CNN Not Happy About Non-Scarce Economics… But Actual Arguments Are Scarce
from the apparently,-i'm-not-a-very-good-teacher dept
Following Scott Adams’ critique of my discussion of economics involving non-scarce products, it appears that CNN Money’s Deputy Managing Editor James Ledbetter has posted a commentary trying to explain why my series of posts on economics and scarcity is flawed. That would be fantastic and could lead to interesting discussion… if he actually explained why the theory was flawed. Unfortunately, he never actually gets to that part. He first starts out making the assumption (incorrectly) that my position is “right wing.” I’m neither right wing nor left wing. I’m just looking at the economics involved. Amusingly, this comes right after Scott Adams called me a socialist for the same exact position. Who knows what I’ll be next week?
First off, I think it’s great that CNN thinks this topic is worthy of discussion. I just wish they actually talked about what I’ve written about, rather than making a bunch of false assumptions. I kept waiting for the point where Ledbetter actually explains what’s wrong with the economics I’ve been discussing, but he never gets to it. The few points he raises suggest that he either hasn’t actually read what I’ve written or hasn’t understood it very well. I’ll take the blame and say that perhaps I haven’t explained the position very well.
There are three points he raises, but he never digs into them or explains how they’re flaws in the economics. First, he says that you should never trust anyone who says the laws of economics have changed. He’s absolutely right. The problem is I never said the laws of economics have changed. In fact, I’ve said the opposite. The basic laws of economics have remained the same — it’s just that technology has increased the number of products that are non-scarce. In the past, not many people paid attention to what this meant for economics, but it’s simply become more important. That’s not new economics, it’s just getting a better understanding of economics.
Second, he complains about my use of Amazon as an example, because it mostly sells physical books, rather than digital ones — and physical books (of course) are a scarce good. Of course, as is abundantly clear in the quote that Ledbetter uses, I wasn’t talking about Amazon turning books into non-scarce products, but about them turning shelf-space into a non-scarce resource. As I’ve said all along, what’s important is the fact that non-scarce and scarce goods always coexist. So, the fact that there are scarce goods involved doesn’t go against the economics we’ve been discussing.
Finally, he brings up the popular point that a movie costs $150 million to make, as if that somehow disproves the rest of the economics. Of course, it doesn’t at all. We’ve discussed it quite a bit, in fact. Yes, producing the original infinite good costs money (sometimes quite a bit), but that’s a totally separate issue from what you are selling and how much you should be charging. Even if the good is non-scarce, that doesn’t mean it can’t be used to make lots and lots of money. In fact, the movie industry has never really been about selling content. It’s always been selling the experience of seeing the movie — which is still scarce. People want to go out and have a fun social experience. The last Star Wars movie was one of the most downloaded movies ever… and was a huge box office hit.
Again, it’s wonderful that CNN thinks this is an important topic to discuss… but there doesn’t seem to be much to actually discuss here. If Ledbetter wants to engage in a debate on the economics of abundance and scarcity, that would be great — but so far the actual economic arguments in his commentary are, well, scarce.
Comments on “CNN Not Happy About Non-Scarce Economics… But Actual Arguments Are Scarce”
Kudos to you Mike
You are not always the most astute person, but are usually pretty insiteful. Keeps up the good work. Make the Stupid “I only read what they wrote for me to say” think a little or look dumb!!
Water for dollars
Have you ever used water as an example? I don’t recall. It just struck me that there is a non-scarce resource that people are making tons of money on. Bottled TAP water, for crying out loud, costs more than gasoline (although gas is working that problem!)
Re: Water for dollars
Actually, drinkable water can be considered a scarce resource. There is only a certain amount of it in the world (I’m not saying that there isn’t a lot of it, I’m just saying that the Earth doesn’t have an infinite amount of drinkable water). During a drought, for example, water becomes a scarce resource.
Fortunately, water is also a renewable resource (to an extent)
Re: Water at your mouth is a scarce resource
While paying money for bottled water may be stupid, not only is water a finite resource (have you heard of global warming and population growth to name two factors), the availbility of water at any one point has a significnat marginal cost – water is damn heavy to move around.
Excellent article series, strange CNN response
I hope you’re planning on turning this article series into a book someday. Your analysis of scarce vs. non-scarce goods is spot-on and balanced.
This is in contrast to the CNN article you mention, which reminds me of a pufferfish as much as anything else — seems bigger than it is, though is possibly toxic if you ingest it.
Mike, tell the truth, you were pretty stoked to see the CNN article, I know I would.
Re: Lol
Of course he was stoked, finally this issue of technology changing the scarcity of certain products is getting some time in the limelight. The faster people are informed the better; it’ll save companies time, money, and hard ache by changing their way of thinking before disaster strikes. Staying with the changing times and technology is as important as keeping up with your direct competition.
An eBook w/hardcopy extra value
It would be pretty interesting if u turned this series into a free eBook. Then u could sell a hard-copy version with added value such as commentary and doctrine. It would be pretty amazing to see u sell/give away this book on economics of scarcity according to your economics of scarcity series.
Obviously a few who are responding to your series aren’t fully and clearly understanding the points you’re trying to make. It’s like they haven’t even fully read the series judging by their responses.
