The Importance Of Zero In Destroying The Scarcity Myth Of Economics
from the let's-go-back-to-basic-math dept
A couple weeks ago, I wrote about all the well-deserved attention being placed on the idea of the economics of abundance. The discussion around that topic, both in the comments and in a series of emails has been quite interesting. Not everyone agrees with the concept, and that presents something of a challenge. It always interests me to figure out what the points of disagreement are in various intellectual debates. Larry Lessig recently quoted Al Gore in talking about the importance of "removing blocks." Basically, the idea is that, when people disagree with you, look closely at the points on which they disagree, and try to figure out why that disagreement is occurring. You can often learn some very interesting things, while challenging your own opinion on things. I am planning a series of posts on this topic, to see if we might be able to clear out the blocks concerning the economics of digital content. To start it off, I'm going to recap the talk (and the reasoning behind it) I gave back in April.
When Jim Harper of the Cato Institute kindly invited me to be on a panel discussion about copyrights at Cato in their Washington DC office, I had a lot of trouble figuring out what I was going to talk about. I had been spending a lot of time trying to understand why there was such a split among folks who prided themselves on having a "free market" or libertarian view of the world -- but who seemed to completely disagree on the economics of content. It bothered me that people who started with the same fundamental toolbox ("the free market is good") would end up at such widely divergent views. On the one side were folks like the Progress & Freedom Foundation, who felt that strong intellectual property laws (including things like stronger protections of DRM) were necessary to build an economy around content. On the other, were folks like myself, Tim Lee and David Levine, who saw that these intellectual property laws were basically government granted monopolies that could hold back economic progress.
As I mentioned in my recap to the panel discussion, I had my "Eureka!" moment on the airplane to DC. While I'd been reading through a bunch of text books on the economics of intellectual property, the history of intellectual property and the history of economics -- none seemed to answer the question of where the breakdown occurred. So I gave it all up, and decided to reread a book I'd picked up at a used book sale a few years back, called "Zero: The Biography of a Dangerous Idea" which is a fascinating history of the number zero -- and the fact that not only did it take societies ages to even recognize the number zero, it was considered heretical in some areas for a while. Zero caused all sorts of problems in that it didn't work like other numbers. It isn't a number. It's the absence of a number, and that screws up a lot of things. For thousands of years, it held back progress. You can't have advanced math or physics without an understanding of zero -- and the difficulty in accepting it was a real problem.
Of course, for all of us who learned about zero in elementary school, this seems laughable. How could zero be such a difficult concept to understand? Except, as I read the book, it occurred to me that it's the exact same problem that was causing this breakdown in the discussion. It's incredibly easy to misunderstand zero in economics. That's because economics, we're often taught, is the "science of scarcity" or understanding resource allocation in the presence of scarcity. All too often, economics itself is defined by scarcity. The "zero" changes all of that. Plugging a zero into an equation that expects a non-zero sends it haywire (think of what happens when you divide by zero) -- and that leads people to think that the equation must be broken. So, for example, basic economics tells you that a free market will push prices towards their marginal costs. If their marginal costs are zero (as is the case with digital goods and intellectual property), then it says that price will get pushed towards zero. However, this makes people upset, and makes them suggest the model is broken when a zero is applied. They see a result where there is no scarcity, and it doesn't make sense to them since they've always understood economics in the context of scarcity.
However, the point is that if you understand the zero, there's nothing to worry about and the model works perfectly. It just requires a recognition that the scarcity doesn't exist. Instead, you have abundance. You can have as much content as you need -- and in that world, it makes perfect sense that there's no costs, because without scarcity there need not be a cost. Supply is infinite, and price is zero. That does not mean, however, that there's no business. Instead, it just means you need to flip the equation and use the zero to your advantage. Instead of thinking of it as forcing a "price" of zero, you think of it as being a "cost" of zero. Suddenly, you've lowered the cost of making something to nothing -- and you should then try to use as much of it as you can. One simple example of this is to use that item that "costs" zero as a promotional good for something that does not have a zero marginal cost. When you realize how zero factors in, you realize that there's nothing new or radical here at all. It's just coming to terms with the idea that free market economics still works in the face of zero (in fact, it thrives) and there's no reason to put in place government-sanctioned barriers to shape the market.
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scarcity
If you are right that there is a viable business in DRM-free distribution of content, what difference does it make whether the government has "strong intellectual property laws"? Even with such laws, owners of intellectual property are free to license use of their property on whatever terms they find favorable. If you're right, why won't they simply provide a blanket license to all users to take advantage of the economics of abundance (effectively opting out of whatever intellectual property protection the government would otherwise provide)?
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Re: scarcity
Even with such laws, owners of intellectual property are free to license use of their property on whatever terms they find favorable.
Unfortunately, it's not that easy. With changes to copyright law, you automatically get a copyright on any material. It's only recently, with things like Creative Commons that it's been easier to do things like distribute your content for free without copyright issues getting in the way.
So, I do agree that there is some stuff that can be done within today's IP environment -- and I absolutely encourage companies and content creators to look for ways to leverage that.
However, some areas of IP rules are much worse -- such as proposals to *require* DRM in new consumer electronics, or banning anti-circumvention techniques that can cause lots of problems for perfectly legitimate uses.
So, yes, a first step is to get content owners to recognize this -- and then the legal changes will be much easier. But that doesn't mean that current laws don't contribute to additional problems.
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missing something
Aren't you neglecting the cost of creating the content? Reproducing the content may have zero marginal cost, but creating the content does not.
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False lack of scarcity
There is no question that the efficient market has constant pressure to drive prices to the incremental costs of production. However, stating that the market price should equal to the incremental costs (in this case, effectively zero) is disingenuous and short-sighted. For many types of IP, the fixed costs are astronomical and the incidence of any return on investment very low.
Music and drugs are classic examples of this: the lion's share of the cost is in producing the first cut of the album, or getting the first pill onto the store shelves. After that, it's basically free to make and distribute more of the same. And that's the key: it's free to create more of the same. Without a market way to recoup the fixed costs, there is no incentive for capital holders to invest in new developments. They'll instead put their money into new housing developments with a good ROI, and the private funding of new innovation in music and drugs will fall to zero, unless propped up by the state.
One of the reasons America has been so successful is that we've created an environment where there is money to be made in the sectors that benefit society: technological innovation, creation of cultural works, process improvements to reduce the cost of consumer goods. This creates constant positive incentive to invest more money in those areas, and society as a whole benefits. Innovation is inherently Intellectual. Without giving it the kind of protection that we have in good IP laws, any innovation created by a well-capitalized endeavor can immediately be copied by the "generics", and the well of capital will move to tangible items (please do note the distinction between "good IP laws" and just plain "IP laws").
Scarcity will always be at the heart of economics. With the advent of digital media and digital duplication, the incremental cost per unit has ceased to overwhelm the scarcity equation. Now the scarcity is primarily in the time of the content creators and, by extension, the capital to pay them while they work. There is no embarassment of plenty; I still don't have enough time to create all of the freely-distributed works that I want.
