2. Some Basic Economics of Information Production and Innovation

From Yochai Benkler - Wealth of Networks
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Summary of the chapter


Information and culture are fundamentally different from standard "economic goods" such as steel and cars in 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.

The Diversity of Strategies in Our Current Information Production System

This section maps the variety of strategies used by information producers. The types of strategies can be divided along two axes. The first is the benefit maximization axis. At one end of this axis are information producers that rely on exclusive rights (such as patents and copyrights) to make money; at the other end, are information producers that give their information away for free in order to gain non-monetary benefits; an in the middle are information producers that aim to make money but not by relying on exclusive rights.

The second axis along which information production strategies are divided is the cost minimization axis. This axis describes the various ways in which information producers minimize the cost of the information inputs they rely on. At one end of this axis are producers who rely on public domain (i.e., free for fall) information; at the other end are information producers who barter with other producers for access to protected information (for example, small companies that form patent pools); in the middle are information producers that a) rely on information they already control, and b) purchase without reciprocity control of new information from other producers.

These two axes of three points each create nine different strategies for the production of information, which Benkler describes as follows:

The Romantic Maximizer: Relies on the public domain to minimize cost and right-based exclusion to maximize benefit. The classic example of the author writing her novel and selling it to a publisher or inventor creating a machine, patenting it, and marketing the invention.

Mickey: Relies on intrafirm strategies to minimize cost and rights-based exclusion to maximize benefit. A salient example is Walt Disney, which owns a vast number of copyrights over cartoon characters such a Mickey Mouse. Disney reuses these characters to produce derivative works or it hires animators to create new characters with the proviso that Disney will hold the copyright over these characters as well.

RCA: Relies on bartering/sharing exclusive rights to minimize cost and rights-based exclusion to maximize benefit. In the 1920s four different companies--RCA, GE, AT&T, and Westinghouse each controlled patents that prevent each other from manufacturing the best radios technologically possible. To solve this problem, these four companies agreed to share their patents with one another but not any outside party. Though no single company had a monopoly, together these four companies could effectively exclude every other competitor from the radio manufacturing market.

Scholarly Lawyers: Relies on the public domain to minimize cost and gives their information products away for free in order to derive income from other sources. For example, legal scholars are not paid when they publish an article in a law journal. But it is not just their devotion to scholarship that drives them to give their information products away for free. They are also trying to acquire status and good reputation in order to get a job or make tenure. Another example is bands that give music away for free in order to attract audiences to their profit-making performances.

Know-How: Relies on intrafirm information production to minimize cost, but does not sell that information to acquire profits. Law firms that have libraries of boilerplate forms minimize their cost because they do not have to "re-invent the wheel" every time a client wants to form a contract or draft a license. However, the law firm is not making its money from selling these forms. It's making it money by serving a larger number clients more efficiently.

Learning Networks: Relies on bartering or sharing information to minimize cost, but does not rely on copyright or patents to maximize benefits. Newspapers that join together to create a wire service share reporting information, but it is not the copyright that makes them money. Rather they wider range of stories they offer (because of the sharing) allows each regional newspaper to attract a greater number of customers.

Joe Einstein: Relies on the public domain to minimize cost and seeks to maximize non-monetary benefits. Joe Einsteins are moved by a wide range of goals. Status in their relevant communities, personal satisfaction from the act of giving, personal satisfaction from the act of creating. Examples of Joe Einsteins include academics who write articles for fame, carolers who sing for free, users who contribute to mailing lists, or programmers who write free software.

Los Alamos: Relies on intra-firm information sharing to minimize cost and produces public goods. Often these public goods are used to secure additional funding (government grants) or increase the status of the agency.

Limited sharing networks: Relies on bartering/sharing protected information to minimize cost and produces public knowledge in order to gain nonmonetary benefits. For example, Academics often join working paper groups where they read each others drafts and provide comments on them so that each member can improve her own work before publication. "Copyleft" conditions on derive works also fall under this category.

The Effects of Exclusive Rights

When Information Production Meets the Computer Network

Strong Exclusive Rights in the Digital Environment


Sources cited in the chapter

Other relevant readings

Case Studies

Supporting examples


Key Concepts

Non-rival (36)

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

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