I’m struggling to figure out why (some) people think that trying to sell something that people are unwilling to pay for is a good, acceptable business model. This is just a re-wording of “non-scarce goods have a price that approaches zero”, because if something is priced at zero, then there are no customers for it, because no one is willing to pay for it. Doing this is called “bad business”, and it you try to do it for a long time, it’s eventually called “bankruptcy”.
Keep in mind that in this context, “customers” does not equal “consumers”. There could still be consumers, but you can’t turn them into customers trying to sell a non-scarce good.
There’s no denying that, in the past, before certain levels of technological progress were reached, there were business models based on selling things that are, now, effectively non-sellable. If consumers do not want to pay for, for example, music, why is there anyone still in the business of trying to sell music? As you’ve been saying here, Mike, the non-scarce good can be used to turn consumers into customers for ANOTHER product or service or a value-add, but that is really marketing and selling something other than the non-scarce good.
Is it some kind association with “if you build it, they will come”? This statement is false when it comes to capitalism, which is based on a seller meeting the actual needs of buyers, not on some kind of pie-in-the-sky hoping that buyers show up to purchase whatever it is that the seller is selling. Have we gotten away from the capitalistic mentality that talks about “if you build a better mouse trap, the world will beat a path to your door”?, which means “meet a need, and people will be willing to pay to have that need satisfied”.
Post-scarcity, etc.
Hi, Mike, thanks for the retort. I enjoy your site, and it always give me food for thought, even when I disagree with some of the opinions.
I wouldn’t say that you have done a poor job of laying the argument out; I would say, though, that sometimes your examples convolute your argument. In the case I cited, for example, you go from talking about moving atoms to bits right into talking about Amazon and Netflix. That’s really confusing, because those companies basically DON’T convert atoms to bits. They help move atoms. I understand that you are arguing that they help make shelf space less scarce; my point is that scarcity of shelf space is really not that big a deal!
I did include a comment to the effect that you say that scarcity and non-scarcity coexist. I think you are being disingenuous above whan you say that they ALWAYS coexist; that’s not what you wrote in the past. The problem is that I don’t really know if that is a terribly meaningful thing to say. I didn’t go into your whole argument about factoring zero into equations, partly because I thought it would bog the piece down, and partly because you’ve never explained why zero should be put into some equations and not others.
Finally, I never called you “right-wing”! The phrase does not exist in the column at all. The term I used was “market libertarian,” which I think is roughly accurate but if you’d care to amend it I am all ears.
Best,
James Ledbetter
Deputy managing editor, CNNMoney.com
Re: Post-scarcity, etc.
Hi, Mike, thanks for the retort. I enjoy your site, and it always give me food for thought, even when I disagree with some of the opinions.
Hi James. Thanks for stopping by and replying as well.
In the case I cited, for example, you go from talking about moving atoms to bits right into talking about Amazon and Netflix. That’s really confusing, because those companies basically DON’T convert atoms to bits. I understand that you are arguing that they help make shelf space less scarce; my point is that scarcity of shelf space is really not that big a deal!
I see. While, there are two points here. First, is whether or not Amazon and Netflix are converting atoms to bits, and I’d argue they are — as you agree — in terms of shelf space. However, your article doesn’t make that clear at all. It implies that I’m completely wrong because these companies sell tangible stuff — even though my comment clearly is about the shelf space.
The second point, however, is whether or not making shelf-space scarce is a “big deal”. That’s something different and it’s not discussed at all in your article. If that’s where your complaint lies, why didn’t you explain that? Then we can have an actual discussion about how big a deal it is. Unfortunately, your commentary didn’t do that. It just implied I was wrong because Amazon sells atoms, not bits.
As for the point of whether or not it’s a big deal, why don’t you think it’s a big deal? There’s a ton of historical evidence to suggest it’s a very big deal.
I did include a comment to the effect that you say that scarcity and non-scarcity coexist.
Yes, but you made it sound like it was a concession, rather than a clear part of the model.
I think you are being disingenuous above whan you say that they ALWAYS coexist; that’s not what you wrote in the past.
It’s true that I haven’t always focused on that point, but it’s always been a part of the economics I’ve been discussing. Again, I should take the blame here for not being clear about that. However, I don’t believe I’ve ever implied that non-scarce products have no scarce components.
The problem is that I don’t really know if that is a terribly meaningful thing to say. I didn’t go into your whole argument about factoring zero into equations, partly because I thought it would bog the piece down, and partly because you’ve never explained why zero should be put into some equations and not others.
Ok, well, in that case, then I haven’t been clear enough. What I’ve tried to do is to show that the zero goes into the equation whenever you have an infinite good/resource. When did I say it shouldn’t go into an equation?
Finally, I never called you “right-wing”! The phrase does not exist in the column at all. The term I used was “market libertarian,” which I think is roughly accurate but if you’d care to amend it I am all ears.
From the subhead:
“The free-market right has adopted a term from the old radical left in an attempt to argue against copyright protection. Here’s why the thesis is flawed.”
I understand that you may not have written the subhead, but the implication is certainly that I’m a right winger.
As for what I am, I don’t consider myself to be anything, honestly. I really am just focused on the economics. I am a believer in the free market, but that’s because there’s an awful lot of evidence to support it. I do not consider myself a libertarian. I really don’t consider myself anything. I simply try to look at what’s going on and understand what it means. I’m wary of putting any labels on that.
