The cooking one can do is limited by the supply of ingredients, and most cooking in the economy produces undesirable side effects. To create valuable final products, we mix inexpensive ingredients together according to a recipe. A useful metaphor for production in an economy comes from the kitchen.
The economist Paul Romer’s discussion on Economic Growth offers a concise explanation for this:Įconomic growth occurs whenever people take resources and rearrange them in ways that are more valuable. It’s the same fallacy facing those who have trouble understanding zero and infinity in economics. They believe that there’s some fundamental limit on the possibility of adding value, and therefore, business models are about moving around a limited amount of value, rather than expanding it. Unfortunately, there are too many in this world who view value and growth as a zero-sum game. The good news is that value is not a scarce concept. So, any new business model must be based on adding additional value. Providing more value than people can get elsewhere is the reason why a business model succeeds. However, for a new business model to make sense, it needs to provide more value. It’s a new business model (well, perhaps not to the dot coms of the original dot com boom), but it’s unlikely to be a successful one (if you disagree, and would like to pay me $1,000 for $1, please use the feedback form above to make arrangements). For example, I’m now selling $1 bills for $1,000. Anyone can create a new unsuccessful business model. I’d like to explain why, economically, that doesn’t make sense.įirst, to clarify, I should point out that, technically, I mean that it doesn’t make sense that DRM could ever open up feasible or successful business models.
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Continuing my increasingly lengthy series of posts on the economics of non-scarce goods, I wanted to take a look at an issue that I mentioned in passing earlier this week concerning the ongoing insistence among the entertainment industry (and the DRM industry) that DRM somehow will open up new business models.
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