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Marginalized
By James V. DeLong 07/29/2003
The current hysterical assault on industries that deal in intellectual property, primarily pharmaceuticals and entertainment, seems utterly baffling. These industries spew out extraordinary floods of worthy things: life-saving, life-enhancing drugs; breathtaking movies; music for every possible taste. And both are bitterly demonized, as if they cheat us by asking that money be paid in return for their wares.
Much of the demonization comes from the left, particularly academia, powered by intellectuals' habitual disdain for the market and lust for a government run by themselves. But disaffected intellectuals are always with us, and the deeper problem is that this disdain has found a lever to wield that has been created by the real culprits -- the economics profession.
This lever is a syllogism that I have now heard to the screaming point: It starts with the proposition, "Economics teaches us that in a competitive market prices equal marginal cost -- the extra costs incurred by producing an additional unit." It goes on to note that the marginal cost of an additional pill, or an additional copy of a movie or song, is close to zero. Therefore, the argument concludes triumphantly, "economics teaches us" that such products should be priced at zero. Any other condition demonstrates that undue "market power" exists, and is immoral. If one demurs to the logic, on the ground that it costs about $800 million dollars to produce the first pill, or $100 million to produce the first print of the movie and this initial investment -- not just the marginal cost of the second pill or the second print -- must be recovered from somewhere, the perpetrators of this logic usually shrug and talk about the need for new business models.
If you doubt the power of the "price should equal marginal cost" mantra, or the moral component that has been infused into it, check out speeches by officials of the Antitrust Division, such as William Kolasky, former Deputy
AG: "An economist would say that a market is perfectly competitive when firms price their output at marginal cost." Or a statement by Lawrence Summers, former Secretary of the Treasury and current President of Harvard: "[T]he most basic condition for economic efficiency [is] that price equal marginal cost." Or go look at almost any textbook, complete with diagrams.
To be fair to these two gentlemen, they immediately move on to note that of course this principle creates problems in an investment-intensive context because it does not allow for the recovery of capital cost. They have no answer for this dilemma, however, and they leave an impression that such situations are aberrational, perhaps temporary, and not a real issue, though Summers notes that this segment of the economy is growing.
The net result is to leave two misconceptions to run amok. First, that the fundamental theorem has any meaningful application outside of the classroom, and, second, that investment-heavy industries are exceptional cases when in fact they constitute almost the entire economy.
In explaining these misconceptions, it is helpful to focus on specific situations. Suppose I have a widget factory, routinely selling my widgets for $100 each. Someone comes to my factory and says "I'll give you $10 if you add one more widget to today's production run for me." I calculate that it would cost $9 in materials and labor to make the widget. Economic theory teaches that, judging solely by the optimal use of resources at that frozen moment of time, I should make the deal. If I do not, then welfare will be reduced because the buyer will not receive his utility, and the resources will either go unused or be put to an inferior use.
But this really says nothing about the price of widgets generally. Does it mean all my other widgets should have been sold for $10? No -- when I was thinking of investing in a widget factory my marginal cost calculation had to encompass the investment cost, so it was then nearer $100, not $9, whereas the theorem refers only to this precise day, even this hour. Does today's marginal cost say anything about my future prices? Not really; I need to recapture depreciation and interest, so $9 will not be enough.
So should I make the deal? Maybe. It depends on the overall effect on my business. Will my other customers find out? Will this guy pay the regular price if I refuse? How much will the competition charge? Will I lose good will from others? Do I save transaction costs by refusing to bargain, so that a special price cut will cost me more in the long run? In the real world, "price" is not just this immediate deal but its ramifications across time and space, and comes from complicated business calculations.
"Marginal cost" has a similar time dimension -- it all depends on how a long a period one is looking at and what costs one must include. The axiom "prices must equal marginal cost" does not tell you whether the relevant time dimension is a decade, a year, or an hour, which makes it into a meaningless statement. So to set up an identity between marginal cost and price, without a tight specification of the assumptions about time, or to assume that short-term marginal cost is the ticket, produces nonsense.
To drive the point home, look at real world examples.
An airliner in Chicago boarding for a trip to San Francisco has some seats empty. Just before the gate closes, a traveler offers the agent $20 to get on. The cost of the extra fuel burned is less than this, and all other costs are, as of that frozen moment in time, fixed, so the airline would indeed make money by taking the deal. But this hardly means that "economics teaches us" that $20 is the correct price in general for the Chicago-San Francisco run. It does not even teach us that the agent should make this one deal, since much depends on calculations of the effect on the overall price structure. Such as, would all passengers then wait at the gate until the last minute, when bargains would be available, and what would this mean for airline pricing and operations?
One can replay analogous scenarios in many other contexts. An automobile assembly line that is running at less than full capacity. A customer entering a stationery store to buy a pen that is priced at $2.00 when it cost about 20 cents to make. Telecommunications services -- the marginal cost of sending a bit around the world a dozen times is close to zero.
In fact, reverse the question. Try to think of an industry in modern America in which marginal cost pricing is workable, in which it would actually promote long-term efficiency. Further, since the dynamic long term is necessarily the sum of the static short-terms, the common distinction between short term "static efficiency" and long-term "dynamic efficiency" does not work either, except under particular limited assumptions wherein the economy is composed of end-of-season or going-out-of-business sales. In the real industrial world, marginal cost is simply the lower bound on price, not the ideal. A company will sometimes sell at this level, but its overall price level must be sufficient to cover every cost, and to conceive of marginal cost pricing as the ideal is demented.
This tension between marginal cost theory and the real world has always caused discomfort. Generations of antitrust lawyers have regarded themselves as the guardians of marginal cost pricing, and view real world departures from it as temporary aberrations in need of correction. This results in blackly humorous interactions between them and businessmen who know, inarticulately, that the standard is impossible to meet, but must pretend to be with the program. They cannot confess that they actually spend all their time scheming how to acquire market power so they will not get caught in the death spiral of marginal cost pricing.
The tension has been tolerable as long as companies could find roads to market power that eluded the technicalities of antitrust doctrine and the attention of a tabloid-ized press. Primarily, heavy investment costs create barriers to entry which, combined with a knowledge of game theory and some conscious parallelism, allow industrial America to function.
But the IP industries have been stripped of this protection. The heavy costs in the pharmaceutical business are in the initial research and the regulatory costs, not is setting up a plant to stamp out pills. The entertainment industry is beleaguered by the new reality that duplicating and transmitting bits takes no capital investment, once the basic computer and telecom networks are in place, so the cost barrier has vanished completely.
Both these industries have been reduced to relying on the protections of the legal system, which means the political system, and that is creating a problem, because the marginal cost mantra has undermined their moral position. People really do feel outraged at the idea of full cost pricing.
