Free Market Capitalism, Moral Character And Doing Good All Work Hand In Hand

from the can-we-get-over-this-already? dept

I've never quite understood the complaints of some that free market capitalism somehow goes against morality or good deeds. As we've discussed in the past, moral questions shouldn't even come up at all in scenarios where everyone is better off. Moral questions only arise in scenarios where some are worse off and some are better off, and a decision needs to be made about who is worse off and who is better off. The nice thing about free market capitalism is that it tends to increase the overall pie, allowing a much larger number of people to be better off, and tends to do so in a more efficient manner than other systems.

Yet, then we have odd stories about people complaining about for-profit charitable organizations even when those charitable organization end up raising significantly more money for charities than their non-profit "competitors." There's nothing inherently evil about profit -- and if you look at much of the important charitable giving out there today, it was created because of profit. The Bill and Melinda Gates Foundation -- which is based on this very idea of doing good through capitalism is built off of the vast profits earned by Gates and Warren Buffet. Google's charitable wing, Google.org, is also designed as a for-profit enterprise, recognizing that if it can make everyone better off while making itself better off, there's no moral dilemma at all.

But, still, there are some who suddenly question whether or not the free market takes away a moral backbone -- but the only situations in which that would clearly be true are in cases of either outright fraud, or where you're dealing with a zero-sum game. In an economy that has the potential for growth, then one should encourage more growth to increase opportunities for everyone. There may be additional moral questions later concerning overall allocation, but increasing the wider opportunity, which is exactly what free market capitalism does, seems ridiculous to question.

In the end, it seems that some have this odd guilt associated with money -- as if because one person has made a lot of it that it somehow takes away from others. That's simply not true. Adam Smith, who wrote the original book on free market capitalism, The Wealth of Nations, only did so after first writing a book on morality, called The Theory of Moral Sentiment. Free market economics and morality go hand in hand. To think that they're mutually exclusive shows both a misunderstanding of morality and economics.

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Fart Apps Prove, Once Again, That The Market Is The Best Decider Of Value

from the economics-101 dept

Over the couple months of existence, Apple's iPhone App Store has received a considerable amount of attention. The successful phone has created an exciting new platform for developers seeking to leverage the advantages of mobile devices. The only problem was, Apple has insisted upon managing the applications in the store - oftentimes without clear guidelines or enforced through NDA.

Apple was in the practice of individually deciding which applications to allow and which to ban, regardless of customer demand. The most curious and paternalistic of Apple's App Store policies was the ban on applications of "limited utility." As a result, developers weren't sure if their hard work would be deemed useful enough to warrant acceptance into the store. Yet, like so many centrally planned economies in the past, this policy failed and Apple began letting in silly applications. However, what may be silly to Apple's gatekeepers may actually prove to be valuable to consumers. Such is the case with a suite of applications that simply produce fart sounds. Dozen exist, and one developer of a fart application is reportedly making nearly $10,000 per day with his crass software. That is the beauty of free markets - consumers and producers can better decide what is valuable than any individual person or firm. The distributed intelligence and preferences are far more capable than Apple's gatekeepers.

Kevin Donovan is an expert at the Insight Community. To get insight and analysis from Kevin Donovan and other experts on challenges your company faces, click here.

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Free Is Not Socialism

from the this-again dept

I've had a browser open with a two part series from the site "e-consultancy" for the better part of a month, debating whether or not it's even worth going through this battle again -- but it seems worth it to clear up some serious misconceptions. The first article decries "digital socialism" and the second part goes after the "tyranny of the consumer." This, by itself, seems contradictory. The capitalist free market works thanks to the tyranny of the consumer. That is, the entire reason why the free market works is because consumers have power to move to a competitor -- and that keeps producers in-line. Complaining about consumers getting their way is a rejection of capitalism and the free market, not support for it.

The complaint about "socialism" is even more confusing. The writer confuses the fact that anyone can own a copy of a non-rivalrous, non-excludable good with "collective ownership." That's quite wrong. Socialism is, indeed, about collective ownership of a single good -- with multiple folks sharing ownership of a single scarce good. What people are talking about when they discuss digital content going free is not collective ownership, but how supply is infinite such that everyone can own their own copy. It's the opposite of socialism or collective ownership. It's very much about allowing personal property to thrive. The article also makes the odd (and incorrect) claim that those supporting such freeing up of digital content are, like "socialists" asking for government interference in the market. Amusingly, just a few paragraphs after making this claim, the writer goes through the history of intellectual property in the US, detailing exactly how intellectual property is government interference in the market.

It never ceases to amaze me that people claim that the free market economics we describe is somehow "socialist," when the system they support is a system of government-granted monopolies managed through a centralized government body. How is that possibly more capitalist than actually letting the free market come up with reasonable business models that don't rely on governments defining the winning business model?

