Gmail or another service with few privacy protections. So, even if you have a property right to your data, the choices of others can adversely affect your privacy.

If we have ownership rights in your data, how does that change things? When Mark Zuckerberg testified before Congress after the Cambridge Analytica scandal, he was constantly asked who owns the data. He kept saying the user owns it. It was hard for the senators to fathom because users certainly didn’t consent to have their data shared with Cambridge Analytica to help impact a presidential election. FB can tell you that you own the data, but to talk with your friends, you have to be on the same network as your friends, and FB can easily say to you, “Ok, you might own the data, but to use FB you’re going to have to give us unparalleled access to it.” What choice do you have?

The digital ecosystem has multiple network effects whereby the big get bigger and it becomes harder to switch. If I’m told I own my data, it’s still going to be really hard for me to avoid the data-opolies. To do a search, I’m still going to use Google, because if I go to DuckDuckGo I won’t get as good of a result. If I want to see a video, I’m going to go to YouTube. If I want to see photos of the school play, it’s likely to be on FB. So when the inequality in bargaining power is so profound, owning the data doesn’t mean much.

These data-opolies make billions in revenue from our data. Even if you gave consumers ownership of their data, these powerful firms will still have a strong incentive to continue getting that data. So another area of concern among policymakers today is “dark patterns.” That’s basically using behavioral economics for bad. Companies manipulate behavior in the way they frame choices, setting up all kinds of procedural hurdles that prevent you from getting information on how your data is being used. They can make it very difficult to opt out of certain uses. They make it so that the desired behavior is frictionless and the undesired behavior has a lot of friction. They wear you down.

LP: You’re emphatic about the many good things that can come from sharing data that do not threaten individuals. You rest your case on what economists call the "non-rivalrous" character of many forms of data – that one person's use of data does not necessarily detract at all from other good uses of the data by others. You note how big data firms, though, often strive to keep their data private in ways that prevent society from it for our collective benefit. Can you walk us through your argument?

MS: This can happen on several different levels. On one level, imagine all the insights across many different disciplines that could be gleaned from FB data. If the data were shared with multiple universities, researchers could glean many insights into human psychology, political philosophy, health, and so on. Likewise, the data from wearables could also be a game-changer in health, giving us better predictors of disease or better identifiers of things to avoid. Imagine all the medical breakthroughs if researchers had access to this data.

On another level, the government can lower the time and cost to access this data. Consider all the data being mined on government websites, like the Bureau of Labor Statistics. It goes back to John Stuart Mill’s insight that one of the functions of government is to collect data from all different sources, aggregate it, and then allow its dissemination. What he grasped is the non-rivalrous nature of data, and how data can help inform innovation, help inform democracy and provide other beneficial insights.

So when a few powerful firms hoard personal data, they capture some of its value. But a lot of potential value is left untapped. This is particularly problematic when innovations in deep learning for AI require large data sets. To develop this deep learning technology, you need to have access to the raw ingredients. But the ones who possess these large data sets give it selectively to institutions for those research purposes that they want. It leads to the creation of “data haves” and “have nots.” A data-opoly can also affect the path of innovation.

Once you see the data hoarding, you see that a lot of value to society is left on the table.

LP: So with data-opolies, the socially useful things that might come from personal data collection are being blocked while the socially harmful things are being pursued?

MS: Yes. But the fact that data is non-rivalrous doesn’t necessarily mean that we should then give the data to everyone that can extract value from it. As the book discusses, many can derive value from your geolocation data, including stalkers and the government in surveilling its people. The fact that they derive value does not mean society overall derives value from that use. The Supreme Court held in Carpenter v United States that the government needs to get a search warrant supported with probable cause before it can access our geolocation data. But the Trump administration said, wait, why do we need a warrant when we can just buy geolocation data through commercial databases that map every day our movements through our cellphones? So they actually bought geolocation data to identify and locate those people who were in this country illegally.

Once the government accesses our geolocation data through commercial sources, they can put it to different uses. Think about how this data could be used in connection with abortion clinics. Roe v. Wade was built on the idea that the Constitution protects privacy, which came out of Griswald v. Connecticut where the Court formulated a right of privacy to enable married couples to use birth control. Now some of the justices believe that the Constitution really says nothing about privacy and that there’s no fundamental, inalienable right to it. If that’s the case, the concerns are great.

LP: Your book is critically appreciative of the recent California and European laws on data privacy. What do you think is good in them and what do you think is not helpful?

MS: The California Privacy Right Act of 2020 was definitely an advance over the 2018 statute, but it still doesn’t get us all the way there.

One problem is that the law allows customers to opt out of what’s called “cross-context behavioral advertising.” You can say, “I don’t want to have a cookie that then tracks me as I go across websites.” But it doesn’t prevent the data-opolies or any platform from collecting and using first-party data for behavioral advertising unless it’s considered sensitive personal information. So FB can continue to collect information about us when we’re on its social network.

And it’s actually going to tilt the playing field even more to the data-opolies because now the smaller players need to rely on tracking across multiple websites and data brokers in order to collect information because they don’t have that much first-party data (data they collect directly).

Let’s take an example. The New York Times is going to have good data about its readers when they’re reading an article online. But without third-party trackers, they’re not going to have that much data about what the readers are doing after they’ve read it. They don’t know where the readers went–what video they watched, what other websites they went to.

As we spend more time within the data-opolies’ ecosystems, these companies are going to have more information about our behavior. Paradoxically, opting out of cross-context behavioral advertising is going to benefit the more powerful players who collect more first-party data – and it’s not just any first-party data, it’s the first-party data that can help them better manipulate our behavior.

So the case for the book is that if we really want to get things right, if we want to readjust and regain our privacy, our autonomy, and our democracy, then we can’t just rely on existing competition policy tools. We can’t solely rely on many of the proposals from Europe or other jurisdictions. They’re necessary but they’re not sufficient. To right the ship, we have to align the privacy, competition, and consumer protection policies. There are going to be times when privacy and competition will conflict. It’s unavoidable but we can minimize that potential conflict by first harmonizing the policies. One way to do it is to make sure that the competition we get is a healthy form of competition that benefits us rather than exploits us. In order to do that, it’s really about going after behavioral advertising. If you want to correct this problem you need to address it. None of the policy proposals to date have really taken on behavioral advertising and the perverse incentives it creates.

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Getting Out of the Rat Race: Is an "Age of Leisure and Abundance" Possible?

Keynes promised shorter working hours and greater prosperity by now. As remote as it sounds, that vision is still possible.

Why haven't working hours in rich industrialized countries declined more sharply or even increased at times since the early 1980s? And why do average working hours vary so much across rich economies? These are the questions addressed in our paper Varieties of the rat race. Working hours in the age of abundance.

These questions are interesting and especially poignant because there are indications that rich societies have perhaps long been in a position to move into an "age of leisure and abundance" due to the level of productivity they have achieved. The famous economist John Maynard Keynes predicted in his 1930 essay on The Economic Possibilities of Our Grandchildren that the conditions for significantly reduced working hours (3-hour days or 15-hour weeks) should be in place by 2030. While Keynes' predictions regarding productivity growth have actually been exceeded over the past nearly 100 years, the obstacles to more leisure time are primarily socio-political in nature.

