The Long Tail

November 13, 2006

More on the Economics of Abundance

First, my apologies for the slow posting. I was traveling for all but five days last month (giving speeches for audiences ranging from telecoms to fashion), pretty much as I had the month before and the month before that and... Basically my life has been nuts since the book came out in July (yes, I'm writing this on a plane). The good news is that all these speeches should provide excellent blog fodder, once I can find a minute to write them up.

Second, I promised to post more on the economics of abundance, which has been a theme I've been toying with for a few years but am now starting to get serious about. As I mention in the book, one of the most common definitions of economics is "the science of choice under scarcity," which doesn't leave much room for abundance. Indeed, in many economic equations if you set the scarcity term to zero you get divide-by-zero errors. But economics is not a grand unified theory of everything, and nobody ever expect it to be. There is much in our world that economics leaves to other disciplines, from psychology to biology.

Yet just because economists struggle with abundance, that doesn't mean that we have to, too. Abundance thinking--understanding the implications of "practically free"--is a core competence of our age. It brought us everything from the iPod ("what if storage were so cheap you could put your entire music collection in your pocket?") to Gmail ("why should you ever have to delete an email?"). Most truly disruptive technologies disrupt because they take a scarcity assumption and, thanks to some technology that generates abundances, simply turn it on its head. Just think VOIP (why should phone calls, which use hardly any bandwidth, cost anything?) or how anyone under 25 uses a digital camera (why settle for stills when you'd rather have the video?)

Before I riff more on this theme in forthcoming posts, I'll close this one out with a round-up of interesting abundance-related posts that came in response to my original speech at Pop!Tech or just randomly popped up on my radar over the past week:

Zero is the loneliest number: Mike at Techdirt goes on a terrific tear on the theme after he comes back from disappointing policy debate where everyone seemed to be talking past each other, mostly because some saw the world through a scarcity lens and some didn't. On the plane back, he writes,

"I decided to reread a book I'd picked up at a used book sale a few years back, called Zero: The Biography of a Dangerous Idea, which is a fascinating history of the number zero -- and the fact that not only did it take societies ages to even recognize the number zero, it was considered heretical in some areas for a while. Zero caused all sorts of problems in that it didn't work like other numbers. It isn't a number. It's the absence of a number, and that screws up a lot of things. For thousands of years, it held back progress. You can't have advanced math or physics without an understanding of zero -- and the difficulty in accepting it was a real problem."

"Of course, for all of us who learned about zero in elementary school, this seems laughable. How could zero be such a difficult concept to understand? Except, as I read the book, it occurred to me that it's the exact same problem that was causing this breakdown in the discussion. It's incredibly easy to misunderstand zero in economics. That's because economics, we're often taught, is the "science of scarcity" or understanding resource allocation in the presence of scarcity. All too often, economics itself is defined by scarcity. So, for example, basic economics tells you that a free market will push prices towards their marginal costs. If their marginal costs are zero (as is the case with digital goods and intellectual property), then it says that price will get pushed towards zero. However, this makes people upset, and makes them suggest the model is broken when a zero is applied. They see a result where there is no scarcity, and it doesn't make sense to them since they've always understood economics in the context of scarcity."

Sooner or later, scarcity bites back: The always astute Nick Carr points out that the traditional scarcity functions that hold back the productivity efficiencies promised by Moore's Law--software and human learning curves--have been joined by another: electricity consumption.

"It's certainly true that, from the standpoint of the consumers of basic computing resources, those resources often seem "sufficiently abundant as to approach free." They are abundant, and that does recast a lot of economic tradeoffs, with far-reaching consequences. But if we step back and look at the supply side of computing, we see a very different picture. What Gilder calls "petascale computing" is anything but free. The marginal cost of supplying a dose of processing power or a chunk of storage may be infinitesimal, but the fixed costs of petascale computing are very, very high."

Nick's article-length post, which builds on the implications raised in George Gilder's Wired article (from which the illustration above was taken) and neatly squares it with his characteristically contrarian comment, is masterful. Read it all.

What if complexity were free? Erick Schonfeld casts 3D printing in abundance terms with a great example:

"He pulled plastic sample cases out of his bag filled with an array of tiny mechanical devices, gears, heat-sinks, and other parts. Then he showed me a small, white ceramic square not much bigger than a cell-phone battery. It was a prototype for a fully-functioning tiny chemical plant that could turn alcohol into hydrogen for fuel cells. Inside were 33 different cavities, pipes, and chambers made out of five different materials, printed one layer at a time. The final part was made of 300 layers. "Complexity, for the first time in history, is free," declares Chait."

Free French: Finally, Om Malik writes about an effort to out-FON FON:

"The maverick French broadband service provider, Iliad, and the company behind the Free, broadband service has made a habit of anticipating disruption; embracing it and then extending. Cheap broadband - they did that. Cheap (and almost free) Voice - they did that. Cheap IPTV, check. So what’s next to do? Open up wireless (WiFi) networks for one and all, and thus create one giant mesh."

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Comments

Chris, there's no link to Nick Carr's article-length post.

Posted by: Carl Caputo | November 13, 2006 at 11:14 PM

Carl,

Whoops. Thanks for the catch. Fixed...

Chris

Posted by: Chris Anderson | November 13, 2006 at 11:55 PM

Abundance. Sounds like a great title for a book.