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Free Music Does Not Conflict With The Free Market

from the economic-principles dept

An associate editor at PC Mag emailed in a link to an opinion piece by PC Mag Editor-in-Chief Lance Ulanoff complaining that the ongoing demise of DRM is actually bad for the music industry -- and even claiming that it goes against basic economic principles. In this, he's flat out wrong. He starts out by trying to explain "basic principles of content, commerce, and our economy," but fails to recognize that the description he gives for economics fits for allocation of scarce goods, but things are different when you're dealing with infinite goods, where efficient allocation no longer is a question. He follows up this incorrect economics lesson by stating:

"Giving up control of content and giving it away free are not rational ideas in a market economy, yet everyone's cheering. Has the world gone mad?"

No, Lance, the world hasn't gone mad. The world (or, at least, much of it) has simply started to understand that basic economics still applies to infinite goods -- and if the marginal cost is zero, then a competitive marketplace will drive the cost to zero. It's not irrational. It's very, very rational. It's exactly as the core principles of economics predict. What's not rational is trying to set up artificial scarcity in a manner designed to shrink the pool of resources out there and to shrink the market itself.

Ulanoff also makes some bizarre statements suggesting that very few bands tour or make any money from touring -- when the facts suggest otherwise. 2007 was the best year ever in terms of concert revenue, up 8% over 2006, and continuing nine straight years of rising revenue. Not only that, but the numbers suggest more bands than ever before are performing live and making more money than ever before performing live. It's not just the top bands that are making money from concerts -- in fact, the percentage made by the top 20 acts and the top 100 acts were smaller in 2007, despite the total amount of concert revenue increasing. As we've seen, every single aspect of the music business has been improving, other than selling plastic discs.

Finally, Ulanoff concludes with this whopper of a prediction:

"giving away content free of charge... [flies] in the face of everything we know about a functioning economy. People will become dissatisfied. Artists will stop making content because they're not getting paid. When there is no content, people will stop buying gadgets to consume that content. In short order, one part of our digital economy will collapse, and it could be followed by countless others."

As we've already pointed out, giving away stuff for free doesn't even remotely fly in the fact of a functioning economy. In fact, historically, a functioning economy has often been improved by giving away things for free. It's usually called "promotions" or "advertising" however. In fact, Ulanoff's salary is most likely paid for because Ziff Davis "gives away his content for free" and sells ads on top of it. That system works quite well and has for years. As for his claim that "artists will stop making content because they're not getting paid," that myth has been put to rest way too many times before. The artists are getting paid. In fact, more people are making money from music today than at any time in history -- it's just that they're not all doing it through selling plastic discs, but by touring and embracing new business models that help the artist make money through different business models. Rather than collapsing, the digital economy is thriving, in large part due to the implicit (and increasingly explicit) recognition of how free isn't just a useful part of the economy, but it actually helps to grow the economy, by increasing the resource base, providing more efficient solutions and opening up new business models.

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Calling Competition A 'Race To The Bottom' Won't Make It Go Away

from the it's-called-competition dept

Bill Rosenblatt has a puzzling article accusing Radiohead of sparking a "race to the bottom" with its name-your-price experiment. There are a couple of big problems with the article. In the first place, Rosenblatt tries to paint the experiment as a failure, but the facts don't support his conclusion. Rosenblatt seems horrified by the fact that 62 percent of downloaders paid nothing, and the remaining 38 percent paid about $6 per album. But that works out to $2.28 per person, which, according to some back-of-the-envelope math by Luis Villa, is right about the average royalty for a major-label CD. If Radiohead got roughly the same amount of money, and got a ton of free publicity in the process, that sounds like a smart move to me. And most likely, this reasoning understates Radiohead's revenues, for two reasons. First, a lot of the people who downloaded without paying probably wouldn't have bought an album anyway. And second, Radiohead has signalled that the comScore statistics Rosenblatt is using are inaccurate. So the results may actually be even more favorable for Radiohead than Rosenblatt's numbers suggest.

But the strangest thing about Rosenblatt's article is the pejorative use of the term "race to the bottom" to describe competition in the music industry. When Apple cuts the price on the iPod, we would be really surprised to see a columnist complaining about how Apple had started a "race to the bottom" that will undermine profits among consumer electronics companies. We understand that, as painful as competition can be for producers, consumers and the economy as a whole benefit from such aggressive price-cutting. Talking about a "race to the bottom" is the language of cartels, which try to hold prices above the competitive level. Music is like any other product As the marginal costs of production and distribution fall, it's natural that the price of music will fall as well. Smart musicians and companies will find ways to adapt and prosper in the new, more competitive marketplace. As we've said before, saying you can't compete with free is saying you can't compete at all. The sooner musicians and record labels realize that, the more prepared they'll be when the price of music drops out from under them.

