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The Internet, IT and the like are not re-writing the laws of human action. Quite the contrary: they conform to laws that have been recognised for at least 200 (and arguably 2000) years. Although there are and will remain some individual exceptions, as a whole and as a rule the nature of the property and property rights which attach to information, knowledge, It – and hence ‘tech’ companies – are intangible, transitory and weak. Further, the vast majority of market participants remain substantially or completely oblivious to the problematic economic status of knowledge, information and technology. Therein lie great and continuing dangers.
Classifying Goods and Services
Given the building blocks set out in Part II, transactions of goods and services can be classified according to the degree to which the goods they comprise possess the properties of exclusion of supply and jointness of consumption. The result, as set out in the table, is four idealised types of transactions: those involving ‘private goods’ (characterised by exclusion and individual consumption), ‘toll goods’ (exclusion and joint consumption), ‘common-pool’ goods (non-exclusion and individual consumption) and ‘collective goods’ (non-exclusion and joint consumption).
Four Ideal Types of Goods and Services
| |
Suppliers Find That It Is. |
| Consumption of the Good Is . |
Easy to Deny Access/ Exclude Consumers |
Difficult to Deny Access/ Exclude Consumers from Benefits |
| Individual |
Private Goods |
Common Pool Goods |
| Joint |
Toll Goods |
Collective Goods |
 Source: E.S. Savas, Privatization and Public-Private Partnerships
Private Goods
Private goods and services, such as Big Macs and haircuts, are consumed individually and cannot be consumed without the assent of their supplier. In the case of a meal at a restaurant or the services of a plumber, the consumer usually obtains this consent by paying the supplier an agreed price in exchange for the good or service. The existence of private goods thus implies the existence of markets and market prices. Under these conditions there exist incentives for entrepreneurs to supply these goods; entrepreneurs, in turn, have an incentive to supply them in the quantity and quality demanded by consumers. Private goods, then, can be and are supplied by private individuals and businesses – but collective action and government intervention will play important but nonetheless background roles in their provision (primarily establishing legal ground rules for market transactions and courts for the resolution of commercial disputes).
Common-Pool Goods
Like private goods, common-pool goods are consumed individually rather than jointly; unlike private and like collective goods, however, it may be impractical or impossible to restrict their consumption to the people who are prepared to pay for the privilege. From these fundamental attributes arise two problems. First, because they cannot (or can only with considerable difficulty) enforce payment, private entrepreneurs may have little or no incentive to produce common-pool goods. Second, this difficulty of enforcing exclusion when combined with rivalry of consumption gives consumers a great incentive to consume – i.e., plunder – large quantities of common-pool resources.
Consider as an example fish in the open sea. If no supplier can force me to pay for fish which I catch, then (assuming that the cost of collecting, harvesting, extracting, appropriating or otherwise taking direct possession of the fish does not exceed the marginal utility of the fish) I have every incentive to catch as many fish as possible. Indeed, I have this incentive even if I realise that my actions are depleting the stock of this otherwise-renewable resource: for if I do not mine them then somebody else most assuredly will.
These two incentives – the disincentive for private supply and the incentive for private consumption – often manifest themselves in the ‘tragedy of the commons.’ In plain English, resources which are owned by nobody will be plundered and depleted by everybody. Compare the Queensland species which are endangered (e.g., the bridled nail-tail wallaby, dugong, Southern tiger quoll, Julia Creek dunnart, Northern hairy-nosed wombat, greater bilby, etc.) with those which are not (e.g., Hereford, Shorthorn, Bradford and Murray Grey cattle, Merino and Rambouillet sheep, horses, dogs, cats, etc.). With no need to pay for such goods, and with no means to prevent their consumption, common-pool resources are usually consumed – and not infrequently squandered – to the point of exhaustion and extinction. The problem has long been recognised: in Aristotle’s words, “that which is common to the greatest number has the least care bestowed upon it.”
Toll Goods
Like collective goods, toll goods are consumed jointly; unlike collective goods and common-pool resources, however, those who are not prepared to pay for toll goods can (in principle if not in practice) be excluded from their use. Examples include roads and bridges and educational goods and services such as libraries and lectures. The more impractical or costly it is to exclude a consumer from the use of a toll good, the more the toll good resembles a collective good. Because exclusion is feasible, private individuals and businesses have an incentive to supply toll goods. Accordingly, as with private goods so too with toll goods: they can be supplied by the marketplace and government intervention need play no more than a relatively minor role with respect to their provision (again, establishing legal ground rules for market transactions and courts for the resolution of commercial disputes).
