The Economics of Information in a Post Carbon Economy

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The Economics of Information in a Post Carbon Economy

Joshua Farley, University of Vermont

Ida Kubiszewski, Portland State University

Economics is frequently defined as the allocation of scarce resources among competing desirable ends. Most economists focus on markets as the ideal allocative mechanism. One critical resource required for any economic activity, from gathering edible plants to genetically engineering them, is information, or knowledge. As a result of the exponential increase in new technologies and knowledge, we now live in what is commonly called the information age. Another critical resource is energy, an essential input into any economic activity. Explosive advances in knowledge, during the 18th century, allowed human society to shift from the finite flow of current solar energy, available at a fixed rate over time, to the finite stock of fossil energy, which can be used virtually as fast as we like.. We have become so dependent on fossil fuels that we could not feed ourselves without them—we currently use an estimated 7-10 calories of hydrocarbons to produce, process, transport, and prepare each calorie of food we consume (Pimentel & Pimentel 2008). Access to such concentrated energy allowed humans to increase the rate of extraction of raw materials from nature and i waste emissions back into nature, with all the harm to ecosystems and human well being inherent to both activities. The market economy emerged simultaneously with the fossil fuel economy. Though most economists attribute the explosive economic growth of the past two centuries to the magic of the market, it would have been impossible without the magic of fossil fuels.

Fossil fuel stocks are finite.. Discoveries peaked during the 1960s then declined precipitously during subsequent years. In spite of amazing advances in technology, conventional oil production peaked around 2006 (International Energy Agency 2010) (IEA). We have likely used half the planet’s finite supply already, and remaining oil is less accessible, of lower quality, and requires more energy to extract, offering a lower energy return on energy invested (Campbell & Laherrere 1998). Even if fossil fuels were infinite, we have exceeded the planet’s capacity to absorb their waste products, threatening catastrophic destabilization of the global climate. Whether due to source or sink constraints, if human society is to thrive, it must shake its dependence on fossil fuels and undo the damage it has caused.

Information will play a central role in this transition. Addressing climate change and peak oil will require major advances in low carbon energy technologies. Creating sustainable food systems will require technologies that increase agricultural yields while reducing ecological impacts and dependence on fossil fuels. Addressing natural resource depletion and environmental degradation will also require new green technologies. .

Given the central and growing importance of information in our economy, it is critical that we assess what type of economic institutions are most effective at allocating resources towards the production of appropriate information and that information among different users. Economists recognize that information has the unique characteristic that it improves through use. Information is therefore not a scarce resource in an economic sense, and we cannot assume that markets efficiently create and allocate new information. There has nonetheless been a tremendous global effort in recent decades to force information increasingly into the market economy, strengthening patent protection across international borders, lengthening patent and copyright duration, and extending intellectual property rights to ever more types of information (Boyle 2003; Jaffe 2000).

The goal of this chapter is to assess the effectiveness of market forces for producing the most potentially valuable information at the lowest costs, for maximizing its value among users, and to compare markets with alternative economic institutions. To achieve this, the paper:

Identifies appropriate criteria for assessing different economic institutions for the production and dissemination of information;

  • Analyzes the unique physical characteristics of information and the most pressing problems confronting human society that require new information and technologies to solve;

  • Assesses the effectiveness of markets in producing the most desirable information, and in minimizing the costs of production;

  • Assesses the effectiveness of markets in allocating information among potential users; and

  • Explores alternative mechanisms for producing appropriate types of information at minimum cost that maximize its value after production.

Assessment Criteria: the Desirable Ends

Implicit in the definition of economics are the criteria for assessing economic institutions: how effectively does a given institution achieve some particular set of desirable ends? Economists have conventionally defined the desirable ends of economic activity as utility maximization, where utility is a measure of relative satisfaction, or “the greatest happiness” for the greatest number of people (Bentham 1907; Mill 1871). Conventional economists typically assume that consumption provides utility and what we pay for the goods we consume is an objective measure of the utility they provide. They also claim that we cannot meaningfully compare utility between people, and therefore our goal should be to maximize total monetary value in the economy.