Anyway, again, I really do appreciate the fact that you found this topic interesting enough to write about, and that you were willing to stop by and respond to my response. If you hadn’t noticed, I enjoy discussing this topic — but I just think that my position could have been better represented in your piece. I also think that if you were going to disagree with my writing, it would have helped to explain your position better, rather than hitting on the points you did bring up in the article, which really don’t do much to show why my reasoning is flawed.
Re: Re: Post-scarcity, etc.
Mike,
Regarding the relative importance of shelf-space scarcity, I thought this was pretty straightforward: “to focus on rental shelf scarcity is to miss more important scarce goods elsewhere.” To me, the scarcity of goods is much more important than the scarcity of shelf space; certainly in classic economics it occupies a far more prominent position.
As for the rest: I didn’t write the piece to be a point-by-point refutation of your series. I was primarily trying to call attention to a curious twist of intellectual history, by which this concept of post-scarcity has evolved from a dream of the utopian left to…well, to whatever it is today. In so doing, I evoked a lot of folks, from Abbie Hoffman to you to Malthus. If in so doing, I did not give the fullest possible explanation of your view, that’s a limitation of my piece, no question. But I would add two things: your arguments are pretty abstract and fluid, and thus tricky to summarize. Secondly – I don’t mean this to sound snarky – most of my readers aren’t you! I had to explain a lot of concepts for a general readership.
But look: what I really like is that there is a lot of passion and energy around these ideas. I intend to revisit this topic at some point, and next time if I quote you again, I’ll get in touch to make sure I represent your views in the clearest way I can. Deal?
Re: Re: Re: Post-scarcity, etc.
Hi James,
To me, the scarcity of goods is much more important than the scarcity of shelf space; certainly in classic economics it occupies a far more prominent position.
You act as if the two are totally unrelated however. That’s not the case at all. Once you have infinite shelf space, it allows for all sorts of things, including making the market for a huge number of scarce goods much more viable. It has a tremendous impact.
In fact, as you start to look around, you’ll discover that the removing of scarcity is a key component in the growth of many, many markets. So to say that removing resource restrictions is “no big deal” seems very strange to me.
I didn’t write the piece to be a point-by-point refutation of your series. I was primarily trying to call attention to a curious twist of intellectual history, by which this concept of post-scarcity has evolved from a dream of the utopian left to…well, to whatever it is today.
Fair enough. Though, again, in the subhead, it very clearly states that you are going to explain why the theory is flawed. If you were just going to focus on how the phrase has shifted over time, why say you’re showing that it’s flawed?
But I would add two things: your arguments are pretty abstract and fluid, and thus tricky to summarize.
Indeed… which goes back to it being my fault for not being very good at condensing my ideas down into easy to understand bullets. However, a big part of writing out this series was to help crystallize some of those ideas, so that they are more easily explained in a few simple points. I’m getting there. Keep reading. 🙂
Secondly – I don’t mean this to sound snarky – most of my readers aren’t you! I had to explain a lot of concepts for a general readership.
Again, fair enough. However, when you set out to show how my ideas are flawed, I would have expected a clearer explanation of why they were flawed. That’s all I’m saying. If it was just a general piece on the topic, that would have been different. But, positioning it as a debunking should require some debunking. 🙂
But look: what I really like is that there is a lot of passion and energy around these ideas. I intend to revisit this topic at some point, and next time if I quote you again, I’ll get in touch to make sure I represent your views in the clearest way I can. Deal?
Sure thing.
Re: Re: Re:2 Post-scarcity, etc.
But look: what I really like is that there is a lot of passion and energy around these ideas. I intend to revisit this topic at some point, and next time if I quote you again, I’ll get in touch to make sure I repr1esent your views in the clearest way I can. Deal?
Sure thing.
Goddamnit Mike are you just going to roll over for Ledbetter like this? The guy practically called you a commie.
Ledbetter your article stinks, it reeks of propaganda bullshit, you promise to debunk economic abundance and explain why the theory is flawed, but nowhere in that whole impotent flacid article do you deliver a convincing argument. Instead you try your best to portray followers of economic abundance as right wing and quite possibly marxist.
You briefly attempt to explain economic scarcity and quote a few powerful pieces from Andersons book then immediately reflect on how a Marxist coined the term “post-scarcity”. As if that in itself should be argument enough.
Then directly after that you refer to the 1985 GNU Manifesto delivery by Richard Stallman in which he quoted a Marxist comment… What do you want to imply by that James? That we should be knocking down the doors of the GNU Foundation screaming COMMIES COMMIES at the top of our lungs?
So after the bulk of the article was dedicated to quotes of Mike & Anderson and then somehow juxtaposing them to communist remarks, you then finally (FINALLY) produce a few lines that somehow should back up your debunking claim – 2 paragraphs even. Unfortunately, the two points that you deliver (amazon ships physical books and movies are apparently expensive to make) do not at all debunk the theory of economic abundance in the digital world, at best they just display your lack of understanding of Mike and Andersons arguments.
If you have any journalistic integrity you’ll go and rewrite that article, remove the political connotations, and this time give some decent arguments.
Re: Re: Re:3 Post-scarcity, etc.
