The Wealth of Networks:
How Social Production Transforms Markets and Freedom
by Yochai Benkler, Yale University Press

Copyright 2006, Yochai Benkler.

Chapter 2
Some Basic Economics of Information Production and Innovation

This online version has been created under a Creative Commons Attribution Noncommercial ShareAlike license - see www.benkler.org - and has been reformatted and designated as recommended reading - with an accompanying Moodle course - for the NGO Committee on Education of CONGO - the Conference Of Non-Governmental Organizations in Consultative Relationship with the United Nations - in conjunction with the Committee's commitment to the United Nations Decade of Education for Sustainable Development, the International Decade for a Culture of Peace and Non-violence for the Children of the World and related international Decades, agreements, conventions and treaties.

Epigraph

"Human nature is not a machine to be built after a model, and set to do exactly the work prescribed for it, but a tree, which requires to grow and develop itself on all sides, according to the tendency of the inward forces which make it a living thing."

"Such are the differences among human beings in their sources of pleasure, their susceptibilities of pain, and the operation on them of different physical and moral agencies, that unless there is a corresponding diversity in their modes of life, they neither obtain their fair share of happiness, nor grow up to the mental, moral, and aesthetic stature of which their nature is capable."

John Stuart Mill, On Liberty (1859)

Chapter 2
Some Basic Economics of Information Production and Innovation

Introduction

There are no noncommercial automobile manufacturers.

The technical economic answer is that certain characteristics of information and culture lead us to understand them as "public goods," rather than as "pure private goods" or standard "economic goods."

This widely held explanation of the economics of information production has led to an understanding that markets based on patents or copyrights involve a trade-off between static and dynamic efficiency.

Nonrivalry, moreover, is not the only quirky characteristic of information production as an economic phenomenon.

Perhaps the most amazing document of the consensus among economists today that, because of the combination of nonrivalry and the "on the shoulders of giants" effect, excessive expansion of "intellectual property" protection is economically detrimental, was the economists' brief filed in the Supreme Court case of Eldred v. Ashcroft./3

The efficiency of regulating information, knowledge, and cultural production through strong copyright and patent is not only theoretically ambiguous, it also lacks empirical basis.

Where does innovation and information production come from, then, if it does not come as much from intellectual-property-based market actors, as many generally believe?

Consider a daily newspaper.

As it turns out, repeated survey studies since 1981 have shown that in all industrial sectors except for very few - most notably pharmaceuticals - firm managers do not see patents as the most important way they capture the benefits of their research and developments./7

The upshot of the mainstream economic analysis of information production today is that the widely held intuition that markets are more or less the best way to produce goods, that property rights and contracts are efficient ways of organizing production decisions, and that subsidies distort production decisions, is only very ambiguously applicable to information.

The Diversity of Strategies in our Current Information Production System

The actual universe of information production in the economy then, is not as dependent on property rights and markets in information goods as the last quarter century's increasing obsession with "intellectual property" might suggest.

Table 2.1: Ideal-Type Information Production Strategies

Cost Minimization/ Benefit Acquisition Public Domain Intrafirm Barter/Sharing

Rights-based exclusion (make money by exercising exclusive rights - licensing or blocking competition)

Romantic Maximizers (authors, composers; sell to publishers; sometimes sell to Mickeys)

Mickey (Disney reuses inventory for derivative works; buy outputs of Romantic Maximizers)

RCA (small number of companies hold blocking patents; they create patent pools to build valuable goods)

Nonexclusion-Market (make money from information production but not by exercising the exclusive rights)

Scholarly Lawyers (write articles to get clients; other examples include bands that give music out for free as advertisements for touring and charge money for performance; software developers who develop software and make money from customizing it to a particular client, on-site management, advice and training, not from licensing)

Know-How (firms that have cheaper or better production processes because of their research, lower their costs or improve the quality of other goods or services; lawyer offices that build on existing forms)

Learning Networks (share information with similar organizations - make money from early access to information.

For example, newspapers join together to create a wire service; firms where engineers and scientists from different firms attend professional societies to diffuse knowledge)


Nonexclusion-Nonmarket

Joe Einstein (give away information for free in return for status, benefits to reputation, value of the innovation to themselves; wide range of motivations.

