The Economics of Fake News

I see that Paul Krugman is talking about the consequences of Fake News so I will enter this market and supply some thoughts.  I will define fake news as stories that are "juicy" but not true.  Think of headlines such as "Elvis is Alive".  This is an old example of fake news.   Throughout this post, I will assume that there is an objective reality (so, I will get a C in some philosophy class).  

There are four cases to consider.

Case #1:  Both the supplier and demander know that the story is false.    Think of the National Enquirer stories stating that Elvis is on Mars.

Case #2:  The supplier knows the story is false but the demander believes the story is true.

Case #3:  The supplier believes the story is true and the demander believes the story is true.

Case #4:   The supplier believes the story is true and the demander believes the story is false.

"Fake News" has no social consequences in cases #1 or case #4.   Case #3 will feature no strategic element.  This is just Tiebout sorting in ideological space.  For example, climate change deniers say the world isn't warming and climate deniers go to this website and read this and the echo continues.

I believe that Dr. K is mainly concerned with Case #2.  What % of all suspect stories fall into this category?  Dr. K has a cynical model in mind in which sophisticated agents (think of Trump and Putin) manipulate the gullible public with messages and then the Facebook and Internet accelerate this information throughout the system as it infects billions and influences real events.

Case #2 raises some deep issues, I will state them as questions;

1.  What is it about the demanders that they don't recognize the "fake news" when they read it?  Are they dumb?  Are they eager to see stories that confirm their prior worldview?   What is the source of this heterogeneity parameter related to their "susceptibility" to be infected?

2.  In public health, we quarantine those who may spread contagion.  Is Dr. K. calling for a messaging quarantine of the "susceptible people" or is he proposing ending free speech for those who spread the contagion?

3.   If there is objective reality, do those who are susceptible to "fake news" update their beliefs as this reality changes over time?

4.   In a world featuring heterogeneous news consumers, and profit maximizing news sellers  what are pareto improving government interventions?   When I taught at the Fletcher School, one student suggested that there should be a constitutional amendment requiring people to watch the PBS News Hour each night.

5.   In a world featuring heterogeneous news consumers, and Russian propagandist news suppliers,  what are pareto improving government interventions for the nations that Russia is targeting with this news?  So, the U.S is fighting a war on terror ---- will we now open up a "second front" as we start a "war on foreign propaganda"?

6.  Why has "fake news" become an issue now?  What is it about 2016?   Has Facebook made communication "too cheap"?   Has Russia recognized this opportunity and increased its supply of fake news?  In the old days, Pravda was filled with such news.

7.  Can prices be too low?  Is Internet communication too easy? In our a "contagion" economy, the answer is yes. We may want some firewalls around some activity.  For example, in international finance -- a Tobin Tax will reduce the likelihood of runs on LDCs banks because it is more costly to pull money from a LDC.

DIRECT Quote from WIKIPEDIA

"In 2001, in another context, just after "the nineties' crises in Mexico, Southeast Asia and Russia,"^[3] which included the 1994 economic crisis in Mexico, the 1997 Asian Financial Crisis, and the 1998 Russian financial crisis, Tobin summarized his idea:

The tax on foreign exchange transactions was devised to cushion exchange rate fluctuations. The idea is very simple: at each exchange of a currency into another a small tax would be levied - let's say, 0.5% of the volume of the transaction. This dissuades speculators as many investors invest their money in foreign exchange on a very short-term basis. If this money is suddenly withdrawn, countries have to drastically increase interest rates for their currency to still be attractive. But high interest is often disastrous for a national economy, as the nineties' crises in Mexico, Southeast Asia and Russia have proven. My tax would return some margin of manoeuvre to issuing banks in small countries and would be a measure of opposition to the dictate of the financial markets.^{[4][5][6][7][8]}

8.   Are voters too "close to the margin"?  If voters never change their votes then "fake news" has no effects on democracy.  If voters are whimsical and subject to "shocks" then those who can supply these shocks have increased influence on our democracy.  In this piece , The Guardian focuses on how news influences elections but this raises a deep issue of choice.  Which voters are influenced by such news?  In aggregate, do these voters "cancel out"?     Does "fake news" increase the participation rate in an election or does it flip votes?  Whose votes?   Political science may be increasingly relevant if this group of scholars can demonstrate that they can model individual voter behavior.

Scholars should return to the Murphy and Shleifer 2004 paper.

ABSTRACT We present a model of the creation of social networks, such as political parties, trade unions, religious coalitions, or political action committees, through discussion and mutual persuasion among their members. The key idea is that people are influenced by those inside their network, but not by those outside. Once created, networks can be “rented out” to politicians who seek votes and support for their initiatives and ideas, which may have little to do with network members' core beliefs. In this framework, political competition does not lead to convergence of party platforms to the views of the median voter. Rather, parties separate their messages and try to isolate their members to prevent personal influence from those in the opposition.