Academic journal article Journal of Economic Issues

Free Ride: An Institutionalist Analysis of Information in the Internet Age

Academic journal article Journal of Economic Issues

Free Ride: An Institutionalist Analysis of Information in the Internet Age

Article excerpt

The distribution mechanisms for intellectual property are undergoing radical change. Until recently, intellectual property distribution was constrained by the technology of mechanical reproduction: LPs had to be pressed, CDs had to be burned, books and other written works had to be physically reproduced, videos and movies had to be copied onto tape or film stock, software had to be put on discs, and all had to be packaged and shipped to retailers and consumers. Under these technological constraints, intellectual property could be produced and sold in the same manner as shirts, footballs, and gallons of gasoline: all items were divisible, exclusive, and depletable and hence could be successfully sold through private markers.

The Internet, combined with high-speed modems, large-capacity disc drives, data compression algorithms, and the digitization of much information, is revolutionizing the markets for intellectual property. Digitized information is indivisible, non-exclusive, and non-depletable and hence is a public good by definition. As is commonly understood, the production of public goods will wither in private markets as sellers are unable to compel enough consumers to pay for the enjoyment they receive. While the production of new music, television programming, and motion pictures may be considered less urgent than that of some public goods such as national defense, these goods and services may nonetheless contribute greatly to our culture and welfare, and the production of new software and certain other intellectual property (such as scientific knowledge) often enhances productivity and living standards, Any threat to the production of such new intellectual property must be taken seriously.

The instrumental-ceremonial dichotomy provides a uniquely useful paradigm for analyzing the threat posed to intellectual property production by new technologies. Additional institutionalist concepts such as ceremonial encapsulation, the idea of instrumental efficiency as a constraint on technical efficiency, and the institutionalist approach to certain resource issues will allow us to recommend policies for exploiting these new technologies for the common good.

Profits versus Production

Mainstream economics includes two efficiency criteria: allocative efficiency is met when production of a good or service occurs up to the output level at which marginal benefit equals marginal cost; productive efficiency is achieved when an item is produced at the lowest possible average total cost. Any policies which push outcomes closer to allocative and/or productive efficiency are deemed desirable. In the case of digitized information distributed via the Internet, problems arise in meeting these efficiency criteria: since almost the total cost of production is fixed and the marginal cost of distributing content is virtually zero (excepting the nominal cost of bandwidth), both allocative and productive efficiency are achieved only through enormous output levels and market saturation. Given the unlikelihood of such production and distribution of intellectual property, it seems that this analytical approach may be fruitless. More broadly, mainstream economics presumes scarcity of goods and services, and henc e is simply inapplicable to situations of abundance.

The threat posed to intellectual property production by the combination of new technologies and information sharing is a classic case of technology versus ceremony. In this institutionalist dichotomy, technological developments which are capable of generating instrumental advances may conflict with established patterns of thought and behavior which tend to be past bound and constraining. Given that most intellectual property is now produced in digitized form and that much of it is available via the Internet (either at legitimate commercial sites or through unauthorized sites), the marginal cost of providing a download to a user is virtually zero. …

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