The Economics of Information, Part I

We live in the information age, but also in the age of global capitalism. Most economists argue that information should patented so that it can be allocated via global markets, and the trend is certainly in that direction. For example, universities used to produce knowledge that was freely available to all, but increasingly use patents to restrict access, as the figure below shows ( [inline:patents9.gif=test]

Economists generally argue that markets are the best way to decide what information to produce, the best way to produce it, and the best way to allocate it among consumers once it has been produced. This blog will take an objective look at those assumptions.

Desirable ends

Information is an essential input into every economic process from hunting and gathering to nano-technology. Human culture is based on information. Our ability to manipulate information, to develop language and culture, is what makes humans so unique. Since all desirable ends require information, the question is, how do we decide what information to produce, what ends are most desirable? Should we allocate the resources necessary to produce information (e.g. scientists and other great thinkers, computers, laboratories, etc.) towards the production of Viagra for the wealthy or cures for contagious diseases afflicting the poor? Towards the production of bigger and faster conventional cars, or towards carbon free energy sources used to power public transportation? Towards ever more consumer goods, or towards literature, music and the art of living? Towards understanding the mysteries of nature and human society, or towards maximizing monetary gains?

To make things more concrete, let’s assume that we want to produce information that improves the quality of life for this and future generations. To achieve this, we certainly have to satisfy our basic needs, those things that are essential and non-substitutable. I’ve already stated that humans, like all species, depend on life support functions of the planetary ecosystem to survive. We currently confront serious environmental crises such as global climate change, biodiversity loss, ozone depletion and so on, and we rely on information — new technologies, new understanding of human impacts on ecosystems — to solve these problems. Good health is also essential and non-substitutable, and modern medicine plays an important role in maintaining and enhancing it. Contagious diseases have probably killed more people than anything else in all of history, and information can provide us with vaccines and cures.

The desirable ends for these examples then are obvious: we want information to minimize the destruction of essential life support functions of ecosystems (for example, by providing a clean, decentralized, abundant and cheap alternative to fossil fuels) and to protect as many people as possible from contagious disease. We want to know what type of allocation mechanism will supply the desired types of information in the desired quantities, and will lead to the desired levels of use.

Are markets the best way to decide what types of information to produce? Markets will allocate resources towards whatever knowledge generates the most profit. The greater the demand for a commodity, the more it can be sold for, and the more likely it is to generate profits. Markets therefore seem well suited to satisfying demand, and economists therefore argue that they are the best way to allocate information towards desired ends.

But what is demand? Demand in economics is preferences weighted by income. Those with no income have no demand. In other words, there is very little demand for life saving cures for contagious diseases that affect poor people. In addition, markets will only satisfy demand for market goods. Most ecosystem services cannot be privately owned (in economic jargon, such resources are non-excludable), and property rights are a pre-requisite for conventional markets to function?for example, if I develop a technology that will restore the ozone layer, I can’t restrict use of the restored ozone layer to individuals that pay for its restoration. If individuals can use it without pay, they have no incentive to pay (they will free-ride), and markets will not provide the service. As a result, there is also very little market demand for most ecosystem services. Markets therefore are unlikely to provide information on cures for contagious diseases that affect the poor or for ecosystem services that cannot be privately owned.

A real life anecdote here can help clarify how markets do decide what information to produce. Drug companies may develop compounds that have promising characteristics without knowing what specific benefits the compounds provide. Bristol Myers Squibbs (BMS) developed such a compound which they named eflornithine, then allowed different organizations to experiment with it. Doctors Without Borders discovered that eflornithine cured African sleeping sickness, a contagious and debilitating disease endemic to Africa which is transmitted by the tsetse fly. A cure based on arsenic already existed, but it was not very effective, was sometimes fatal, and was always very painful to administer. Eflornithine proved much more effective in every way, to the point where it would restore people from comas when all else failed, essentially bringing them back from the dead. Needless to say, Doctors Without Borders was thrilled, and told BMS the good news. BMS however pointed out that while millions of Africans were exposed to this disease, they were all poor, and there was no effective demand for the drug. BMS was therefore not interested in producing it. At the same time however, Gillette was experimenting with the same compound, and discovered that it removed unwanted facial hair in women. Now this was a market with tremendous demand that BMS was happy to meet!

The story actually concluded reasonably well, with BMS eventually being pressured into supplying the drug for sufferers of sleeping sickness as well. The point of the story however is that markets forces will allocate scientists towards the production of luxury goods for the rich over basic necessities for the poor, yet most people if asked would state that saving lives was a more desirable end than getting rid of unwanted facial hair. This would not be a problem necessarily if scientists and other resources required to produce information were available in infinite quantities, but that is not the case. Every scientist hired to develop cosmetics for the rich is no longer available to develop life saving cures for contagious diseases.

I would argue that if scientists were publicly funded to generate open access information, or paid through universities and other research institutions to do so, they would be more likely to conduct research that meets basic needs for the poor and provides public goods for all then to cater to the wants of the rich, which is where the profits are. We do have to admit however that the market ultimately led to the cure for a terrible disease, so it may be that markets remain the best way to produce information. To answer this question more completely, we need to objectively assess the relevant characteristics of information, which will be subject of the next post.