Wednesday, August 8, 2012

the clothesline paradox

Shane Greenstein has some smart things to say about orphan technologies:
Does the clothesline paradox apply to information technology? There is a relationship between the clothesline paradox and digital dark matter, but there is also a subtle and important difference. It is important to keep those differences straight. It makes a difference to several contemporary policy debates.

That will take some explaining. There are some terms to define.

The clothesline paradox comes from energy economics. For a definition here is a quote from this well-meaning article from the Whole Earth Catalogue:

If you take down your clothes line and buy an electric clothes dryer the electric consumption of the nation rises slightly. If you go in the other direction and remove the electric clothes dryer and install a clothesline the consumption of electricity drops slightly, but there is no credit given anywhere on the charts and graphs to solar energy which is now drying the clothes.

In other words, standard approaches to economic measurement do not count inputs that lack a price. The clothesline paradox leads to under-counting the importance of activity that uses free endowments from nature. It is one of the quirks of modern economic measurement. No price equals no value.

Why does that matter? For one, out of sight leads to out of mind. The sun does not have a firm that lobbies on its behalf. Policy conversation tends to favor existing firms with seemingly big economic contributions, and tends to underestimate the importance of the free.

Perhaps more importantly, when a new technology (which uses the free inputs) substitutes for existing economic activity, on first glance it looks like the new technology brings about a decline in total economic activity. That appearance is misleading, of course, because the savings goes into other economic activity, but those gains are diffuse and difficult to identify.

A third aspect matters as well. An unpriced input tends to come without restrictions on use. There are very few laws governing the proper use of the sun. (Ok, there are a few zoning laws, actually, but you get my point).

This bothers Tim O’Reilly. Why? He argues that open source software suffers from a clothesline paradox. Open source software is an input into one trillion dollars worth of activity, he estimates. Yet, because the open source is unpriced, it gets little or no credit.

Simon Phillips of InfoWorld liked this point, and gave a catchy label for the effect, calling open source software “The Stealth Stimulus Package.” Phillips goes on to compare the open source software and the clothesline paradox, arguing for their similarity.

There is a good insight there, but also an interesting oversight. The interesting insight is worth stressing. Open source software deserves credit, but there is more. This comparison reminds me of an old column in this space, one devoted to “digital dark matter.” Digital dark matter are “important building blocks of the digital economy that we do not measure using standard tools.” (Indeed, the first example of digital dark matter in that essay is open source, where the lack of price is the source of the issue.)

There is a key difference between using the sun and using open source software, however. Nobody has to invest in the sun in order to keep the light coming. Not so for some digital dark matter. Fail to invest, and stuff will not arise.

For my take on a related subject, check here.

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