Based on an empirical analysis of 17 European countries and the U.S. for the period 1983-2019, we conclude that lower income inequality, coordinated wage bargaining, and strongly developed public services can contribute to short working hours. This result is relevant in that shorter working hours could make an important contribution to addressing several of society’s most pressing current challenges – climate change, gender equity, and social cohesion.

The saturation of middle-class needs in the "Golden Age of Capitalism" (ca. 1950-1980)

What is the minimum amount of money a family needs to do well in life? In the United States, this question is regularly asked in a large-scale survey. How respondents' answers have changed over time since World War II says a lot about the evolution of American society, and likely also about the evolution of capitalism in rich countries as a whole.

In 1950, on average, the families surveyed thought they needed about 68% of the actual median income at the time to live satisfactorily (Figure 1). By 1980, after three decades of strong income growth across all strata of the population, 53% of median income was already sufficient for a satisfying life for the families surveyed. During the 1950s and 1960s, while aspirations for a satisfactory standard of living increased, they did not increase as much as the actual incomes of the middle class. And, interestingly, the growth of these aspirations actually came to a complete halt during the 1970s. Apparently, a certain saturation of basic material needs had been reached.

The three postwar decades, often described as the "golden age of capitalism," also displayed a remarkable reduction in average annual working hours. This was the case not only in the U.S., where the hours worked per year by employees declined by about 200 hours but in virtually all industrialized countries (Figure 2). From the perspective of neoclassical economics, leisure time behaved like a "normal good": as they got richer, people consumed more leisure.

It almost seems that, as Keynes put it in his 1930 essay, "the economic problem" was more or less solved: as income levels rose, people's material needs would be met and they would now prefer to devote more of their time to non-economic purposes rather than continuing to work long hours.

The reestablishment of material neediness in the "neoliberal age" (from ca. 1980)

But things turned out completely differently. Since the 1980s, material saturation has given way to a new and growing sense of material deprivation among large segments of the population. The level of income that families consider minimally necessary to make ends meet has risen again over this period, and at increasing rates of growth. When the global financial crisis hit in 2007, the subjective minimum income was again 68% of the actual median income, just as it had been in 1950 (Figure 1).

Average hours worked by employees did not decline in the U.S. after 1980; instead, they rose again until the early 2000s before remaining at a high level. In fact, annual hours worked per working-age person rose steadily by about 150 hours from 1980 to 2000, a trend interrupted only by two deep recessions. Working hours in other industrialized countries show broadly similar trends over time, but with some differences in the extent and timing of these developments (Figure 2).

Inequality, decentralized wage bargaining, and poor public services as reasons for long working hours

One finding of our macroeconomic panel analysis is that top household income shares are positively related to average working hours. Income inequality has increased since the 1980s, first and more strongly in the U.S., with a time lag and less strongly in Europe (Figure 2a). Two phenomena are striking. First, as inequality has risen, average working hours have fallen more slowly over time than in earlier decades or have even risen again (Figure 2b-c). Second, it is striking that employees with higher hourly wages in countries with high inequality at the upper end of the income distribution now tend to work longer hours than employees with lower hourly wages (Figure 3). Both developments are historically unusual. This is because they contradict the observation of economists that societies or individuals with high incomes consume more leisure time.

Our explanation for this historical anomaly is upward status comparisons in the context of rising income inequality. In particular, the upper-middle-class emulates the consumption norms of the rich and sacrifices leisure time to do so. Because the rich also increase their spending on status goods such as housing, education, etc. as their incomes rise, the middle class feels pressured to keep up. After all, what constitutes a "good place to live" or a "good education" is essentially defined in comparison to the standards that the upper-income groups largely determine. If, on the other hand, the gap in the living standards of the rich becomes too great for the lower-income groups and they are left further and further behind, these groups are often left with nothing but resignation, i.e. giving up the "rat race".

Another finding of our empirical analysis is that centralized wage bargaining and government social transfers in-kind (but not in cash) are negatively related to working hours. One possible explanation is that centralized wage bargaining mitigates status conflicts because workers can collectively decide against a "positional arms race" at the expense of leisure. The fact that public services (social benefits in-kind), unlike monetary social transfers, are associated with lower hours of work may be because the direct provision of goods and services reduces the need for status-oriented private spending on goods and services.

Finally, we also examine the importance of education as a positional good. The extent to which the education sector is organized through private markets is found to be associated with longer working hours among workers who themselves have high levels of education.

Inequality also makes leisure time more stressful - the example of raising children

Our findings can also be seen in the context of family economics research by Matthias Doepke and Fabrizio Zilibotti. The authors show that the intensity of parenting styles is positively related to income inequality. In highly unequal societies, the loss of status associated with relatively low educational attainment is particularly large. This seems to explain, in large part, why it is precisely educated and high-income parents who spend more time and money on children's education when income inequality is higher.

Doepke and Zilibotti point out that parents in the 1970s and 1980s took a much more relaxed approach to child-rearing. Especially for the educated and comparatively high-income middle class, which attaches great importance to children's educational success and labor market prospects, both work life and leisure time (which includes time spent with children) have therefore become more stressful in many respects as inequality has increased. Parents with less educational attainment, on the other hand, are much less prone to "helicopter parenting." Again, the explanation is that parents with low educational attainment are more likely to resign due to the large status differences and therefore more often do not even try to enter the "rat race" for the best education.

What to do about "neediness despite abundance"?

Social cohesion is currently being severely tested throughout the Western world. The overarching problem seems to be status concerns related to increased economic inequality, which have spread well into the upper-middle class.

At the same time, there seems to be a great need in large sections of society for more leisure time and to get off the hamster wheel. The Coronavirus pandemic has made many parents in particular aware that they have little time leeway to deal with unexpected additional stress. Among the younger generation, the view is increasingly widespread that the prospect of ever further increases in production and income is not only not meaningful, but also ecologically questionable.

However, a reduction in working hours is likely to remain unattractive or unattainable for many people as long as high inequality, incomplete collective bargaining agreements, and inadequate public services foster a feeling of "neediness despite abundance.” In our view, an unconditional basic income, which many are toying with, does not offer a solution as a purely monetary social benefit. More promising would be an expansion of "unconditional public services" in areas of key positional goods (especially housing, transportation, and education), combined with labor market reforms (e.g., four-day week, regular sabbatical years, job guarantee, subsidized free time for service to the common good).

This post is based on a text published in German on the research blog of the Institute for Socioeconomics at the University of Duisburg-Essen: https://www.ifsoblog.de/raus-a...

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Creating a Digital Circular Economy for Net Zero

Luohan Academy's Director Chen Long discusses the academy's latest report, on the benefits of creating a "digital circular economy," which would go a long way towards reaching net zero carbon emissions and addressing the climate crisis. Report link: https://www.luohanacademy.com/insights/bc89734b94adf00c

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Transcript

Rob Johnson: Welcome to Economics & Beyond. I'm Rob Johnson, president of the Institute for New Economic Thinking. I'm here today again, we've done podcasts before with Long Chen. He is the president of the Luohan Academy and he and his team have created a fascinating report on the digital circular economy for net zero. There are dimensions in the report that relate to the role and possibilities of the digital, the entire systemic vision of the circular economy, including what is involved in governance. And I'll let him explore.

