Zero Marginal Thinking: Jeremy Rifkin gets it all wrong
<p>A note from the publisher says Jeremy Rifkin himself asked them to ship me a copy of his latest book, <cite>The Zero Marginal Cost Society</cite>. It&#8217;s obvious why: in writing about the economics of open-source software, he thinks I provided one of the paradigmatic cases of what he wants to write about &#8211; the displacement of markets in scarce goods by zero-marginal-cost production.  Rifkin&#8217;s book is an extended argument that this is is a rising trend which will soon obsolesce not just capitalism as we have known it, but many forms of private property as well.</p>
<p>Alas for Mr. Rifkin, my analysis of how zero-marginal-cost reproduction transforms the economics of software also informs me why that logic doesn&#8217;t obtain for almost any other kind of good &#8211; why, in fact, his general thesis is utterly ridiculous.  But plain common sense refutes it just as well.  </p>
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<p>Here is basic production economics: the cost of a good can be divided into two parts. The first is the setup cost &#8211; the cost of assembling the people and tools to make the first copy.  The second is the incremental &#8211; or, in a slight abuse of terminology, &#8220;marginal&#8221; &#8211; cost of producing unit N+1 after you have produced the first copy.</p>
<p>In a free market, normal competitive pressure pushes the price of a good towards its marginal cost.  It doesn&#8217;t get there immediately, because manufacturers need to recoup their setup costs. It can&#8217;t stay <em>below</em> marginal cost, because if it did that the manufacturer loses money on every sale and the business crashes.</p>
<p>In this book, Rifkin is fascinated by the phenomenon of goods for which the marginal cost of production is zero, or so close to zero that it can be ignored.  All of the present-day examples of these he points at are information goods &#8211; software, music, visual art, novels.  He joins this to the overarching obsession of all his books, which are variations on a theme of &#8220;Let us write an epitaph for capitalism&#8221;.</p>
<p>In doing so, Rifkin effectively ignores what capitalists do and what capitalism actually is.  &#8220;Capital&#8221; is wealth paying for setup costs. Even for pure information goods those costs can be quite high.  Music is a good example; it has zero marginal cost to reproduce, but the first copy is expensive.  Musicians must own costly instruments, be paid to perform, and require other capital goods such as recording studios.  If those setup costs are not reliably priced into the final good, production of music will not remain economically viable.</p>
<p>Fifteen years ago I pointed out in my paper <cite>The Magic Cauldron</cite> that the pricing models for most proprietary software are economically insane.  If you price software as though it were (say) consumer electronics, you either have to stiff your customers or go broke, because the fixed lump of money from each unit sale will always be overrun by the perpetually-rising costs of technical support, fixes, and upgrades. </p>
<p>I said &#8220;most&#8221; because there are some kinds of software products that are short-lived and have next to no service requirements; computer games are the obvious case. But if you follow out the logic, the sane thing to do for almost any other kind of software usually turns out to be to give away the product and sell support contracts.  I was arguing this because it knocks most of the economic props out from under software secrecy.  If you can sell support contracts at all, your ability to do so is very little affected by whether the product is open-source or closed &#8211; and there are substantial advantages to being open.</p>
<p>Rifkin cites me in his book, but it is evident that he almost completely misunderstood my arguments in two different ways, both of which bear on the premises of his book.  </p>
<p>First, software has a marginal cost of production that is effectively zero, but that&#8217;s true of <em>all</em> software rather than just open source.  What makes open source economically viable is the strength of secondary markets in support and related services. Most other kinds of information goods don&#8217;t have these. Thus, the economics favoring open source in software are not universal even in pure information goods.</p>
<p>Second, even in software &#8211; with those strong secondary markets &#8211; open-source development relies on the capital goods of software production being <em>cheap</em>.  When computers were expensive, the economics of mass industrialization and its centralized management structures ruled them.  Rifkin acknowledges that this is true of a wide variety of goods, but never actually grapples with the question of how to pull capital costs of those other goods down to the point where they no longer dominate marginal costs.</p>
<p>There are two other, much larger, holes below the waterline of Rifkin&#8217;s thesis. One is that atoms are heavy. The other is that human attention doesn&#8217;t get cheaper as you buy more of it. In fact, the opposite tends to be true &#8211; which is exactly why capitalists can make a lot of money by substituting capital goods for labor.</p>