Thanks for putting into words what I was thinking. This Ledbetter piece did read like ‘propaganda bullshit’ as you say. He says he is going to debunk Mike’s ideas and then doesn’t even come close to producing a convincing argument, or much of an argument at all.
All I got from the article is Mike is a right wing, marxist and his writing should be ignored because of it.
Re: Re: Re: Post-scarcity, etc.
I would also like to see an opportunity for discussion on your next Article Mr. Ledbetter. One of the reasons I prefer many sites over the CNN and some other “news” agencies… I do not like news “Handed to me” without reference links and and opportunity for discussion.
News is not intended to be a text book, and in fact, I’d go so far as to say news reporting is one of the things that Mike should discuss that is affected by his series of how the digital revolution is affecting the markets previously based on scarcity.
When “News” had “scarce” distribution points, there was a problem with not only the cost of the news (only the rich got newspapers) there were also issues raised about the bias of news coverage.
Now that reporters are paid from advertising revenue rather from sales of stories to “papers” it has become increasingly diverse, with angles from every walk of life and availible to everyone… FOR FREE!!! AKA net price ZERO for the consumer.
Of course, that’s not to say that with enough marketing and money, one can’t CREATE a PERCEIVED NEED in consumers for your product. Coke and Pepsi do this all the time. But that takes a lot of work and time and branding, and often savvy consumers don’t necessarily fall for it.
CN-frickin'-N!
Congratulations Mike!
A fraction of the (visible) users of Slashdot, same forum engine and serious mention on network TV.
Awesome.
It’s not? Thanks to Amazon, you can more easily find and acquire books that your local bookstore is unable to carry solely due to inventory volume and the fixed amount of shelf space a bookstore has (thus, shelf space is a scarce resource in bookstores). Huge areas of bookstores are devoted to new releases, at the detriment of other books. Inventory is such a problem at bookstores, that large amounts of floor space is dedicated to clearance items (conveniently placed near the checkout stands where you wait in lines) to make room for newer releases.
One thing I’d like to throw out: it doesn’t matter if you can’t make money off of a product which is valued at $0 to the customer… the fact is technology has created ways for some types of content to equal $0. Take music for example… should the record companies try and sell the music by itself? No, there’s no possible way to make money off of it, Andy you’re right in that aspect.
The hurdle these companies need to overcome are things like expanding their market and using this $0 content as a way to promote other ventures of business related to the product. It’s beside the point that a company can’t make a dollar off something that’s valued at $0. The companies doing business are FORCED to find a way to use the content as promotional or find someway to sell it in a way people are willing to pay for it. Technology has forced these businesses to change their business model. If they don’t adapt, they’ll go out of business eventually.
James,
I’m in total agreement. These companies are being forced to find new models. I’m just not quite sure why they are not willing to admit it. It’s impossible to fight it, yet tremendous amounts of money and rhetoric are wasted on trying to fighting. Whoever does first, and I would argue that iTMS and Steve Jobs are not even there yet, is going to undercut everyone else initially, and as everyone else catches up, there will be an expansion in the diversity of products available that the non-scarce goods are used to promote and draw consumers in to make them customers.
Excellent point
I’d say you’re right on Andy, and with Steve Jobs being the one who actually understands what’s going on I think iTMS, given their popularity as the largest online music retailer, will for sure be the first to help massively shift the whole online music sector. We see that eMusic sells DRM-free tracks, but iTunes is so much bigger and if they successfully change their model and listen to Steve Jobs, I’m thinking they’ll have a huge upper-hand… which is strange since iTMS already dominates the area. If a competitor was to complete a change in business model before iTMS, I’d say they’d gain some ground on them, but it’s looking like iTMS may just expand its market even further.
doth protest an awful lot. the main point i got from the CNN post was that this revolutionary idea of post-scarcity economics isn’t new…that you, anderson, and the rest of the new radicals are just co-opting old ideas that, ironically, come from the other end of the ideological continuum. in a nutshell, i’d say ledbetter merely called you a marxist. does that tickle?
Re: Re:
the main point i got from the CNN post was that this revolutionary idea of post-scarcity economics isn’t new
I never said it was new. So, I’m not sure what kind of point that is.
that you, anderson, and the rest of the new radicals are just co-opting old ideas that, ironically, come from the other end of the ideological continuum
Except that I’m not at any end of the ideological continuum. I’m just looking at what makes the economy work. I don’t care if an idea is labeled free market, socialist, marxist, malthusian, ricardian, keynesian, schumpetrian or what. I just want to know if it’s useful in understanding what works.
i’d say ledbetter merely called you a marxist. does that tickle?
Again, people call me all sorts of things, and I don’t really care. All I care about is whether the economics makes sense.
Mike, I don’t know why you would be offended by being called a librarian, but maybe when you were young, you had a bad experience in a library.
My issue with the whole argument is that music isn’t infinite. Just because it can be digitized doesn’t mean that the supply is unlimited. If you remove the reward, you will have less supply sooner or later. In terms of music, make the song and can create infinite copies for free, but if the music maker isn’t rewarded for making that one song, what will make him make the second song?
Do other things to use the free music as a promotion? What makes you think the music maker wants to do other things?
Re: Re:
My issue with the whole argument is that music isn’t infinite. Just because it can be digitized doesn’t mean that the supply is unlimited
This is wrong. The supply, once created, of that song is infinite.
