But commodification does more than allow buyers and sellers to transact more freely. It also gives rise to a set of incentives that can cause such marketplaces—under the right circumstances—to inherit some of the pathologies observed in financial markets over the past few decades. Now that it has adopted the form of these other marketplaces, a key question becomes whether online advertising, too, will face some of the same structural vulnerabilities.Crisis on the Way?
In 2005, the economist Raghuram Rajan presented a paper at a private gathering of central bankers and economists in Jackson Hole, Wyoming. The paper was titled “Has Financial Development Made the World Riskier?”45 Rajan made the prescient argument that certain changes in global finance—while producing a wide range of benefits—had also created perverse incentives that posed systemic risks to the integrity of the financial sector. At the time, this paper was derided by the former U.S. Treasury secretary Lawrence Summers as fundamentally unsound.46 In hindsight, Rajan’s diagnosis correctly identified many of the factors that produced the global financial crisis just a few years later.
Reading Rajan’s paper more than a decade after the 2008 mortgage crisis, I find striking similarities between the transition that has taken place in the world of online advertising and the transition that took place in the financial markets during the 2000s. For example, Rajan describes a shift from transactions “embedded in a long-term relationship between a client and a financial institution” to transactions “conducted at arm’s length in a market.” He characterizes this shift as a “process of ‘commodification’ of financial transactions” driven by a combination of technological, regulatory, and institutional change.47 For Rajan, this introduces a series of potentially risky incentives into the system, even as it spreads risk and expands participation in the financial markets.
Online advertising, too, has become increasingly commodified and “at arm’s length” in its design. By and large, long-term relationships do not characterize the transactions that take place in the real-time bidding systems for allocating advertising inventory. Programmatic advertising goes on without either party knowing much about the other or having to interact person-to-person at all. Indeed, the goal of dominant players like Facebook and Google is to make buying attention on their platforms as “self-serve” and automated as possible. As in the financial markets, commodification has led to a massive increase in the size and interconnectedness of advertising markets and has allowed a much broader set of actors to participate.
These rough parallels between advertising and finance invite deeper exploration. Like Rajan, we might ask a simple question: Has the development of online advertising made the world riskier? Are the unhealthy dynamics produced by commodification in the 2008 financial markets mirrored in online advertising markets? Perhaps most important, can we use the history of the financial markets as a guide to the future development of the internet’s economy?
To be sure, there are substantive differences between financial markets and advertising. Advertising markets involve bidding over the right to show something to someone. Advertising is consumed at the point it is acquired, and its value is based on whether it shapes behavior in some way. That might be as concrete as persuading someone to make a purchase, or as abstract as improving someone’s opinion of the brand being promoted. In contrast, stocks are bought and sold, and profit is derived from the difference in value between markets or over time. Buyers of advertising inventory generally do not “hold” ad space to sell at a higher value later (though attempts are being made to introduce these types of transactions in the marketplace).48
However, the mechanisms of a market crisis do not depend on these differences. As the economists Carmen Reinhart and Kenneth Rogoff write, “Financial crises follow a rhythm of boom and bust through the ages. Countries, institutions, and financial instruments may change across time, but human nature does not.”49 Reinhart and Rogoff catalog an entire bestiary of different financial crises, from governments defaulting on their debt to faltering promises to maintain an exchange rate. The specific kind of asset does not matter; a market crisis is ultimately a crisis of confidence.
A number of factors are handmaidens to the emergence of a full-blown market crisis. Market opacity plays a fundamental role. The inability to see what is actually happening within a marketplace allows doubt and panic about the value of an asset to set in. In the 2008 crisis, financial innovation in the form of collateralized debt obligations and complex options pricing algorithms prevented the players from having a clear idea of what was going on.50 Past financial crises in markets around the world have shown that opaque government balance sheets and finances can also trigger doubt that escalates into panic.51
Opacity allows the value of the thing being bought and sold to deteriorate in secret, without anyone knowing. In the subprime crisis of 2007–2008, packages of shoddy mortgages that were nearly certain to default at unexpectedly high rates were increasingly circulating in the marketplace. Opacity allowed these toxic assets to trade at prices far above what they were actually worth.
Opacity isn’t dangerous only because it can cause errors in valuation. It also allows the active inflation of a market despite the fundamental shakiness of the thing being bought and sold. This sometimes results from irrational levels of market confidence, a regular feature of financial crises going back hundreds of years. Reinhart and Rogoff refer to the “this time is different” syndrome, in which “financial professionals and, all too often, government leaders explain that we are doing things better than before, we are smarter, and we have learned from past mistakes.”52
But market inflation can also result from deliberate recklessness. Perverse incentives can emerge in a market, encouraging players to continue pushing the bright horizons for a marketplace despite knowing that major structural problems exist. Later reporting about the mortgage crisis illustrates the extent
