Rickard Falkvinge: Economics 101 for Newcomers to Discussion on Sharing and the Sharing Economy

Economics/True Cost, Knowledge
Rickard Falkvinge
Rickard Falkvinge

Economics 101 For Newcomers To Discussion On Sharing

Infopolicy:  This is a primer on some fundamental concepts of economics: property, sale, goods, services. In the discussions around sharing of culture and knowledge, many words are thrown around that make no sense in the context of the discussion. Therefore, this is a reference article to use and link to in such discussions.

Our economy is a market economy. That means each and every person, over and above governmental welfare programs, is responsible for finding their own paycheck. This happens in one way, and one way only: a person makes a sale.

This concept, the sale, is the only thing that entitles a person to any money at all in our economy. You can sell two things: goods and services.

  • When you are selling goods, property is exchanged for value.
  • When you are selling services, something other than property is exchanged for value.

In the very common special case of an employee in our economy, a person sells 40 hours of service a week in exchange for value. Entrepreneurs, the focus of this article, can make sales of both goods and services – so for the rest of this article, we disregard the special case of employees.

(Another special case of contracts have an exchange of value is not discussed here, as they don’t concern brief and efficient interactions on a free marketplace, but significantly more complex, long-term relationships.)

This leads us to the first important observation:

Sunk costs and spent work are irrelevant to the economy. If you have spent two years creating something, that entitles you to exactly nothing. If you have spent thirty fantasillion euros perfecting your pet project, nobody cares. The only – only – thing that entitles you to money is a sale.

Nobody gets to be entitled to money because they have spent the past two years learning a skill, buying equipment, or doing something they enjoy (or don’t enjoy, for that matter). They get entitled to money when a sale happens.

This leads us to the important definition of property, in order to learn the difference between sale of goods and sale of services. In economics, property is either a tangible object or a piece of land. You could say that for something to be property, you must be able to either touch it or stand on it.

Definition of property: a "thing" (which you can touch) or land

The money-in-the-bank fallacy: At this point, defenders of monopolies and protectionism tend to mock this axiom and pick the example of how “their money in the bank” is “obviously their property”, and yet, that money in the bank account is not touchable and wholly abstract. But it would be they who argue such who are in the wrong. Money deposited in the bank is the bank’s property. You deposit coins and notes (touchable) in the bank against a contractual obligation that the bank will give coins and notes back to you on request – quite likely other coins and notes than those which were your deposited property. If you are unsure of this observation, check the economic definition again. The bank holds all four property rights.

To wit: if the bank refuses to let you withdraw money, it is legally not theft, but an unfulfilled obligation. Hence, money you deposit in the bank is the bank’s property.

With this, let’s examine a couple of common but confusing phrases, as they don’t clearly separate the fundamental concepts of economy.

I have sometimes seen “sale of digital goods”, referring to downloads. This is one example of self-contradictory wording. If no property changes hands, there is not a sale of goods at all. When you are charging to let somebody download a data stream, you are selling a service. This distinction is important. There is no such thing as “digital goods”. When charging for access to the data stream, you are charging to let somebody else manufacture their own copy of a data stream using their own property (computer, storage, network equipment). Again, no property is transferred in such a sale.

When you are selling a DVD, however, you are selling goods. Property is transferred in exchange for value. And you are selling the entire DVD, the full DVD, and nothing but the DVD. There is no such thing as “selling the DVD but not the film on it”. That concept does not exist. You are selling the physical object, every atom of it and their internal arrangements, along with every piece of information that they carry. However, other people can hold a monopoly on duplicating that information, limiting your normal property rights to your own property. We’ll return to that shortly.

The worst weaselphrase by far in deliberately confusing basic economic concepts is “Intellectual Property”, as in the concept of non-material property: this is something that goes beyond merely not existing. The phrase itself is as meaningless as “solid vacuum” or “the square root of turquoise”. The phrase is conceptually self-contradictory. Not only is there no such thing, it’s conceptually impossible for such a thing to exist. Property, by definition, is tangible. You cannot say “non-propertizable property” and expect the term to carry meaning.

That phrase is only PR semantics intended to politically legitimize what the copyright monopolies, patent monopolies, etc. are: governmentally-sanctioned private monopolies, or as lawyers say, exclusive rights, and attempting to legitimize them by deceptively masquerading them as something else entirely. These monopolies, these exclusive rights override property rights to an object.

