The Cost and Risk of Regulations That Make Information ‘Own-able’

The internet is forcing us to engage with a far broader definition of the economy than in the past. Instead of thinking of the economy primarily in terms of physical goods and services, the internet is putting front and center a fuller picture of the economy—including other forms of value and trade, such as information and social, moral and even sexual capital.

I believe you can trace many of the political and social challenges we face today back to our expanding awareness of—and ability to measure—the size of the broader economy. In particular, debates about who “owns” data, the right to be forgotten and privacy regulations can easily be seen effectively as a debate about how to value information and formally assign its ownership. So too can a lot of the consternation about the scale and size of internet companies that have large amounts of this previously under-appreciated data-as-asset.

The Takeaway
The information economy is putting increasing pressure on the physical economy, creating lots of debates about ownership of data and privacy. But it would be dangerous to write regulations for the information economy that are based in the physical economy.

More broadly, it is easy to view things like Elizabeth Warren’s presidential campaign narrative about the idea of “soft corruption” in Washington—where policy makers favor the rich over everyone else—as really a discussion about how power operates across different forms of capital. A lot of the unrest among people on the left is based on the idea that the deck is stacked against the working class. The reason that they feel that way has a lot to do with uneasiness about how these alternative unregulated economies function.  

But liberals who are calling for the regulation of information and alternative forms of capital should do so with eyes wide open that they are arguing for an expansion of private property and capital.

I am very worried that the path we as a society are moving down is to write laws and policies that make the diverse set of human economies all adhere to standards we use in physical trade —regardless of whatever nuance may be lost as a result.

Tension Between the Physical and Information Economies Laid Bare by The Internet

Nowhere is the tension between different economies more apparent and intense today than between the physical economy and the information economy.

Because of the internet, information is putting serious negative pressure on the physical economy. There is no question that the increased efficiency of services delivered to people with the internet is hurting the cash economy, whether you look at Uber’s negative impact on car sales, or you consider Airbnb’s impact on hotels and construction, or think about the impact of free social media on paid entertainment like movies.

As these two economies are brought into such direct competition it is understandable that people want to use laws and policy to resolve the tension between the two. It is lost on no one that this is especially true given that the cash economy is taxed by the government, while the information economy is not. That gives regulators an extra incentive to stop economic activity shifting from cash earnings in the physical economy to social currency–based or information- capital–based activity in the information economy.

The problem is, when you think about how the physical and information economies actually work, they are at odds with one another.

The first principles of any economy stem from how you define ownership of something and how you exchange that ownership with others. The way in which ownership functions and the way in which exchange flows set the stage for how any economy works.

Ownership and Trade in the Natural Physical World

We all know how ownership works in the case of the physical world of atoms. Owning a physical thing (land, a car, a baseball glove) means that you have the right to use it as you see fit, exclude other people from using it, and sell or trade those rights of use and exclusion.

A thing can only be in one place at a time, and exchanging it means physically moving it so that the new owner has easy access to use it, and everyone else practically loses access. So, in the physical world, the right to use, the right to exclude and the right to exchange all go nicely hand-in-hand.

This is the basis of what economists talk about as “exclusionary” or rivalrous properties. My use limits or prevents your use.

To be sure, the full right to ownership extended to all people and backed up by the law has been a hard fought battle throughout history. It isn’t even close to being globally secured today. But at a fundamental level, in the physical world possession is both nine-tenths of the law, and nine-tenths of the reality of how ownership and exchange works in physical reality.

Ownership and Trade in the Natural Information Economy

Contrast this with the world of information. In the case of bits as opposed to atoms, exchange doesn’t fundamentally happen through movement. Instead, in this world, exchange means copying information from one place to another.

The key is that when I tell someone else a fact, I do not myself lose access to that information and can never “prove” that I forgot it.

Consider as an example a funny joke as an information good. If I know a funny joke, I can choose to exchange it with you in return for a funny joke you know, or for really anything else. When I tell you my funny joke, you get a copy of it—but unlike a physical good, I don’t lose the memory of my own joke in the transfer. So, effectively, by telling you the joke I give you the “usage” property of ownership and the ability to trade it by telling someone else, but I don’t give you the ability to exclude me or others from using it or continuing to trade it.

This difference between exchanging something as movement through the atomic world versus copying it in the digital world has profound implications for the nature of ownership, exchange and how the different economies function.

