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David Ricardo’s Open Web

2010 September 12

The Internet, and the World Wide Web it has spawned, has always had a quasi-hippie feel to it.  Openness has been prized, in both architecture and practice, while proprietary technology and business models have been viewed with suspicion, if not disdain.

Lately, there is a growing sense among many digerati that a shift is taking place; that the web is passing from its idealistic adolescence into a more realistic adulthood.  Accordingly, the digital future will begin to look more like the analog past where hardnosed business people defend their dominion with fervor and intensity.

Central to this view is that the open web is some kind of newfangled idea that will perish once cooler heads prevail.  However, a more realistic interpretation is that the concept is as old as capitalism itself, dating back to just after American Revolution and David Ricardo, one of free enterprise’s seminal figures.

The Balkanized Web

I recently wrote a response to Chris Anderson’s “The Web is Dead” article in which I argued that the Web, as envisioned by its creator, Tim Berners-Lee, is essentially a web of links.  Moreover, because links remain valuable, the Web will not only stay alive, but thrive.

However, a recent Economist article makes a more subtle and dangerous point.  They submit that although the Web is not in danger of dying, it could become devalued through balkanization.  In effect, the Web will stay connected, but be divided into proprietary fiefdoms in which connectivity is sequestered.

This is a serious argument which represents a graver problem.  Interestingly, they make an apt analogy to free trade.  While it has been long established that open economic borders promote prosperity, unfair trade practices and tariffs not only exist, but are extremely politically popular.

The best way to understand the issues, therefore, is to go back to Ricardo’s funamentals concepts: economic rent and comparative advantage.

Economic Rent

In the early 19th century, David Ricardo postulated that a society expands more land is cultivated to support it.  However, since the best land gets used first, the owners of that terrain earn excess profit.  This is the essence of economic rent.

Brands are, in truth, an attempt to extract economic rents.  That’s why Internet start-ups invested billions in the 90’s in the hope of gaining enough “eyeballs” to achieve a sustainable advantage.  The idea was that once you have enough people devoted to your brand, network effects will kick in and you will have a dedicated market for your product or service.

Many believe that is what is going on today.  Companies like Apple and Facebook have attracted such a large and dedicated following that they can earn rents from the rest of the Internet.  Moreover, they will wall themselves off in order to extract maximum value from their powerful position.

Comparative Advantage

The problem of economic rent is mitigated somewhat by comparative advantage.  Everybody is better at some things than at others.  So even if a company is the best at everything, they are better off specializing rather than doing everything themselves in order to avoid opportunity costs.

This isn’t always true in the short term, because of informational costs.  When technology is new there are very few people who understand it.  Therefore, many innovative firms integrate most, if not all, facets of development under one roof.  This isn’t most efficient, but it’s fast and speed is what’s important when you’re operating on the cutting edge.

However, in the long term the idea holds up.  The world is a big place, with lots of people and lots of ideas that can undercut even seemingly insurmountable advantages.  Therefore opening yourself up to competition is the best way to adapt to the changing context of a vibrant marketplace.

The Google Economy

Google, by revolutionizing how we search for information, created a new economy.  However, in this economy links are the primary currency.  Web pages that attract a lot of links from other pages show up higher in search engine results and earn more money.

However, it is not only the page that receives the link that extracts value, the source of the link gains as well.  On this site, for instance, I do my best to provide links so that my readers can explore aspects of what I’m writing about for themselves, without me having to substantiate every point.  There is more information out there on the Web than I can fit in my head.

So the Google economy has its own form of comparative advantage. I don’t need to compile every relevant fact on Digital Tonto, but can concentrate my efforts where I feel I can best make a contribution and reap the benefits of other people’s labor by linking to valuable information.

The Fitness Model

The best explanation of how the Google economy works is the fitness model of networks, which I explained before in a post about the Justin Bieber phenomenon (see link). It has two components:

Preferential Attachment: Often called the “rich get richer” effect, preferential attachment is the network version of economic rent.  Just as consumers tend to prefer products that are already popular, web sites that already have a lot of links tend to attract even more.

Fitness: Offsetting preferential attachment is fitness, which is only mathematically defined in the model, but it is safe to say the concept is related to meme fitness.

