Artificial Scarcity Is Subject To Massive Deflation

from the bingo dept

In discussing the basic economics of scarce and infinite goods around here, sometimes certain points get lost or confused. One of the key points that we've tried to make (but that sometimes gets lost), when we say that an old model is obsolete or going away, is that you can try to hang onto that business model, but the economic trends are clear: it's not going to last. So, you can try to keep charging for information in a highly competitive market, and maybe you can pull it off for a little while. But betting your future business on it alone? Good luck.

The Citizen Media Law Group points us to an even better explanation of this very point, by Eric Reasons, noting that artificial scarcity is facing massive deflation. It's such a great concise way of making the point, I wish I'd thought of it:
Every business model relying on intellectual property law (patent and copyright) is heading for massive deflation in our lifetimes. We've seen it with the music industry and newspapers already. The software industry is starting to feel it with the maturity of open source software, and the migration of applications to the cloud. Television, movies, and books are next. I've come to question the ability of copyright and patent law to foster innovation, but leaving that aside, the willingness of people to collaborate and share, and the tools provided for it on the internet, may render these laws obsolete.
He then explains why he believes deflation is the right term:
Why is deflation a better descriptor? Because as businesses whose product is reliant on intellectual property shrink due to Internet-based efficiencies, consumers are reaping the rewards of these efficiencies.
Exactly. The reason old business models are at risk is because the free distribution of content is simply more efficient due to modern technology, and it's about as close to impossible to hold back economic efficiency, once enabled. Artificial scarcity is based on pretending you can hold back that efficiency.

So this is a great way to think about the threat side of things. Unfortunately, I don't think Eric takes it all the way to the next side (the opportunity side), which we tried to highlight in that first link up top, here. Eric claims that this "deflation" makes the sector shrink, but I don't believe that's right. It makes companies who rely on business models of artificial scarcity to shrink, but it doesn't make the overall sector shrink if you define the market properly. Economic efficiency may make certain segments of the market shrink (or disappear), but it expands the overall market.

Why? Because efficiency gives you more output for the same input (bigger market!). The tricky part is that it may move around where that output occurs. And, when you're dealing with what I've been calling "infinite goods" you can have a multiplicative impact on the market. That's because a large part of the "output" is now infinitely reproduceable at no cost. For those who stop thinking of these as "goods that are being copied against our will" and start realizing that they're "inputs into a wider market where we don't have to pay for any of the distribution or promotion!" there are much greater opportunities. It's just that they don't come from artificial scarcity any more. They come from abundance.


Reader Comments (rss)

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  •  
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    Anonymous Coward, Jul 7th, 2009 @ 7:01am

    The new business model

    How long before software companies start suing their Open Source counter parts for having an unfair business advantage?

     

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      Brian (profile), Jul 7th, 2009 @ 7:18am

      Re: The new business model

      On what grounds? Being beaten by a competitor doesn't mean there's an "unfair business advantage." The closest we're getting in this regard is the patent lawsuits, but the FSF and Microsoft butted heads about that a while back and it ended up being a sort of Cold War patent threat standoff (since both sides have impressive patent portfolios).

       

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        Chronno S. Trigger (profile), Jul 7th, 2009 @ 8:00am

        Re: Re: The new business model

        Didn't all the anti-virus software people freak out after Microsoft reveled that the price for their new software was going to be really freaking low? Something about price sharking? Ether way, if a company thinks it's being threatened by a better product it will find any reason to sue. That's the way it is now a days. Why compete when you can crush, that sort of thing.

         

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      Jason Buberel (profile), Jul 7th, 2009 @ 8:24am

      Re: The new business model

      It is funny that you should mention this possibility today:

      http://www.itwire.com/content/view/26117/1090/

      It appears as though Microsoft has acknowledged that in matters of software, using IP to prevent competition (or even mimicry) is a losing proposition. So they went ahead and changed their license agreement to specifically allow free and open-source implementations of their CLI and C# development tools.

      But in other parts of the industry, threats of lawsuits against open source projects have been occurring for the last 4-5 years, IIRC.

       

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      Rui Seabra, Jul 20th, 2009 @ 5:56am

      Re: The new business model

      There is no unfair business advantage because the same business advantage is available to proprietary software companies.

      It is them who opt not to use it.