It is time for the economists to stop misleading a gullible public. They cannot claim ignorance. Their predecessors of the late 19th and early 20th centuries were skeptical of the Sherman Act and subsequent antitrust laws precisely because of the difficulties of accounting for fixed costs in competitive analysis. Ronald Coase wrote on "The Marginal Cost Controversy" in 1946, in an essay incorporated into The Firm, The Market, and The Law. Professor George Bittlingmayer of Kansas has examined the instabilities in pricing created by fixed costs, using core theory, a concept developed by Professor Lester Telser of the University of Chicago. Holman Jenkins, Wall Street Journal columnist, gets into the issue from time to time.
But in the context of pharmaceuticals and intellectual property, the concern is over the moral impact, not the long-term economics. The current situation, wherein sectors of the economy that are both vital and incredibly productive are systematically delegitimized by moral opprobrium, is not tolerable. It is demonstrating the dark side of Lord Keynes famous
dictum:
[T]he ideas of economists and political philosophers, both when they are
right and when they are wrong, are more powerful than is commonly
understood. . . . . Practical men, who believe themselves to be quite
exempt from any intellectual influences, are usually the slaves of some
defunct economist. Madmen in authority, who hear voices in the air, are
distilling their frenzy from some academic scribbler of a few years
back.
The academic scribblers need to scribble some new ideas.
The author is Senior Fellow & Director, Center for the Study of Digital Property, Progress & Freedom Foundation, Washington, D.C. Mr. DeLong is an attorney. His ideas are his own, and do not necessarily represent those of PFF.
Copyright © 2003 Tech Central Station 2003 Tech Central Station Tech Central Station - www.techcentralstation.com
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Re: missing something
Aren't you neglecting the cost of creating the content? Reproducing the content may have zero marginal cost, but creating the content does not.
That's a fixed cost. It's a cost, absolutely, but once the content is created the marginal cost is still zero.
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your almost there
Funny how cyclic economic trends seem to be.
I did doctoral research 10 years ago on what happens when marginal costs of goods get's close to zero (in my case, I was studying the cost of distributing the netscape browser).
I came to the same conclusion. as marginal costs gets close to zero, the price will also drive toward zero.
what was missed however, is the premium on end users time - individuals have to deal with the scarcity of time, which forces them to make decisions on which content to spend their time with, or which freeware applications to invest one's time to learn and train on.
what is interesting is as scarcity economics starts to fade, network economics starts to take hold. The very best free products will take the lion's share of users attention, which has tremendous value for different economic models.
The irony of all of this is it isn't new.Traditional broadcast television lived off of a free to user model for decades, and end users were traditionally faced with the limits of their own time as to which show to watch.
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Re: False lack of scarcity
Music and drugs are classic examples of this: the lion's share of the cost is in producing the first cut of the album, or getting the first pill onto the store shelves.
Yes, and that's a fixed, not marginal cost.
After that, it's basically free to make and distribute more of the same. And that's the key: it's free to create more of the same. Without a market way to recoup the fixed costs, there is no incentive for capital holders to invest in new developments.
The point is that there absolutely still are ways to make money -- in fact even more money.
They'll instead put their money into new housing developments with a good ROI, and the private funding of new innovation in music and drugs will fall to zero, unless propped up by the state
This is provably false -- especially in the pharma industry. Specifically many countries did not allow patenting of pharmaceuticals until very recently. Look at the history of the Italian pharma market, for example. Until 1978, you couldn't get patents on pharma, but the industry was thriving, one of the largest in the world. After the law changed to allow patents, the industry pretty much dried up in Italy, and the amount of research and development in the space went away.
Without giving it the kind of protection that we have in good IP laws, any innovation created by a well-capitalized endeavor can immediately be copied by the "generics", and the well of capital will move to tangible items (please do note the distinction between "good IP laws" and just plain "IP laws").
You are giving the IP laws way too much credit. And, you make the very false assumption that "generics" immediately replace the market for originals. You also leave out the side effects of using these things as promotional materials that allow for much bigger markets where even more money is available.
Scarcity will always be at the heart of economics. With the advent of digital media and digital duplication, the incremental cost per unit has ceased to overwhelm the scarcity equation.
Scarcity is always at the heart of selling -- not necessarily of economics.
Now the scarcity is primarily in the time of the content creators and, by extension, the capital to pay them while they work.
That's a fixed cost.
There is no embarassment of plenty; I still don't have enough time to create all of the freely-distributed works that I want.
EXACTLY! But, that's a good thing. There's money to made in paying people to create new works of content. That's got value, because that is scarce. But the point is once the content is created, it's abundant and will be priced accordingly.
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Re: your almost there
what was missed however, is the premium on end users time - individuals have to deal with the scarcity of time, which forces them to make decisions on which content to spend their time with, or which freeware applications to invest one's time to learn and train on.
I don't think that's missed, I think that's the whole point (which was part of the point of my next post in this series). You use the non-scarce good to focus on a problem that *IS* scarce: and one very good one is people's time!
That's the opportunity.
The irony of all of this is it isn't new.Traditional broadcast television lived off of a free to user model for decades, and end users were traditionally faced with the limits of their own time as to which show to watch.
Indeed, and it's an important point. None of this is radical. It's just recognizing that it still applies.
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Excellent
Excellent post and discussion... very enjoyable, and I'm very much looking forward to the next installment.
Scarcity is always at the heart of selling -- not necessarily of economics.
I agree. I don't think any single concept defines a "heart" of economics, but if I had to pick one concept as slightly dominant, I'd say Economics is the science of incentives.
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Something for nothing
By mathematical convention, zero raised to the zero power is 1.
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Excellent discussion.
Bravo and thank you to Mike and all the posters.
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I think the disconnect comes from the blind acceptance of the notion that creators ought to control what they create. SHOULD THEY?
Two reasons why:
1. If they don't, then they will have no incentive to produce [this is false. there is, unquestionably, still incentive to produce. art predates economy]
2. why shouldn't they? I control a basket I weave. why not a song? But only a moment's reflection reveals that we intrinsically support your right to command your basket because if someone else does then you are probably left basketless. If anyone should have your basket, it is you. But everyone can have your song without you lacking anything.
A naive person is inclined to ignore these objections and insist that, well, regardless, it is unfair for me to have no say over the ideas I create. I confess such an impulse in myself, but--it is tempered by a solemn realization that there is no mechanism whereby society can guarantee protection over the ideas I create. Nor even can society define the bounds of my idea or the bounds of my control over it. A basket is not an idea.
You can't control the ideas you create, and nobody can help you. We will forgive you if your ideas incite individuals to crime or violence or antisocial behavior. And if you please, forgive us if your words infuse us with passion, awe, and wisdom.. and we are too flawed to recall our decent obligation to reward those who bring us joy. Forgive us especially as our current system has set us up as mutually distrusting antagonists.
I hope I do not presume too much when I absolve you of responsibility for your ideas. I thought this was one of the most brilliant inventions of our civilization. But this road runs both ways.
