The Effect of the Internet on Free Trade

The basic principles of free trade that David Ricardo wrote about two centuries ago remain valid today. Nations, organizations, and individuals benefit by specializing in the tasks they do best and trading with others for the rest.1 However, the internet and its users have changed market relations in a permanent and meaningful way. Using the free software movement as a guide, it is clear that a different organization paradigm has emerged. Nevertheless, in a way, the basic concept of specializing and sharing is reinforced by the free software movement, with the common goals of efficiency and diffusion of innovation.

Communications technology and the Internet may be fundamentally changing the way economists look at free trade. Alan Blinder, a well-regarded proponent of free trade, admits that free trade economists may have to adjust their theories to account for technological innovation. He writes, “We used to think, roughly, that an item was tradable only if it could be put in a box and shipped. That's no longer true. Nowadays, a growing list of services can be zapped across international borders electronically. It's electrons that move, not boxes.”2

But even a model that considers the transformational consequences of the movement to primacy for zero marginal cost goods3 does not grasp the full scope of how the internet society will affect the economy.

Free software is a category of good that does not fit into the current economic paradigm. For example, consider the basic definition of economics, found in the first chapter of any economics textbook: “Economics is the study of how society manages its scarce resources.” So, how does this basic definition account for free software? Free software is a non-scarce good. This is so because software can be shared easily, and the cost of making a new copy is negligible. The definition is inadequate to describe the new organizational model.

In a traditional market economy, the cost of a good consists of the cost of the product itself plus the cost of movement. For example, a retail store selling widgets will determine how much to charge per widget by first determining their costs, which will include both the manufacturing cost as well as the cost of shipping the widgets from the manufacturer to the shop. It is easy to see how the cost of movement for software tends towards zero because, whether the software is free or proprietary, it can be transferred electronically at negligible cost. So, in a traditional market economy, the cost of software consists solely of the cost of production.

However, in the case of free software, in addition to the cost of transfer eventually becoming zero, the value of the good will also tend towards zero. To understand this, let us first examine proprietary software. Manufacturers of proprietary software will charge a fee for the right to use the software and will limit access to the software to only the individual who purchased it. Therefore, the value of proprietary software remains of some monetary amount, and proprietary software can be viewed as a traditional economic good. With free software, however, even if a user originally pays a fee to acquire the software, the value will eventually tend towards zero because the software can be freely transferred to any number of other users for free.

As technology advances, more and more services will become deliverable electronically. This will fundamentally alter the labor market. These elemental changes, however, do not justify an increase in protectionism or a shift away from free trade. The computer age has already changed the low end labor market in myriad ways. We are already familiar with voice-activated operators when we call any customer service help line. John Tanny adds, “Thanks to the proliferation of ATM machines, self-serve ticket kiosks at movie theaters, and the Internet, we now for the most part no longer deal with live human beings when we go to the bank, the movies or buy airline tickets.”4 And, as Blinder notes, it's not just low-skill labor markets that will see a decrease in labor demand. “It's also high-skill services such as radiology, architecture and engineering -- maybe even college teaching.”5 It is tempting to turn to protectionism in times of economic turmoil. As Blinder writes, “American workers will face a troublesome transition as tens of millions of old jobs are replaced by new ones. There will also be great political strains on the open trading system as millions of white-collar workers who thought their jobs were immune to foreign competition suddenly find that the game has changed.”6 However, for the benefit of the world economy in the long-term, the principles of free trade must win out.

In fact, I would argue that the fundamental economic changes demanded by technological innovation and the free software movement justify an increase in free trade. In the free software community, a socioeconomic system exists in which the access to goods is freely granted given the users’ agreement to adhere to a set of rules that define the way in which the good can be used.

When one considers that the production capacity of free software tends upwards with no limit and that free software promises common access to goods which are not scarce because they can be easily shared, it is easy to see that a new economic model is possible. The free software movement provides a different approach to the primary dilemma of capitalism: the distribution of scarce resources. Through the dissemination of free software, manufacturers of products (whether they be electronic or tangible) can become more efficient and more innovative. This, in turn, would provide higher quality of products at lower costs, thus accomplishing what David Ricardo originally set out to do.

2 Blinder, Alan S., “Free Trade’s Great, but Offshoring Rattles Me.” Washington Post, 25 May 2007.

3 This is a quote from your comments on the 1st draft. I really couldn’t say it any better myself. Thanks for the phrasing!

4 Tanny, John, “Free Trade and the Rattling of Alan Blinder.” Real Clear Markets, 28 November 2007. Newspaper online. Available from http://www.realclearmarkets.com/articles/2007/11/free_trade_and_the_rattling_of.html, accessed 7 December 2008.

5 Blinder, Alan S., “Free Trade’s Great, but Offshoring Rattles Me.” Washington Post, 25 May 2007.

6 Id.

I commented a few days ago, but it seems like it never showed up. Anyways, I wanted to say great paper, and that it's very organized and well thought-out. I like the threat on Professor Moglen's job.

My question for you is whether or not you think there is ever a time when increased protectionism is warranted.

For instance, given the current economic downturn, I might make the following arguments: (1) saving a few dollars and jobs here and there will result in large returns in the future, both in terms of profits and saved welfare. (2) if we can save money anywhere and invest it, it will grow quite large when this country recovers (3) if we allow protectionism to slip, we might lose a lot of things (e.g. jobs to other countries) in the short run (due to the recession) that we can't fully recover in the long run

My instinct is that despite all this, we really do need to get used to dropping our history of protectionism, even during the recession. What do you think? Are there better or worse times to lose the protection?

-Steve

-- StevenHwang - 10 Dec 2008

• I think the title is misleading. Although there's an interpolated paragraph concerning the restructuring of the markets in location-independent services, there's no new political economy here about network-connected society. You've taken a straight cut through the usual version of "free trade" propaganda, including the familiar bullshit about the lamentable effect of steel protectionism on the auto industry, even as the industry supposedly lamed by rules against steel dumping is now seen to be perishing primarily from its own stupidity and inability to produce anything customers would buy with their own money. This is think-tank economics, not even economic thought, and it neither teaches us anything about, nor is informed by, the transformational consequences of the movement to primacy for zero marginal cost goods. If you choose to rewrite, in my view, the goal should be to ask a novel question within the scope of the title: what unexpected or non-dogmatic observations have you to share, and how came you by them?