Timothy Lee is an expert at the Insight Community. To get insight and analysis from Timothy Lee and other experts on challenges your company faces, click here.

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Another Example Of Less Intellectual Property Protection Leading To More Innovation

from the innovation-without-IP dept

ZeroPaid, TechCrunch and Wired are all pointing to a video interview done by writer Thomas Crampton of a guy in China, who talks about how much more advanced P2P technology is in China, mostly because the makers of that technology don't have to constantly hide themselves underground or fight with the entertainment industry and the government just for the right to exist. While some are saying this is quite a revelation (others are pointing out that the claims seem exaggerated), it shouldn't be surprising at all to find out the technology is getting better without the constant pressure from the entertainment industry. For years, we've seen example after example after example of where the fight to more stringently protect intellectual property in the name of innovation has actually done the opposite, slowing down the pace of innovation. In fact there are whole books on the topic. This is merely another example. While the entertainment industry has continued to insist that more stringent copyright laws help promote innovation, that's increasingly being proven incorrect.

Amusingly, it seems that the "protectionist" China is leading the way with much more free market policies on these issues. Two and a half years ago, we pointed out that, despite all the problems with rampant "piracy," the Chinese music industry was doing extremely well -- because those musicians had learned to adapt and embrace new business models that didn't require directly selling the music. It's only two years later that musicians outside of China seem to be catching up.

However, the more important lesson here is in understanding the unintended consequences at play. The RIAA and the MPAA (and Congress, through the generous donations of those two organizations) have talked about how important it is to "protect" content -- but in doing so, they crippled the industry for developing P2P tools, which have the potential to be a much more important part of economic activity in the future. Better tools for the distribution and promotion of content are quite important, and by cracking down on that in the name of "piracy" we've now hurt the US's ability to lead in that field -- and without any real benefit to the content creators the industry was so anxious to protect. It's really the same as any other protectionist policy. If you protect an industry, it just allows others elsewhere to be more innovative and more nimble and to take control over that industry. It simply destroys the industry at home where it's supposedly "protected" and hurts consumers by offering them less innovation for more money.

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Copyright Alliance Pretending That Gov't Backed Monopolies Are The Free Market Again

from the up-is-down,-black-is-white dept

A few months back, the big entertainment companies formed yet another copyright lobbying group -- as if they didn't already have enough -- to push for more restrictive copyright policies that would limit the rights of consumers. This was the group that just last week was trying to spread the myth that fair use was not a right and copyright holders should be able to lie about what rights copyright grants them. However, the head of the group, Patrick Ross, really seems to get into trouble when he tries to trot out free market concepts to support his positions. You may recall back in January his position that getting rid of the DMCA would go against the free market because it would represent government intervention. He seemed to totally ignore the fact that it was the DMCA that was gov't intervention in the first place. Apparently, Ross hasn't given up on this "up is down, day is night" type of debate style, as copyright expert William Patry has taken Patrick Ross to task for claiming that new laws supporting consumer rights when it comes to copyrighted content were "government intervention" against the free market. As Patry points out all copyright is government intervention -- and supporting stronger copyrights is to be calling for greater gov't intervention. To then claim that giving more power back to the consumers on copyright is gov't intervention, is being intellectually dishonest. You can support copyright by claiming that the market breaks down and there's a market failure that necessitates such gov't intervention (and, in fact, many people do). But to claim that stronger copyrights means a stronger free market is an outright falsehood. Ross seems to be under the false impression that the "natural" position of the market is to have the strongest possible copyrights, and therefore, any weakening of that is gov't intervention. That creates a complete blindspot to the fact that all copyright is government intervention, and giving rights back to consumers is less government intervention.

Ross's response to Patry in the comments continues this rather twisted logic, by claiming that free markets are about property rights, and therefore, supporting stronger copyright is about supporting stronger property rights -- and therefore, it is a free market position. However, Ross's understanding of the free market is confused here. He's right that property rights are important -- but only as a means of more efficiently handling the allocation of scarce resources. That's the entire purpose of property rights in the free market. The logic breaks down, rather completely, when you talk about infinite, rather than scarce, goods. There is no need for more efficient allocation of infinite goods, because they're infinitely available, and therefore allocation is automatically efficient. Again, it's perfectly reasonable (though I would likely disagree with some of the assumptions) to argue that copyright is a necessary gov't intervention due to market failures from a true free market (which appears to be Patry's position). However, to argue that stronger copyright monopolies from the gov't is the opposite of gov't intervention isn't a supportable position.

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