Under certain rigid assumptions, markets achieve this goal. Markets use the price mechanism to decide how to allocate resources among different products and how to allocate those products among different users. The basic mechanism can be split into two parts: the allocative function of prices and the rationing functioning. We can think of the allocative function as how raw materials are apportioned among different products. Many different firms are competing for raw material inputs into production, such as oil and steel, and whoever is willing to pay the most wins the resource. If I am able to convert the resource into a product of higher value than my competitor, I can afford to pay more than my competitor. This ensures that resources are allocated towards the highest value products. The rationing function of price awards products to whichever consumer is willing to pay the most for them. This ensures that those products go to whoever values them the most in monetary terms. Markets therefore maximize monetary value on both the production and consumption sides. When economists state that markets are efficient, they mean that markets maximize monetary value. If maximizing monetary value is our goal, then markets would appear to be an excellent economic institution (Farley 2008).

However, the “greatest number of people” should include future generations, in which case ensuring sustainability takes precedence over maximizing current monetary value. Future generations cannot participate in today’s markets, and market values do not reflect their preferences. To ensure sustainability we must not deplete renewable resources faster than they can reproduce, cannot deplete essential non-renewable resources such as oil faster than we can develop renewable substitutes, and cannot emit waste into the environment faster than it can be absorbed (Daly 1990). Our efforts to maximize monetary value for the current generation come at the cost of sustainability.

But even if we ensure sustainability, it is not at all clear that monetary value is what we want to maximize. Monetary value is determined by preferences weighted by purchasing power. Someone who is destitute and starving does not value food, someone who is destitute and ill does not value health care. The conventional economists’ assumption that we cannot compare utility between individuals is unrealistic: a good meal obviously provides more utility to a starving person than to an overfed one by almost any metric besides that of monetary value.

This chapter will take the position that the desirable ends of economic activity must include the satisfaction of basic biological necessities for growing populations now and in the future. Concern for future generations means that we must ensure sustainability. The most serious threats to basic needs and sustainability include global climate change, peak oil, natural resource depletion, food security, biodiversity loss, and global pandemics, among others. Information must play an important role in solving any of these problems. Given the severity and urgency of these threats, we must ensure that our economic institutions are well-suited for producing the required knowledge and disseminating it as effectively as possible.

The Nature of the Resource: characteristics of information relevant to its allocation

Economics typically focuses on scarce resources. If I burn a barrel of oil, that oil is no longer available for you to burn; if ecosystems sequester the CO2 I spew into the atmosphere, they have less ability to sequester yours. Because my use leaves less for you to use, we must compete for access to the resource. Economists use the terms rival or subtractive to describe such resources: use by one person leaves less for others. If society fails to ration access to scarce rival resources, anyone who wants can use them. The likely result is unsustainable over-use or under-provision, unjust distribution, and inefficient allocation towards activities that do not generate the greatest monetary value or towards people who do not value them the most.

However, information is a non-rival resource: one person’s use of information has no impact on the amount of information left for others to use. More accurately, information is actually an additive resource that improves through use (Kubiszewski et al. 2010), and this additive nature of information is what led to the rapid development of technologies and civilizations. If we look back over time, the rate of technological progress was exceptionally slow for the first 200,000 years or so of human existence—small bands of hunter-gatherers roamed the countryside looking for food and technological advances were separated by millennia. The invention of agriculture however allowed denser populations and the more rapid circulation of ideas, which improved through use. Written language emerged, allowing ideas to be stored and transmitted more easily. As the rate of flow of information increased, so did the rate of technological change. Mercantilism and industrialization led to more rapid communication of ideas between cities and across cultures, contributing to an even more rapid rate of increase in knowledge (Diamond 1997). For example, when Genghis Khan conquered most of Asia, the Middle East, and Eastern Europe, he adopted new technologies and spread them across his empire. Equally important, he opened up and protected trade routes, allowing people and ideas to continue to spread. As ideas spread, new users found ways to improve them. The spread of information through Genghis' conquest may have ultimately paved the way for the European Renaissance and the industrial revolution to which it led. Genghis Khan could be considered the father of the modern age (Weatherford 2004).

Many low carbon alternatives to fossil fuels are effectively non-rival. For example, no matter how many photons we capture for solar energy in North America, it will have no impact on the number available in the rest of the world. If we freely share technologies for capturing solar energy with other countries, those countries are likely to burn less fossil fuel, improving everyone’s quality of life. The more scientists and industries experiment with these new technologies, the faster they are likely to improve.