       

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    Lance, Jul 7th, 2009 @ 7:50am

    Efficiency

    Efficiency will only expand the market if the beneficiaries of said efficiency reintroduce that saved capital into the market in the form of accessibility or r&d. If they simply pocket the gains there will be no growth.

     

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      Chronno S. Trigger (profile), Jul 7th, 2009 @ 8:04am

      Re: Efficiency

      As apposed to the billions being pocketed and not returned to the market thanks to the inefficiencies of the current system?

      That's the great thing about these new efficiencies; Money has to go back into the market to keep updating their product or they won't have any money to pocket.

       

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      Jeff, Jul 7th, 2009 @ 8:06am

      Re: Efficiency

      That's the point. Someone else will come around and revolutionize the platform or develope a new one. It already happened to the newspapers and music industry. They pocketed the cash and are being swept aside as a result.

       

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        Ryan, Jul 7th, 2009 @ 8:24am

        Re: Re: Efficiency

        I wouldn't say they're being swept aside given the government-provided advantages provided to the incumbents, and if we're really unlucky Obama and Co. may ultimately subsidize these industries like certain others--either because they're "too big to fail" or some other bullshit excuse. However, this is a good example of why failure is important for facilitating competition.

         

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          Jeff, Jul 7th, 2009 @ 1:01pm

          Re: Re: Re: Efficiency

          Regardless where they get money from, they are not contributing to the market. As long as they stay out of the way and allow others to drive the market it will get better.

          Another part of the equation is spending money, for that people need jobs. I don't know about you but tens of thousands of workers are better utilized making something than sitting at home draining unemployment.

          However after everything gets settled I hope the govt will be able to cutoff all flow of the gravy train to those big companies. I somehow doubt they'll be able to though, but we can always demonstrate, worked in my home state of Jersey when they passed the "toilet paper" tax.

           

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      Eric Reasons (profile), Jul 7th, 2009 @ 5:12pm

      Re: Efficiency

      Lance-

      The efficiency, in the case of Intellectual Property, is passed directly to the consumer. Believe me, the RIAA *hates* the new efficiency of iTunes. Newspapers *hate* the new efficiency of craigslist, blogs, twitter, and digital distribution.

      We're the ones pocketing the gains, not the companies. Their business models are crumbling, and they're having to cut real jobs to stay afloat. The question is, are we pocketing enough gains to make up for the requisite losses in jobs.

       

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    angry dude, Jul 7th, 2009 @ 9:49am

    T-Shirts idiots !

    Start selling f****** T-shirts ASAP !!!

     

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    Reed (profile), Jul 7th, 2009 @ 11:27am

    Not surprising

    IP is obviously butting heads with technology and has been doing so since its very inception. Intellectual property goes against the very notion of human cooperation and cultural development.

    It is impossible to enforce and impractical for numerous reasons besides. As I have said before, IP is simply DOA for the 21st century.

    Nothing could make me happier than seeing IP law becoming obsolete in the near future. The only problem with this is there are not enough influential organizations against the notion of IP.

    It really is a human rights issue at the core which does not bring many people to the table due to IP being very abstract by nature.

    A better way to frame the debate is to show the possibilities for diversity and advancement once IP law has been eliminated. A few case studies on the technology development in China, which openly ignores IP, would probably be the smoking gun to show how quickly things can progress without lawyers deciding how advancement should happen.

    This is good for developing countries but will likely result in a dramatic deflation of the value of IP in the modern world over time, hence why we are trying to ram IP down the throat of the world at large.

    I for one don't care because I don't spend time investing time or money in an imaginary system designed to restrict technology, meter development, and oppress human culture.

     

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      Eric Reasons (profile), Jul 7th, 2009 @ 5:19pm

      Re: Not surprising

      While I think the argument over whether or not IP law fosters or inhibits innovation is a worthy one, I don't think it matters in the long run.

      Individuals are taking over production and sharing of Intellectual Property, instead of just sitting around consuming it, now that the tools for it exist. Sooner or later, these legacy markets won't be able to compete with what individuals are doing for themselves in areas like music, open source software, news gathering and delivery, just to name a few.

      IP is indeed DOA for the 21st century, but we don't have to change any laws to kill it. It can't compete with our urge to create and share for free.

      And you don't have to look to China for your smoking gun.

