Economics 2.0

This Week in Google (TWiG) is Leo Laporte’s weekly “netcast” about Google and features Gina Trapani and Jeff Jarvis.  The hosts are tech-sphere mavens.  But they seem unable to grasp real-space economics.

Two weeks ago Laporte began the show by asking whether it could be “the week that Google finally started being evil.”  Over the next hour, TWiG denounced Google and Verizon as evil corporations based on their recent policy proposal regarding net neutrality.  They also declared that “The People” own the public internet and spoke of internet access as if it were a free, ubiquitous resource.

People have debated and conflated net neutrality for going on five years, and I won’t belabor the topic here.  Two years ago Tim Lee thoroughly addressed, and precisely defined, the issue in The Durable Internet. But I will address economic distinctions that TWiG, and many others, does not.

Many tech geeks don’t understand economics of the hardware world, which houses buildings, infrastructure, and goods — matter.  And why would they?  They live in the software world — code, information, ideas, services — governed by what some label economics 2.0.  Economics 2.0 comprises increasing returns, non-rivalrous consumption, zero marginal cost, and unlimited (virtual) resources.

Once original information — software code, a pdf, a blog post, an mp3, an idea, a film — is produced, it usually takes almost zero time, energy, or money to replicate.  Now it often involves no more than copying an electronic file.  Not only is information cheap (or “free”) to reproduce, but also millions of people can use it simultaneously without depleting it.  I can read the wikipedia page for internet memes at the same time as millions of other people, and the page doesn’t disappear once I get to the end of it.  And information is typically more useful the more, or more widely, it is used (think internet protocols).

Once physical stuff is created, however, it’s much more costly to reproduce than is information.  Economics 1.0 is Scotland in 1776.  It is a land of scarce resources, rivalrous consumption, and diminishing returns.  There are only so many cheeseburgers.  If you eat one of them, I can’t eat it.  And, at some point, the more that people eat cheeseburgers, the more they’d rather eat pizza.

The good news is that we humans have learned a few things over the years, our methods and strategies of using limited resources have evolved, and we’ve innovated better and better ways to get things done.  We now use land much more efficiently than we used to, especially in agriculture, and we’re constantly finding new and better ways to use it (and other physical resources).

The right to own, use, and transfer property is probably the concept that most encourages investment and innovation in learning how better to get things done.  It forces people to use their resources — like time, energy, money, matter — purposefully and deliberately.  And it encourages us to think about how our use of resources affects the future — whether during our own lives or future generations.

The same regime of property rights, however, is not necessarily the best system to manage informational — economics 2.0 — resources or promote innovation and investment in them.  Hence heated debate over intellectual property, digital copyright, and net neutrality.  Failure to make distinctions between two types of resources — informational (virtually infinite) and physical (limited) — results in failure to recognize that each has distinct and different optimal management strategies.

Strict property rights aren’t always optimal if you produce software, music, podcasts, or text.  Producers instead can make content available for free, reach a much larger audience than by charging for content, and sell ancillary services or complementary products.  But strict property rights — whether instituted by government, society, or family — are pivotal to produce and manage physical goods, or services that rely on them.  Wire, cable, and servers by which telecom companies provide internet access clearly fall into the latter category.  TWiG’s utter failure to differentiate informational resources from physical ones is at the heart of its rant on Google, Verizon, the “schminternet,” and net neutrality.

Conversely, many economists (and most lawyers) don’t yet understand that economics 1.0 customs — such as strict property rights — are not optimal strategies to manage resources governed by economics 2.0.  Just as lots of people have yet to realize not only that producers of information can profit (through both recognition and money) while giving away content but also that a strategy of free distribution is often the most profitable (in terms of both recognition and money) one.

Societies rely on investment and innovation to grow and develop.  We should recognize that economic rules for physical resources are different from those for informational ones.  We should tailor institutions to recognize differences in economics 1.0 and 2.0.

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