Info-Goods Change Everything

Page 116-120: INFO-GOODS CHANGE EVERYTHING:

In 1990 the American economist Paul Romer blew apart one of the key assumptions of modern economics and in the process thrust the question of info-capitalism in the mainstream.

In their search for a model that could perfect a country's rate of growth, economists had listed various factors: savings, productivity, population growth. They knew that technological change influenced these factors but they assumed, for the purposes of the model, that it was 'exogenous' — external to their model and therefore irrelevant to the equation they were trying to write. Then, in a paper titled Endogenous Technological Change , Romer reset the whole argument. He demonstrated that, since innovation is driven by market forces, it cannot be treated as accidental or external to economic growth but must be an intrinsic ('endogenous') part of it. Innovation has to be situated within growth theory: its impact is predictable, not random.

But as well as completing a nice piece about capitalism in general, Romer had come up with a proposition specific to info-capitalism with revolutionary implications. He defined technological change in a deliberately facile way, as an 'improvement in the instructions for mixing together raw materials'. That is, he separated out things and ideas — for that is what 'instructions' are. Information, for Romer, is like a blueprint or recipe for making something either in the physical world or in the digital world. This led to what is called a new fundamental premise: 'that instructions for working with raw materials are inherently different from other economic goods'.

An information product is different from every physical commodity so far produced. And an economy primarily based on information products will behave differently from one based on making things and providing services. Romer spelled out why: 'Once the cost of creating a new set of instructions has been incurred, the instructions can be used over and over again at no additional cost'.

In one paragraph Romer had summed up the revolutionary potential of the tiny gesture I just made to extract that quote out of a PDF and put it into this book: copy annd paste. Once you can copy/paste a paragraph, you can do it with a music track, a movie, the design of a turbofan engine and the digital mockup of the factory that will make it.

Once you can copy and paste something, it can be reproduced for free. It has, in economics-speak, a 'zero marginal cost'.

Info-capitalism have a solution to this: make it legally impossible to copy certain kinds of information. For example. while I'm allowed to quote Romer for free in this book, downloading the PDF of his famous 1990 paper cost me $16.80 on the JSTOR academic website. If I tried to copy and paste the design of a turbofan engine I could end up in jail.

But intellectual property rights are notoriously messy: I can legally copy a CD that I own into my iTunes folder, but it's illegal to rip a DVD. The laws of what you can and can't copy are unclear. They are enforced socially as much as by law, and like the patents of the pre-digital era, they decay over time.

If you are trying to 'own' a piece of information — whether you're a rock ban or a turbofan manufacturer — your problem lies in the fact that it does not degrade with use, and that one person consuming it does not prevent another person consuming it. Economists call this 'non-rivalry'. A simpler word for it would be 'shareable'.

With purely physical goods, consumption by one person generally blocks the use by another: it's my cigarette not yours, my hire car, my cappuchino, my half-hour of psychotheraphy. Not yours. But with an mp3 track, the information is the commodity. It can technically exist in many physical forms, and at a scale so small that it allows me to carry around every piece of music I have ever bought in my life on a 2-inch flash drive, a.k.a. an iPod.

Once a commodity is 'non-rival', the only way you can defend your ownership to it is by what economists call 'exclusion'. So you can either put a bug into the software that makes it impossible to copy — as with the DVD — or you can make copying illegal. But the fact remains, whatever you do to protect the information — bug it, encrypt it, arrest the pirate-DVD seller in the car park — the information itself remains copiable and shareable, and at negligible cost.

This has major implications for the way the market operates.

Mainstream economists assume that markets promote perfect competition and that imperfections — such as monopolies, patents, trade unions, price-fixing cartels — are always temporary. They also assume that people in the marketplace have perfect information. Romer showed that, once the economy is composed of shareable information goods, imperfect competition becomes the norm.

The equilibrium state of an info-tech economy is one where monopolies dominate and people have unequal access to the information they need to make rational buying decisions. Info-tech, in short, destroys the normal price mechanism, whereby competition drives prices down towards the cost of production. A track on iTunes costs next to zero to store on Apple's server, and next to zero to transmit to my computer. Whatever it cost the record company to produce (in terms of artist fees and marketing costs) it costs me 99p simply because it's unlawful to copy it for free.

The interplay between supply and demand does not come into the price of an iTune track: the supply of the Beatles 'Love Me Do' on iTunes is infinite. And, unlike with that of physical records, the price doesn't change as demand fluctuates either. Apple's absolute legal right to charge 99p is what set the price.

To run a multibillion dollar business based on information, Apple does not only rely on copyright law, it has an entire walled garden of technologies that work together — the Mac, iTunes, the iPod, the iCloud, the iPhone, and the iPad — to make it easier for us to obey the law than to break it. As a result iTunes dominates global digital music sales with around 75 per cent of the market.

With info-capitalism, a monopoly is not just some clever tactic to maximize profit. It is the only way an industry can run. The small number of companies that dominate each sector is striking. In traditional sectors you have usually four to six big players in every market: the big four accountancy firms; four or five big supermarket groups; four big turbofan makers. But signature brands of info-tech need total dominance: Google needs to be the only search company; Facebook has to be the only place you construct your online identity; Twitter where you post your thoughts; iTunes the go-to online music store. In two key markets — online search and mobile operating systems — there is a two-firm death match, with Google currently winning both of them.

Until we had shareable information goods, the basic law of economics was that everything is scarce. Supply and demand assumes scarcity. Now certain goods are not scarce, they are abundant — so supply and demand become irrelevant. The supply of an iTunes track is ultimately one file on a server in Cupertino, technically shareable by anyone. Only intellectual property law and a small piece of code in the iTunes track prevent everybody on earth from owning every piece of music ever made. Apple's mission statement, properly expressed, is to prevent the abundance of music.

So Romer's new theory was simultaneously bad news for mainstream economics and reassuring news for the emerging giants of info-capitalism. It tied together in a single explanation many of the anomalies conventional economics had struggled to explain. And itgave a tacit justification for the market position of tech monopolies.

The journalist David Warsh summed up its impact:

The fundamental categories of economic analysis ceased to be, as they had been for two hundred years, land, labour and capital. This most elementary classification was suppleanted by people, ideas and things... the familiar principle of scarcity had been augmented by the important principle of abundance.

On the publication of Romer's paper in 1990, did the world of economics start singing 'Hallelujah'? It did not. Romer was greeted with hostility and indifference. Critics of mainstream economics, Joseph Stiglitz at their head, had been saying for years that its general assumptions — of perfect information and efficient markets — were wrong. Now Romer, working inside the mainstream and using its methods, had knocked down the mainstream's defence against these critics. For Romer's research had shown that, once you move to an information economy, the market mechanism for setting prices will drive the marginal cost of certain goods, over time, towards zero — eroding profits in the process.

In short, information technology is corroding the normal operation of the price mechanism. This has revolutionary implications for everything, as the rest of this book explores.

If they'd understood capitalism as a finite system, Romer and his supporters might have explored the massive implications of this extraordinary statement — but they did not. They assumed the economy was, as in the textbooks, composed of price makers and price takers: rational individuals trying to pursue their self-interest through the market.

Those who did see the bigger picture were not to be found in the world of professioal economics but among the tech visionaries. By the late 1990s they had begun to understand what Romer did not: that info-tech makes possible a non-market economy and creates a demographic prepared to pursue their interest through non-market actions.