This Agency Might Wreck Internet Economics

By Jeffrey A. Tucker

The Department of Housing and Urban Development has filed civil charges against Facebook for allowing advertising to target some groups and exclude others, on grounds that this violates fair housing laws that mandate equal access. The prosecutor is none other than Ben Carson, appointed by President Trump to head the agency. “Using a computer to limit a person’s housing choices,” he said in a statement, “can be just as discriminatory as slamming a door in someone’s face.”

There are many problems with the thinking behind the legal action. If interpreted broadly enough, it is a direct attack on the entire economic engine of Facebook. You know how it works if you have ever advertised on the Internet. You pay to play, and playing means reach. You necessarily must discriminate on some grounds based on the pricing formula. It makes sense that you would target the people most likely to purchase your product.

For advertisers, this has been a massive improvement over the old way of advertising. You put up a billboard. You ran a TV ad. You took out an ad in the newspaper. There was very little chance to target buyers based on their interests. Nor was there much in the way of feedback. You had very little idea who saw the ad much less whether and to what extent buyers were influenced by what you did.

The Internet changed that and thus eliminated vast waste in the advertising sector. Nothing is perfect, but now there are technical ways to much more precisely determine who sees your ad and what they do in response to it. This allows for a constant tweaking of the content and reach. You can catch waste and work the system to limit it as much as possible. This is the reason why advertisers have been so drawn to the Internet.

The Economic Viability of the Internet

Back in the late 1990s and 2000s, a major question emerged as to how companies on the Web could or would make money. Your product mostly had to be offered for free else people wouldn’t look at it. Early attempts at paid sites didn’t produce much in the way of an economically viable product. As time went on, much later, some strategies emerged that have made paid content work, but this took some ingenious work on the part of programmers to figure out how to incentivize customers.

In the meantime, there was advertising. The insight was most fully realized by Google in the space. The point was to delineate the difference between what is scarce and what is not scarce. The search function would provide the non-scarce good that would be distributed for free. Consumers would come to love it. Then the non-scarce space would become the geography of the screen itself. You could pay for ads on the side bar and even pay to be very high in the search rankings and this was noted by a small mention next to the item.

This was brilliant because it indicated a way out of the great problem of this period of trying to figure out how to turn a website service into a business. This model came to dominate the app economy, social media, and everything else. The crucial element here is that the advertiser pays for reach and can determine the demographics of the reach based on an assessment concerning who is most likely to buy. Reaching everyone equally would be impossible because screen space is a scarce good. Like any scarce good, it would be allocated by price.

Facebook mastered this best because the entire platform specializes in gathering demographic data. This became the perfect match between a website, advertisers, and economic viability.

Good, Bad, and Correctable

To be sure, no one wants to live in a world in which advertisers can use invidious grounds for discrimination. On the other hand, it can be difficult to discern the difference between good and bad intentions behind targeting advertising. If you have a nonprofit retirement home set up for Methodists or Catholics or nonbelievers, this is providing a service to particular groups. On the other hand, a housing development set up for a single racial group would be problematic under the law, and regulations would likely prevent that.

Permitting a fully laissez-faire system is not lacking in humanitarian concern because of the hyper-competitive environment of the entire sector. If your ad excludes potential buyers, that becomes a fabulous opportunity for another advertiser to sweep in and clean up. In this way, everyone is rewarded for finding the best possible market for goods and services, and leaving no sector unserved.

Facebook has been working to make its advertising policies consistent with the law, but there is a problem that the list of protected groups is long and ever growing; what’s more, HUD seems to believe that there are certain proxies for protected groups that should also be disallowed. For example, the lawsuit accuses Facebook of permitting advertisers to exclude people who are parents. And yet one can think of many services that might rationally want to exclude parents, for example a condo in Florida pushed for use at Spring Break. Such cases are potentially infinite.

Take the case of gender targeting, for example. Obviously advertisers want to push certain products to men and certain products to women, exactly the same as when an advertiser chooses to push an ad in Cosmopolitan vs. Car and Driver. No one thinks there is anything wrong with this. It seems strange that something would be prohibited on the Internet that is not even an issue in print advertising.

What’s more troubling is the ideal that the HUD lawsuit seems to be pushing: equal access to every ad by everyone. Simply put, this is impossible because of the reality of scarcity. Mandating this would absolutely blow up the economic model that makes the Internet work at all.

Social media companies like Facebook obviously want to comply with the law, but they would also like to stay in business. That business depends fundamentally on targeting based on some demographic grounds. If a consistent application of non-discrimination law means that advertising has to become completely random to be compliant, Internet economics will experience the fate of countless public housing units in the past: it will be completely demolished.

Jeffrey A. Tucker is Editorial Director for the American Institute for Economic Research. He is the author of many thousands of articles in the scholarly and popular press and eight books in 5 languages. He speaks widely on topics of economics, technology, social philosophy, and culture. He is available for speaking and interviews via his emailTw | FB | LinkedIn 


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