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Data, Information, and Knowledge as Economic Goods

An idea is a thing of remarkable expansiveness, being capable of spreading rapidly from mind to mind without lessening its meaning and significance for those into whose possession it comes. In that quality, ideas are more akin to fire than to coal. Thomas Jefferson, writing in 1813, remarked upon this attribute, which permits the same knowledge to be jointly used by many individuals at once: “He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine receives light without darkening me. . . .” (see David, 1993, on Jefferson's observations in this connection).

Modern economists have followed Nelson (1959) and Arrow (1962) in recasting this insight and pointing out that the potential value of an idea to any individual buyer generally would not match its value to the social multitude, since the latter would be the sum of the incremental benefits that the members of society derived from their use of the idea. The individual benefits conveyed, however, will not readily be revealed in a willingness to pay on the part of everyone who would gain thereby; once a new bit of knowledge is revealed by its discoverer(s), some benefits will instantly “spill over” to others who are therefore able to share in its possession—at little incremental cost. Why should they then offer to bear any of the initial costs that were incurred in bringing the original thought to fruition?

Commodities that have the property of “expansibility,” permitting them to be used simultaneously for the benefit of a number of agents, are sometimes described as being “non-rival” in use. This characteristic is a form of non-convexity, or an extreme form of decreasing marginal costs as the scale of use is increased: although the cost of the first instance of use of new knowledge may be large, in that it includes the cost of its generation, further instances of its use impose at most a negligibly small incremental cost. It sometimes is noticed that this formulation ignores the cost of training potential users to be able to grasp the information and know what to do with it. But while it is correct to point out that there can be fixed costs of access to the information, these do not vitiate the proposition that re-use of the information will neither deplete it nor impose further costs. It may well be costly to teach someone how to read the table of the elements or the rules of the differential calculus. Nevertheless, any number of individuals thus instructed can go on using that knowledge without imposing further costs either on themselves or upon others.

A second peculiar property of ideas, which has to be underscored here, is that it is difficult, and generally costly, to retain exclusive possession of them whilst putting them to use. Of course, it is possible to keep a piece of information or a new idea secret. The production of results not achievable otherwise, however, discloses something about the existence of a method for doing so. Quite understandably, scientific and technical results obtained by methods that cannot or will not be disclosed are felt to be less dependable on that account; their production is deemed to be more in the nature of magical performances than as contributions to the body of reliable knowledge. Even the offer of a general explanation of the basis for achieving a particular, observable result may be sufficient to jeopardize the exclusivity of its possession, because the knowledge that something can be done is itself an important step toward discovering how it may be done.

Public Goods and the “Appropriability Problem”

The dual properties of non-rival usage and costly exclusion of others from possession define what a “pure public good.” The term “public good” does not imply that such commodities cannot be privately supplied, nor does it mean that a government agency should or must produce it. Nevertheless, it follows from the nature of pure public goods that competitive market processes will not do an efficient job of allocating resources for their production and distribution, simply because where such markets work well they do so because the incremental costs and benefits of using a commodity are assigned to the users. In the case of public goods, such assignments are not automatic and they are especially difficult to arrange under conditions of competition.

One may see the essence of the problem posed by the public goods characteristics of knowledge by asking: How can ideas be traded in markets of the kind envisaged by disciples of Adam Smith, except by having aspects of their nature and significance disclosed before the transactions were consummated? Rational buyers of ideas, no less than buyers of coal, and of fish and chips, first would want to know something about what it is that they will

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