He's had some brilliant co-authors working with he and his team and particular Patrick Bolton from Princeton University, Michael Spence, Nobel Laureate well known to the economics community of INET. Peter Lacey, [inaudible 00:01:27]. How would I say, in a time when people are in distress, it's a very encouraging report. People are afraid of digital transformation. But now they envision how to use digital transformation to diminish our fear and improve the likelihood of sustainability and their circular economy I think is a very important way of seeing how to be, which you might call respectful of the side effects, what economists call the externalities. And so let's, how do we say, push off from shore and go on the voyage with you. Thanks for joining me today.

Chen Long: Thanks, Rob.

Rob Johnson: Let's start with what inspired you and your team to say, "This is what we've got to do. This is the report that we can see or we can articulate to help the world get on course." Where did the inspiration come from?

Chen Long: Right. But let me start with maybe some personal experience. Actually we realized the power of the digital technology many years ago, I think back in 2016. So at that time I was the chief strategy officer for the Ant Group, the Alipay, the payment company. And at that time we were doing inclusive finance. So make payments available, digital payment available for everyone possible at a very little cost.

But at that time we were inclusive, but then we realized that we would like to do something for the environment challenges. At that time remember the climate in Beijing was really bad, so it's very foggy and the air is dirty, we couldn't see each other and the kids suffer or this or that. And that tide was very impressive. You can hear that the governments and the big companies, they commit to do a lot of things, which is, I simply want to do a lot of things.

Individuals, they suffer in bad air in the cities everywhere, but individuals feel powerless. There's nothing they can do about this, but it affects everybody's life. At that time we thought, well, we would like to do something about it. What we did then is we come up with app in Alipay, it's called the Ant Forest. Basically what that does then is use the digital technology and the big data. It is based upon every user's approval to track their carbon footage. Let's say, Rob, wants today rather than driving to work, you decide to take a subway, that would mean reduction of the carbon emission.

And that can be calculated according to certain scientific formula, through experts. So that we can actually accumulate. We can calculate and accumulate how much you have saved, reduce the carbon emission. Effectively we have created a carbon account for everyone. Then the interesting thing is that you can actually monitor this account. It's going to show up as a little green ball. And we plot a forest. It is going to show up in little green ball in a forest.

And there you can collect this little green ball, then a little virtual tree will grow. Then gradually as you accumulate your carbon reduction behavior, this virtual tree will grow into a full one. And at that time, a real tree will be planted in the deserted areas. The areas that forest is needed most, so that is a simple idea.

And also, actually, if you have friends, you have friends circles, they see each other's little green balls. You can collect, in a sense you can steal each other's energy, but only through friends, the people you know well. Then it create a friendly competition, a social challenge to each other to do that. So that's a little program and it blossomed within half year. I think in the past several years, it has grown into the world's largest, fastest growing application globally. It has accumulated more than, I think right now is probably more than 600 million users are using that.

What this really says is that effectively you have 600 million people, they monitor their green behavior. In the meantime, they are planting trees every day. We've planted a lot of trees and they can be seen through the satellite because there's huge areas in the desert areas. And this is I think a cool example to show that what can be done as I would call this a bottom up approach. It's not through the government's pledge from big company's pledge, which is crucial but not sufficient, far from sufficient.

Every citizen, every institution, we are affected and we are responsible to do something about it. The challenge is how can you design something, make this scalable, make everybody a willing people, change their behavior and get everybody involved in affordable, scalable way to achieve what we want to do against the climate change. And so that's something you combine the power of the digital technology and a concept would cause the circular economy. And so which is something you do to help reduce the carbon reduction, the maximum use of the energy. Anyway, so that's what we have been doing in the past years and are just putting at the current climate the environment, we're trying to put something, new stars together for this report, that's some background.

Rob Johnson: Okay. Well, let's work on helping the audience comprehend. You talk digital circular economy, let's break it into two parts. How does digitalization help? I could infer that from some of what you just described with the app and so forth. But there are many areas that I see in the report related to energy transportation, buildings, and other sectors that you articulate. But what is digitalization doing? Is it obviating the need to burn carbon in order to get things done? How would I say? You can do remote school, you don't have to commute to school every day, things like that. But tell us just broadly how digitization is, which you might call a central part of this strategy.

Chen Long: Right. Digitalization in nature is a revolution of information. And information, it has important feature is called [inaudible 00:09:26]. What it says is that it can be used unlimited times. Anybody's use of the information does not consume the information itself. Sometimes we say data is like oil. But actually data is not oil because data can be burned unlimited times. What I'm trying to say is that when we use the information for any activity involves information, if you use the digitized version of that, then actually you can reuse the energy and it becomes very scalable and much more efficient way of doing without physical use of the resources.

For example, let's say we can use the video conference and one economist, [inaudible 00:10:17] last year, he's also a fellow at Luohan Academy. He wrote a paper last year with the aspect that if you have a virtual conference is like us we're talking to each other, they have more than 207 participants. They calculate, estimate their carbon. They find it's only 166, is very minor portion of the emission that would have been produced by a physical conference.

What I'm trying to say is that digitization can help reduce the carbon emission at least in three ways. One is the virtualization, which essentially you replace a lot of the use of the physical resources by virtualization. Now they're using the digitized version of it. The second way I think to do it is that make us smarter because of the big data, because of the AI, so that make us smarter to measure and track our carbon footage to optimize our use of resources. And that's the second way to do it.

And a third way I think is equally crucial is the connectivity. Because of the internet, because we are connected to each other. So that actually is critical in economy's concept. Because in any economy, if you have to have certain design, like a market that get everybody involved, they have incentive to exchange to allocate resources. But with that connectivity, you build certain markets. So help each other to fulfill their goals, demand and supply using the digital tools. And it was traditionally you can only do markets very locally. For any store in the big city, cosmopolitan cities, usually 80% of your customers comes from within 10 kilometers surrounding your location.

But now we know that we can trade. We can talk to each other, things happen, break the traditional boundary. The average distance between the bar center, for example, in China's online platforms is around a thousand kilometers. The traditional physical limits were broken. My point here is that we can actually organize new possible ways to collaborate, to make the use of resources better for people who wants to sell green products, who wants to have demand for that meet each other. And that's also crucial.

So through virtualization, through the smarter use of the make us smarter to make the environmental friendly decisions and connect the supply demand for that through at least there's three ways digital can help better against challenge against climate crisis.

Rob Johnson: I remember reading a section of your report about the use of data to heighten the awareness with renewables, whether wind or solar. They have what you might call variations within the day. There's daylight and there's dark, or the winds go up and down during the day. And until we have, how do I say? Extraordinary batteries, you can perhaps shift the time when you choose to consume at the time when the supply is most plentiful.

I thought that was a very interesting matching that that awareness can, what you might call, allow society collectively to be much more reliant upon renewables, because they can time their demand to synchronize when the supply is greater. And so there are lots of fascinating dimensions in the report. But I remember thinking how insightful that one was when I started.

Chen Long: Yes.

Rob Johnson: Other things, I know you talked a little bit, very popular theme right now. How do cryptocurrencies relate to this energy challenge?

Chen Long: Crypto. Let me first respond to what you commented just now. I think the important future for the human society for the energy use is actually it needs to be local and somehow decentralized. And so that's related to the crypto too. So you won't have a decentralized solution for the energy use. What I'm trying to say that, so a lot of countries, they have committed for the net zero within certain years. Society as a whole would like to get this done as say by 2060 latest.