We subsidize you guys. We create the food you eat and the cars you drive and the power that lights your studio and the tools you use. Whether through the old system of patrons of the arts or the new system of economic activity, we are subsidizing you. You take scarce resources, of which this earth will one day be exhausted, and in return give us mostly fleeting ideas which will almost certainly grow worthless over time as the connection to the environment in which they were created changes and is eventually left behind. Those that are not fleeting are so profound that they are absorbed into our civilization in a way that I will not apologize for. You are repaid thousandfold for these ideas. We subsidize you guys, and I will have this in return.
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Yeah, but.
On the surface, I would love to agree with this. In fact, I don't think Mike said one inaccurate thing: marginal cost of reproducing digital media is null. BUT, as Mike admits, the fixed costs still exist. My concern is who pays for those fixed costs? The artist? The movie producer? Sure, I understand that other merchandise -- merchandise that DOES have an associated marginal cost -- can be sold, but this brings up another point:
The cost of producing "other merchandise" is the fixed overhead (land, labor, capital) + marginal cost (labor again, materials). But, as we all know, no one sells items at the same price as production costs, because then there would be no profit and therefore no incentive to produce the item.
Similarly, if one replaces "other merchandise" with digital media, he can conclude that the cost of producing digital media is the fixed overhead (land, labor, capital) + 0. But, as we all know, no one sells items at the same price as productino costs (including digital media), because then there would be no profit and therefore no incentive to produce the digital media.
There are several markets (off the top of my head, drugs) that start with high prices until competitors are introduced -- then prices begin to decline until equilibrium is reached (simple supply and demand). Naturally, companies want to take advantage of the high prices originally so they can equal their investment and then profit from it (otherwise, where's the incentive to produce?).
Idea: What does this mean for the media industry? Well, give it the same laws as patents. If you produce media, you can sell it to earn your investment and profit for X amount of time, then it becomes public domain. At this point, the fixed costs have been accounted for, so it can be sold at marginal cost.
The problem with this idea, even, is that people NEED things like drugs. People do not have the same need for media. People are not going to be as likely to go out and buy the CD or DVD right away (or pay to download), as they have incentive to wait until the cost of purchase is 0.
The only argument I'll accept against this is that people will still go to concerts and to the movie theatre.
Idea 2: If, rather than giving a time limit for the "patent", a profit limit was ordered, people would once again have incentive to wait, knowing (or rather thinking) that prices will drop. Unfortunately, enough people are likely to take this route that the price will not drop. It will become a matter of "how bad do I want it?", which isn't necessarily a bad thing, but there would still be people "mooching" off those who care enough to buy the music.
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Re: Yeah, but.
To remove the requirement that consumers of ideas compensate the creators in exchange for their usage in order to recoup fixed costs and thus leave it profitable to create ideas is not to remove all sources of compensation. I think Mike would propose that they find cleverer ways to use and monetize their ideas... I would propose that the creators can still get money from consumers. Most people are somewhat ethical. If we can train them to feel obligated by ethics--though not by nature or law--then artists will get some people's money some of the time.
As to whether that is as much as they should get, or as much as they need, or want, or deserve--I wont speculate. I say only that it is not zero and that as far as nonzero numbers go it is awesomely higher in this civilization here and now than it has ever been at any point in history, as we have a disturbing amount of disposable income to spend on such things.
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Re:
I'm curious, how much did it cost you to acquire the rights to publish Mr. DeLong's intellectual property here and what was the process involved?
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Re: Re: scarcity
Henry Evans said
Even with such laws, owners of intellectual property are free to license use of their property on whatever terms they find favorable.
Mike replied
Unfortunately, it's not that easy. With changes to copyright law, you automatically get a copyright on any material.
Henry was right.
Look at the growth of free ware and open source software. All of that software is protected by copyright but the creators can declare that the whole world has a licence to use it.
People who create copy righted material - be it music books or movies have the right to set the terms on which they are prepared to sell it. The music industry and the movie industry are grossly overreaching in their efforts to enforce those rights but that does not change the fact that they have those rights.
If Mike was right then there would have been a "free" Internet based music industry by now and there isn't.
None of this applies to patents which pose a completely different set of problems.
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Re: Re: Re: scarcity
I am really lost. How would automatic copyrights make it harder to freely license your ideas? And why would mike saying it is harder imply that he has falsely predicted a free internet based music industry? What does that have to do with it? If anything it predicts the opposite. If somehow it is harder to freely license your ideas..then..it would be..harder to give them away for free?
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innovation
One thing to consider is innovation. Perhaps the automotive industry isn't the best example for comparison to online music and DRM, but for prescription drugs it may apply. In the 1980's Chrysler used parts bin technology to produce 'new' models. Admittedly, the minivan saved the company, but it was a K car (built on a variation of the K car platform). So was the Dodge Aries K, the LeBaron, et al. To see all the variants, go to http://www.allpar.com/eek/k/k.html or http://en.wikipedia.org/wiki/Chrysler_K_platform for lists of the makes, models, and years. These cars cost Chrysler less money to design and build than all-new cars. They were able to grab from the parts bin (need a radio, grab it off the shelf). They undercut prices, offered long warranties (if it broke, replace the part, it costs so little), and used the profits to up the stock and get out of bankrupcy. A drastic measure for bleak times. However, they stuck with that model so long that people drove away (pardon the pun) in droves. The cars were horrible. Lousy parts made lousy cars and there was no money for R&D. That's what can happen when your profits become marginal. Chrysler finallly had to bite the bulit, invest in the future, and make new cars from new parts. Now they are part of Daimler-Chrysler (they sold so little that they became a take-over target), yet even with Mercedes great reputation the word Chrysler leaves a bad taste in some people's mouths. Thus, the Dodge truck has to play catch-up with Ford and Chevy. The lesson is that you must protect your brand's name and that means innovating and producing ever new, quality products. And that takes operating above margin.
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Interesting discussion. I am no economic genius but I think so far as media is concerned one argument is missing, and I believe I've seen Mike talk about it before.
No matter what the media companies attempt at this point, they MUST compete with free. It is a part of the market now, and there is no changing that.
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Re: Something for nothing
dorpus, there's no way you can be a graduate student... the shit you come up with on here... 0^0 is undefined...
as far as a proof for n^0 = 1 and applying it to 0^0 ... one of the laws of exponents is (n^x)/(n^y) = n^(x-y) for all n, x, y ... so (2^3)/(2^2) = 2^1 = 2 ... but let's look at (2^3)/(2^3) ... this fraction is equal to 1... so 1 = (2^3)/(2^3) = 2^0 ... so 2^0 = 1 ... however 0^2 = 0 ... (0^2)/(0^2) = 0^0 but (0^2)/(0^2) = undefined... so 0^0 power is undefined...
of course, there are plenty of arguments for 0^0 = 1, but these used for special circumstances and need to be defined when in use. the general convention is that it is undefined. there's a reason the rules is any nonzero number to the zero power is one.
