SYNOPSIS: The new economies of free information

Aw, Jeez, I Am So Sorry...

Go ahead, read this column. It won't cost you anything more than the $4.95 you paid for the magazine. You don't even have to buy it: just borrow someone else's, or read it at the dentist's, or photocopy it; maybe there's a free version on the Internet. If you read the column without paying, no harm done--it doesn't cost me anything or prevent anyone else from reading it. Whoops--my editors have just made a point: If you don't buy the magazine, FORTUNE doesn't make money and can't pay me. So cancel what I said: if you don't pay, you're ripping me off, and posting a free copy on the Net is an act of theft.

Of course, those rules are not enforceable, and maybe shouldn't be: If readers who wouldn't otherwise buy FORTUNE sneak an illicit peek at my column and learn something, nobody is hurt. But don't tell me, or I'll have to report you to the intellectual-property police.

Hey, isn't the free market supposed to solve this sort of thing? Well, no. FORTUNE produces and sells information, and that is a business in which markets have never worked well and will probably work even less well in the future. Thanks to the Internet, traditional information producers--publishers, record companies, economists--are finding it ever harder to allow access only to those who buy the information. And since we are becoming an "information economy," one in which people are producing information rather than goods, FORTUNE's problems today will be everyone's problems tomorrow.

Recently, an economist and a lawyer--Berkeley's Brad DeLong and Miami's Michael Froomkin--collaborated on a paper titled "The Next Economy," analyzing how the information economy of the future is likely to work. It makes depressing reading. To make money in the marketplace, they say, companies must be able to deny their products to those who haven't paid. But information is not naturally "excludable," so that making it so may require spending lots of money to deny information to others (e.g., FORTUNE could end up spending more on chasing those who illicitly circulate my column than it pays me to write it). And what is my column, anyway, chopped liver? No: If you eat some chopped liver, you prevent someone else from eating it, and that's not the case with reading my column. Stopping you from reading it deprives you of my wisdom without any offsetting gain.

Or to use an old economics metaphor: producing information is like putting up a lighthouse that can be used by those who helped build it and those who didn't. The problem is that no one has an incentive to help build the lighthouse.

Well, people will find ways to make money in the information economy. There are two strategies. One is to make products excludable, possibly at considerable cost: Replace the lighthouse with coded navigational signals and charge a hefty fee for the decoding devices. The other is to use the free information to sell something else, such as advertising: On top of the lighthouse have a huge neon sign that says EAT AT JOE'S. But both strategies have unfortunate side effects. If you try to make information artificially excludable, using resources not to create information but to hide it, you'll be behaving in what might be seen as a spiteful manner--and cause a few unnecessary shipwrecks. And when information is used as a loss leader that sells other products, the information you get won't necessarily be what you need: massive coverage of Posh Spice, not much on Chinese deflation.

What can we do about it? The traditional answer to market failure is government intervention. But prophets of the information economy tend to be free-marketers, with good reason: However badly markets may work in the fluid new world of information technology, government bureaucrats would do worse. Maybe the government can set ground rules. DeLong and Froomkin suggest instituting the legal principle that information is in the public domain unless specifically exempted, putting the burden of proof on those who would try to make it excludable. The truth is that nobody knows how to make an information economy function. We are heading for a world in which Adam Smith's invisible hand has lost its touch, in which the argument for free markets is not that they do it right, but that the alternatives are worse.

Maybe there is some other way to think about this; surely it is important that economists make a major effort to understand how the Next Economy will work, and how to make it work better. But why should we try? After all, there's no money in it.