Sunday, June 21, 2009

Intellectual Property and Deflation of the Knowledge Economy

[Update: This accidentally became a series of posts on a theme.

Does Intellectual Property Law Foster Innovation? Where I question the efficacy of patent and copyright in a socially networked world.

Intellectual Property and the Deflation of the Knowledge Economy - (this post) Where I toy with the idea that the Knowledge Economy may not turn out to be much of an economy, especially when it comes to Intellectual Property

The Economic Reset Button - Where Jeff Jarvis asks Eric Schmidt whether or not this is a fundamental shift in the economic base

Innovative Deflation - Where I ask, "Is the knowledge economy ripe for growth, or is it the means by which traditional economies are shrunk?" ]

Friday night I was discussing the future of intellectual property law with some friends. My argument, in a nutshell:

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.

Jeff Jarvis seems to be toying with some of the same ideas when he posted When Innovation Yields Efficiency last week. In it, he writes:

But as I thought through the major innovations of the last decade, many of them have not led to economic growth; they haven’t added money to the economy but left it in the economy. Thus measuring innovation’s impact in the revenue, growth, productivity, and market cap of large companies may not be valid. Instead, we are seeing innovation take money out of their pockets, leaving it with their customers.

The problem, if you can call it that, is that many of the customers are also employees that have had their jobs fall victim to efficiency. Jarvis refers to this as "efficiency" or "shrinkage", and he's right on both counts. But the better term for it is "deflation". Journalists, auto workers, record industry players, retail sales clerks, and marketing staff are forced to go looking for work in shrinking markets. These businesses are either suffering from old business models based on increasingly artificial scarcity (newspapers, music, marketing, software development), or are able to do more work with the fewer resources due to the newly created efficiency (retailers). In short, businesses relying on artificial scarcity created by intellectual property law, are businesses most susceptible to deflation.

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. Fewer people are employed by this sector, but fewer consumers are having to pay for products previously only produced by this sector.

The knowledge based economy doesn't follow the laws of supply and demand. (Well, sort of.) First, Intellectual property are largely non-rival goods, meaning that I can "consume" news, or music, or software, and it doesn't get used up. Until recently, restrictions on production in the delivery medium (newsprint and CD's) and/or licensing restrictions on consumption have kept the law of supply and demand in place for intellectual property.

The Internet first struck a blow to the restriction on production, because the copying and transmission of IP became nearly free. Now, with the maturation of open source software, social networks, and collaborative platforms, we're moving away from licensing restrictions on consumption: social networks and news aggregators bring us news, blogs bring us opinion pieces, musicians like Nine Inch Nails and Jonathan Coulton are beginning to release their music for free. Musicians don't need the backing of recording studios any longer: They'r recording in home studios, fans spread their music via social media, and fewer people are getting new music from the radio.

Effectively, the restrictions that held supply in check for IP are slowly falling away. As effective supply rises, price plummets. Don't believe me? You probably spend less money now on music than you did 15 years ago, and your collection is larger and more varied than ever. You probably spend less time watching TV news, and less money on newspapers than you did 10 years ago, and are better informed.
I won't go so far as to say that the knowledge economy is going to be no economy at all, but it is a shrinking one in terms of money, both in terms of cost to the consumer, and in terms of the jobs produced in it.

Kevin Kelly of Wired magazine called this "The New Socialism". He's aware of the stigma attached to the word, but he justifies well:

When masses of people who own the means of production work toward a common goal and share their products in common, when they contribute labor without wages and enjoy the fruits free of charge, it's not unreasonable to call that socialism.

He's right. I've always been a capitalist to the core. I have frequently defended this belief by saying that Capitalism is society's best method for the allocation of scarce resources. And I believe that now more than ever. But what happens to markets like intellectual property when "scarcity" no longer exists?


  1. megan e. marshallJune 23, 2009 at 1:09 PM

    Lawrence Lessig has been talking about just this for years. He has two books on it - one is "Free Culture" also Jonathan Lethem wrote a great article called "The Ecstacy of Influence" that speaks on the topic - You can find it online at Harper's.