       

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        Reed (profile), Jul 8th, 2009 @ 4:19pm

        Re: Re: Not surprising

        "While I think the argument over whether or not IP law fosters or inhibits innovation is a worthy one, I don't think it matters in the long run."

        Yes, things have a funny way of working out like this and I agree with your reasoning. I just hate to see companies with business models in their death-throws attacking and clawing at everyone as they go down.

         

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    The Cenobyte, Jul 7th, 2009 @ 12:03pm

    I am going to start by saying that I support a truely free and open market. I think IP hurts the world as a whole, but I also think that most of you don't understand what you are asking America to do.

    IP is the product that America makes. America grows a lot of food and has a pretty good industrial base but her bread and butter is IP.

    If America gives up it's hold on IP it will give up it's hold over the world. While I am not sure this is a bad thing, it's something to think about when you ask for the dropping for all IP rights.

     

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      Steven (profile), Jul 7th, 2009 @ 1:41pm

      Re:

      This doesn't make much sense to me. Americas laws don't extend beyond our shores. That's like saying 'If you stop listening to me I'll lose my power over you'.

      The power isn't in the person doing issuing demands, it's in the receiver to chose to listen or not.

       

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      Eric Reasons (profile), Jul 7th, 2009 @ 5:08pm

      Re:

      Ceno-

      One of the points that led me to write the article I did was that there doesn't need to be any change in IP law, or any violation of it, to have intellectual property move towards free (or at least, very, very cheap).

      I'm not arguing that it this is a good or a bad thing, but something we will likely have to contend with, just as the music industry and newspapers are trying to do already.

      Additionally, when I hear all the heralding of a new "knowledge economy" that we should be striving for, I worry that we're abandoning or chasing away the industries that will never approach "free" - industries that rely on atoms, not bits.

      If you're right and "IP is America's bread and butter", and I'm right, and "IP is heading towards a commune instead of an economy", we're in for a very rough ride.

       

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    Anonymous Coward, Jul 7th, 2009 @ 12:21pm

    This article makes me wonder how this will affect those people trying to sell equity in domain names - another artifical scarcity based on IP. Let's hope the imminent failure of IP means that the people behind domain equity also fail miserably.

     

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    Eric Reasons (profile), Jul 7th, 2009 @ 4:55pm

    The glass is twice the size it needs to be...

    Mike-

    Thanks for the link and the kind words. You're absolutely right that I didn't focus on the *opportunity* side in that post, but I definitely see it as being there. "Deflation" is a value-neutral concept, and it has it's advantages, particularly in this economy.

    Let me clarify a bit. I believe that this efficiency will make the economic markets they affect "shrink" in terms of economy and capital. It doesn't mean that the number of variation of the products available will shrink, just the capital involved.

    Innovative deflation lets $100 Million at Craigslist undercut $100 Billion dollars that used to service the same thing in newsprint. We're getting better and more varied services and products (especially in intellectual property) for much cheaper, but it's also costing lots and lots of jobs without replacing them, taking money out of the economy.

    My big fear is that a "knowledge economy" is being touted as our obvious salvation, but much of what a knowledge economy brings in with it may be prove terribly difficult to monetize in the long run, at the same time that this efficiency is driving out employment in traditional markets without replacing it.

    As I wrote in a related post:
    Couldn't we take advantage of this deflation to help cushion the blow of falling wages? How much of our income is dedicated to intellectual property, and its derived products? If wages decrease at the same time as cost-of-living decreases, are we really that bad off? Deflation moves in both directions, as it were.

    Hours will be cut. Wages will fall. So too will the cost of living fall as these efficiencies are passed on the consumer. The balance between these two forces will be the key to determining how painful the transition is.

    Thanks again for the link and the discussion.

     

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    Suzanne Lainson (profile), Jul 8th, 2009 @ 12:42am

    What about pharmaceuticals and biomed?

    Let's assume we no longer offer legal protection for new ideas. And maybe in some industries you can show VCs that your idea will make money even if others come into the field immediately and copy it.

    But what about a company that designs a new drug or bioengineers a new product? I'd certainly like to see the cost of health care drop to next to nothing, so being able to buy new drugs at generic prices sounds great to me.

