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November 12, 2006
David Warsh, Proprietor


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The World is What?

Popular books in recent years have offered some striking vocabulary for talking about the changes wrought by technological advance: The Death of Distance, The Weightless World, The Invisible Continent, and, most famously, Thomas Friedman’s best-seller, The World Is Flat. (“…[I]t is now possible,” wrote Friedman, “for more people than ever to collaborate and compete in real time with more other people on more different kinds of work in more different corners of the planet and on a more equal footing than at any previous time in the history of the world…”)   

But what do these figures of speech actually mean? None captures with much depth or precision the essence of the change that is taking place.  For that we have to turn from journalism to technical economics. There we find an important new idea — a discovery, actually, in a science that most people consider to be pretty much the same as it ever was.

In the last ten years, economists have learned to distinguish between rival and non-rival goods, and the degree to which their use by others may be excluded by those who create them. This is definitely not the familiar old distinction between public goods and private goods. It is a new and important way of dividing up the world in order to think more clearly about the sources of economic value. And it is described in my Knowledge and the Wealth of Nations: a Story of Economic Discovery, a book that appeared earlier this year.

A rival good is one that can be possessed by only one person at a time: your lunch, for example; if I eat it, you cannot. A rival good can be shared, of course:  I can cut my apple in half, let you use my pencil, give you my seat in the subway,  lend you my car, or co-sign a loan.  Ultimately, however, its corporealitry defines a rival good. There’s a limit to how much it can be shared.

A nonrival good, on the other hand, is characterized by the fact that that its use or consumption by one person or in one process doesn’t reduce the amount of it that can be consumed by another. Once it has been created, once a certain fixed cost has been incurred, a nonrival good can be used over and over again with almost no additional cost.  A non-rival good, in essence, is a design.

What’s an example? A nonrival good can be as simple as the time of day — if I tell you what time it is, I don’t lose track of it myself — or as complicated as the design of the wristwatch I consult in order to tell you. The specifications of a new airplane.  The formula for a wonder drug. The design of an improvised explosive device. The manuscript of Tom Friedman’s book. Or the text of “Endogenous Technological Change,” the 32-page article in the Journal of Political Economy that introduced the rival/nonrival distinction to a wide audience in economics in 1990. (Friedman describes the article’s author, Paul M. Romer as “my economics tutor.”)

Not surprisingly, excludability is usually the key to whether or not a nonrival good gets produced. (In the past, economists spoke of a new idea’s “appropriability,” which amounts to the same thing.) Patents, trademarks and copyrights exist to exclude nonpaying customers from the use of nonrival goods– but so do secrets, locks and keys, tickets, applications programming interfaces, encryption devices, and rapid serial innovation. Manufacturing anything requires a vast array of inputs that are essentially nonrival: recipes, formulas, techniques, arrangements, designs, blueprints, procedures, texts, and so on. So naturally, a great many workers are employed in the excludability industry, from engineers and patent lawyers to railway conductors and game wardens.

The essence of these distinctions can be seen in the simple tables depicting the economic attributes of different goods that have begun appearing in introductory texts. This one, perhaps the clearest, though still not especially clear, is from the fifth edition of John Taylor’s Economics.  Missing is a two-way arrow designed to convey that the degree of excludability of anything, rival or nonrival, is essentially a continuum that  extends from complete excludability (among rival goods, your lunch, for example; among nonrival goods, a coded satellite radio broadcast) to full nonexcludability (among rival goods, fish in the ocean or hives of bees deployed to pollinate orchards; among non-rival goods, say, the Pythagorean theorem). You can choose examples of your own.

Rival Nonrival
Excludable A pencil

CD player with headphones

Movie theater

The opera

Nonexcludable Swing in a public park

Book in a public library

Fireworks

Network television

Note that the provision of any good or service inevitably possesses both rival and nonrival aspects.  A Beatles recording may be stored and communicated as an LP with an ounce of vinyl, a couple of grams of polycarbonate plastic as a CD, or a stream of bits that can be sent as a file over the Internet and stored on a chip in a hard drive or in an iPod, but, even there it still takes up space. The important thing, however, is the original recording, of which the record, the CD, the MP3 file are just another nonrival copy — four lads named John, Paul, George and Ringo singing a certain song together on a certain day in London in 1965.

(Some slang can further illuminate the difference here:  economists and others speak sometimes of atoms and bits. Atoms make up the rival part of a particular good, that which may be possessed corporeally by just one person at a time — a banana, say, or a Cuisinart, or a paperback edition of A Tale of Two Cities. Bits comprise the nonrival portion, that which can be written down and encoded in a computer, and therefore used simultaneously by any number of persons — the genome of the banana, the design of the food processor, the text of Dickens’ novel.)

Our customary shorthand for nonrival goods is technology. But then a World Cup football match is a non-rival good; so is a concert, a performance, a novel, a painting, or the design of a dress. Individual nonrival goods are best described as ideas. The incalculably many ideas of humankind sum up to what we call knowledge. More knowledge, incidentally, usually means less mass: the IPod, for example. The declining ratio of atoms to bits is a favorite hobby horse of former Federal Reserve chairman Alan Greenspan.