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Re:
Marginalized
By James V. DeLong 07/29/2003
First of all, I would suggest that it's not a very good idea for the commenter here to have reposted DeLong's copyrighted content. If we are asked to remove that material, we absolutely will.
However, it does say something that you feel that you can only defend the argument that copyrighted content should be sold by then infringing on someone (in this case, Tech Central Station's) copyright.
But... on to the point DeLong raises. I addressed this directly to DeLong in DC, but his article is just wrong. Not mildly wrong, but flat out wrong -- and it's his inability to understand "zero" that's causing the problem. Let me go through in a bit more detail -- and I'll avoid DeLong's annoying tendency to fall back to insults ("the left" "academia") whenever he hits on a point that he doesn't understand. This has nothing to do with "left" or "right" or "academics" or "professionals." It's an issue of economics, and DeLong's economics are wrong.
"Economics teaches us that in a competitive market prices equal marginal cost -- the extra costs incurred by producing an additional unit." It goes on to note that the marginal cost of an additional pill, or an additional copy of a movie or song, is close to zero. Therefore, the argument concludes triumphantly, "economics teaches us" that such products should be priced at zero. Any other condition demonstrates that undue "market power" exists, and is immoral.
Well, first he adds that little "immoral" bit to the end there, which I've never seen an economist do in this kind of discussion. It biases his argument and takes away from the core, which is true. However, he makes one little shift and it's sneaky. He says "such products should be priced at zero." No, what economics actually says is that "such products WILL be priced at zero."
It's NOT making a moral argument at all. It's making a predictive one. It's saying that the market dictates the price and you can see that overtime the price will equal the marginal cost in a competitive market. That's *how markets work.*
Of course, most markets aren't competitive. The point of this exercise is to understand the pricing pressures as markets do get more competitive. But DeLong flips it around into a moral issue, and pretends that people say that if a market isn't competitive then it's immoral.
If one demurs to the logic, on the ground that it costs about $800 million dollars to produce the first pill, or $100 million to produce the first print of the movie and this initial investment -- not just the marginal cost of the second pill or the second print -- must be recovered from somewhere, the perpetrators of this logic usually shrug and talk about the need for new business models.
Well, first of all, we don't "shrug." We DO point out the new business models. But, again, that's not the point. The point isn't to come up with new business models at all, but to warn those with the existing business models that they're going to be in trouble.
Again, DeLong seems to think that this is somehow a choice, and not an actual force that will impact the business. I really hope that PFF's clients don't listen to him, because they're gonna be in trouble soon.
DeLong then goes on to mock this basic FACT of market behavior because it would mean that you could never recover fixed costs. That's flat out wrong (and really makes you question his economic understanding). The point is that you do look for markets that are not fully competitive or where you do have an advantage of some kind and can charge money and make back your investment. The problem is that the content market is moving away from that. He seems to think you can hold back the tide.
What's funny is that a number of the points DeLong then makes are completely on the mark -- though he falsely tars all economists as beliving things that almost none do (i.e., that most of the market is competitive and that marginal cost *must* equal price).
Again, that's not what anyone is saying. Almost everyone admits that there are very few truly competitive markets and, in fact, that's exactly how profit is made. DeLong is right to note that if the market is fully competitive it's tough to make a profit. That's why companies keep innovating and changing, to get a *fleeting* advantage in which they can charge. But, over time, if they don't change, they get eaten up by the competition.
So it's amusing that DeLong notices this time aspect, but then seems to suggest that the solution is to put up false barriers in terms of IP protection that don't allow the market to advance in this fashion, forcing the innovation he's supposedly such a big fan of.
The problem, of course, is that he doesn't understand zero. He's happy for the progress to continue, but once a zero gets thrown into the equation, he freaks out and says the system (in this case, basic economics) no longer works. That's exactly what he's saying throughout the article and all I'm saying is that the economics does work, and DeLong is blinded by the zero.
What he's missing, due to the zero-blindness, is the fact that the market is for more than just the narrow focused product he's talking about -- but the overall industry. If he looks at how industries can use competitively priced products (commodities) to make other products that have scarcity and have a competitive advantage, he wouldn't be so worried.
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Re: Re: Re: scarcity
Look at the growth of free ware and open source software. All of that software is protected by copyright but the creators can declare that the whole world has a licence to use it.
Yes, that's true with some content, but it's not so easy with other types of content.
People who create copy righted material - be it music books or movies have the right to set the terms on which they are prepared to sell it. The music industry and the movie industry are grossly overreaching in their efforts to enforce those rights but that does not change the fact that they have those rights.
Yup. No argument from me there. They do have those rights, but part of the point is that it's dangerous for them to keep enforcing them.
If Mike was right then there would have been a "free" Internet based music industry by now and there isn't.
No, that's not true at all. The point is that is where the market is headed, but the time frame need not be immediate. I still believe there absolutely will be a free internet-based music industry (and some are already doing well by embracing that concept), but old habits and business models die hard, so it takes time.
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Re: Yeah, but.
On the surface, I would love to agree with this. In fact, I don't think Mike said one inaccurate thing: marginal cost of reproducing digital media is null. BUT, as Mike admits, the fixed costs still exist. My concern is who pays for those fixed costs?
Whoever benefits from leveraging the free goods into a different market. In other words, whoever embraces the free nature of the content will be able to benefit from it, recognizing that they get promotion for some scarce-good where they have a competitive advantage. Then, for them, it makes sense to pay that fixed costs, because they'll profit from it at the other end.
The problem is that everyone gets so tied up in the idea that you need to sell the content. You don't. You use the content to sell something else (and the list is a long one). And, you could even use the free content to sell the creation of new content. In other words, use the free promotional content already created, to convince people to prepay the fixed cost of creating new content.
This the model some musicians have been experimenting with. They've got enough music that they give away for free to get fans. Then they ask those fans to pay for the creation of a new album. In return, those fans get early access to the new content, or access to the musician in some form or another, or free/cheap concert tix or whatever. And then once the musician has enough money committed to the project he or she creates the new album. And then he can use that content to get more fans and begin the process all over again.
Idea: What does this mean for the media industry? Well, give it the same laws as patents. If you produce media, you can sell it to earn your investment and profit for X amount of time, then it becomes public domain. At this point, the fixed costs have been accounted for, so it can be sold at marginal cost.
Well, technically, that is how it works now.
People are not going to be as likely to go out and buy the CD or DVD right away (or pay to download), as they have incentive to wait until the cost of purchase is 0.
All music is available for free online right now. Yet plenty of people still go out and buy CDs. And there are lots of ways to add additional incentives -- such as including additional content in the liner notes, or letting those who buy the CD get access to a special website or offering tickets to concerts to those who actually buy the CD, etc. etc. etc. Lots of business models.
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Re: Re: False lack of scarcity
This is a fascinating topic.