If you remove the reward, you will have less supply sooner or later.
You are talking about the supply of something else. You’re talking about the overall supply of “music.” Not the supply of a single song.
However, again, I believe you are misreading my arguments if you believe that I’m talking about removing the reward. I’m not talking about that at all. I’m actually saying you can increase the reward by recognizing that you use the free music to promote other non-scarce goods, you increase the overall economic pie and can make much more money. So there’s no reward being removed. It’s actually about making the reward bigger. So, why would supply shrink in that situation?
if the music maker isn’t rewarded for making that one song, what will make him make the second song?
I really have described this many, many times. You no longer are selling “the song.” You’re selling the scarce goods associated with the song — and you can sell a lot more of them because the song helps promote those things.
In fact, that’s actually how the system really does work today. Most musicians don’t make money selling “songs.” Their songs promote their live shows and merchandise.
What makes you think the music maker wants to do other things?
Again, that’s the same thing as asking, what if you don’t want to work, why can’t you still get paid?
Re: RandomThoughts
In terms of music, make the song and can create infinite copies for free, but if the music maker isn’t rewarded for making that one song, what will make him make the second song?
Do other things to use the free music as a promotion? What makes you think the music maker wants to do other things?
if he doesn’t think it’s worthwhile to make a second song, he shouldn’t make the second song. people made music long before there was a music industry. i’m certain people will continue to make music when the industry is no more.
the new ways will include marketing and selling things that can’t be easily reproduced. that’s the direction that the market is headed in. the sooner the proponents of outdated ways go out of business, the sooner the way will be paved for the next generation.
And to continue in that vein, James Stevens, iTMS is locked up selling the very thing that is non-scarce. The market may very well have to change to a model where the consumers are not even exposed to the music as a purchasable item at all. Musicians can still get numerous jobs related to music (are there any more jingle writers? I hear a lot of Sting’s and Aerosmith’s catalog to sell things these days) that do not have a goal of going platinum, and there’s nothing wrong with that and it’s not “selling out” — the market for original music may not be based on trying to sell it to consumers.
But part of that problem is the teenage mindset of the rockstar lifestyle that musicians can have that has been pushed down everyone’s throats for the past couple of decades. That is also a model that will eventually need to change, if music, as a marketable-to-consumers art form, is to survive.
Why is it that music and musicians have some sort of perceived value such that if they stop doing whatever it is they do, there will be some kind of great loss. Even if it has value from a cultural standpoint, someone will stand up and fill the resultant void. I would argue that music for music’s sake is more valuable, culturally, than music for sale’s sake, because of the implicit cultural independence that it has for not being intimately tied to economics.
Music makers can do whatever they want – make music or not make music: it is their choice. But the producer does not get to decide what consumers are willing to pay for; consumers decide that. If no one is willing to pay for the music maker’s output, the music maker can make music on his own time and on his own dime, and will have to find some other way to support himself.
Fun debate
This debate is very interesting. However, speaking as an economist, non-scarce goods being priced at $0 creates no goods.
The fundamentals of economics are based on supply and demand, which you have correctly identified. You have correctly argued that if enough quantity exists, the price will be zero. Unfortunately, you did not mention that no one will be willing to produce where MC>MR (marginal cost > marginal revenue). Producers will only produce when MR=MC.
I am aware of cases where individuals and companies have produced where MC>MR. Linux is an example of this. It is free to download and you can enhance the software as you see fit. The uniqueness of Linux is that individuals perceive this work as fun. Through the collaboration of many individuals, a final product has been achieved at a very low MC.
The movie business is a little different (as it stands now). That does not mean that technology and enjoyment cannot change that. YouTube gives some insight into what our future could become. Instead of studio produced movies, it could become collaboration of many individuals who find the work fun and rewarding. Thus, the MC is very low and the MR can be very low (possibly zero).
In the future, users could develop videos, music, software, etc… and post it to various servers that have different user interfaces that pay the artist through advertisement revenue.
I am sure someone out there could figure out a business model that will take “labors of love” and add value to them and give back a little profit to the producer and make it available to the consumers for free (or ad clicks).
As it stands now, YouTube is getting paid, but the producers of these clips aren’t. At some point, that may change.
Mike, I would love to see some feedback. I love this stuff!
Re: Fun debate
Heath – I think what you are missing is that the point of this is not to profit from non-scarce goods. Giving away a product or producing a $0 price product is not the business model. Using those goods to promote and leverage sales of scarce goods whose price != $0 is the goal.
The beauty of this is that for these goods the cost is very low or negligible. Therefore it is relatively inexpensive to create the non-scarce good used to promote the scarce good, thus negligibly affecting the cost of the scarce good.
Re: Fun debate
This debate is very interesting. However, speaking as an economist, non-scarce goods being priced at $0 creates no goods.
That’s both empirically and theoretically wrong. You posted here, yet you didn’t get paid for it. People do all sorts of things that they don’t get directly paid for. Why? As an economist, you should know: they get other benefits from it. It may be satisfaction. It may be reputation. It may be the ability to make money elsewhere.
The point is that the marginal benefit is greater than zero, even if the monetary compensation isn’t.