Now, but you see a lot of this renewable energy like the wind, solar energy, it has the seasonal, it has daily effect. How do you get them and store them and transport them from the areas that are abundant to areas that really in need. It's very costly to do this. That's why it's very kind of ironic, if you look at last year, actually so many countries pledged the net zero, but actually the price of the oil as a lot of the coal, a lot of the traditional resources, the price just skyrocketed. So that has something related with the demand. Demand doesn't shift and supply is limited. And then it just still has to go up. So we have a long way to do that.

But I believe the important future of that in the near future that a huge chunk, probably close to half of the energy we use will be produced locally through wind and solar. But that varies throughout the day. We need to be smart with how ... we need to have this IOT. A lot of the devices, it helps us to collect the data, sorry, collects the energy and store and use it. And actually we need to have this virtual electricity coordination system, so to help the local to do that. I think that would constitute a huge chunk, probably half of the energy we use.

And that's a decentralized solution rather than a country's comprehensive electricity network. So that is the decentralized solution. I think that's a good part of the ... we call this decentralized or crypto part of this. That's perhaps the bad part of this, the bad part of this is for example, is the Bitcoin, cryptocurrencies right now. A problem of this currencies is that I'm very in favor of the decentralized solutions, it's great. But the problem of this is that because there's zero trust, there's another zero, zero trust in the users of the cryptocurrencies. And they don't know each other, there's no institutions to coordinate the trust.

Let's say I want to send you one Bitcoin, but then how do you ... Can you trust I send you this. And how can I prove I do have one Bitcoin. There's no institution to verify this. So it verify this through the burning energy, it's called mining on the internet. Actually a lot of people just prove that my thought, one Bitcoin exists and the transaction happened. They need to burn a lot of the energy. So according to one calculation, for me to send you $1 worth of this, let's say I will send you $1 of cryptocurrency. The cost of that, if you all consider is like $26. It has a lot of externalities, my point is this.

In that way then, in order to live in the environment of zero trust. You actually have to burn a lot of energy and that's not necessary. So that at least at this stage, it's not very energy efficient at all. So that's not the best example of the energy use when digitization is involved at this point. I hope it could do much better, but right now it's not.

Rob Johnson: We talk about digitization and all of the efficiencies that it allows us to aspire to achieve and actually achieve. What is the circular economy? Describe that dimension of kind of the big picture of your report.

Chen Long: Right. Circular economy is a scientific economic concept. Basically it is an economy that is restorative and regenerative by design, and it aims to keep products, components and materials at their highest utilization potential and value at all times, both through their technology and their biological circles. Essentially you can think about for our ancestors, they were having some kind of circular economy, even though it's not very efficient, they rely on the solar system, the sunlight to generate, they have the food and they consume, then it's circular in its way.

But then so the point here is that in order to have an economy, economy means is the humans for the human society, all the production inputs, our efforts together, resource our locations together to make the economy going. So that has the economy part, but make it circular. That means for every input we would like to make the best efficient use of it, the regenerative and restorative, and to for example recollect the waste. So for the whole life cycle of use of any of the materials that can be maximized use, and it can be restorative and regenerative, so that's the essential concept.

It's only when in such a way that we can achieve the goal that is called net zero emission of the carbon. The challenge of the circular economy, so the concept is beautiful, the challenge is how because it's not very scalable. Think about how are we able to do this in a scalable, efficient way for every step, every procedure we do, we know how we can track and measure and manage our use of the energy. So that part, you wouldn't have the power of scalability. We need the digital technology.

Rob Johnson: I mean, when you talk about circularity, I mean I understand it conceptually. But I saw some fascinating just what I'll call specific examples I've never heard of like markets or networks, digital networks for used clothing, so that you're not having to harvest any more cotton. You can do other things with the land, or what have you. There seem to be many, many dimensions where that regenerative or non wastefulness of these myriad, this whole constellation of ingredients.

And it almost makes which I might call ... it's like making the population smaller given the old methods, because now instead of gobbling everything up, we regenerate it and use it the second or third or a fourth or many, many times, depending on how durable it is. And this makes tremendous amount of sense, but it's I imagine which you might call, it requires some very careful thought about the design of incentives for people to be conserving and recycling and recirculating. Is that a political, which you might call responsibility? Or can you do these things through digital technology innovation, where governance does not have to, which you might call be the overlord and enforce these things?

Chen Long: Yeah, that's a great question. So just now the case you mentioned, we can call this recommerce and actually it's prevalent in many countries. For example, in United States we have this Craiglist. Craiglist is one of the largest digitized secondhand marketplace. And there's estimates that Craiglist has led to about 2% to 6% annual reduction in municipal's solid waste per capita generated.

So in China we have something called Idle Fish. It's right now the largest second hand commodity goods marketplace in the world. So for example, for clothes. So for every piece of clothes, if several people can wear it and can use it in its lifecycle, then that means several times of reduction of the production on the supply side. So that is regenerative, circular.

But so that's the connectivity part of the digital technology, because it's only when you ... so a lot of people they have the idle items that they do not want to use anymore like the clothes. They are actually still pretty very good condition, but they don't want to use anymore. But then they can sell it on the market. And then a lot of the people, actually they need it, and they can buy it at a very affordable price.

So this is a very good example of use the idle resources. And actually for the Idle Fish in China, it has more than 300 million users with more than 20 million active users every day. So they buy and sell a lot of secondhand stuff and a huge chunk of those are young people. And we find that very young people, actually they have better sense of the environmental issues and actually they like to use the old, reuse the stuff. And because this reused stuff are actually in very good condition, there could be even trendy good stuff.

But then let's say a secondhand iPhone for example, so it's not the newest brand, but actually it's still in very good quality and all clothes, a lot of stuff. So that's a good example. Now for that marketplace to happen, actually you don't need the government intervention. You do need have certain mechanism design to meet the supply demand. You have to create a trust system, such that those items are not for fraud to verify it's true and it's reliable.

And so you have to have this whole design, use the digital technology to use it, to make it happen in a trustworthy way, the buyers and sellers, they didn't know each other. Somehow they can trust this is secondhand stuff but it works, it's in good quality and not get into a fraud, so it's kind of stuff. So that can be done through the technology in a scalable, efficient way without the government. So that meets the incentive. That's why we call this economy, it's not just technology. You have to do this in economy, which means involves everybody's incentive.

Ant Forest I just mentioned at the beginning is another good example that we actually, because the consumers, the users, they're happy to see their little virtual tree to grow, then customed to do that. So then that's good enough. So Ant Forest actually it has becomes, as I mentioned, is one of the fastest growing mobile app in the world at that time. And later it won the United Nations champion of the environment award because of efforts. And this again requires government support. So I'm giving you multiple examples to say that with the digital technology and with the smart design, we can do this kind of stuff without government intervention.

Rob Johnson: A lot of these things can be done without government. But to be what you might call complete in your digital circular economy, what role is there for government? I mean, I'm not saying it will always be performed, I'm saying in your vision, what's the necessary elements of governance or governance awareness to join and enhance this system.

Chen Long: Yeah. I think governments are crucial because environmental challenge happens a lot of time because of the externality. In economics we know that the market sometimes fails because individuals, the energy users, they don't bear the whole cost of doing that to the environment. There's a lot of externality there. The market cannot solve this problem by itself. I think first of all, the government has to have the leadership to crack the whole society the efforts to set goals, to set certain through the laws, through the regulations requirements, call for actions, coordinate, so that is essential.