That's a fixed cost.
You keep discounting the fixed costs when looking at the economics of abundance. To recoup the investment in innovation, you need to recoup [(fixed costs/# of units) + maginal costs] per unit. Historically the marginal costs have overwhelmed the amortized fixed costs in economies of scale, but when marginal costs approach zero, the required price to continue to stay in business (and producing new innovation) is only the amortized fixed cost.
When discussing an economy of abundance, you need to either recoup the majority of the fixed cost out-of-band or base the price of the product on the amortized fixed cost. If there's no positive cash flow, there's no capitalized innovation. That's true in Italy, and it's true here. You do a good job of reporting on innovations in offsetting the fixed costs, but in the end, you have to bring in more money than you spend.
With regard to the Italian pharma industry pre-1978, I assume you're referring to the Boldrin/Levine "Against Intellectual Monopoly" paper (correct me if I'm wrong). I'm a bit skeptical in a "great claims require great evidence" kind of way; they compare a 20 year sample from a single country to a 3 year sample skewed by 60% in time from the inception of patents there. Throughout most of the rest of the paper, they're recounting how robust the production of goods is, rather than the rate of innovation. It's not shocking to see that if the capitalized industry continues to produce new IP (e.g. the music industry) and markets exist where it has no protection (e.g. Napster), the rate of "generics" production will suddenly skyrocket. I'm still reading the paper, but the level of linguistic rigor leaves me feeling a bit skeptical of its academic rigor; are you aware of any peer reviews of that work?
There's money to made in paying people to create new works of content. That's got value, because that is scarce.
The hard part is finding ways to recoup my investment in paying people to create the new works of content. Open Source software is, of course, the perfect example of many of the factors of the abundance issue. The corpses of Bubble companies prove how hard it is to create a successful business when you don't recoup your costs directly from unit prices. Red Hat and a very few other vendors have made a good go of it, but the success rate is far below that of more conventional businesses.
I'm looking forward to a world where my grand-children wonder how people ever got away with charging for information. I'm not sure, though, that any system that forces the issue by drastically weakening IP will continue to be innovative enough to stay at the head of the pack.
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Oops
Sorry, didn't realise I needed to use the br tag. Please remove that last one, if possible. Whoever benefits from leveraging the free goods into a different market. In other words, whoever embraces the free nature of the content will be able to benefit from it, recognizing that they get promotion for some scarce-good where they have a competitive advantage. Then, for them, it makes sense to pay that fixed costs, because they'll profit from it at the other end.
The problem is that everyone gets so tied up in the idea that you need to sell the content. You don't. You use the content to sell something else (and the list is a long one). And, you could even use the free content to sell the creation of new content. In other words, use the free promotional content already created, to convince people to prepay the fixed cost of creating new content.
Maybe I fail to see this long list of something elses that one could sell instead of content. I do, however, applaud the idea of "[using] the free content to sell the creation of new content". This actually makes sense, but the people who invest in the new content are going to want a return on their investment. Which leads to your next suggestion:
In return, those fans get early access to the new content, or access to the musician in some form or another, or free/cheap concert tix or whatever. And then once the musician has enough money committed to the project he or she creates the new album. And then he can use that content to get more fans and begin the process all over again.
Basically, what this translates into is distributing the music for free and making proceeds from concert sales. I like this idea, but it's not always practical. Artists can only do so much touring. They can only reach so many venues and so many cities. This means that certain people (those near the venues) will be funding the artist's content, while those for whom attending a concert is more of a trouble (travel, etc.) than it's worth are receiving the content without contributing to paying for the fixed cost and profit of making the original content.
In addition, it costs money to put on a concert to begin with. If a concert has to fulfill the costs of the concert AND the original content, profits will either decrease (which isn't awful -- entertainers make way too much money anyways, in my opinion), or (more likely) ticket prices will increase, thereby decreasing the number of people who are willing to attend (again, supply and demand).
Well, technically, that is how it works now.
To a degree. The content is still sold for much more than the marginal costs of producing another CD. The problem here (in my opinion) is the presence of the middle man -- record companies. This actually comes back to your point:
- artists do not really need the record companies
- BUT they need sponsorship for advertising
- free content allows fans to hear about the artist without the need of record company advertising.
All music is available for free online right now. Yet plenty of people still go out and buy CDs. And there are lots of ways to add additional incentives -- such as including additional content in the liner notes, or letting those who buy the CD get access to a special website or offering tickets to concerts to those who actually buy the CD, etc. etc. etc. Lots of business models.
Yes. This is true. But many people are hesitant to download music for free due to current legislation. Not everyone, but those who "still go out and buy CDs".
That said, I like the idea of additional, exclusive content, but I have a feeling it would not take long for people to get around these blocks too. Again, there's the discrimination of who pays, but this time in a good way: true fans who love the band and love the music will pay for the extra content, while those who are only experimenting with a new band or new sound will not be paying for something they may not like.
You definitely present many good ideas to support free content, but I feel too many people in the music industry will be too closed-minded to accept some of these business models. Not to mention current contracts with record companies, which would have to expire before the artists could take your path.
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I think people assume that the the real price is always the same or extremely close to the marginal cost but this is not the case. when something first comes out there is a premium to recoup the investment. after that the price tends to gravitate to the marginal cost. firms also use discrimanatory priceing to make back the investment costs.
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Re: Re: Re: False lack of scarcity
You keep discounting the fixed costs when looking at the economics of abundance. To recoup the investment in innovation, you need to recoup [(fixed costs/# of units) + maginal costs] per unit. Historically the marginal costs have overwhelmed the amortized fixed costs in economies of scale, but when marginal costs approach zero, the required price to continue to stay in business (and producing new innovation) is only the amortized fixed cost.
You're right... I don't mean to be "discounting" the fixed costs, but it comes out that way. I'm discounting the fixed costs once the content has been created. That's a sunk cost and we all know sunk costs are meaningless towards future pricing.
But, you're right that fixed costs matter very much in making the build/don't build decision. Which is where I fall back to the point that before an investment is made, the product is scarce and can be sold. In other words, you can convince someone (or a group of people) to pay for the fixed cost, if there's enough benefit for them to have the product made. I gave the example with music, where you get enough people who are fans to pay for the production of the next album -- providing a combination of incentives.
With regard to the Italian pharma industry pre-1978, I assume you're referring to the Boldrin/Levine "Against Intellectual Monopoly" paper (correct me if I'm wrong). I'm a bit skeptical in a "great claims require great evidence" kind of way; they compare a 20 year sample from a single country to a 3 year sample skewed by 60% in time from the inception of patents there.
Yes, I was mostly referring to the Levine paper (entirely when it comes to the pharma example discussed) and you are right that it would be good to get more data on that. But it is a single example. I'm not as worried about the comparison between pre- and post- patent there. That's less important than the simple fact that pre-patent, there was a thriving industry. It seems like pretty good proof against the argument people make that without patents, there would be no pharma industry. That's provably false.