Posted by: Mike Abundo | November 14, 2006 at 06:05 AM

Water , basically has no cost. But in the last twenty years . Many many marketers have figure out wayst to get people to bay close to 20$ a gallon .for something that is essencially free.

today selling almost anything .. is an excersise in selling water

Posted by: Ken O'neill | November 14, 2006 at 08:22 AM

The McKinsey Quarterly has published a book called profiting from proliferation: basically a clone of the Long Tail theory with lots of cream on it i.e. the "Long Tail" is much smarter, clearer and innovative in making its points :)

Posted by: Alberto | November 14, 2006 at 08:45 AM

The scarcity/abundance view is probably the decisive way to look at it. It only has economic value that which is scarce, abundance has no value.
As a mater of fact, I think that when you put things on that perpective you get a glimpse of what net neutrality is all about and how it relates to the survival of tradicional media. Tradicional media are eroding because content providers are suddenly abundant whereas they were scarce. If a non-neutral internet should prevail, society would probably have much do loose, but the media and telephone and cable companies would gain scarcity over abundance. See what I mean in this post: http://teseeantitese.wordpress.com/2006/10/25/on-net-neutrality/

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Posted by: huaqing | November 14, 2006 at 10:46 PM

I think Herbert Simon's work provides a useful point of departure for thinking about a world of growing abundance.

Simon argued that the most fundamental constraint of all is the computational constraint of the human brain.

(A recent variant of this is the idea that attention - which I view as a subset of Simon's argument - is the scarce and valuable commodity.)

"Practically free" (e.g. gmail - why file, when you can pile?) seems put to best use when applied to working around this constraint.

Posted by: Ben Miller | November 14, 2006 at 11:19 PM

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Posted by: Third Rake | November 15, 2006 at 10:10 AM

On the one hand, I find it intellectually liberating to think about a world of abundance that defies traditional economics.

One the other hand, I'm not yet (figuratively) ready to throw away my college econ learnings (even tho I threw away the actual books a long time ago).

I suspect that we will find a world of difference in the definitions of "free" and "practically free". Does "practically" free imply that the old econ rules of supply and demand will still apply?

...and how can anything be truly "free" when you factor in opportunity costs -- the costs of foregone opportunities when I'm spending all my time drinking "free" water or listening to "free" podcasts.

Posted by: Vince Kuraitis | November 15, 2006 at 07:45 PM

I recently attended an Infosys conference where Chris Anderson was a speaker. I had not heard of the "the long tail" but was very disappointed at the information presented.

His characterization of Blockbuster vs Netflix appears to be either biased or very poorly researched. He compared Blockbuster stores vs Netflix online and completely disregarded the Blockbuster online component.

When considering true apples to apples Blockbuster online has a larger SKU base (a longer tail) than Netflix. When looking at the companies as a whole Netflix offers only a long tail whereas Blockbuster offers a longer tail preceded by an the high velocity / lower sku base component.

I am not sure if I am hoping this is a simple oversight (which brings the competence of the author, Hyperion Press and all long tail disciples into question) or a pay off by Netflix (an ethical question). Either way not a good situation!

Posted by: Casey Chung | November 16, 2006 at 07:43 AM

C. Chung:

As I see it, the possibilities you have raised include:

1) you did not understand the argument

2) the author is incompetent

3) publishers are to be deemed incompetent if they publish something you have not read and/or do not understand and/or do not agree with

4) the group of people who think lower search (for information) costs and lower transactions costs, along with the near-zero marginal cost of digital reproduction and distribution, are a useful way to think about some internet-related phenomena are incompetent

5) the author is accepting bribes

I would venture that of the possibilities #1 has the greatest explanatory power

I would also add that completely unfounded challenges to an individual's ethics are -- let's not mince words here -- despicable.

Posted by: Ben Miller | November 16, 2006 at 03:57 PM

I ran into a great example of the long tail in a developing country. No fancy internet startup in the entertainment sphere, but a telco initiative for micro entrepreneurs. Read more about it on my blog:
http://bertvanwassenhove.blogspot.com/2006/11/micro-telco-another-long-tail-story.html
and see the video (in French):
http://bertvanwassenhove.blogspot.com/2006/11/liajlicom-project-video.html

Chris, if you want more info just give me a shout. I've got more pics and can hook you up with the man behind this who is a friend of mine.

Posted by: Bert Van Wassenhove | November 16, 2006 at 09:53 PM

Chris,
I really admire your work, but in this case you're working with a false dichotomy. Abundance is not the absence of scarcity, as scarcity is defined by economists. We have an over-abundance of food in America, but there is still a scarcity, in economic terms, or else the market couldn't set a price for cheeseburgers. "Little scarcity" is not "no scarcity," and "ridiculously cheap" is not free. As cheap as digital storage has become, it is not free. To say there is absolutely no scarcity is to either say there is zero demand or infinite supply. And on earth, there isn't an infinite amount of anything.

Posted by: Daniel Sanchez | November 16, 2006 at 10:08 PM

Several thoughts. I'm not an economist, but my husband and I have always wondered why the economy must continue to grow in order for people to feel it's successful. Why can't it stay stagnant in the sense that there's a balance between what's produced and what's consumed with people living at a comfortable level - not outrageously rich or stupendously poor?

I often wonder, if so many people produce content for free online, how are we going to have paying jobs from the online community that will allow us to pay the bills? However, if we are able to get services like VOIP and WiFi and the like for free, then perhaps we won't need larger incomes in order to keep up.

Abundance theory is something I've seen discussed in religious communities, especially in the more liberal traditions. The trouble with practicing the principles of abundance is that too many people stick with scarcity thinking. They think there isn't enough, so they horde. If you look at the current U.S. economy, with the widening gap between the rich and the poor, you'll see a lot of hording going on. How do you get the scarcity thinkers to loosen up?

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