The fundamentals of economics are based on supply and demand, which you have correctly identified. You have correctly argued that if enough quantity exists, the price will be zero. Unfortunately, you did not mention that no one will be willing to produce where MC>MR (marginal cost > marginal revenue). Producers will only produce when MR=MC.
Again, that’s wrong. You’re actually confusing a few points, I believe. First, people are willing to produce, even if the MR is zero. I’ve already explained that above. Second, you point out that producers will only produce if MR = MC… and that’s exactly the case when you price an infinite good at zero. Once the good is produced, the MC = 0 and the MR = 0. Therefore, MR = MC.
The point I think you’re trying to make is that *prior* to being created, the MC is > 0, which is the case. But, as long as there are enough ancillary benefits, the content can still be created. In fact, if you look on it as a promotional good for something else, there’s quite a good reason to create it to make a lot of money off of something else.
I am aware of cases where individuals and companies have produced where MC>MR. Linux is an example of this. It is free to download and you can enhance the software as you see fit. The uniqueness of Linux is that individuals perceive this work as fun. Through the collaboration of many individuals, a final product has been achieved at a very low MC.
Again, you run into a few problems here. Linux does not have a MC>MR. Right now, the MC to make a new copy of Linux is 0. So MC = MR (and since you can still buy a copy of Linux, in many cases MC The movie business is a little different (as it stands now). That does not mean that technology and enjoyment cannot change that. YouTube gives some insight into what our future could become. Instead of studio produced movies, it could become collaboration of many individuals who find the work fun and rewarding. Thus, the MC is very low and the MR can be very low (possibly zero).
Again, I think you’re confusing MC with fixed cost. Once the movie is created, the MC of a new copy is zero. So the MC is 0. It’s not high at all.
What I think you’re trying to say is that the fixed cost of making a movie is high, and that’s a problem.
But it’s not a problem, because you’re not selling the movie. You’re selling the experience of going to see the movie… and you can still do that even if the movie is given away for free. People like going out to the movies. They like the social experience. As I noted in the post, the last Star Wars film was downloaded many, many times, but was still a tremendous box office success. As long as you’re really selling the scarce thing (the experience of going out to see this movie) the non-scarce good (the movie itself) doesn’t need to be protected.
In the future, users could develop videos, music, software, etc… and post it to various servers that have different user interfaces that pay the artist through advertisement revenue.
In the future? Why? Artists are already make their money from selling scarcity. Most musicians who make money make that money from touring and concerts, selling the scarcity of their appearance. But that’s only made valuable by the non-scarcity of their music. The wider the music goes, the more demand there is for an appearance.
I am sure someone out there could figure out a business model that will take “labors of love” and add value to them and give back a little profit to the producer and make it available to the consumers for free (or ad clicks).
Again, there are many, many business models, and many of them are already happening. Have you noticed that many YouTube stars have gotten jobs because of their work? They just used YouTube and their videos (non-scarce) to build their reputation (scarce) and then sell that to the highest bidder.
Which goods? When it comes to Amazon, or any on-line retailer without a brick-and-mortar store, they save significant money by using space efficient warehouses and shipping goods rather than obtaining retail locations physically close to consumers where consumers can pick up the goods themselves. If you were to analyze how an on-line retailer can undercut brick-and-mortar, you’d look at their costs of doing business. Brick-and-mortar stores are limited by the size of their physical location, and geography. In terms of booksellers, one way to measure inventory capacity and the need for quick inventory turn-over is shelf space. Except Amazon has no shelf space to measure. If they want a bigger inventory, they obtain more warehouses. Shelf space is not a limiting factor in the economics of bookselling for Amazon, but it is for brick-and-mortar. It’s that comparison that is the core of the shelf space a scarce or non-scarce resource argument.
Libraries used to put rarely accessed and large volume prints, like periodicals and newspapers, on microfiche. This allowed them to more efficiently use their storage space to store more (the same applies to digitalization of print resources: more efficient storage space, but with the added benefit of easier searching and accessing). On-line retailers have just taken that to the next level by removing the necessity for shelf space all together.
Andy, that is my point exactly. We agree. Music makers can’t dictate to consumers what they buy. If consumers don’t buy their music, some will stop making it.
Is that what we want? Do we want a nation of American Idol singers (although some would say we have already reached that point)
Re: RandomThoughts
Whoever you are, RandomThoughts, yes, we do agree.
God I hope so. 🙂 Because if not, it means that capitalism is broken and producers producing goods that can’t be sold leads to an inefficient market.
I hope that’s not what we want, but it gets hard to tell… However, I still vote with my attention by not watching it. One could argue that these are not true artists anyway, no matter how much they cry when they aren’t chosen, because a true artist doesn’t need to be on television or win an award to be an artist.
Fun debate
Fascinating. Am I missing something, or do the second two sentences exactly contradict the first two, even including an example of why the first two are wrong ?
BTW, I’m no musician, but I’ve heard that creating music is fun, too (and the existence of karaoke would seem to support that).
Lazy, lazy reporters
You know, back in the day, you picked up your phone and made some calls, arranged for interviews, and did research. Now it seems you string together a things-I-saw-on-the-Intartubes article.
I assume CNN did not call you, Mike, rather just pulled your “quotes” right from the Web site.
Seems like history is just repeating itself to me.