  2. Thanks Megan. I've read a lot of Lessig around the web, but never went digging deeply into his books. Time to start.

  3. Hey Eric, like your blog a lot, would you substitute this (edited and now spell checked) redo of my comment for the one I just clicked on in? Thanks, and keep up the good blog! (you can keep or remove this preamble. :-)

    The problem with the analysis here lies in ignoring a main process of capitalism, that of production having momentum even as a market is collapsing. In this case (and in 2009) there will be and is declining production in the most web "socialized" sectors, sectors that will continue to produce valuable goods or IP after the capital moment has started to leave the equation - at least for awhile. For example, with frictionless piracy, the music business is quickly losing its capital base, and as it declines, it continues to release valuable music (95% of the tunes on an American iPod are pirated, and of those over 90% constitute the so called "top 50", the product of the declining labels). It's interesting to note this product (music, entertainment, art) is more and more skewed towards the "mega" artist with, somewhat counter-productively and distressingly, less and less of the vanishing capital going to newer (or older) artists, or more experimental artists or less "commercial" musicians or bands, because of the inherent capital risk of the less known vs the well-known and more presently popular.

    So the argument that "you spend less money on music" and you have more of it, is only a view of the momentum and overshoot of a failing production machine, in a moment in time, probably a short time. Can there be in the future, a discovery, filtering and polishing of "news", music, and other creative processes, not done by "crowds" but by experts, writers, producers, engineers, if we kill the capital input into these processes? This is an important question since it's well proven the great joy we get from music, in this case, has turned out to follow a predictable human sample selection curve (ours) that is pure Pareto's law and must be funded to exist at its highest value? (Think Beatles or Cold Play or Jay-Z or Miles, vs the amateur punk band in your aunt's garage. Think your aunt's blog vs the NY Times' writers.)

    It's very un PC, but it's still an error to conflate "socialist" art, (the punk band) with the output of well-funded IP "hit" machines, such as newspapers and record companies, particularly since everything "hit" driven is well-proven in social science to be statistically rare, a unit which mostly not only commands capital throughout history, but, as nobody mentions, requires it for its production. The filter and polish is not free. The French killed copyright during the revolution, but brought it back in a decade after expert authors' output dwindled.

    Nowhere is this "Golden Goose" function - without which any analysis of IP and innovation can be accurately made - factored in by Lessig's or here. In fact a canard is usually substituted for this truth in order to support a convincing anti-IP argument: that the little guys everywhere will produce the replacement for the rare expert. This comforting egalitarian myth is something that social science tells us won't happen, and as real life and reality shows us, we humans, 95% of us, don't want to happen, don't want as our main source of art and intellectual and entertainment input.

  4. As I say at my site, there have always been four interwoven economies, and the balance of them is shaped by our society:

    * A subsistence economy ("There's some lovely berries over here.");
    * A gift economy ("The meat from this deer is going to spoil; let's share it with the tribe.");
    * A planned economy ("Let's put the longhouse here.");
    * An exchange economy ("You scratch my back, I'll scratch yours.");

    And as has been pointed out to me since, there probably always a fifth economy based around "theft" or "conquest".

    Paid human labor has less and less value due to several causes including due to robotics, AI, and other automation, due to better design, due to the accumulation of physical infrastructure, due to cheaper energy (which can often substitute for human labor), and/or due to the emergence of voluntary social networks.

    Mainstream economists try to get around this long term trend by assuming infinite demand, but that is just not in accord with human psychology or social dynamics. See Maslow's Hierarchy of Needs, or an emerging "Reduce, Reuse, Recycle" ethic, or see any of the world's major religions -- including humanism -- about moving beyond materialistic values.

    So, we can expect the balance between those four economies to change as our technology and society changes, perhaps with:

    * A subsistence economy through 3D printing and local PV solar panels or other clean energy technologies (like cold fusion or something else);
    * A gift economy through the internet, like sharing digital files to use with our 3D printers;
    * A planned economy on a variety of scales, including through taxes, subsidies and regulation affecting market dynamics; and
    * An exchange economy marketplace softened by a basic income.

    The particular balance achieved may be unique to a region's culture and history.

    A YouTube video presentation of this idea can be found here:

    Google also on "RSA Animate - Drive: The surprising truth about what motivates us" for a great YouTube video on how creativity is actually dimished when intellectual work is done for gain.