I think the government is essential and indeed many countries, many governments, and the big institutions have committed to do this for society. My problem is that sometimes I call this the top down big boy approach. The big boys needs to be responsible, but that's not far from enough because there also needs to be a bottom up approach that has to involve the individuals, the small and the microenterprises because we are the consumers and we decide the demand.

If we do not change our behavior, if we will not get involved there's very little hope for this whole economy to achieve the net zero. But for this bottom up approach to be scalable, you need to have certain technology. And this technology is crucial in this regard. My point here is that both side is needed. And we call this the social economic governance. You need governments, you need the people's ... we need the culture and habits to change. We need the top down and bottom up approach together for technology to play a role on this whole society. That has been the case if we look back on the impact of technology on society as a whole.

Rob Johnson: Just for the purpose of our audience, many in these Institute for New Economic Thinking are dedicated students to the history of economic thought. Obviously there's innovation here in this digital world and so forth, but are there precedents? I saw, remember in the notes, I looked at the Nobel laureate, Elinor Ostrom, had a book that you all cited on understanding institutional diversity.

And there was another book from Cambridge Press, Andrew Jordan and others did on governing climate change. It was like polycentricity. And just looking at your references and so forth, but are there pillars? Are there people who ... how would I say? When you look back wisely could see these different structures that you are pulling together now? Maybe not the digital dimension, but the circular dimension and the nature of governance. Are there precedents or are we, if you will, in a brand new world?

Chen Long: I think, so to battle the climate change, people do realize the strengths or the necessity of this crucial elements. Obviously there's previous and the circular economy were not of course the first and it's being circulated around for some time, so we understand that. If we think about the digital circular economy, there's three keywords here. One is digital, one is circular, and one is economy. So all the three elements have been emphasized, so different channels. There's a lot of precedents.

We know that we need to, this is climate change, essentially to solve that you have to do things circular way. So you have to reuse the energy, the maximum efficient way use of energy, so we need to be circular. But then it has to be the economy, economy means that it's not just that you order people to do this. The human society live in economy, which means that involve the people. They have to utilize their resources in incentive driven efficient way, so it has to be economy. It cannot be just planned, just be the order, just restrictions. You cannot do this, you cannot do that, but that's not enough. People have to have the incentive to do this.

So to do that and to make related to the [inaudible 00:34:51], so that needs to be economy, so that's the concept we need. So then of course economists have written a lot about the what's marketplace, a lot is doing that, so that's the economy part.

The third part is the digital technology. So that is, how do you make the circular economy happen but in a scalable way, efficient way, and you need technology. It's not just about the energy technology itself. You also need to have the digital part and make everybody involved, and then together to battle the climate change, the crisis. I think to put together is what probably relatively one of the early ones to really emphasize on this.

But I think the concept, the individual elements are known, and sometimes people put them together, but we emphasize that this is probably one of the few, the unavoidable, we should really best use, combine those three key elements together, so that's our understanding.

Rob Johnson: Another dimension that people express a lot of concern about these days is that in the era of globalization, I'll be kind of silly about it, maybe the treaty of Westphalia is dead. Meaning the notion of the nation state and integrity of boundaries is really drawn into question because capital can move around the world in nanoseconds and there are all kinds of side effects. Los Angeles talks about its pollution, but it can't control it, because it comes from other places in the Pacific Ocean or whatever.

And it feels to me like, I guess what I'm trying to set up is a question which is I can see in a closed governed place putting this system together works, but we almost need it to be done simultaneously in every region or nation. There has to be kind of like a global agreement for a platform deployment everywhere, because to be simple about it, pollution and poison in Philadelphia and Detroit harms people in the long term in Southern Africa. In other words, maybe COP27 will be too soon, but how do we put this on the table at the COP meetings to create an agreement to deploy it side by side everywhere.

A lot of people who didn't like global governance don't like global governance because they say it's up there at the top for the whole world and it's not sensitive to the region. But in the early parts of your presentation and in your report, you talk about the need for that decentralization and that intimate awareness in each little pocket. But in order for us to get the common good, we need all these places to work at the same time, employing these methods, we need a global agreement to deploy them in each region. Do you think that's feasible?

Chen Long: Right. Essentially what you describe is a challenge. As we talk about that, environmental challenge is a lot of externalities. So that externality is a lot of time is outside of individual, but you can say it's also beyond local. So then we need to have a bigger and bigger circular economy. And then here we're talking about maybe a global circular economy, which means globally, collectively, we are effectively achieving this goals. And that's extremely difficult because different countries like the different locals, they have different development level, the stages.

In developing countries, in much less developed countries, they're trying to survive. And it's very difficult for them actually to ask them to really do a lot of things, a better climate change, they can only enjoy the greener food production in certain way. They're barely surviving. And that's why in more advanced countries then there are much more active in advocating for this. But we have to have the sympathy for each other. We have to understand we're at different stages. Then that highlights I said several things. It highlights the collective leadership of the global, a lot of countries. The governments, we need to understand this battle actually fits all of us. We're not immune to this.

If another country pay no attention to the environment issues, then everybody is affected. Collectively the governments have to do this. And that's why we need to have the COP27, 28, we have to do something really about this. This is on the government side. We have to have the joint agreement to help each other. For example, the developed countries, they have to provide technology, also to provide maybe the necessary funds to help the developing countries to battle that, otherwise it's hypocritical to just ask them to do things they are better surviving.

But then so we have to help each other to do that. Then we also needs to have the economy. We mentioned that we want to make the whole world circular, but then you want to have the economy so that everybody involved, regardless of the economic level, they have the incentive to do environmental friendly things, activities. Then you need to have the technology to make that into the scalable way. And also for that to happen, then it's decentralized the efforts, properly use the technology and the mechanism design also works.

I think we can see this big picture is possible, but well far from that, fortunately I think more and more governments and the companies, institutions, individuals, they're more aware of that, and we're making efforts to do that. But really we have very limited time left. To achieve the goal of the Paris accord to limit the increase of the temperature on our planet within 1.5 degree, at the current level of the carbon emission of our production and life, a living standard, we have few than about 10 years, so a lot should be done.

Rob Johnson: Yeah. And you said something that I thought was very interesting in this last passage, which is you've got to help the poor countries, but with the pervasiveness of externalities related to global warming and so forth, you're not just helping them, you're helping yourself. Meaning if you don't deploy these technologies in those places, we won't meet the one and a half degrees or anything close to it, and then we will all suffer. So there is, how would I say, a need to acknowledge the pervasiveness of externalities and react to that in addition to the need of poverty or to foster development to the places that are less advantaged.

And I guess the people that I talk to, particularly in Africa about this often emphasize to me that the carbon problem is not about this year. It's about the cumulative amounts. And America and Europe's cumulative burning of carbon is a very large proportion of the problem that we didn't shift gears years and years ago, as authors like [inaudible 00:43:31] have made very clear that we knew about it and we didn't do anything for almost 50 years. And so I think they have what I'll call a moral basis for demanding assistance in those developing areas, because the people who set the stage for the problem are the rich communities who burned a lot of carbon yesterday and the day before.

Chen Long: I fully agree because actually up to now, if you draw a graph to show the per capital GDP and the per capital carbon emission, you can see an upward straight line, almost a straight line, which means the more advanced countries tends to be the per capital more carbon emission countries. And historically, if you look at where the more economic advanced countries, where they came from, they started the industrial revolution, which is the various large scale use of the fossil energy. And that prompted the whole industrial revolution.

