Ben Buckman.net

Via Tom, Matt Yglesias has a fascinating post about "social production" that doesn't translate into standard monetary value. Craigslist, Wikipedia, and open-source development are classic examples: they "revolutionized the way people do a lot of things but have done far more to destroy other firms’ revenue sources than to make money for themselves." The ramifications of this are huge, and he explores a few briefly: financial markets become less effective at efficiently allocating resources; there will be pressure on the labor market (as after the Depression) to shorten working hours; broadband connectivity becomes crucial; the roles of the government and markets needs to fundamentally re-evaluated.

One of the most fundamental and lasting concepts I learned in college was the principle of externalities in Econ 101. It's basically when the true cost or value of something isn't adequately captured by the actors' balance sheets in the market. Dumping waste in a river is a classic negative externality, because it costs the polluter nothing; education and health care are considered positive externalities because the market lacks the long-term and social-value calculations to provide enough. This makes sense for particular behaviors and sectors in basic economics. What we're seeing now, though, is potentially an entire economy based on externalities; or more accurately, an economy in which the most valuable production isn't adequately calculated by the market. Everything from news to books to music to communications is becoming "free," breaking all conventional business models. I tweeted earlier about open-source textbooks; that plus the Kindle guarantee the brick and mortar book store giants won't be around forever.

This happens to coincide with an economic depression in which all the economic titans of the past - finance, auto manufacturing, real estate - are collapsing. Coincidence? Maybe the underlying dynamic is that the markets, at a very basic level, aren't functioning anymore. There's all this surplus capital lying around, incalculable non-monetary value being created, quality of life improving on the one hand, but basics like jobs and homes disappearing. This is obviously extremely simplistic. But we need so much money now for things that could be "free" in the near future. They'll be allowed to be free, perhaps, because we'll have more free time - because less work will be financially profitable - so people will contribute more to projects they truly love.

Several years ago, I was fascinated by economists trying to put monetary value on the seemingly incalculable. I thought answering the question, how much will global warming cost (in dollars)? would be the key to smart environmental policy. The GNP/GDP paradigm (in which war and natural disasters look great for the economy) would be turned on its head with new models that took into account actual cost and value. Now I'm not so sure we'll ever really have the numbers. But we're going to need the models someway or another, to understand the new economy.