The funny thing about the market is that, when there's a real need for something, the market often comes up with very creative ways to make it worthwhile to produce without government help.
The hard part is finding ways to recoup my investment in paying people to create the new works of content. Open Source software is, of course, the perfect example of many of the factors of the abundance issue. The corpses of Bubble companies prove how hard it is to create a successful business when you don't recoup your costs directly from unit prices. Red Hat and a very few other vendors have made a good go of it, but the success rate is far below that of more conventional businesses.
I think this isn't the greatest example (and also suffers from a small sample size problem). There were numerous other issues that contributed to bubble-era problems, and I'm not sure you can really make the claim that businesses dealing in open source have been unsucessful. What's happened, instead, is that plenty of businesses now use, rely on *and* contribute to open source development -- not as their core business -- but because they recognize it's a resource that helps expand their core business.
I think that, really, is the key.
I'm looking forward to a world where my grand-children wonder how people ever got away with charging for information. I'm not sure, though, that any system that forces the issue by drastically weakening IP will continue to be innovative enough to stay at the head of the pack.
Again, I don't think you need to drastically weaken IP. I think you just need to recognize the inevitability of the situation, watch the companies that embrace it, and others will eventually have to follow. Economics solves the problem much faster than any policy change. However, I do worry about IP laws that make it more difficult for these changes to happen.
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Re: Oops
Basically, what this translates into is distributing the music for free and making proceeds from concert sales. I like this idea, but it's not always practical. Artists can only do so much touring. They can only reach so many venues and so many cities. This means that certain people (those near the venues) will be funding the artist's content, while those for whom attending a concert is more of a trouble (travel, etc.) than it's worth are receiving the content without contributing to paying for the fixed cost and profit of making the original content.
No, not quite (and I apologize if I implied that it was only about concerts). I did give that as *one* example, but not necessarily the only one.
However, the argument that bands might not want to tour isn't particularly relevant to the discussion. Some people don't like to work... and they don't get paid. :)
Already, the way the music industry works with things like advance money is that most musicians make their content from touring, not from album sales -- so to say relying only on concerts won't work is untrue. It's already how most bands make their money -- and if they do it our way, they could make even more money by having more fans who want to see them in concert.
But, again, the point is that concerts aren't the only thing in play here. It could be just "access" to the band. What if you got people to pay $20/year to be in a special fan club, that could occassionally talk with or meet the musicians in person, as well as other fans. That's not selling concerts.
What if the music is good enough that a big name brand (Pepsi?) commissions a song for their latest commercial?
What if you add incentives to get people to buy the CDs (physical media), such as having the CD set so that it allows you to access a special user group/fan forum?
These are just a few quick ideas, and there are hundreds more that people can think of. The trick is not to think of it only within the bounds of what's done today, but what can be done when the music is free. Also, recognize that once the music itself is free, you can focus on promoting that, and using that to get many more fans than you currently have. So even if you do rely on concerts, if you're good, they could be much larger venues where you can get more money.
You definitely present many good ideas to support free content, but I feel too many people in the music industry will be too closed-minded to accept some of these business models. Not to mention current contracts with record companies, which would have to expire before the artists could take your path.
Indeed, it will take time. I don't expect this to happen overnight at all. But, what will happen is that some will embrace this, and it will start to spread... and then those that don't will be forced to move in that direction as well.
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Re: Re: Oops
I would be intrigued to see someone try this, as it seems to have potential. Again, as you point out, it will take time to spread.
It'd be interesting to see how other parts of the entertainment industry could adapt as well.
I can't think of any more arguments in the "devil's advocate" category, except for objections raised in vain by the record companies. The only thing that I anticipate being a problem in the long term is government.
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and still, techdirt ignores the critical issue
I agree that debates about property rights in the digital age are often distracted by faulty thinking about scarcity. So let’s get the facts straight.
Unless a resource is scarce, assigning property rights to those who “produce” that resource is neither sensible nor harmful. After all, even if those who produce an "abundant" resource can exclude others from the portion of the abundant resource that they produce, the value of that right to exclude will be $0 absent scarcity.
But, as economists have long known, scarcity comes in two forms, ex ante, and ex post. Ex post scarcity means that a resource remains scarce even after it is produced and disseminated. Apples, wheat, and iPods exhibit ex post scarcity. Ex ante scarcity means that the resource is scarce until a means to produce and disseminate it is devised. Lighthouses and information goods (like innovations and expressive works) are examples of resources affected by ex ante scarcity.
Copyright and patent law respond to the problem of ex ante scarcity. Anyone who argues that information goods like innovations or expressive works are not "scarce" can validate their argument by producing the following:
-- copies of the films that will win Oscars in 2009,
-- a detailed description of a 100% effective cure for cancer, and
-- a detailed description of a cheap, nonperishable malaria vaccine.
In short, useful information is scarce, and it is expensive to create and produce, until the information in question is created and broadly disseminated.
So the problem with information goods is twofold. First, we must convince someone to incur the expenses and risks involved in creating them. Second, we must convince those who create valuable information goods that they should disseminate them broadly instead of carefully restricting access to those who are willing to pay (a lot) to obtain access.
An example may make this point more clearly. Dr. Stephen Covey studied business practices for many years and concluded that he could identify seven principles that would increase the odds that a businessperson would succeed. For years, he profited from this information by acting as a consultant to Fortune 500 corporations and disclosing it only to the senior executives of corporations that paid his (very high) consulting fee.
Then, copyright laws convinced Covey that he could better exploit his hard-earned insights by publishing a book and making his insights available to anyone willing to pay $7 or visit a library. As a result, The Seven Principles of Highly Effective People was created and widely disseminated. Saying that this particular work is no longer “scarce” because it has been created and widely disseminated dodges the real question: How do we encourage people like Covey to create information goods and broadly disseminate them?
For now, the best answer yet conceived to this question is “copyright”: We give authors like Covey an exclusive right to their expression of ideas so long as they are willing to allow the ideas expressed to pass immediately into the public domain. This bargain explains why you owe Covey nothing if you read a copy of his book at the library for free and then use his seven principles to build a multi-billion dollar business.
To oversimplify somewhat, copyrights are justified by the difference between the costs of creating an expressive work and the costs of copying an expressive work that has already been created, disseminated and become popular. The “abundance” of digital works that have been created and disseminated does not eliminate this justification. To the contrary, it strengthens it: As the marginal cost of reproducing a popular, disseminated work decreases, the justification for copyright increases.
So I agree: If humans already knew everything worth knowing and had already expressed everything worth saying, then it would make no sense to prevent zero-marginal-cost copying of innovations and works that had already been created and broadly disseminated.
But we don’t. That is why copyright and patent laws continue to make sense. And that is why people who support those laws do understand “scarcity” in the digital age.
I hope this helps. --Tom
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Back at it?