<p>These are very stubborn cost drivers. They&#8217;re the reason Rifkin&#8217;s breathless hopes for 3-D printing will not be fulfilled.  Because 3-D printers require feedstock, the marginal cost of producing goods with them has a floor well above zero.  That ABS plastic, or whatever, has to be produced.  Then it has to be moved to where the printer is. Then somebody has to operate the printer. Then the finished good has to be moved to the point of use.  <em>None</em> of these operations has a cost that is driven to zero, or near zero at scale. 3-D printing can increase efficiency by outcompeting some kinds of mass production, but it can&#8217;t make production costs go away.</p>
<p>An even more basic refutation of Rifkin is: food. Most of the factors of production that bring (say) an ear of corn to your table have a cost floor well above zero.  Even just the transportation infrastructure required to get your ear of corn from farm to table requires trillions of dollars of capital goods.  <em>Atoms are heavy.</em>  Not even &#8220;near-zero&#8221; marginal cost will ever happen here, let alone zero.  (Late in the book, Rifkin argues for a packetized &#8220;transportation Internet&#8221; &#8211; a good idea in its own terms, but not a solution because atoms will still be heavy.) </p>
<p>It is essential to Rifkin&#8217;s argument that constantly he fudges the distinction between &#8220;zero&#8221; and &#8220;near zero&#8221; in marginal costs.  Not only does he wish away capital expenditure, he tries to seduce his readers into believing that &#8220;near&#8221; can always be made negligible. Most generally, Rifkin&#8217;s take on production economics calls to mind the famous Orwell quote: &#8220;One has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool.&#8221;</p>
<p>But even putting all those mistakes aside, there is another refutation of Rifkin.  In his brave impossible new world of zero marginal costs for goods, who is going to fix your plumbing?  If Rifkin tries to negotiate price with a plumber on the assumption that the plumber&#8217;s hours after zero have zero marginal cost, he&#8217;ll be in for a rude awakening. </p>
<p>The book is full of other errors large and small.  The particular offence for which I knew Rifkin before this book &#8211; wrong-headed attempts to apply the laws of thermodynamics to support his desired conclusions &#8211; reappears here.  As usual, he ignores the difference between thermodynamically closed systems (which must experience an overall increase in entropy) and thermodynamically open systems in which a part we are interested in (such as the Earth&#8217;s biosphere, or an economy) can be counter-entropic by internalizing energy from elsewhere into increased order. This is why and how life exists.</p>
<p>Another very basic error is Rifkin&#8217;s failure to really grasp the most important function of private property.  He presents it as only as a store of value and a convenience for organizing trade, one that accordingly becomes less necessary as marginal costs go towards zero. But even if atoms were weightless and human attention free, property would still function as a definition of the sphere within which the owner&#8217;s choices are <em>not interfered with</em>.  The most important thing about owning land (or any rivalrous good, clear down to your toothbrush) isn&#8217;t that you can sell it, but that you can refuse intrusions by other people who want to rivalrously use it.  When Rifkin notices this at all, he thinks it&#8217;s a <em>bad</em> thing.</p>
<p>The book is a blitz of trend-speak.  Thomas Kuhn! The Internet of Things!  3D printing!  Open source! Big data!  Prosumers! But underneath the glossy surface are gaping holes in the logic. And the errors follow a tiresomely familiar pattern. What Rifkin is actually retailing, whether he consciously understands it that way or not (and he may not), is warmed-over Marxism &#8211; hostility to private property, capital, and markets perpetually seeking a rationalization.  The only innovation here is that for the labor theory of value he has substituted a post-labor theory of zero value that is even more obviously wrong than Marx&#8217;s.</p>
<p>All the indicia of cod-Marxism are present.  False identification of capitalism with vertical integration and industrial centralization: check.  Attempts to gin up some sort of an opposition between voluntary but non-monetized collaboration and voluntary monetized trade: check. Valorizing nifty little local cooperatives as though they actually scaled up: check. Writing about human supercooperative behavior as though it falsifies classical and neoclassical economics: check.  At times in this book it&#8217;s almost as though Rifkin is walking by a checklist of dimwitted cliches, ringing them like bells in a carillon.</p>