    But those companies want to be compensated for all the research and testing. So how do you encourage them to look for new drugs if they can't own exclusive rights for a number of years? Even if you have all the research done via some form of crowdsourcing so no single company has to pay the price for the research, who pays for the testing? A government entity?

     

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      Anonymous Coward, Jul 8th, 2009 @ 1:48pm

      Re: What about pharmaceuticals and biomed?

      I wonder how "internet efficiencies" will affect Airbus and Boeing? You think that Jenny iHead will come up with a competing airliner that will have a marginal cost approaching zero?

       

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        Suzanne Lainson (profile), Jul 8th, 2009 @ 3:03pm

        Re: Re: What about pharmaceuticals and biomed?

        I'd really like to explore this new model of funding scientific and technological innovation.

        Using the music industry as an example of IP isn't really comparable because there isn't much time invested in creating music.

        But let's say we want to encourage clean tech products or medical innovation. In some cases the research is being done at a university or at a government facility like NREL. If that research is already paid for and no one has to recover the research costs via sales or licensing, then that's great.

        Should we plan for and budget for a new model where all research is paid for via government or educational funds? If so, how do we make that transition? How do we convince taxpayers and their representatives that raising their taxes to pay the salaries of the researchers will pay off for them in the end?

         

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      Reed (profile), Jul 8th, 2009 @ 4:26pm

      Re: What about pharmaceuticals and biomed?

      "But those companies want to be compensated for all the research and testing."

      From the peer-reviewed studies I have read 99% of these companies have recouped these costs in the first 1-3 years.

      Mike has suggested that companies get exclusive rights to sell a product for a period of time as opposed to using IP law. I find that solution workable.

      As far as crowd-sourcing it would likely be a pot that private and public entities invested in. The money could be paid out per solution to individuals/entities much like is already happening in the open source programming world. In this way the lightweight and quick innovators would get the rewards and they could be shared openly with anyone.

      No idea if this would work, but it is interesting to consider.

       

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        Suzanne Lainson (profile), Jul 8th, 2009 @ 4:31pm

        Re: Re: What about pharmaceuticals and biomed?

        "Mike has suggested that companies get exclusive rights to sell a product for a period of time as opposed to using IP law."

        Doesn't that already happen? Patents expire, yes?

         

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    ra, Jul 8th, 2009 @ 12:50am

    thus

     

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    Kevin Carson, Nov 5th, 2009 @ 10:55am

    Progress destroys value--and that's a good thing

    I think the quibble over whether abundance will shrink markets involves a confusion of exchange value with utility.

    Current metrics of economic output and market size are based on the value of inputs consumed. Anything that increases the total value of inputs consumed increases the size of GDP. On the other hand, increased efficiency destroys value.

    Theories to the contrary, like Romer's New Growth Theory, assume that productivity increases can be capitalized as a source of rents, rather than being passed on to the consumer through reduced price.

    To assume that reduced cost from imploding IP rents will be offset on a one-to-one basis for increased monetizable demand elsewhere, requires the assumption that demand is infinitely elastic. I think it's more likely that, when it takes fewer hours of labor to earn the money to purchase present consumption goods, part of the present sum total of monetized value and wage labor will simply vanish. As people are able to meet present needs outside the cash nexus, with less labor, they won't discover enough new needs to keep working the same number of hours to buy additional kinds of stuff; they'll just work less.

     

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    Kevin Carson, Nov 5th, 2009 @ 11:07am

    Re: Pharma

    Suzanne Lainson: The amount of up-front investment for new drugs is itself a dependent variable, though, and IP can have the perverse effect of inflating the cost of R&D. Leave aside the diversion of drug R&D from new molecular entities to "me too" drugs tweaked just enough to justify repatenting. Even in the case of fundamentally new drugs, the great majority of the testing expense goes not to testing the variant actually marketed, but to securing patent lockdown on the other major variants. Most of the basic research in identifying therapeutic windows is done by small, low-capitalization, low-overhead biotech firms, or by taxpayer funded university R&D. Big Pharma firms are primarily high-overhead bureaucracies for carrying out the testing regimes--and most of the cost of those testing regimes results, not from the intrinsic requirements of drug development, but from the special requirements of gaming the patent system. And that doesn't even deal with the function of the FDA's arguably inflated testing requirments, as a source of artificially high entry costs to benefit the big players.

     

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