Re: ECON: Everything's free.

Michael S. Lorrey (
Tue, 09 Feb 1999 09:29:10 -0500

"Eliezer S. Yudkowsky" wrote:

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

giving product away for free obviously means they are dumping product on the market to gain market share. Its so obviously illegal that I'm surprised that the feds aren't knocking on his door right now.

Selling products at 'wholesale' is the biggest scam in the game. Whose wholesale level are we talking about? I'm guessing that his 'wholesale' prices are cost of product plus overhead, possibly even a little below that maybe.

you wonder, how can anyone possibly have a company that investors are willing to valuate highly on the market?

  1. the losses are not really that big. A lot of what the SEC disclosure accounting rules call 'losses' are merely what a company can do to finance very high growth. A lot of what high tech companies call re-investment is not called that by the SEC. So long as their sales are growing at near or over a hundred percent a year, they can pull this trick off. Its when sales flatten out that the fun hits the fan. By then the key players will have grabbed their golden parachutes and late entry investors are left holding the bag. Deft management might get the company through that sort of crisis. is not really losing that much money, they are building new warehouses, investing in more bandwidth, more servers, more programming, etc. I would venture that their loss picture may flatten out in a year or two.
  2. yes, ad revenues are really that big. I recently did a business plan for a start up auction website. Based on the number of pages at various levels and the standard industry ad rates, 99% of corporate revenues will come from ad sales. This isn't new. Treat a website like a magazine. Some magazines get by on totally ad paid costs, with minimal or no subscription cost (i.e. Little Nickel, Auto Trader, The Robb Report, any publication that provides little content besides advertising). Now to generate traffic to the site (which supports the ad rates) you need to advertise on other sites, so ultimately where you make your money is in getting more money for your ad space than it costs you to put ads on other people's sites.

This does not mean the end of the marketplace. There is still a fullfillment center that the website outsources to handle order stocking, packing, and shipment. They are still charging normal overhead and making a profit with no ad sales. The manufacturer is still making his buck.

Look at a e-commerce website like a shopping catalog that has completely outsourced its other departments. Amazon is pulling incredible losses because it is building all of that itself, so it is creating assets to support its market share demand. This is what is driving its stock prices (based on future earnings) upward (which is also helping to finance further growth....they've got a nice little positive sum cycle going there.

> == The Free Economy
> 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?

The ad market is not the equity market. Magazines have done it for a long time now.

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

No, those are reasons why you place ads on other people's sites....

> 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.

Microsoft still does not issue dividends. There are plenty of established companies which do the same. Their stocks are in the Growth equity market, while the dividend payers are in the Income equity market. You buy growth stocks when you are young, and income stocks when you are retiring...

> 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.

There is no doubt in most people's minds (those that are on the inside) that a large chunk of the perceived value is a)pure hype b) its a land rush, and c) everyone is desperate get in while the iron is hot, but don't know enough about the online economy to make fair estimates of value. This is because its such a new economy, there are no textbooks that are worth referring to. Its all brand new, and yes, most of the value is purely fictional, in the eyes of the buyer.

> 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.

Positive feedback loops are only bad when they stop feeding back, or when the feedback starts varying. I'm not too afraid of this at this point, because the new economy is really just an additional layer on the old economy, like an interpreted programming language. If it were like we were completely starting from scratch and nobody made any money outside it, then I could see your point, but the money that is driving this at this point is supplied by working people in the real world.

Mike Lorrey