These two factors can work either in competition or in concert.  Incumbents have an inherent advantage, but one that can be usurped by a talented or well positioned upstart.  The fitness model is a very common sense approach that best explains mathematically how the Web evolves.

Net Neutrality

According to the economic forces described by Ricardo, all should be well.  Yet we do not live in a world of pure free enterprise.  Incumbent industries and firms not only compete in the marketplace, they also enter into agreements and lobby governments for preferential legislation in order to sustain their advantage.

This is the essence of the net neutrality issue.  If powerful firms can arrange preferential conditions for traffic to their sites, they can tilt the playing field in favor of preferential attachment and away from fitness.  This, of course, will squelch innovation.

Companies that build and own the infrastructure that Web traffic runs on are opposed to a free and fair Internet because they say that it would limit their ability to innovate.  However, the argument falls flat.  As the Economist article mentioned above points out, countries with open access laws have faster and cheaper broadband than in the US, where no such laws exist.

In reality, opponents of net neutrality are simply seeking economic rents.

A Very Real Danger

Although most of the relevant economic forces are in favor of a free and open Web, there are some powerful ones working against it.  Again, the situation is very much the same as in international commerce.  While it has been firmly established that free trade benefits everyone, tariffs and subsidies do exist, even to the detriment to the countries that impose them.

The possibility of a balkanized Web is a very real one and the danger needs to be taken seriously.  The Web has unleashed more innovation and creativity than any invention the world has ever known.  It should be protected against those who would undermine its core values.

Finally, the concept of an open Web is not just for idealistic, pie in the sky do-gooders.  It is an idea that sits at the foundation of capitalism itself. We all have an interest in seeing it endure.

– Greg

6 Responses leave one →
  1. September 14, 2010

    There never has been, nor will their ever be a level playing field in anything. It is an impossibility. And then how would we enjoy such notions as the underdog and David kicking Golliath’s ass every now and then There are only two real positions in business as in life – innovation or protection (positive / negative, fear / love). As soon as you move into protection mode you are dying. The only defense is not to defend, move on and innovate. So while the monopolies and policies and politics that strive to protect themselves quietly choke their enterprise to death (even if over an extended period), the innovators will move on and pull the rug right out from any so called closed market or monopoly. Put more eloquently in the wisdom of Jurassic Park, “Life will find a way”. Great Post though. Uncle Jimi.

    [Reply]

    Greg Reply:

    Thanks, Jimi.

    I think you’re right about the long term risks of protection. However, in the long term we’re all dead and people can make a lot of money in the interim, so there are real incentives for businesses to seek protection.

    – Greg

    [Reply]

  2. September 17, 2010

    Greg:
    What do you recommend as political strategies to preserve the open web? We should be looking at not just the economics of information but the political-economics of information. The common good of the open web is widely dispersed whereas the benefits of proprietary networks are concentrated. The coercive power of the state can be used to enforce regulation for the common good or to enforce proprietary rights that will produce concentrated benefits. Concentrated interests tend to be the ones funding lobbyists. And the picture is complicated by increasing returns of scale in information which favors concentration (I still say size matters in media) and by the fact that information influences belief, a key factor in political economics. The forces of concentration are formidable and not exclusively economic. What are the counter forces?
    Yours, Roger

    [Reply]

    Greg Reply:

    Roger,

    That’s an excellent analysis. I guess the main counter force is grassroots organization. Silicon Valley as well tends to be quite politically active.

    But I agree. The situation is dire and very similar to the issue of agricultural and industrial subsidies.

    – Greg

    [Reply]

  3. September 18, 2010

    Probably it is not an economically justified thought but I have always had the feeling that dividing the web into proprietary fiefdoms is like building fences at sea. This is against its nature. To me even the concept of account based access to sites is clumsy and archaic. Not to mention CATCHAs that recently became so difficult to resolve that users have to enter them several times before getting access to their account.

    [Reply]

    Greg Reply:

    Stan,

    I agree, but as Roger pointed out, it’s a problem of concentrated benefits and diffuse costs, so the problem is a real one.

    As for CAPTCHA’s, I’m with you all the way. I’m always re-entering those things!

    – Greg

    [Reply]

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