2. Some Basic Economics of Information Production and Innovation

Summary of the chapter

Overview

Information and culture are fundamentally different from standard "economic goods" such as steel and cars two ways. First, standard goods are rival or exclusive while information is nonrival. Consider an apple: If I eat it, you cannot also eat it. If you want to eat an apple too, more resources (trees, irrigation, fertilizer, labor, etc.) will have to be expended to procure you that apple. This is not the case with information. You and I can both read this book at the same time. My consumption of the information contained in the book in no way diminishes that information or prevents others from consuming it as well. The second way in which information differs from other goods is that it is both and input and an output of its own production process. Consider a wood table: the inputs of the production process are wood, fastening devices (nails, glue), and labor. A carpenter uses these things to make the output: a table. Now consider an academic paper: The inputs are ideas and labor and these ideas are often grounded in previous academic papers. Academic papers are thus "used" in producing new academic papers

It is these two properties of information, nonrivalry and input/output circularity, that explain why the law gives people some property-like rights over information but limits those rights in comparison to those given over other types of goods. The standard rationale for giving people property-like rights over information is that people will fail to produce information if they have no incentives to do so. Copyright, which grants the right holder a monopoly over her creation, allows her to turn information into a rival good, creating scarcity and, thus, a market for her work. That is, while the actual cost of producing a second copy of a book is marginal (it is merely the cost of photocopying the pages), copyright prevents people (through threat of sanction) from doing this without the author's permission, and thus allowing the author to control the distribution of her work.

The standard rational for limiting the monopoly rights created by copyright and patents is that because information is both an input and an output of information, we should not allow the "building blocks" to be captured indefinitely or entirely. Thus we have time limitations on copyright, thus returning old information to its nonrival state, and "fair use" provisions, allow new producers to use otherwise protected information in certain ways and contexts (e.g., criticism, parody, news reporting).

Many economists describe the system of intellectual property as a balance of static and dynamic efficiencies: Intellectual property creates static inefficiency by artificially raising the price of information goods, but this inefficiency is balanced out, however, by gains in dynamic efficiency in form of creating an incentive for new information production.

This chapter explores whether the realities of information production fit well with standard economic theory. It argues that the efficiency of regulation information, knowledge, and cultural production through strong copyright patent is not only theoretically ambiguous but also empirically inaccurate. This chapter posits that innovation and information production is driven mostly by a mixture of (a) nonmarket sources (both public and private) and (b) market actors whose business models do not depend on the protections of intellectual property.

The chapter concludes that while granting exclusive rights-based over information provides some incentives for the future production of information, a comprehensive intellectual property regime that mimics property too closely (such as the system in both the United States and the European Union) cannot work perfectly even under ideal conditions. The upshot is that noncommercial production can often be more efficient and more important commercial production and that noncommercial production is thus moving to a more central role in our information production system.

Key Concepts

Non-rival (36)

Standing-on-the-shoulders-of-giants Effect (37)

Input/Output Circularity (see Standing-on-the-shoulders-of-giants Effect)