What exactly is so new here? Technology ALWAYS reduces scarcity and always makes the relative cost of the now less scarce goods fall. I think you can see this in any industry that uses technology. Which would be pretty much all of them.
Using computers and networks to digitize media and reduce its distributions costs to near zero seems pretty similar to using robots and mass production techniques to reduce the manufacturing costs of other goods. It leads to more plentiful goods in more varieties and more affordable to more consumers. Isn’t this just “progress?”
The customer decides how much a movie costs
“The fact that I can burn, say, a DVD of a movie onto my iPod in a matter of minutes does not change the fact the movie cost $150 million to make. Much of that money goes to pay actors, directors and technicians who, presumably, possess one of the scarcest goods that exists – talent; the digitization of the medium doesn’t affect that at all.”
I think they miss the point. Movies cost $150 million because THEY CAN. There are few movies playing to wide audiences, so they can justify that budget. When there are many movies playing to smaller audiences each, the money they take is less and hence the budget to make them is less.
You can claim movies REQUIRE $150 million to be made, but well, that’s bollocks. How much did Abre Los Ojos cost? A tiny fraction of the budget of ‘Vanilla Sky’ the US remake. You sell goods at the price the market will bear, if there´s less money, the market bears less and suppliers are suddenly able to match the lowered price.
Talent is very flexible in it’s pricing. I charge $xxxk in good times, and $xxk in poor times, but it’s the same me in both cases. I charge what the scarcity of my skills will obtain in the open market.
Movie talent is not in short supply, it´s movie talent THAT HAS A CHANCE TO MAKE A MOVIE that is in short supply. That’s changing.
Re: The customer decides how much a movie costs
Yes indeed. If anything, the movie and music industry are too succesful. The fact that 150 million dollar movies are being produced and that actors can charge 20 million per movie indicate the stupidity of consumers to continue doling out cash for the same crap dished out with different garnish. And when you look at the people who are being dragged kicking and screaming into the information age, its usually those fatcats who benefit from those archaic business models. Seriously, the world will not end if Hollywood stops spraying heaps of cash like so much ejaculate at anything that potentially features some ego filled “movie talent”.
I know!
“Who knows what I’ll be next week?”
A DUCK! 😀
Right wing vs Left wing bias comes out
I love how the news media, while always claiming to be neutral, shows there biases when something comes out that they don’t like.
If they are biased towards the right, they will accuse you of being an atheist or a communist.
If they are biased towards the left, they will accuse you of being a fundamentalist or a fascist.
It doesn’t matter that the point or opinion they don’t like has no connection with right wing or left wing politics. If they don’t like you or your point, they will paint you as being in the opposite political spectrum. And in the extreme area of it as well.
Re: Right wing vs Left wing bias comes out
I love how the news media, while always claiming to be neutral, shows there biases when something comes out that they don’t like.
LOL Thats seriously one for a ride on the ROFLCOPTER. Like CNN is even remotely neutral, the only way to get a neutral idea about a news item is to watch it on CNN, SKY and ALJAZEERA and then form your own opinion of what the real issue is.
CNN
I am not sure why you would expect CNN to dislodge their pretty consistent ignorance on economics. Why would you expect that the network which has Lou Dobbs babble on would have any willingness to consider the issues of the changes that technology offer to the economy?
My Thoughts on Scarcity.
For some reason this brings the actions of pharmaceutical companies to mind. Why does a bottle of medicine that cost 2.00$ to make cost 90.00$ in the pharmacy. Because the company that produces it has a limited monopoly on it in the form of a patent. If you go by the rule Mike laid out than that bottle of pills should cost between 2.50 and 3.00$ per bottle as the actual cost approaches the marginal cost but that never happens till the patent ends and competition enters the market in the form of generics.
The thing is when you own the copyright or patent on something you have a monopoly and with no competition for that particular item you can like the Pharma industry put a 1000% markup on it and not have to worry about competition.
Now charging an 80 year old woman so much for her heart medication that she has to eat cat food is despicable. They might as well be holding a knife to her neck and saying “Give me all your money *****” because if she stops taking the medication she will die. It almost makes the actions of the RIAA look nice and fuzzy. My point is people don’t need music. Downloading or buying it is a choice they make and I think they should pay the person who owns it that or face the possible consequences of stealing it.
Now if you were talking about pharmaceutical companies extorting money out of the elderly I would be right there with you but this is different it is a choice you make when you want music. Some people just don’t seem to understand the difference between wants and needs. Over charging someone for something they need is extortion. Over charging someone for something they want is just the free market at work.
Can you please
Can you please keep this mindless drivel off of Techdirt, Mike?
Lately it has been less Tech Dirt and more Mike Dirt, and frankly you and your opinions are not interesting enough to read.
what does hollywood sell?
“In fact, the movie industry has never really been about selling content. It’s always been selling the experience of seeing the movie — which is still scarce.”
Actually, the movie industry – aka hollywood – has always been about selling content in combination with the theater entertainment industry which sells the experience of seeing the movie. That’s a misleading statement.
Amazing
This series is the most interesting bunch of articles I have ever read. I have the utmost respect for Techdirt and its views. I am very optimistic about the future and what can become of it.
Average, Total, and Marginal
Mike et al,
Just a quick comment that it seems many of the counter-Mike arguments in this thread are misunderstanding the “M” in MC and MR.