The rival/nonrival distinction augments the much more familiar dichotomy between public and private.  Private goods, we say, are those provided by markets; public goods either occur naturally (well water, fresh air) or are supplied by governments when there is some kind of “market failure.” National defense is a public good, we say, so are streetlights. Each is nonrival and nonexcludable. Yet all kinds of nonrivalrous items in the modern world are not at all what we think of as being public goods. The cholesterol-lowering medicine Lipitor, for example, is mostly a non-rival good (a chemical formula) whose manufacture as a chemical tablet is carefully protected by a patent. The Windows computer operating system is protected against copying or modification both by copyright and by the secrets of its source code.

You’d think this conceptual apparatus would have always been around.  And in fact as early as 1832, Charles Babbage, in The Economy of Machinery and Manufactures, identified the basic idea of nonrivalry, in a chapter on copying.  But mainstream economics has had a hard time with knowledge. Lacking the kind of mathematical intuition of diminishing returns that has made the “invisible hand” such a powerful idea, economists have either cloaked the economic role of the growth of knowledge (and the increasing returns that flow from low or even negligible marginal cost for each additional item) in the tricky language of uncompensated external effects (good externalities are called “spillovers;” bad externalities “congestion,” “pollution” and so on); or deliberately left it out their account altogether, letting an essentially unexplained residual measure the importance of apparently autonomous technological change.

So instead, the law of intellectual property has evolved over the centuries to protect the ownership of these goods, a complicated doctrine that often verges on the metaphysical.  The underlying rationale is no different today from when Nathaniel Ward wrote it up in 1641 for the civil code of the Massachusetts Bay Colony known as The Body of Liberties: “No monopolies shall be granted or allowed amongst us, but of such new Inventions that are profitable to the Countrie, and that for a short time.” Why protect inventions at all? To spur their creation, naturally. But which inventions to protect?  And for how long?  Good questions, when a cholesterol-busting compound similar to Lipitor could be produced for a tiny fraction of the price and even introduced into the communal water supply, like fluoride, as a truly public good. 

Not until early 1990s did the new distinctions emerge clearly, mostly from the work of Romer, then a professor of economics at the University of Chicago, today at the Graduate School of Business at Stanford University. Romer achieved his breakthrough, not through literary investigation, but via the exploration of the properties of mathematical models. The rival/nonrival distinction he found in the attic of public finance, where it had gathered dust since Richard Musgrave apparently created it in 1966.  Romer combined nonrivalary with potential excludability, giving intellectual property its first real standing in aggregate economics. At a fundamental level, the result has been a gradual reorganization of the mental filing system that we call the “factors of production” — from Land, Labor and Capital to People, Ideas and Things.

It is the nonrivalry of knowledge that is behind globalization, not some mysterious flattening of the earth. What has fundamentally changed is the willingness of previously non-participating nations of the world to join in the chase, by educating their citizens and permitting them to acquire and create and deploy new knowledge in global markets. The economy of the fledgling United States soared after Boston merchant Francis Cabot Lowell traveled to Manchester in 1811 to surreptitiously memorize the design of the Cartwright power looms, machinery whose export had been strictly forbidden. It did not matter. By broadening the market, American entry into the textile manufacturing stimulated the industry in Great Britain, too — the nonrivalry of technology meant that the price of clothing fell dramatically. Eighty years later, Japan did the same thing.

Today it is China and India (and Russian, Brazil and all the rest) that have entered global markets, computers and software having replaced power looms. Central banks in Germany and France have sold much of their gold reserves in order to symbolically plow the proceeds into research universities. (Note to governments:  the reform of higher education is harder than it looks.) In the United States, a blue-ribbon panel of the National Academies of Sciences, Engineering and the Institute of Medicine, in a report called “Rising above the Gathering Storm,” last year prescribed a range of far-reaching reforms, from investing more heavily in K-12 education to funding more high-risk research and modernizing the patent system. “The rapid pace of technological change and the increasing mobility of capital and talent mean that our current lead in science and technology could evaporate quickly if we fail to support it,” the authors wrote. “The consequences would be enormous, and once lost, our lead would be difficult to regain.”

Romer’s contribution to this debate is a scheme for subsidizing the supply of scientists and engineers, rather than government demand for their services, insisting all the while that market signals (such as starting salaries) be publicized by degree-granting institutions on  market signals (such as starting salaries) — a slightly souped-up version of the 1958 National Defense Education Act.  The NDEA was the principle American response to the Soviet Union’s success in hoisting the first satellite into earth orbit: it produced the generation of scientists, engineers and entrepreneurs which vaulted the United States well ahead into technological pre-eminence. It is important, however, to master the analysis on which Romer’s proposal is based. The new distinctions are still working their way into the textbooks, under the banner of “endogenous” growth. You can’t think clearly about globalization without them.

Distance is not dead.  You have only to look at the gradient of land rents in any city.  The earth is not flat. All kinds of frictions remain. But knowledge definitely is nonrival and, at best, only temporarily excludable. The result is that there is much more competition for new know-how than ever before, with many more people anxious to learn and compete. And that is what globalization is all about.

(This is a version of remarks presented last week at a meeting in Arlington, Virginia, organized by the Rand Institute, “The Gathering Storm and Its Implications for National Security.”)

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