Collective Goods
Collective goods are consumed jointly, and it is difficult or impossible to exclude anyone from their use. The infrastructure of the rule of law (i.e., police, statutes, courts, etc.) and national defence are often-cited examples of collective goods. Under many circumstances individuals and private businesses have little or no incentive to supply such goods because exclusion is difficult and therefore no revenue can be derived from their provision. Further, because exclusion is not feasible the consumer has an incentive to become a ‘free rider’; that is, to use any goods provided without paying for them. As with common-pool resources, then, so too with collective goods: the incentives to produce them are scanty and the incentive to consume them are great.
The Paradox of Information and the Information Economy
This classification and the building blocks which underlie it have an implication which is as fundamentally important as it is poorly recognised. In two respects and depending upon the good in question, digitised information, knowledge technology and the like – the basis of the much bally-hoo’d Internet and IT Revolutions – resemble collective goods. First, it is not easy to exclude non-payers from the consumption and enjoyment of information and ideas. The usual way to achieve exclusion is through technical devices (such as scramblers and passwords) and legal contrivances (such as patents). The inherent difficulty of and cost associating with the exclusion of non-payers means that the phenomenal rise of the Internet has necessarily been accompanied by the growing prominence of – and disputes over – ‘intellectual property.’ Hence lawyers and governments, once disdained by entrepreneurs and valued only to uphold clear rules of law and keep entrepreneurs out of court, are now key players who are engaged precisely in order to drag competing entrepreneurs into court. Yet for ‘non-exclusive’ goods or services, litigation, regulation and government intervention are clumsy, incomplete – and perhaps ultimately ineffective – means of enforcing the exclusion principle upon which commercial viability depends. Just ask the record companies chasing Napster – to say nothing of Gnutella and Mojo Nation.
Second, the consumption and transmission of expertise, information and ideas – and therefore one of the New Economy’s most important manifestations, computer software – often violate the principle of rivalry. Any number of consumers can jointly use a single copy of some types of software (indeed, they are designed for this very purpose), and one person’s use does not decrease others’ use and enjoyment. More generally – and as its evangelisers never tire of telling us – the Internet makes it possible for many people to copy and transmit vast amounts of information instantaneously, almost anywhere and at virtually zero cost. For producers of digitised information, however, this is a potential disaster: goods which can be easily copied and distributed will quickly become low-value commodities.
Clearly, then, if consumption is non-rival and exclusion is difficult to enforce, the establishment and maintenance of clear rights of private property and private ownership over information – particularly digitised information – will not be straightforward. Very few of today’s market participants have acknowledged – much less come to terms with – this acute difficulty. Bill Gates, however, articulated it clearly in his “Open Letter to Hobbyists” in 1976. Long before Microsoft’s rise to colossus, Mr Gates remonstrated against the practice of sharing software. The result of such “piracy,” as Gates called it, was the prevention of “good software from being written. After all,” he asked rhetorically, “who can afford to do professional work for nothing? What hobbyist can put three man-years into programming, finding all bugs, documenting his product and distribute it for free?”
Yet Linus Torvalds, the father of Linux, has done just that, devising a free PC-operating system which (according to some experts) is considerably more stable and less prone to bugs than Microsoft’s Windows programs. One of Linux’s other products, the free Apache Web server software, has a 60% market share (versus 20% for Microsoft’s competing Internet Information Server). It comes as no surprise that in remarks to Morgan Stanley Dean Witter in January 2001 Microsoft CEO Steve Ballmer referred to open source software in general and Linux in particular as “threat No. 1.”
In general terms, the difficulty of establishing and maintaining clear rights of private ownership over information has been recognised for more than 200 years. As noted by polymath and U.S. President Thomas Jefferson, the exclusion principle cannot be applied to knowledge and information: “If nature has made any one thing less susceptible than all others of exclusive property, it is the action of the thinking power called an idea, which an individual may exclusively possess as long as he keeps it to himself; but the moment it is divulged, it forces itself into the possession of everyone, and the receiver cannot dispossess himself of it.”
With respect to rivalry of consumption, Jefferson also noted that “the peculiar character [of ideas], too, is that no one possesses the less, because others also possess the whole of it. He who receives an idea from me, receives instruction himself without lessening mine. That ideas should freely spread from one to another over the globe, for the moral and mutual instruction of man. seems to have been peculiarly and benevolently designed by nature, when she made them, like fire, expansible over all space, without lessening their density at any point. [Knowledge, information and ideas], then, cannot in nature be a subject of property.” If so, then some disturbing consequences necessarily follow. Most importantly, in the words of Tom Bethel, author of The Noblest Triumph: Property and Prosperity Through the Ages, under these conditions “a lot of economic value [becomes] precarious.” Alan Kohler, writing in The Australian Financial Review Weekend Edition on 14-15 October 2000, put it more bluntly: “... the so-called intellectual property of many so-called new economy businesses is nothing more than a promoter’s silver tongue.”
...continued in Part IV
 
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