Friday, April 09, 2010

A Schoolboy Economist's views on DRM and the Future of Western Civilisation

1. I am not an economist. My musings are built on a shaky understanding of the neo-classical model gleaned from a couple of undergraduate level courses in macro and micro economics.

2. One concept that seems key to me is the whole notion of a public good versus a private good. Private goods are exhausted by consumption. If I eat this cake (a typical private good) then you can't have it too. Public goods on the other hand are not exhausted by consumption. Fresh air is a public good. My enjoyment of a fresh country breeze does not prevent you from enjoying exactly the same thing.

3. Experience has shown that free markets struggle to deal with public goods. A major difficulty is known as the "Free Rider Problem". Free riders can enjoy the benefits of public goods without sharing in the cost of producing them. This can lead to underproduction (I am not going to waste time and effort making something for you to enjoy) or overproduction (everybody makes their own even though only one is required for everyone).

4. Because of the free rider problem governments regardless of their political leaning, will often intervene in the market to regulate the supply of public goods. Various types of intervention may be used:
- In some cases governments may directly control the production and supply of the public good. This method is often used for roads or for public parks.
- In other cases they may allow private enterprise to provide the public good under a regime of strict regulation. Electricity and Gas networks sometimes come under this model. The financial system is also an example of this model albeit in recent times not a very happy one.
- Another method to solve the free rider problem is to impose laws which try to turn public goods into private goods. If you can somehow restrict access to a public good then you can treat it like a private good and let the free market control supply and demand. Toll roads are an example of this principle and of course the whole concept of intellectual property is another.

6. Information is clearly a public good whether it is an idea, a design , a piece of music, a story or an image it is not exhausted by consumption. Intellectual property rights are an artificial concept created to turn information into a private good that can be supplied through the normal free market.

Distinction - The design of a thing is a public good. Each copy of the good that is made is a private good. So the design of an Ipod is actually a public good (despite the fact that Apple spent millions designing it) but every individual Ipod is a private good.

7. This method of dealing with the free rider problem is central to the whole Western Economy. It can be argued that it has served us very well. By turning information into a private good it has created the incentive for people to invest time and effort into developing new ideas and inventions.

8. However it can also be argued that the very artificiality of the concept of "intellectual property" has meant that the laws required to enforce it are arbitrary, crude and unjust. As an extreme example consider the case of a child who dies for want of a drug which costs €0.01 to make but is sold for €100.

10. Large parts of the world do not adhere to the Western view of intellectual property. Yes their governments may pay lip service to the notion in global trade talks but the reality in many many countries is that intellectual property rights are unenforceable.

11. Traditionally those countries that do not follow the IP model have been poorer than those that do - lending some weight to the argument that IP is a useful notion.

12. In recent decades a curious thing has happened. The West has effectively abandoned the production of private goods and has instead subcontracted their production almost exclusively to other countries, in particular China, where the concept of intellectual property is not really supported. The West has continued to enjoy a higher standard of living but the whole Western economy is now almost entirely dependent on the creation, ownership and control of public goods using the mechanism of property rights.

13. The advent of new forms of information technology has made it harder and harder to enforce the artificial controls on intellectual property. Unsurprisingly this has led to increasingly bizarre and more restrictive laws being passed by Western Nations in order to try and maintain control.

14 There is a large cohort of people living in the West (including most young people by all accounts) who actively reject the whole notion of intellectual property and actively flaunt the laws and try to resist new intellectual property laws. Given the artificial nature of intellectual property and the increasingly unfair restrictions being put in place to try and shore the concept up such views are entirely understandable. In fact a world without intellectual property laws would probably be a fairer juster place.

15 However - given that the entire Western Economy is built on the tenuous concept of intellectual property it seems almost certain that the weakening of intellectual property laws will lead to a collapse of the Western economy and a collapse of the artificially high standard of living enjoyed by people living in the West. Westerners who argue against restrictive DRM and IP protection laws really are like turkeys voting for Christmas.

16 I think this is probably the defining conflict of our age. The battle of East versus West is not going to be fought by US Marines on the Mongolian Steppes. The main face-offs are happening in the boardrooms and courtrooms of Brussels and Washington while the incisive battles are being won or lost in the bedrooms of self taught hackers.


Stabs said...

Yeah this pretty much nails it.

Seems inconceivable to me that western economies will continue to be richer than anyone else's as we progress through the century.

Everything of value we export could be made cheaper elsewhere.

Obviously in games the cheaper areas are still struggling with production values - crappy Korean games and money-grabbing Russian f2ps.

But Allods came really really close until they got greedy.

It also doesn't help that the US games industry is exploding with litigation at the moment adding considerably to the cost of business.

Here in the UK our government announced tax breaks for games companies in the recent budget. Too little too late though.

mbp said...

@stabs said Seems inconceivable to me that western economies will continue to be richer than anyone else's as we progress through the century.

To be honest this is the thought that keeps me awake nights. For the last twenty years the story of development has been all about second world nations doing their best to catch up with the wealth levels of the first world. As we go forward it seems much more likely to me though that instead of everyone else catching up with the first world a much more likely scenario is that the standard of living of former first world nations will fall back to that of every one else.

Stabs said...

I wouldn't lose sleep over it.

Just make sure your pension is not dependant on the state of the Irish economy and welfare system in 2035.

The government will have less money but property will still be reasonably valuable until later in the century and pension funds based on the stock market will be really healthy*

I don't know the Irish system but to put it in my native terms as a Brit my National Insurance is rather wasted as I'll see very little of that back from my government but my private pensions and my flat are perfectly viable assets for my lifetime.

(*Assuming no major changes in the status of the world such as World War, armageddon, climate collapse etc).

Anonymous said...

It's mostly just whining by the big music companies. It's all happened before. Only difference is this time they are bigger and therefore have stronger lobbying powers. They're not interested in a compromise like they use to have with tapes.

Stabs, you're being rather negative about the economic outlook. Economies will keep growing. And, yes, the "Asian Tigers" will keep growing faster for some time yet.

All the cheap renewable electricity that's on the drawing boards will spur on even more growth. Latest generation solar cells are so cheap and fast to produce on massive scales that it'll change the world almost unbelievably. The often bandied around all-electric car will happen this time for sure.

Then fusion power ... In a few decades time the base load capacities will need superconductors for transmission!

Then the space elevator ... all 36000km of it straight up ... now that's something I'd love to ride! :)