ECON: Everything's free.

Eliezer S. Yudkowsky (sentience@pobox.com)
Tue, 09 Feb 1999 03:40:06 -0600

Amazon.com, Jerry Kaplan and Bill Gross - in that order - have just kicked the support struts out from under the entire U.S. economy.

Amazon.com has been selling books at a loss for quite some time, supported by their stock prices (i.e. market capital), in order to build market share.

Then there's Jerry Kaplan's plan to sell computers at wholesale prices and make money off of ads (http://www.onsale.com). I told my friends that this might (but only "might") signify the Impending Collapse And/Or Transformation of the U.S. Economy, caused by the elimination of the entire retail and mark-up-supported sector. This wouldn't be quite as thorough a transformation as my projection that collaborative filtering will eliminate the entire marketing sector, or that complex barter will eliminate the entire financial sector, but it would be a good start.

Now, Bill Gross (yes, the idealab! guy) is going to give computers away and make money by selling ads. Really. http://www.free-pc.com. We ain't talkin' some wimpy network computer; we're talkin' 333 Mhz, monitor and free internet access included...

So. It looks like I may have severely underestimated the transformation of the U.S. economy. Not only are most of the major middleman sectors going to be eliminated, but whatever's left will be given away for free. The question now is: Is this kind of economy stable? How can you sell ads when there's nothing left to buy? And how can you sell stock when all the companies are operating at a loss?

We have three basic business models here:

Amazon.com is financed by stock prices, which are dependent on market share. The incentive is therefore to operate at a loss, because the resulting increase in market share brings more stock-based revenue than they would get from selling at normal prices.

Onsale's atCost distributes items at cost (not at a loss), and is planning to make a profit (not operate at a loss) by selling lots of cheap ads.

Free-PC is distributing items for free, on the theory that they can get more ad revenue by assembling very thorough marketing profiles and charging a percentage of sales.

The basic transformation may be summarized as follows:

  1. The primordial source of money shifts from sales to the equity market.
  2. Revenue derives from selling ads, rather than sales margins.

Forget, for a moment, the question of whether the Free Economy is stable. First, is it theoretically possible?

There are still two reasons to sell ads: One, to build market share; two, to convince people to buy stocks.

There is still reason to buy stocks: No companies will actually be issuing dividends, but as long as everyone is still buying stocks, it makes gambler's sense to buy the ones you think will go up.

==

I'm not entirely sure, but I think this is a bad thing, mostly because when CF and complex barter eliminate the ad market and the equity market, that's the whole economy down the toilet. Also, it seems very probable that the Free Economy will be unstable - it seems far more grounded in psychology (rather than a deep ontology) than our current market.

>From the Person On The Street's perspective, however, it might be a very
good thing. The Free Economy may make it substantially harder to build wealth by working rather than shuffling wealth - a trend already grown too strong in the modern economy. But against this abstract, we must weigh all the free goodies.

My intuition says that it would still be a very bad thing from the POTS perspective. Suppose everyone wakes up one morning and decides that poor people's ad-viewing "eyeballs" are worth less. Then they get fewer free products, and have even less purchasing power, and the whole thing spirals. Since it's all supported by stock prices, one suspects that the stock-owners will be the most valued eyeballs. One suspects that Free-PC will be giving PCs away to high-income customers, not the homeless. I could be wrong, however.

On the whole, the Free Economy may be more stable than the current one. High productivity does not destabilize the Free Economy. Whereas with this economy, once 10 million people can do the work of 100, the other 90 million starve; only productivity-reducing innovations such as lawyers, paperwork, the stock market, and Welfare have kept us afloat so far.

However, the Free Economy would be substantially less efficient than a complex barter network. Furthermore, the difficulty of transitioning to a complex barter network would be greater from the Free Economy than a modern one.

Finally, the Free Economy is inherently unstable (being based entirely on market psychology and circular logic), and any crashes that occur will be much worse.

Recommendations:
1. Simplify the tax laws to allow for complex barter. 2. I may not deliberately attempt to block the Free Economy, but I won't help it, either - the same rule I use for nanotech) 3. Try to create a psychology in which the poor are still valued eyeballs, or in which their increased need for Free Stuff makes them a more valued, targeted market segment. Discourage the use of income-based customer profiles as a part of stock valuations. 4. Brace for massive unemployment, perhaps via the creation of charity-run arcologies. Encourage the use of company-sponsored or industry-sponsored apprenticeships in computer programming. 5. Somehow get everyone, including welfare children and the homeless, at least a small equity stake - perhaps one that doesn't "vest" (but whose investment s/he can still control) until, say, age 65. (As distinguished from Clinton's suicidal Social Security "investment" plan, which would be controlled by the government.)

Counterarguments:
1. So far, stock-priced-based companies seem to have substantially increased the pace of technological development. 2. If the Free Economy does _not_ create an underclass, we should replace the modern, unstable economy as fast as possible. How can we know that unless we try it and see?
3. My inability to perceive a deep logic for the Free Economy does not mean it's all "market psychology and circular logic". 4. I don't understand what's going on and I shouldn't try to intervene. 

-- 
        sentience@pobox.com         Eliezer S. Yudkowsky
         http://pobox.com/~sentience/AI_design.temp.html
          http://pobox.com/~sentience/sing_analysis.html
Disclaimer:  Unless otherwise specified, I'm not telling you
everything I think I know.