Let’s take that again, because it is important: the copyright monopolies and patent monopolies override property rights to an object. They are limitations of property rights. This can be easily observed in the actual copyright monopoly law text of the United States, which lists six specific actions for an object that are reserved for the copyright monopoly holder, regardless of who owns the object – regardless of whose property it is. Normally, these six actions would be part of very typical property rights, but when you buy a DVD or similar goods, your rights to your own property are limited by this monopoly.

A monopoly is a privilege granted by a legal framework that gives somebody the right to prevent others from exercising normal property rights, and is a very strong market intervention. The copyright monoply and patent monopolies are two examples of such monopolies. (If I hold a monopoly on putting two planks at an angle to one another, I can call on the monopoly-issuing government to prevent you from placing your two planks – which are your property – at such an angle.)

So with the basics settled, let’s examine the sharing of culture and knowledge in proper economic terms. Let’s take a film, just to illustrate.

When somebody buys a Blu-Ray disc with a film on it, that disc becomes their property in full. However, instead of watching it, they can read the encoded information off that piece of their property onto another piece of their property, a storage unit like a hard drive. We call this process “ripping”. Then, using a third piece of their own property, they re-encode the bitpattern that makes up the movie — still all stored on the buyer’s property, and therefore intrinsically part of the buyer’s property — into a more convenient format, typically MPEG-4 encapsulated in a Matroska container. We call this process “encoding” and it all happens within the buyer’s property, exercising normal property rights.

Finally, the encoded new bitstream – the Matroska encoding of the movie, which resides on the buyer’s storage and is the buyer’s property – is shared in blueprint format, again using only the original buyer’s property (networking equipment). This time, the action is combined with other pieces of property that belong to other people, people who volunteer their property (networking equipment, storage, etc.) for the sharing to take place.

In this way, other people are able to use the shared blueprint in order to manufacture the same bitstream using their own property (storage, networking, computers), and thus, the original movie gets duplicated into more physical copies as people manufacture them.

Now, let’s compare this to the economic basics we just learned. The most obvious thing is that no sale happened anywhere in the process, so nobody is entitled to any money in a free market. It can be argued that a monopoly was violated, and it quite likely was. But that’s also what happened. A manufacturing monopoly was violated, the first action of the six monopolized actions. Somebody manufactured an object without paying governmentally-forced license fees.

We can also observe that no property has changed hands as part of the process. Everybody is using their own property to share blueprints and to manufacture from those blueprints. Therefore, by definition, nothing has been stolen and nothing has been taken.

In particular, nobody is “taking somebody’s work”. That is conceptually impossible. The only thing that entitles somebody to money is a sale. Sunk costs and sunk work are irrelevant and entitle to nothing. Further, there has been no transfer of property in this sequence of events. You cannot steal a service, you can only steal property, by definition. (As you are not taking somebody’s work, you are not taking it “without paying” or “without permission”, either.)

Note that this article doesn’t discuss whether the copyright monopoly is good, bad, righteous, or anything else. It merely establishes what it is: a monopoly, a governmentally-sanctioned private monopoly, intended to create effects that “promote progress of science and the useful arts“. Note how that link correctly speaks of “exclusive rights”, monopolies, by the way.

The next time somebody asserts a defense of the copyright monopoly where they clearly don’t understand economic fundamentals, quote this article and link them to it. Example:> But you are taking their work without permission!Nobody is “taking somebody’s work”. That is conceptually impossible. The only thing that entitles somebody to money is a sale. Sunk costs and sunk work are irrelevant and entitle to nothing. Further, there has been no transfer of property. You cannot steal a service, you can only steal property, by definition. (As you are not taking somebody’s work, you are not taking it “without paying” or “without permission”, either.)See this article with Economic Concepts 101: http://falkvinge.net/2013/08/23/economics-101-for-newcomers-to-discussion-on-sharing/

Hat tip to Fredrika for her relentless and correct focus on the sale

Opt in for free daily update from this free blog. Separately The Steele Report ($11/mo) offers weekly text report and live webinar exclusive to paid subscribers, who can also ask questions of Robert. Or donate to ask questions directly of Robert.