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 One of the key points that we've tried to make (but that sometimes gets lost), when we say that an old model is obsolete or going away, is that you can try to hang onto that business model, but the economic trends are clear: it's not going to last.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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Filed Under: artificial scarcity, deflation, economic efficiency, economics
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The new business model
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Re: The new business model
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Efficiency
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Re: Re: The new business model
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Re: Efficiency
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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Re: Efficiency
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Re: Re: Efficiency
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Re: The new business model
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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T-Shirts idiots !
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Not surprising
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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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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Re: Re: Re: Efficiency
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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Re:
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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The glass is twice the size it needs to be...
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:
Thanks again for the link and the discussion.
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Re:
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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Re: Efficiency
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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Re: Not surprising
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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What about pharmaceuticals and biomed?
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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thus
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Re: What about pharmaceuticals and biomed?
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Re: Re: What about pharmaceuticals and biomed?
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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Re: Re: Not surprising
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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Re: What about pharmaceuticals and biomed?
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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Re: Re: What about pharmaceuticals and biomed?
Doesn't that already happen? Patents expire, yes?
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Re: The new business model
It is them who opt not to use it.
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Progress destroys value--and that's a good thing
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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Re: Pharma
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