Market Implications of the Divergent Principles of Information vs. Physical World Economics

So, if we can establish that information economies work differently than the physical economy, what can we say about how information economies work as compared with physical economies? Here are a few of the key components:

1) The Scarcity Value of Information Erodes With Distribution

In the physical world, a unique good can stay unique and be transferred and traded without losing its value forever. In the information world, each time a piece of information is traded, its value erodes.

Take our joke example above. If you know a joke that no one else in the world knows that’s very funny, it is valuable. People laugh at a new joke they have never heard very hard. At the other extreme, once everyone knows the joke then the fact that you know it is no longer valuable.

Another way to think about this is in terms of the economy of the joke. Each time you tell someone the joke, you are increasing the number of “sellers” of the given joke in the market. This makes the price of the joke go down as supply goes up. It is ultimately very simple economics.

Of course, this isn’t a laughing matter. If you look for historical examples of this in action consider medieval guilds. In the guild system specialized knowledge of different trades was hoarded by a small number of people who joined guilds. These guilds acted to effectively monopolize information through a cartel that allowed the artisans to prosper but came with heavy-handed enforcement for anyone who attempted to share the secrets. That clearly impeded economic progress.

These tradesmen in guilds knew that their value was held in information stock, and used an aggressive system to keep from losing control of information.

2) You Can’t Rent Information

In the physical world, you can rent access to a car, boat, home, piano, you name it. Renting something is effectively giving up the specific rights to use and exclude others, but not the right to transfer the asset for a limited period of time.

On the other hand, you can’t naturally rent information because you can never take back access to information once you give it to someone. There is no way to “return” knowledge once given. The person who has had access to it can remember it forever.

It is easy to lose sight of this basic fact in a world of Netflix, Amazon and HBO Go. It sometimes feels like you can rent content and, therefore, information. But a key property of how information moves is that once you tell someone something, you can never take it back or force them to forget it.

Information cannot be returned in a verifiable way—at least, outside of the movie “Men in Black.” If you tell someone something, the natural reality is you can never take it back.

3) Your Direct Ability to Use and Distribute Information Productively Dominates Its Value to You vs. The Market Resale Price

So, the question is, if you can’t rent information and the value of information always declines with distribution, what type of an asset is it and how do you generate value from it?

The first part of the answer is that the value of information is highly contextual to the person who has it, based on their ability to use and distribute the information itself. This is true of information far more than it is true of physical goods.

In the physical world, the value to you of a tractor, say, is much more a function of the market than it is your ability to use it. Whether or not you are a farmer doesn’t make the tractor more or less valuable.

In the world of information, however, everything is about context. If you can use information without sharing it in a highly productive way, that information can be extremely valuable. For instance, if hypothetically you always knew the next day’s price at market close for Walmart, and had the credit to use leverage with a bank, that information would be priceless to you.

If you can’t use the information yourself, then your ability to distribute the information rapidly to everyone who can use it is the second best option. If you sell copies of information to everyone who can use it at the same time, that is the second best way to monetize information. This is why distribution matters.

If you can’t use the information, and can’t efficiently distribute the information very rapidly, then information stops being very valuable to you because—unlike a physical good—every time you sell your information, the person you sold it to also becomes a seller. The erosion of value happens too quickly to capture a lot of value.

This is a key factor in the decline of so many news organizations. Information used to diffuse through a market more slowly, giving aggregators and distributors a chance to publish information more broadly and extract some value in the process. Today information goes from being very scarce and very valuable to fully distributed and nearly worthless almost instantly and in far fewer hops.

4) Trust Determines Value of Information, but not Physical Goods

Ultimately, perhaps the biggest difference between the value of bits and atoms is the role of trust in value.

If you are buying something, physical trust doesn't matter beyond the immediate transactional moment. You can buy a piece of land or a diamond from an untrustworthy source with confidence, so long as you can inspect the good yourself and confirm the properties of what you are buying.

Not so when it comes to information, whose value is heavily based on the trustworthiness of the source. Sure, you can set up complicated schemes to “sample” information in order to build trust in the source. But because the only way to inspect what you are buying in the case of information is to get a copy of it, and you cannot give it back if you decide not to buy, buying information is always a function of trust in the content’s validity.

So, the question is whether the differences between information economics and physical world economics are a good thing that should be preserved—or not?

We as a society have repeatedly attempted to make some information behave more like physical property and less like its natural physical state. Intellectual property law, covering things like copyright and patents, are good examples.