And then gradually waste that with that, gradually the countries with their living stand improve. It becomes the more consumption driven countries, they move the manufacturing out to other countries. But then they actually are still consuming those things. And then at this stage, because they have a living standard, they realize that we want to have a more friendly greener environment, which is true, which is great.

But the problem is that, that's why other countries are not at this stage yet. So they really have to have understand this is a collective problem. And in a sense the whole human society is paying back the debt they own to our mother earth. Because in the past hundreds of years, it is the industrial revolution, the very large scale use of the fossil energy that get us today. Our living standard is so much higher than before, but then we have created so much problem for the planet.

Collectively, we have to pay this back. It's not just about the less developed countries. And it started with the much more economic advanced country like Europe and United States, and of course many other countries. We have to do this collectively with history in perspective. It does make sense to pay back the debt from history.

Rob Johnson: There was once a famous economist, he was called the Earl of Lauderdale. His name was Lord Maitland, the 13th Earl of Lauderdale. And when Adam Smith wrote The Wealth of Nations, he emphasized value as exchange value in the market. And the Earl of Lauderdale wrote a book that was very critical of The Wealth of Nations by saying, "What we have is something that is not really value, because if you turned off the water, if you turned off the oxygen, humankind would die."

And so those things are obviously valuable even though they're priced at zero. And what the Earl of Lauderdale seemed to foresee was that at that time, the population in the world in the degree of industrial development, as you were alluding to was small enough that nobody was afraid of losing the climate or the air or the water. But it does seem, now that we are embarked on that challenge, and it's more complicated than the Earl of Lauderdale said because of this pervasiveness of externalities. The market left to its own devices won't price things adequately to reflect the side effects that are produced, that can harm a lot of people.

And there are a lot of people now who are very concerned in the United States that we have what they call a market for too many things. And what I mean by that is a market for politicians, a market for the corporate media, a market for university endowments, so that the truth can be thwarted, avoided, with a lady name, Dr. Naomi Oreskes wrote a book called the Merchants of Doubt, sewing the seeds of doubt, paying off the politicians, stopping the proper design.

And most people would accuse the big fossil fuel producers like Russia, the United States, Canada, and some of the middle Eastern companies, countries, excuse me, that are based in the Middle East, the companies are based there. That these people have a vested interest in which you might call continuing to burn their fossil fuels. And what I like is your digital economy is monitoring it. Your circular economy is making the best of it. And the innovations in governance, which might include digital can start to track the externalities and other things in ways that heighten consciousness.

But we've got to figure out a way to, I will call stop the commodification of social design and enforcement. We've got to find a way to free the world to do the right thing. And I think as some have said, there's a wonderful book by Bernard Harcourt at Columbia University called The Illusion of Free Markets. That markets are a tool, but the structure of the markets and the rules and the enforcement are political decisions. The market is not a god. The market is a tool and your report does a beautiful job of using the market as a means to achieve this transformation. But I think this, what I'll call the dark side of political economy is a very important part of the challenge.

Chen Long: Yeah. Thank you for your wonderful comments. And so if we go back to Hayek, as Hayek said, the market is an information processor. So essentially it's great strength comes from it can put together and process a lot of decentralized information from everyone. And I think very important elements for the market to be efficient. Why it's limited is because some of the information is not processed enough.

I think that digital technology can help us to actually better measure and track the carbon emission, how severe the crisis it is. Because if we look back why it takes so long, more than half a century for people to realize that, we have to collectively do something about it, because we do not have enough evidence, we do not have good measurement. So people debate all the time. And then they're driven by other incentives.

So the better we can use the technology to measure, to describe how severe the challenge is, the answer people will be reminded from the governments to institution, individuals, we can do more. If we want to break the limitation of the traditional markets, it starts with the measurement, it starts with the proper technology. Then we'll be forced to do something. And we can only hope that this can be much faster.

Rob Johnson: Yes. Well, I must say this is a very, very troubling time in many dimensions for people all over the world. And what I'm always afraid of is that if people are identifying a crisis, but without seeing the North star of the way forward, the path to navigate, they become more frightened and they despair. And they perhaps then submit to what I will call the comfort of authoritarian rule.

And in the United States right now, whether people are talking about issues of race or gender inequality or fiscal discipline or the healthcare system, everybody is really pessimistic. And I want to congratulate you because in these what I'll call dark times, you're shedding light with this report on the possibilities of doing something constructive, instead of just being afraid of technology, viewing technology as your partner in achieving these goals. The vision of the circular economy, the notion of how would I say, the possibility of overcoming this challenge and allowing the world for our children, grandchildren to be prosperous.

I think the very fact that you are constructive is as important. Obviously the credibility and quality of the work partners with that, so that people can feel some hope. And as you know, you run a leading institute, one of the world's most dynamic institutes in my opinion. It's very hard to find people who have ... they sometimes fear being which you might call foolishly romantic. So they don't talk about the good news. They talk about the bad news. And what I think you did here, along with your team with these experts is you are pointing a way forward that might alleviate. It might enhance confidence and alleviate despair and fortify trust, renewed trust in both expertise and governance, which I think are essential to accomplish this mission.

Chen Long: Well, thank you so much, Rob, for your kind words. And I guess we have no choice. So if we look back, actually it is precisely technology has brought the society to where we are. But then the whole history of the modern history is a history of the technology revolution, but is also one of the constant anxiety. Because technology brings a lot of changes. It completely change our life a good way, but then it also brings a lot of side effects. And through this whole way, constantly we have anxiety because it's very hard for us to predict what's going to happen next is changing us.

But in the meantime, we have always been finding some good solutions. The problems that brought by technology. So that has been history. And I think this time is no different and we have no choice. And so we have to face the ... where we're enjoying the benefits of technology, then we have to be realistic. We cannot sugarcoat the reality. But I think there are ways to do it. And then that's why we need to have the right approach. We have to realize what can be done and the best, mixed technology is useful for. We're hopeful we can do that, that's a spirit.

Rob Johnson: Well, I guess, I had the good fortune of growing up in a musical community called Detroit, Michigan. And when I listen to you, I think first of the famous song Theme From Mahogany by Diana Ross in The Supremes, or [inaudible 00:55:59] by Diana Ross after the time of The Supremes. Where she says, the song is, do you know where you're going to? Do you like the things that life is showing you?

Well, but the other one that I found very potent, sometimes these things come into my mind as I'm listening to the guests and I was listening to you, I heard Marvin Gaye, he's got a famous song which was transformational in the political awareness in music of what might call soul movement, gospel and soul. His song was called What's Going On? What's going on, what's going on, we got to find a way to bring some understanding here today.

And as I've read your report, I think you and your team have said at some level, if Diana Ross is asking, "Do you know where you're going to?" You guys found a way to bring some understanding here today. And I think, like I said in my previous comment, the ability to be constructive and find credible guidance and the basis for optimism is absolutely the nourishment that we all need. My friend keep up the good work. I'm very proud to know you and I'm very much admiring all the things that you create. And in this world with the US and China and everything else in turmoil, you are creating public good for all of us. Thank you.

Chen Long: Thank you very much, Rob. Thank you.

Rob Johnson: And as I always do, I attend many of your seminars. I love the one that you did recently on elder care. And I brought some people who work in that realm as observers. I think with all of the fiscal challenges of pandemic, energy transformation and what I'll call the boom, the baby boom bulge, the aging of the population. That was a very prescient thing. I'm bringing that up along with your report today, because what you do is impressive. And I want to encourage all of my audience and my young people to keep a close watch on the Luohan Academy, because you're illuminating very important things over and over and over again.