As many people in the commons movement point out, information is like grass that grows longer and more nutritious the more it is grazed, so everyone should be free to graze on it as much as possible. In reality however, an increasing amount of information is patented or copyrighted. People are not allowed to use it unless they pay. The WTO TRIPs (Trade Related Intellectual Property) agreement was the greatest expansion of IPRs in history (Tansey 2002). In spite of this expansion in IPRs neither patents nor copyrights can make access to information completely excludable, so that even those who do not pay may benefit. The result is that the private sector is likely to invest less in R&D than is socially optimal (Arrow 1962). Accumulating evidence suggests that restricting access to information has slowed the rate of growth of knowledge (Heller & Eisenberg 1998; Paul 2005; Runge & Defrancesco 2006).

Why Price Information? The Logic of the Market

Competent economists recognize that the price mechanism only maximizes monetary value for resources that are competitive in use, also known as rival or subtractive resources. The rationing of non-rival resources creates artificial scarcity and actually reduces the economic value of the resource.

Paradoxically, the value of existing non-rival resources is maximized at a price of zero. This is readily evident from an example. If someone develops an inexpensive, safe, and carbon free substitute for fossil fuels, the more people that adopt this technology, the better off society is. Placing a high price on the technology (i.e. the information required to produce it) would reduce adoption and increase the probability and severity of climate change. In more technical terms, net benefits to society increase whenever the marginal social benefits (i.e. the benefit from one additional ‘unit’) of an activity exceed the marginal social costs. The marginal cost to society of disseminating information is nearly zero. Individuals continue consuming resources as long as the marginal benefits they receive are greater than the price, and if forced to pay for access to information or other non-rival resources, will stop consuming them long before their marginal benefit falls to zero. In economist’s terms, this creates a dead-weight loss of economic surplus—a loss of value. The price mechanism fails to maximize value for non-rival resources.

Prices also pose problems for the creation of new knowledge. If we accept the conventional economist’s notion of value, then the marginal value (i.e. the value of an additional unit) of a rival resource is determined by the greatest amount any single individual is willing to pay for it. If this exceeds the cost of producing an additional unit, profit is possible, or at least a fair return on the labor and resources used in production. However, the marginal value of a non-rival resource is given by summing the marginal benefits across all users (Samuelson 1954). The sum of marginal benefits to all users of the clean energy technology described above may far exceed the research and development costs at a price of zero. However, as soon as the producer charges for use, the number of users and hence total value of the technology decreases. Again, the value to society is maximized at a price of zero, but at such a price there is no market incentive to produce new information.

Patents and copyrights are an effort to solve this paradox. Intellectual property rights, in essence, give a state-protected monopoly to information for a limited time. According to the US Constitution, their purpose is “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” When the patent expires, the price of information reverts to zero, maximizing the value of the invention. The belief, albeit far from unanimous1, was that positive incentives for innovation overwhelmed the negative impacts of monopoly.

Both patents and copyrights initially lasted 14 years, and were national, not international. Fourteen years of monopoly profits were considered adequate incentive for the private sector to develop new ideas. When such patent laws were first put in place, technology moved slowly, and inventions might have a useful life of many decades. Governments were often much smaller, with fewer resources to invest in publicly sponsored research and development. In such a context, intellectual property rights were perhaps a good idea, though even this is subject to debate (Arrow 1962; Boyle 2003; Jaffe 2000).

However, under the aegis of the World Trade Organization, patents are now international, and last 20 years. Copyrights in the US have been extended to 70 years beyond the death of the author or to 95 years for anonymous works or those produced for others (e.g. corporations). The cost and ease of transmitting information around the world has plunged to almost zero, making information increasingly non-rival and non-excludable, more of a pure public good. The contribution of information to value added has also increased. Society has responded by trying to strengthen intellectual property rights (IPRs) to maintain the incentives for innovation (Boyle 2003), at considerable cost. At the same time, the rate of change of technology has increased exponentially, and new technologies frequently have a useful lifespan shorter than the patent or copyright that protects them. In essence, governments now spend considerable money protecting monopolies for the useful life of a product or idea, even as costs of dissemination approach zero.

In the presence of such dramatic changes, we must assess whether or not the market price mechanism is an effective institution for allocating resources towards the production of knowledge that is the most valuable to society, then allocating that knowledge among users in a way that maximizes its value once it has been produced.

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