As these two economies are brought into such direct competition it is understandable that people want to use laws and policy to resolve the tension between the two.

But should we use regulation to force a broad spectrum of information to heel unnaturally, in line with how physical assets work?

Here are what you would have to resolve to go down that path.

Thought Experiment 1: Who Owns the Photo of Us?

Consider the case of someone using their phone to take a group photo at a party. Do you want that photo artifact to be exclusively and formally owned by the person who took it? What about the people who are in it? What about the person who owns the venue where the photo was taken? Who should get custody of that asset and have the right to destroy it? Who has the rights to reshare that asset and with what audience?

This is of course before you get into the problem of me viewing that photo. If I see it and comment on the photo, who owns that comment? What if I like the image and decide to go to the venue and make a copy of it with other people? (Remember planking?) Who has the right to remove images from my access (or my memory) once I have seen them?

Right now these questions can be casually answered because, from a practical perspective, even if the person who took the photo might legally “own” it, in reality if they share digital (or physical) copies with their friends, those other people have broad ability to reshare the content.

But if society were forced to formally decide these issues, what would happen? All of a sudden every person would want to take a photo of the same thing on their own camera. The commons breaks down.

Thought Experiment 2: If We Try to Force Information to Behave Like Traditional Physical Goods, What Happens to Information as a Key Form of Compensation?

We all know the adage, “Give a man a fish, he will eat for a day; teach a man to fish, he will eat for a lifetime.” Throughout our lives we are compensated for the work we do in at least two different economies—with cash in the physical world, and with knowledge on how to do things.

The guilds I referenced before from the Middle Ages understood this. For years apprentices worked effectively as slaves and were compensated in knowledge rather than cash for their labor—that is, by learning a trade.

Another good example of the cultural imprint of knowledge as a form of compensation and wealth is the obsession of minorities with education throughout history. People who are used to having their physical capital taken away have a bias toward being compensated in information and knowledge.

Do you want a world where, hypothetically, the lineage of all information can be tracked, and the creators can assert ownership over the information and its use? Would you want the ultimate extension of physical property rights into the information space?

My view is that such a move would make the world far more brittle. It would put us in a position where a given government or organization can exert near complete power over people's lives. In contrast, today knowledge and information are beyond the reach of the state, which ensures resilience for individual holistic wealth.

This might sound fanciful—and I admit that projecting forward to a world where all information is committed and traced back to owners is a long way away. But, consider the abstraction today of labor from the content of work.

Historically, if you were a cobbler you learned to make shoes. You were compensated partially with information, and if you wanted to take that information and make shoes on your own, you could (setting aside physical reprisals from your guild).

Today, if you make shoes, you make them on a production line. You don’t learn how to make a whole useful shoe, just a part of a shoe. The mechanization of work makes your knowledge more specialized and less valuable.

This is happening over and over in the economy. Some people are still broadly compensated in knowledge—tech engineers and investors come to mind—but most people face a world where employers are, whether or not on purpose, factoring work so that their employees don’t learn enough from the work they do to compete.

Thought Experiment 3: What Will Happen to The Taxation of Knowledge If We Model it As a Physical Good. Conversely What Happens if We Don’t Tax Knowledge?

Governments love the formal cash economy because it allows for efficient taxation. Even in the 1200s the Mongols figured out that by having a currency and building a cash economy they could extract taxes in a standardized and useful instrument rather than in portions of various goods like rugs and tea.

Imagine for a second that there is a contest playing out right now between the measurement and monetization of information, pushing it toward more of a physical good equivalent, and pressure from the social and information economies to undermine the physical cash economy by expanding efficiency of things like housing and transportation.

Implicitly what side of that equation do you think governments prefer? The obvious answer is that they would rather all economies be collapsed into a cash economy so that it is easier to extract taxes, whether or not that is long-term healthier for the overall human ecosystem.

The history on this is clear. In the last century one of the biggest drivers of economic growth was women entering the cash economy in the U.S. This happened because the things you could buy in the cash economy in that period—like washing machines and modern houses—was sufficiently valuable to people that they switched their labor towards the cash economy and away from the social and information economies. Of course, it wasn’t like women weren’t working all along, they just went from working in the home to working in an office or factory. What looks like growth was just a change in accounting to a large extent—and of course the real net benefit was to the government because labor was switched from an untaxed economy to a taxed economy.