That’s for Marginal. It means the cost of producing one additional unit. With digital media, it’s about as close to 0 as you can get.
When some of you argue that no one will produce a good when price = 0, and MC=MR=0, that’s totally incorrect. You are thinking of Total revenue, or average revenue. It’s true that some artists will not produce if total revenue on the song is 0. But some would:
– some would because (as Triumph sings) they have “the magic power of the music in me”. (And by the way, you could fill an opera with famous musician’s song lyrics about how they sing for the love of singing.)
– some would because they know that, even if total revenue on the song is 0, they could sell ancilliary scarce goods for a fee.
confusion, confusion, everywhere...
I thought this was an earnest discussion about free market economics, and the need for ever-adapting, technosaavy BUSINESS MODELS; – so why then has this devolved into an ideological and political “pigeonholing contest?”
Mike, I agree with you, and so from an artist’s point of view; rethinking the business model and addressing the necessity of new, innovative marketing techniques will certainly go a lot farther toward the goal of reclaiming “presumed” losses from failing industries than the current situation being played out;
in the courts – endless litigation,
in the distribution chain – endless DRM,
by the artists/musicians – endless witchhunts, and ultimately
foolish notions that copyright/IP protection is reasonably enforceable in this day and age (note: noone said CR/IP rights were obsolete, – they just need to be examined thru an new lens)
This is a step in the right direction since I believe an artist would rather create, share, and be rewarded, then battle themselves, their business partners and their customers thru litigation.
…great topic, keep it up.
(but enough already with the geopolitical socioeconomic BS already)
Heavy thoughts...
Wow. Things have really heated up on this discussion. Who knew economics could get so confrontational. Great series Mike, I hope to someday buy the book 😉
How about the non-scarcity of communication in new media vs the scarcity of communication in old media; there isn’t even a link to email the author of the CNN post.
wrong word?
I’m not sure, but I think that in the 5th paragraph of the original story (talking about movies), you probably didn’t really intend to use the word “infinite” in the phrase “producing the original infinite good costs money”. I’m not sure what word you intended. It may be that “infinite” is correct and what you meant, but it doesn’t seem so to me.
It may not be important enough to correct, but I wanted to raise the question, in case you want to fix it.
Re: wrong word?
I think infinite is correct… as once the movie is created, copies that can be produced are infinite… thus it is an infinite resource.
It's actually the marginal cost of production
It seems that your analysis is once again wrong. It’s not the abundance or scarcity of the item, it’s not after all raw materials, it’s the low marginal cost of production.
The reason the record business is going to die is because the marginal cost of production of a single track is basically zero. It’s not that tickets are scarce, just get a bigger venue if you want to eliminate scarcity, it’s that the cost of production for each show is high.
It’s OK if the record companies die. There was a thriving music business before record companies and there will be one after them as well.
Great discussions but...
I am not an economist and will never claim to be one. But I would not make pricing decisions based on the supply factor alone.
1. To clarify – I agree with the assertion that non-scarce goods (i.e. digital goods in this context) will see downward price pressure, as the time-tested basic supply and demand law dictates – nothing new here
2. However, pricing also depends on the demand for the goods. For instance, in case of digital songs, there are tons of musics offered on the web for free. But what’s the demand for these musics compared to the demand for musics by a well-known musician? Would there be greater demand for songs sang by Sting (or insert the name of your own preferred famous musician) than songs by Mike? No offense to Mike, but the answer should be quite obvious
3. Therefore, I would contend that Sting should put a price to his songs even though his marginal cost is zero
4. Now, why would anybody put out songs for free on the web or post their thoughts on free-to-access blogs? One possible answer would address the question why anybody would make donation or work pro-bono for social causes – self satisfaction. Another possible answer would hint to their own perception of the demand for their goods/songs – if they put a price, would there be anybody willing to pay for them? Yet another possible answer comes from real-world examples such as retailers which would have loss leaders to get consumers into their stores. At the end of the day, people post their blogs for free because: (i) they just like doing it, (ii) they think nobody would pay for their writing, or (iii) they think that their blogs would lead them to revenue-generating or more interesting opportunities
5. So, the fact that digital goods are non-scarce and have zero marginal cost should not simply lead to a decision that digital songs (or any other digital goods) should be freely distributed and that DRM is not required. If Sting thinks that by freely distributing his songs, he can get more people to attend his concerts, then perhaps he ought to. But to answer this, more facts on the demand factor is needed
rwm?
mkam – what is a right wing marxist? 😉
How about Sunsets
How about Sunsets
Sunsets are non-scarce (unless you live in Portland), but may people continue to make good money by repackaging them.
There is plenty of artwork for sale featuring sunsets, as well as several movies where people ride off into the sunset.
You even pay more for a hotel room with a nice view (which can include sunsets)
The same value added repackaging holds true for music and movies.
Many people would be willing to pay more to drink at a bar with a live band, even if another bar has the same songs on it’s jukebox.
Once upon a time, movie theaters had better picture and sound that you could achieve at home, making it an out of the ordinary experience. Unfortunately, there are only a few theaters, such a I-max, that are offering a experience that isn’t available to many at home.
If people keep trying to make money selling things that people already have or don’t want, they will follow others who have tried the same model, such as buggy whip manufacturers.