The Internet: a new information economy?

The contradictions of information economies

Free markets and economies of scale

There are several reasons for such a trend:

• 
  the share of agricultural goods is falling while their (traditional) production is generating decreasing returns;
  
• 
  manufactured goods require more and more initial investment in research; this investment represents a fixed cost, independent of the subsequent volume of production; it depends on the potential market (as forecast ex ante);
  
• 
  a significant proportion of initial development costs and operating costs for most products and services is now represented by information input, particularly software, whose production is governed by considerable economies of scale;
  
• 
  information represents an increasing share of products ; the production of a content, be this of a book, a movie or a T.V. program, involves a fixed cost (independent of the number of actual customers) and distribution of this content represents a smaller and smaller proportion of costs: the marginal cost of a contact between a given customer and the information he wants falls from books or newspapers to T.V; it is practically zero on the Internet.
  

Free markets are rather inefficient when the products and services have been produced with high economies of scale. It is a fact that non-convex economies³ are, generally speaking, unstable and that when they reach an equilibrium, this situation does not benefit from the conventional properties of optimality. More precisely, when the marginal cost is far below the average cost, the optimal (marginal cost) pricing clearly does not provide sufficient funding for the initial fixed cost. On the other hand, financing the fixed cost by means of a subsidy granted collectively (State subsidy, for example) would interfere with the operation of the market and prevent it from fulfilling its role properly.

Confronted with this problem, liberal economies developed a whole range of strategies which are becoming less and less efficient:

1. 
   given that states have controlled markets very closely for many years, particularly in Europe and Japan, public funding of initial fixed costs for information products seemed quite natural, especially in the field of information technology or production of content (funding currently defended by France in the context of “the cultural exception”);
   
2. 
   it has sometimes been possible to finance initial fixed costs, whose amount is independent of the volume of subsequent production, thanks to accounting write-offs; that is to say, by those who ultimately contribute capital and who are not fully reimbursed for their initial outlay⁴. The low return on capital (rates of interest, earning per share, etc.) during the 1950-1980 period has also, in the case of production governed by marked economies of scale, made it possible to set a price below average costs and thus close to the optimum;
   
3. 
   information has long been linked to a physical support, which was itself costly to produce, therefore it was possible to market information through the support itself. The price of a private (or even semi-industrial) copy was often greater than the cost to produce the information in the first place (so there was no advantage, for the client, in photocopying an entire book because the cost would have exceeded the price charged for the book);
   
4. 
   finally, intellectual property rights and copyright rules⁵, legally reinforce the protection offered by the mere cost of duplicating information supports. It extends this protection to industrial copying, prohibiting, in the case of a book, for example, a printer taking a text and circulating a pirate version (this was widespread practice in the xviii century, promoting relative freedom of speech whereas strict censorship was the general rule).
   

The current development of the Internet raise doubt about the efficiency of these strategies:

5. 
   States see their freedom of action restricted both by the growing size of markets and by federal authorities or international organizations whose express task is to supervise their actions especially those which restrict market freedom;
   
6. 
   the return on capital, which fell to almost zero between 1945 and 1980, has increased rapidly since 1982. The growth in actual interest rates is ushering in a new type of sharing the added value between capital and labor. Consequently, it is now no longer possible to finance fixed production costs by means of capital write-offs;
   
7. 
   it is difficult to enforce copyright on modern media, particularly on the Internet; all consumers feel that a ban on copying diminishes social welfare, and their own in particular. If access to a given information costs nothing, then limiting such access to protect the initial income of the author seems manifestly Malthusian⁶. Furthermore, current techniques are blurring the limits of a piece of work in terms of its attribution to a specific author, given that new information can be processed from raw material which is itself drawn from original works which have been transformed and reassembled (for example, a Web page is an original work which may consist of diverse photographic or sound-based reproductions);
   
8. 
   the link between content (abstract information) and the product which enables it to be marketed has progressively become weaker with the reduction in reproduction costs. Nowadays, with computer networking and free access to all digital information, the link between content and its physical support has completely disappeared⁷.
   

However, the development of the Internet also makes it possible to displace value from production of the goods towards the "production of demand", thereby modifying the balance between the initial fixed costs of creating the content and the costs of generating demand, which depends on the actual audience. Information products may therefore be traded more efficiently than in the past, just like ordinary commodities, in a competitive market.