Chen Long: Thanks so much, Rob. That's joining our efforts, it's wonderful.

Rob Johnson: Well, keep up the good work and I look forward to the next chapter that we can make as you continue to illuminate where we should be going to. Thank you.

Chen Long: Thank you.

Rob Johnson: And check out more from the Institute for New Economic Thinking at ineteconomics.org.

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Your Money and Your Life: Private Equity Blasts Ethical Boundaries of American Medicine

In a harrowing new book, scholar Laura Katz Olson pulls back the curtain on a shadowy Wall Street threat that is taking over health care companies – and preying on human lives.

Newsflash: Private equity firms– the most rapacious entities ever spawned by Wall Street -- want your body.

They’re already in your urinary tract and your fallopian tubes. In your dentist’s chair and your dermatologist’s office. Unbeknownst to you, these financiers track you from cradle to grave, lining their pockets through everything from fertility treatments to hospice care, all the while decimating the quality of services you receive and jacking up prices.

Kids, the elderly, and the poor are especially tasty targets in their break-neck hunt for profits. They’re even coming for your pets.

In her harrowing new book, Ethically Challenged: Private Equity Storms US Health Care, political scientist Laura Katz Olson documents how private equity firms are reshaping health care in the U.S., circling in to buy dentist offices, mental health facilities, autism treatment centers, rehab facilities, physician staffing services, and myriad other providers, forcing them into bare-bones, bottom-lined focused “care”.

Once upon a time, it was stores like Toys ‘R Us that learned what happens when billionaire-run PE firms fix companies in their sights. Now, the harm they do is about more than bankruptcies and lost jobs. It’s a matter of life and death.

In a nutshell, PE seeks to invest or acquire equity ownership in companies and flip them fast for a higher price. They’ll get that higher price by any means necessary – chopping staff, cutting corners, and loading the company with debt along the way. The idea is to buy, squeeze, dump, repeat. Private equity is now a major player in the health care sector, with investments accelerated in recent years at a mind-blowing pace ($100 billion in capital invested in 2018 alone).

So how do these motives and operations line up with health care? Let’s see … how would you like to send your loved one to a rehab facility where successful treatment would be considered a failure because they want the patient to come back?

As Olson documents, that’s how perverse things get. She notes that in order to gin up business, PE firms taking over rehab centers will resort to a tactic known as “body brokering” – having companies pay intermediaries to lure patients in by trolling on social media, hanging out at 12-step meetings, and spinning fancy marketing campaigns. If the (often unscientific) treatments don’t work, score one for private equity! Owners aren’t liable for ineffective treatments, Olson points out, “so when patients relapse they can charge them another round.” Meanwhile, they abuse eligibility for federal payments, soaking up taxpayer funds meant to fight human tragedies like the opioid scourge.

Some of the worst players in this frightening game of human health roulette have likely already set up shop in your town. Bain Capital (hi, Mitt Romney!) swoops in on renal care, home health care, substance abuse, emergency medical transport, and hospitals. The Carlyle Group goes for dentistry, home health care, hospice, and eating disorders. KKR, one of the biggest players in the health care industry, targets physician staffing, emergency medical transport, dentistry, home health care, substance abuse, autism disorders, health information, and hospitals.

As usual, it all goes back to the 1980s, when financialization took hold of the American economy. Olson observes that private equity has been growing ever since, boosted by lax regulation and preferential tax treatment. Politicians and regulators grease the wheels of the gravy train in hopes of hopping aboard the minute they leave office. Private equity often gushes campaign contributions, and both parties enjoy the largesse. Never mind that PE bilks taxpayers through Medicare and Medicaid, making medical bills more burdensome and patients sicker.

“PE firms take over businesses using other people’s money; plunder what they can, and spit out the remains,” writes Olson. And sadly, it’s public pensions that feed the hungry beast. She notes that pension funds, along with endowments and wealthy individuals, finance the largest percentage of PE deals. This means that workers are invested in the very business model that wrecks their jobs – and now, their health.

“Private equity’s business model is neoliberalism on steroids,” declares Olson. It’s the profit motive over everything – most assuredly over human life. And there’s hardly a whiff of accountability: “private equity lives in a darkly curtained world, protected from external scrutiny,” she writes.

It's like the black hole of capitalism, into which every positive human value vanishes into oblivion.

This is real. This is happening. And as Olson warns, it’s just getting started.

The Institute for New Economic Thinking (INET) has focused on the alarming trend of private equity buying health care providers and taking them private through research by Eileen Appelbaum and Rosemary Batt, and detailed the encroachment of private equity into emergency rooms in a series of articles over the pandemic. INET’s Thomas Ferguson and colleagues Paul Jorgensen and Jie Chen have also focused attention on private equity’s political contributions. Now, Laura Katz Olson shares her perspective with INET on how we got to this dangerous place and what we can do to get out of it.

Lynn Parramore: We all remember Mitt Romney telling us during his presidential campaign that private equity firms like Bain Capital are good for society, saving failing companies and creating jobs. What didn’t Mitt tell us? How is the public perception skewed?

Laura Katz Olson: There are a few private equity firms that specialize in buying distressed firms -- sometimes they buy businesses decimated by other PE firms just to milk what’s left. But in reality, most of them buy up flourishing companies. The results usually aren’t very good for society.

LP: How do they make money buying well-functioning companies?

LKO: The first way is to put high debt on the company and have the company pay it off. PE firms generally aren’t putting in more than 2% in equity themselves. Maybe 28% or so comes from their limited partners, like public pension funds. When the PE firm sells the company, the debt has been paid off by the company but the PE firm gets 20% of the money, having put very little in.

The second way is to charge the company all kinds of enormous fees – transaction fees, monitoring fees, annual management fees, consulting fees, advisory fees, servicing fees. The PE firms siphon a great deal of money in fees both from the company and from their limited partners, like the pensions.

The third way, becoming more popular recently, is to take special dividends called “dividend recaps.” The company has to take on even more debt to pay these dividend recaps. The PE firms share a little bit of the money with limited partners but they pocket most of it. And it’s a lot of money – PE took in $58 billion this way in 2021.

Just think about all this debt and all this money going into the PE firm’s pockets! The company is stuck paying off the debt, so it has to increase the cash flow any way it can. It all makes me think of that old medical practice of bloodletting. PE just drains the company and weakens it, at times driving it into bankruptcy.

Private equity firms used to take huge conglomerates and tear them apart to sell off the parts because the parts were worth far more than the whole. Today what they do is the opposite – they take a small piece that’s well-functioning, like a flourishing dental practice, and they add more and more dental practices to it -- consolidating. They’re especially interested in niches that are not consolidated. After they consolidate for three or four years, they sell it in a secondary LBO [leveraged buyout], and after that, they’re selling it to a third, on and on.

LP: It seems like a neat trick to extract so much money from a company and at the same time build its market worth for resale. How do they manage it?

LKO: Consolidating is one of the main ways they do it now. Instead of the parts being worth more than the whole, the sum is worth more than the parts. They put all this debt on the company and then squeeze it. When you’re talking about services like home care or hospice care, it’s the front-line staff that will get squeezed. They cut the workforce, so you have fewer workers per patient. You lower the qualifications for the staff so you can get cheaper labor. You have fewer physicians because they’re expensive. You have less training and supervision. You overbook – you get a kind of production line going. For products, you use cheaper materials. You skimp on medical supplies, etc.