Going forward what will happen? If taxes on the cash economy continue to rise, or the market fails to provide more physical things that people both want and are financially attainable, then it would be rational for people to switch their production out of the cash economy and back toward the social and informational economies. I think there is some evidence that is exactly what is happening today. Young people aren’t stopping “working” entirely. But they are marginally choosing to invest in alternative ecosystems of relationships and virtual worlds versus the physical cash economy.

If the internet and technology allow the social and information economies to flourish at the expense of the cash economy, then will the government be highly incentivized to treat information like property, monetize it and tax it? Probably yes—and the consequence of that could be dire—fitting a square peg in a round hole.

All of the European rule-setting around information and data-ownership fit into this narrative of information monetization nicely. And all massively fail the test of properly modeling the ownership of information and knowledge. I very much worry that inadvertently in an attempt to turn information into a traditional asset these types of regulations will stem the flow of information and destroy a vibrant human economic ecosystem.

The upshot is this: If we attempt to tax information, we will end up attempting to use the legal framework to make it look like a traditional physical good, which is contrary to how information functions as a good and will likely distort the flow of human knowledge meaningfully and make the world more brittle. The world could easily start to look like the ancient guild system of information control all over again.

At the same time, if we don’t tax information as technology, people will move production and consumption further and further away from the physical world. And we are going to have to figure out a different way for governments to fulfill their basic real-world functions.

The Ultimate Question: Should We Use a Legal Regime to Force the Information Economy to Behave Like the Physical Property Economy?

Technology coupled with certain decisions about our legal regime could, in theory and for the first time in history, allow us to force information to “behave” like a traditional physical good.

We shouldn't.

Moving in that direction gives the state, and corporations, too much power to tax, consolidate and set rules. It also challenges the ultimate human safety net and asset of last resort: education and human memory.

I strongly believe that if the idea of “freedom of memory” had ever been contemplated by the founding fathers, it would have been considered even more sacred than freedom of speech.

Having a polyculture of economies and forms of trade is critical to the vibrancy of humanity in all sorts of ways we cannot even fully understand or articulate, just like the physical biodiversity of the world.

We shouldn’t be trying to use the legal system to force the complexity of reality into standardized trade-able models.

This is the great mistake that I believe that people like Elizabeth Warren and the left risk making.  They want to fight what they see as consolidated power with legal policy, but they don’t realize that in regulation, control and standardization of previously open systems, they actually risk expanding the leverage and control they are fighting against.

If anything, rather than our current course, we should be considering legislation that limits contracts and guarantees fair data access and openness, to make the internet and technology behave more as our natural human society does—not the opposite.

Don’t Fear Power, Fear Asymmetry

Power and wealth are both fundamentally functions of asymmetry. If everyone has something, it is not valuable—and if no one does, then it can be very valuable.

Right now, the defensive stance of our policy seems to be heading toward attempting to limit power in information by defining control and ownership to artificially mirror the physical world of scarcity—to make data into more of an asset—and effectively limit how much data any one person or entity can have.

But what if we try the opposite? Why not attempt to erase power and wealth imbalances by encouraging information’s natural economic properties and abundance? It might lead you to the same place if you care about inequality, in a far healthier way, just as it happened in the renaissance.

What we have seen in the last several decades is the expansion of the wealth and power of a small number of people and organizations. The solutions we should be looking for should be less about making them less powerful and more about ensuring everyone else can also become more powerful.

So often in human history we have made the mistake of using technology to let one aspect of the world overpower other aspects of important but fragile systems.

We can’t let this happen with the fundamentals of how we interact and trade with each other. It would be a mistake from which we will be unable to recover. Hopefully the left will figure out sooner than later the deep mistake in the direction toward regulating alternative economies like the physical economy before it is too late.

The free market of the physical world has done untold good in the world. The idea that all dollars are equal, and that anyone can buy anything regardless of who they are if they have the cash to pay, is an amazing historical social achievement. But even I think we shouldn’t own and capitalize everything.

Sam is currently a General Partner at Slow Ventures and an intern at The Information. He is also the co-founder of Fin Analytics. He was formerly a vice president of product management at Facebook from 2010 to 2014. Prior to joining Facebook Sam founded drop.io, a file-sharing platform that was acquired by Facebook in 2010. Before drop.io Sam was an associate at Bain and Company. In his spare time Sam enjoys skiing and kite-surfing. He is married to Jessica Lessin, founder of The Information.