Mike said: "If their marginal costs are zero (as is the case with digital goods and intellectual property), then it says that price will get pushed towards zero."
I read this statement to mean that all my knowledge and experience is worthless.
"You can have as much content as you need -- and in that world, it makes perfect sense that there's no costs, because without scarcity there need not be a cost."
This confirms it. Who doesn't know something that isn't valuable in some context?
It's really late and I didn't read all the posts but I'm afraid that whether we're talking music, art, ideas or toys, somebody spent some time creating it, documenting it somehow and in my mind, the idea of that being worth zero is insulting. Regarless of how much money was spent on research and development, how much it costs to make the next one or whether it be an on-going manufacturer of widgets, there is always a cost (fixed, marginal, ethereal or otherwise) and I don't feel that recovering costs or selling at the marginal cost should make any difference. It has to be recovered or it is worthless.
Mike: since I'm an abstract thinker and I'm not getting your concept, maybe you could find some other way/person or drawing to explain it? Maybe I'm not comprehending what you're saying because I count on things to remain the same, so that I can make a buck? Could it be that simple?
Anoymous Coward: Although I enjoyed the passage, perhaps you could have put it in your own words, which are normally eloquent, or gone for the Reader's Digest Condensed Version?
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"If Mike was right then there would have been a "free" Internet based music industry by now and there isn't. "
Go to YouTube and do a search on Terra Naomi. She started from no name recognition at all, no record deal, nothing but a pretty face, nice voice, and some songs that she had written. Then she started posting homemade videos of herself singing on YouTube, and built up a fan base. After a few hundred thousand people had watched her videos, she started producing her own CDs, selling them through her website. She used the free distribution of YouTube to create a customer base to sell her much higher-quality recordings.
"Maybe I fail to see this long list of something elses that one could sell instead of content."
Allow me to quote Mel Brooks:
Yogurt: Merchandising, merchandising, where the real money from the movie is made. Spaceballs-the T-shirt, Spaceballs-the Coloring Book, Spaceballs-the Lunch box, Spaceballs-the Breakfast Cereal, Spaceballs-the Flame Thrower.
[turns it on]
Dink, Dink, Dink, Dink, Dink, Dink: Ooooh!
Yogurt: [reacts to dinks] The kids love this one.
[a dink hands him a doll that looks likes Yogurt]
Yogurt: And last but not least, Spaceballs the doll, me.
[pulls string]
Doll: May the schwartz be with you!
Yogurt: [kisses the doll] Adorable.
If you've ever seen the Flash animation Napster Bad, which parodies the Senate testimony of Metallica drummer Lars Ulrich, you can see a similar theme. Metallica didn't make their money from album sales or concert tickets. They made their money from $3 T-shirts with the Metallica logo, sold for $40. Also baseball caps, lighters, keychains, etc, etc, etc.
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Re: and still, techdirt ignores the critical issue
I agree that debates about property rights in the digital age are often distracted by faulty thinking about scarcity. So let’s get the facts straight.
Hmm. Tom, you accuse us of ignoring critical issues, but every single issue in your comment I've addressed in the other comments above it.
You claim that uncreated content is scarce. I agree. I never indicated otherwise.
In fact, that's part of the point, as I say above. You use the created content (the non-scarce item) to help sell the creation of new content (the scarce item).
The only thing I'm talking about is once content is created. At that point it is no longer scarce.
Your argument, basically, is that the market can't handle items once they are scarce -- which is why you need incentives to make people create them. I believe that the market works, and that the market is the incentive to create new content goods.
I guess I don't really get the rest of your post, because I've discussed lots of different ways to incent people to create new content without relying on copyright. So all of your points about how copyright is the only way to incent people is, frankly, wrong. It is one way, but it's not a particularly good one, because it's based on introducing an inefficiency in the market.
You seem to be saying that people do understand scarcity in digital media, and to support it you use an example that suggests you don't understand it at all. I'll try to address this further in a later post on this issue, but simply repeating the way things were done in the past isn't proof that the old way makes sense -- or that it will continue to make sense going forward.
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Re: Back at it?
mousepaw,
I read this statement to mean that all my knowledge and experience is worthless.
Oh, hell, no. The exact opposite. Your knowledge and experience is extremely valuable. It's just a question of how you can monetize it. Think of it in the Jeffersonian way:
The point is that ideas, once out there, are non-scarce and you can't just charge for the idea. But, the experience applied to a new situation *is* absolutely scarce. So the fact that your knowledge and wisdom that's publicly available gets people to know that you're an expert in an area, should open up lots of opportunities for you to use that knowledge and wisdom and apply it to new situations. That's where the value is.
This confirms it. Who doesn't know something that isn't valuable in some context?
It's not about value. It's about what the economics say the market will bear. Recognize that price and value are often quite independent.
It's really late and I didn't read all the posts but I'm afraid that whether we're talking music, art, ideas or toys, somebody spent some time creating it, documenting it somehow and in my mind, the idea of that being worth zero is insulting.
Again, it's not worth zero at all. But that's how it will be priced. Think of it this way: the commercial you saw on TV today was "free." Was it *worth* nothing? No, it cost plenty to produce and it has value in that it helps drive sales. But they give it away for free, because of that value.
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Re: Back at it?
In the context of artificial scarcity, almost anything cam be made valuable. For example, I have an idea for something I call "breathing". How valuable is the idea of breathing? Not very, because lots of other people have the same idea. But, if I could get a patent on the idea of breathing, then I could create a scarcity of this idea and become quite wealthy licensing it. It all depends on the context. Sure beats working.
Just because someone invests in something, that does not automatically make it valuable. Whether it insults you or no makes no difference. The world does not automatically owe you a profit on everything you do.
What place do your feelings have in economics?
How about this: An idea has to "practiced" or it is worthless. If I am a carpenter and know how to build houses, should I receive checks in the mail just for knowing that or should I have to actually go out and practice that knowledge in order to be paid? Or, if I have a dream of something, should I be well paid for the rest of life for that? (The tune for "Yesterday" came to Paul McCartney in a dream.)
Well, it's time for me to go to sleep and do some intellectual work now.
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PhotoshopX
But, you're right that fixed costs matter very much in making the build/don't build decision. Which is where I fall back to the point that before an investment is made, the product is scarce and can be sold. In other words, you can convince someone (or a group of people) to pay for the fixed cost, if there's enough benefit for them to have the product made.
Fine. I'm a developer and I'm going to build PhotoshopX, which will blow Photoshop out of the water. I hope you and your readers will send me and my team of 50 people enough money to live on for three years. I promise that the end-result will be great.
Ah, I don't see any money yet.
Okay, I'm a director and have made a "B" movie or two. Please give me enough money for me and about 10,000 people to live on for the next ten years. I want to make a movie about some elves and dwarves and such, and promise that by the time it's over everything will be great...
Anyone???
Sorry, but it's not going to fly. Tens of thousands of people are simply NOT going to give you money up front and that far in advance for a pi