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 One of the key points that we've tried to make (but that sometimes gets lost), when we say that an old model is obsolete or going away, is that you can try to hang onto that business model, but the economic trends are clear: it's not going to last.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.

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  1. identicon
    Kevin Carson, 5 Nov 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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