Economics of free (19 January 2007)

Julian Sanchez links to this series of posts about post-scarcity economics, the gist of which is this: ideas (and digital copies of intellectual property) do not become scarce once they are thought of, which means they are not subject to the law of diminishing returns. The marginal cost (what it costs to make one more unit of something) for duplicating an idea is nil, implying an infinte supply of the fruits of knowledge once it exists. (See David Warsh's Knowledge and the Wealth of Nations for a thorough explanation of this -- and the history of theorizing about increasing returns to scale -- and the paper by Paul Romer that brought it to contemporary economics.) The upshot of these posts is that  an "infinite" supply of a good should cause its price to approach zero in the absence of state-granted monopolies and other "artificial barriers" (copyrights) that are becoming unenforceable (but don't tell these people). Whether there really is an infinite supply of anything is questionable (human attention, if nothing else, is not infinite; neither is server space or the energy to maintain them). According to the management consultant writing these posts, this can be a good thing for producers if they focus on selling the medium rather than the information: "You don't sell 'ideas' you sell books, or consulting services, or reports or conferences (or a bunch of other things). You don't sell music, you sell CDs or concerts or T-shirts or access (or a bunch of other things). Basically, you look at the content itself (which is infinite in supply) to sell something that isn't infinite in supply." This, as is pointed out in the comments, is a matter of using captivating content to distract the customer from the fact that he is paying not for that content but an essentially empty package. (The content, infinite in supply, is zeroed out of the exchange.)

Several different commenters made the point that when post-scarcity economics kick in, so does the attention economy

What was missed however, is the premium on end users time - individuals have to deal with the scarcity of time, which forces them to make decisions on which content to spend their time with, or which freeware applications to invest one's time to learn and train on. What is interesting is as scarcity economics starts to fade, network economics starts to take hold. The very best free products will take the lion's share of users attention, which has tremendous value for different economic models. The irony of all of this is it isn't new. Traditional broadcast television lived off of a free to user model for decades, and end users were traditionally faced with the limits of their own time as to which show to watch.

When too much is available at no expense but your time and effort, you can make money by being the filter on the unlimited supply. If you have figured out how to monetize your filter, its to your benefit to have the spigot of free content opened ever wider. (Which explains why Google wants to digitize everything possible.)

But filterers would still need something to filter. Assume that there's not already too much stuff out there and that we need new "innovative" stuff. (I'm thinking of entertainment industry here, not an industry where "innovation" actually  is innovation, like the pharmaceutical industry.) If marginal costs for intellectual property is zero, the fixed costs (what it costs to make the original version, the R&D to come up with the idea) remain, and someone has to pay them. (You don't get a new Metallica record unless someone pays Metallica.) One rather utopian argument is that in the future artists will pay themselves in the sheer joy of creation -- kind of like most bloggers do now. The underlying implication is that anything worth doing in the field of intellectual creation is its own reward.

Another way to recoup fixed costs is via subscription services -- after enough people pay in advance, the musician delivers the new album. (This presents an obvious free-rider problem. Why pay if you are willing to wait for others to pay, and then you'll just copy the product once it's made.) Perhaps artists can go back to finding patrons, as they did in pre-Capitalist times. The Medicis didn't seem to mind everyone reaping the aesthetic benefits from the artworks they sponsored.