In the case of dermatology, we’ve seen unnecessary treatments being pushed, as well as untrained people who may not know, for example, how to spot cancer. Dentistry has had an especially egregious history -- and some companies known for abuses, like the chain Aspen Dental, are still around. It’s incredible.

LP: Private equity firms like to claim that they are maximizing efficiency and controlling costs, but it looks like what they’re really doing is pushing shoddy services and products at higher prices.

LKO: That’s right.

LP: What happens to patients when they get into the hands of a health care provider under pressure from private equity? What else can go wrong beyond getting poorly trained staff?

LKO: Well, you have to worry about getting lured into procedures you don’t need. I’ve heard of dental offices where children were put in straight jackets and teeth were pulled that didn’t need to be pulled. Elderly people have been given unnecessary dental work. I’m particularly offended by what goes on in hospice care. You have people dying and Medicare is paying for them to have a dignified, quiet death. Instead, they are neglected as these PE firms are profiteering. Children with autism are being harmed, too. Autism is an easy target for profiteering because there’s a shortage of practitioners and you’re free to do whatever treatment you want and call it standard treatment. There’s so much that goes wrong. These are just a few examples.

LP: As you’re pointing out, children and the elderly are especially vulnerable to the harm done by the intrusion of private equity into medicine. How are the poor affected?

LKO: If you go through all of these areas of health care, Medicaid is paying a significant percentage. The poor are very vulnerable. Minorities are also vulnerable.

LP: And the taxpayers?

LKO: Taxpayers get hit hard by the Medicare and Medicaid costs. Medicaid is the second-largest item on every state budget and around the fifth largest item on the federal budget. Medicare, for example, is the major payer for hospice services.

LP: How is this allowed to go on? Why isn’t anybody in government doing anything about it?

LKO: I would have to argue – I’m trying to think how to put it – this is not a partisan issue. The Democrats and the Republicans both take advantage of it. They go back and forth between private equity and top government positions, like secretaries of defense and secretaries of state. It’s so lucrative. Even presidents. George H.W. Bush was involved—he went to a private equity firm.

LP: We’re talking about big money here, as you say. In your book, you mention that the heads of the six main listed PE firms are among the topmost earners in the U.S. right now.

LKO. It's very big money. A significant percentage of our billionaires now come from private equity. They make far more money than investment bankers.

LP: Let’s talk about how this money is working its way through the political system. What most concerns you?

LKO: You have the lobbying and the campaign donations, of course. But the larger issue in my view is the revolving door. If government officials come down hard on private equity, that would preclude them from joining the PE firms when they leave the Biden administration, for example. It just keeps anybody from being interested in this, with a few exceptions like Elizabeth Warren. Such a lack of interest!

One thing that has to be looked at is how the public pension funds are invested in private equity. That is steadily increasing, and it means that PE is getting more and more money. They are now going to appeal to retail so that the general public can put in money. And the more money they get, the more they have to spend, and the more health care facilities and practices they buy.

LP: So this problem is metastasizing as we speak, to use a term from medicine.

LKO: Yes. That’s a good word.

LP: How does a regular person know if private equity has gotten involved in their health care? Are there any telltale signs?

LKO: You have to ask. It’s difficult to know. Many of these chains have separate names for each of their businesses so they are hard to identify. Often I’ve noticed that the facilities have nice, shiny nice buildings, like the rehab centers, for example. They’re gorgeous.

LP: Let’s talk about this involvement of private equity in rehab and mental health facilities. It seems that PE contributes to the distress in our society – and then turns right around and profits from that distress. How are patients faring in these facilities?

LKO: Not very well. Look at the rehab facilities – one thing they tend to have in common is that people who have alcohol or drug problems usually have other issues, too. But the facilities taken over by PE tend not to have other kinds of specialists. They focus on one thing and don’t look at the co-existing issues. The staff tends to be less trained. It’s all the things we’ve talked about. They use techniques and treatments without scientific backing. One of the techniques is using horses. Look, horses are wonderful. I love horses. But there’s no proof that horse therapy can treat drug or alcohol abuse!

LP: Sounds like there’s not much oversight on the efficacy of treatments.

LKO: It’s a problem with private equity in general. They tend to pick areas that have very little oversight.

LP: Private equity is even getting into pet care, as I understand it.

LKO: I haven’t studied it specifically, but I belong to groups and I see things coming in about pet facilities that are very concerning. PetSmart, for example, is reported to have some serious issues. Animals are reportedly being killed and abused.

LP: Is there any case that you’ve seen in which private equity makes medicine better?

LKO: No, I haven’t. Private equity argues that one of the best things they do is make more services available in scarce markets. Well, certainly they do make more services available, as in the case of autism services. But is it better to have more low-quality services than none at all? Experts will tell you that low-quality autism services are pretty damaging to the child.

LP: Does private equity belong in medicine at all? Should it be banned?

LKO: This is something I didn’t put in my book, but the conclusion I have come to is yes, we have to ban it. We really need to prohibit, I think, the corporate practice of medicine, period. If you look at the private equity playbook, its only goal is to make outsized profits – they can’t make ordinary profits. If they make ordinary, respectable profits, their investors will go somewhere else because of the risk.

Private equity doesn’t care whether the product is Roto-Rooter or hospice. That’s one of the major differences between PE and a regular company, which may care about the community, the reputation of the company, and the quality of the product. They want to keep their customers. They care about the future. But private equity doesn’t work like that. Because private equity often aims to sell a company after four or five months, they don’t care about the future. They don’t care about the product at all. Private equity is antithetical to our health care system.

So yes, we need to ban private equity from health care. But given that it’s not going to happen, I would say that we need to prohibit the corporate practice of medicine – anybody can make a case for that. You can eliminate their tax advantages. You can limit the debt imposed on companies, especially in the health sector. You could easily control consolidation and monopolies in the health sector. You could use specific anti-trust laws. I would definitely forbid investment by retail customers such as their 401(k)s. I would forbid non-disclosure and non-disparagement agreements, which make it so difficult to obtain information. I had such a hard time interviewing people. When I could get people to talk to me – and that was really hard -- they were extraordinarily careful. I would also prohibit “stealth branding” – where the PE firm buys a chain, like a dental chain, but gives each office its own name, like Marilyn’s Happy Dental Care. It’s very deceptive.

LP: It’s interesting that PE players and firms don’t tend to be household names. They’ve really managed to fly under the radar. Can you mention a few that came up a lot in your research? Folks to look out for?

LKO: Bain Capital, the PE company that Mitt Romney still profits from, is one. The Carlyle Group has really been involved in recruiting high-ranking people from the government – one of its co-founders, David Rubenstein, served as Deputy Assistant to the President for Domestic Policy during the Carter administration. George H.W. Bush became a senior member of its Asia advisory, and so on. KKR, of course, is one of the biggest. They control a lot in health care.

I’m concerned that as PE gets more and more money – with these pension funds, and especially if they get their hands into the 401(k)s – they’re just going to keep buying up anything and everything. And it’s not just health care. More and more of these firms are appearing and getting into more and more industries. As young people, or even older people involved in the well-established financial firms, realize how much money is involved, they just start a PE firm. Look at Jared Kushner [Affinity Partners]. It’s a very worrisome situation.

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