<p>Perhaps the most serious error, ultimately, is the way Rifkin abuses the notion of &#8220;the commons&#8221;.  This has a lot of personal weight for me, because I have lived in and helped construct a hacker culture that maintains a huge software commons and continually pushes for open, non-proprietary infrastructure.  I have experienced, recorded, and in some ways helped create the elaborate network of manifestos, practices, expectations, how-to documents, institutions, and folk stories that sustains this commons.  I think I can fairly claim to have made the case for open infrastructure as forcefully and effectively as anyone who has ever tried to.</p>
<p>Bluntly put, I have spent more than thirty years actually <em>doing</em> what Rifkin is glibly intellectualizing about. From that experience, I say this: the concept of &#8220;the commons&#8221; is not a magic wand that banishes questions about self-determination, power relationships, and the perils of majoritarianism.  Nor is it a universal solvent against actual scarcity problems. Maintaining a commons, in practice, requires <em>more</em> scrupulousness about boundaries and respect for individual autonomy rather than less. Because if you can&#8217;t work out how to maximize long-run individual and joint utility at the same time, your commons will not work &#8211; it will fly apart. </p>
<p>Though I participate in a huge commons and constantly seek to extend it, I seldom speak of it in those terms.  I refrain because I find utopian happy-talk about &#8220;the commons&#8221; repellent.  It strikes me as at best naive and at at worst quite sinister &#8211; a gauzy veil wrapped around clapped-out collectivist ideologizing, and/or an attempt to sweep the question of who actually calls the shots under the rug.</p>
<p>In the open-source community, all our &#8220;commons&#8221; behavior ultimately reduces to decisions by individuals, the most basic one being &#8220;participate this week/day/hour, or not?&#8221;  We know that it cannot be otherwise.  Each participant is fiercely protective of the right of all others to participate only voluntarily and on terms of their own choosing. Nobody ever says that &#8220;the commons&#8221; requires behavior that individuals themselves would not freely choose, and if anyone ever tried to do so they would be driven out with scorn.  The opposition Rifkin wants to find between Lockean individualism and collaboration does not actually exist, and cannot.</p>
<p>Most of us also understand, nowadays, that attempts to drive an ideological wedge between our commons and &#8220;the market&#8221; are wrong on every level.  Our commons is in fact a reputation market &#8211; one that doesn&#8217;t happen to be monetized, but which has all the classical behaviors, equilibria, and discovery problems of the markets economists usually study.  It exists not in opposition to monetized trade, free markets, and private property, but in productive harmony with all three.</p>
<p>Rifkin will not have this, because for the narrative he wants these constructions must conflict with each other. To step away from software for an instructive example of how this blinds him, the way Rifkin analyzes the trend towards automobile sharing is perfectly symptomatic.  </p>
<p>He tells a framing story in which individual automobile ownership has been a central tool and symbol of individual autonomy (true enough), then proposes that the trend towards car-sharing is therefore necessarily a willing surrender of autonomy.  The actual fact &#8211; that car-sharing is popular mainly in urban areas because it allows city-dwellers to buy <em>more</em> mobility and autonomy at a lower capital cost &#8211; escapes him.  </p>
<p>Car sharers are not abandoning private property, they&#8217;re buying a service that prices personal cars out of some kinds of markets.  Because Rifkin is all caught up in his own commons rhetoric, he doesn&#8217;t get this and will underestimate what it takes for car sharing to spread out of cities to less densely populated areas where it has a higher discovery and coordination cost (and the incremental value of individual car ownership is thus higher).</p>
<p>The places where open source (or any other kind of collaborative culture) clashes with what <em>Rifkin</em> labels &#8220;capitalism&#8221; are precisely those where free markets have been suppressed or sabotaged by monopolists and would-be monopolists.  In the case of car-sharing, that&#8217;s taxi companies.  For open source, it&#8217;s Microsoft, Apple, the MPAA/RIAA and the rest of the big-media cartel, and the telecoms oligopoly. Generally there is explicit or implicit government market-rigging in play behind these &#8211; which is why talking up &#8220;the commons&#8221; can be dangerous, tending to actually legitimize such political power grabs.</p>
<p>It is probably beyond hope that Jeremy Rifkin himself will ever understand this.  I write to make it clear to others that he cannot recruit the successes of open-source software for the anti-market case he is trying to make. His grasp of who we are, his understanding of how to make a &#8220;commons&#8221; function at scale, and his comprehension of economics in general are all fatally deficient.   </p>