Includes members of amateur choirs who perform for free, academics who write articles for fame, people who write op-eds, contribute to mailing lists; many free software developers and free software generally for most uses)


Los Alamos (share in-house information, rely on in-house inputs to produce valuable public goods used to secure additional government funding and status)

Limited sharing networks (release paper to small number of colleagues to get comments so you can improve it before publication.

Make use of time delay to gain relative advantage later on using Joe Einstein strategy.

Share one's information on formal condition of reciprocity: like "copyleft" conditions on derivative works for distribution)

The ideal-type strategy that underlies patents and copyrights can be thought of as the "Romantic Maximizer."

Exclusive-rights-based business models, however, represent only a fraction of our information production system.

The most common models of industrial R&D outside of pharmaceuticals, however, depend on supply-side effects of information production.

An excellent example of a business strategy based on nonexclusivity is IBM's.

figure 2.1

Figure 2.1: Selected IBM Revenues, 2000-2003

Figure 2.1 shows what happened to the relative weight of patent royalties, licenses, and sales in IBM's revenues and revenues that the firm described as coming from "Linux-related services."

I began this chapter with a puzzle - advanced economies rely on nonmarket organizations for information production much more than they do in other sectors.

My point is not to provide an exhaustive list of all the ways we produce information.

The Effects of Exclusive Rights

Once we recognize that there are diverse strategies of appropriation for information production, we come to see a new source of inefficiency caused by strong "intellectual property"-type rights.

The diversity of appropriation strategies adds one more kink to this story.

Another kind of effect for the change in law may be to persuade some of the firms to shift strategies or to consolidate.

Given diverse strategies, the primary unambiguous effect of increasing the scope and force of exclusive rights is to shape the population of business strategies.

When Information Production Meets the Computer Network

Music in the nineteenth century was largely a relational good.

This stylized story of the music industry typifies the mass media more generally.

Information and cultural production have three primary categories of inputs.

Human communicative capacity, however, is an input with radically different characteristics than those of, say, printing presses or satellites.

Let's do a little experiment.

The difference that the digitally networked environment makes is its capacity to increase the efficacy, and therefore the importance, of many more, and more diverse, nonmarket producers falling within the general category of Joe Einstein.

When you multiply these very simple stylized facts by the roughly billion people who live in societies sufficiently wealthy to allow cheap ubiquitous Internet access, the breadth and depth of the transformation we are undergoing begins to become clear.

The known quirky characteristics of information and knowledge as production goods have always given nonmarket production a much greater role in this production system than was common in capitalist economies for tangible goods.

Strong Exclusive Rights in the Digital Environment

We now have the basic elements of a clash between incumbent institutions and emerging social practice.

The networked information economy has upset the apple cart on the technical, material cost side of information production and exchange.

There are diverse motivations and strategies for organizing information production.

Notes

1. The full statement was:

2. Suzanne Scotchmer, "Standing on the Shoulders of Giants: Cumulative Research and the Patent Law," Journal of Economic Perspectives 5 (1991): 29-41.

3. Eldred v. Ashcroft, 537 U.S. 186 (2003).

4. Adam Jaffe, "The U.S. Patent System in Transition: Policy Innovation and the Innovation Process," Research Policy 29 (2000): 531.

5. Josh Lerner, "Patent Protection and Innovation Over 150 Years" (working paper no. 8977, National Bureau of Economic Research, Cambridge, MA, 2002).

6. At most, a "hot news" exception on the model of International News Service v. Associated Press, 248 U.S. 215 (1918), might be required.

7. Wesley Cohen, R. Nelson, and J. Walsh, "Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not)" (working paper no. 7552, National Bureau Economic Research, Cambridge, MA, 2000); Richard Levin et al., "Appropriating the Returns from Industrial Research and Development"Brookings Papers on Economic Activity 3 (1987): 783; Mansfield et al., "Imitation Costs and Patents: An Empirical Study," The Economic Journal 91 (1981): 907.

8. In the 2002 Economic Census, compare NAICS categories 5415 (computer systems and related services) to NAICS 5112 (software publishing).

9. Levin et al., "Appropriating the Returns," 794-796 (secrecy, lead time, and learning-curve advantages regarded as more effective than patents by most firms).

10. Eric von Hippel, Democratizing Innovation (Cambridge, MA: MIT Press, 2005).

11. Eben Moglen, "Anarchism Triumphant: Free Software and the Death of Copyright," First Monday (1999), http://www.firstmonday.dk/issues/issue4_8/moglen/.