Who Will Pay for the Zero Marginal Cost Society?

I strongly support the notion of building systems and developing public policies that enable and take advantage of zero marginal costs, for example in the context of various infrastructure and knowledge commons. But what about the fixed costs?
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Jeremy Rifkin's book, The Zero Marginal Cost Society, is at times thrilling, at times encyclopedic, and at times possibly hyperbolic. It is very well-written, it touches on an incredibly wide variety of modern topics, it builds on an exhaustive set of references, and most importantly it makes you think seriously about the future. You cannot possibly read this book without pausing at least a half a dozen times to ponder. There were parts of the book that presented me with completely new facts, claims, technologies, and predictions. For example, I hadn't considered the prospect of nearly zero marginal cost energy production. I don't know that I have as much confidence as Rifkin in that prospect coming true in the near future. But to contemplate the possibility and its implications alone was exhilarating. Similarly, I found fascinating his claim that "what makes the great infrastructure revolutions transformational is the convergence of new communications media with new energy regimes." I will be thinking a lot about this in my own work.


Due to space constraints, I'll focus on one difficulty I had with Rifkin's analysis. I strongly support the notion of building systems and developing public policies that enable and take advantage of zero marginal costs, for example in the context of various infrastructure and knowledge commons, but the first concern that arose in my mind as I began reading the book was simple and likely one that most people will raise: What about the fixed costs? Who is going to supply the infrastructures necessary for the various near zero marginal cost systems to function? Whether we are talking about knowledge or electricity or education or physical production systems, there are critical infrastructures that support, structure, and sustain the systems for participants (users, producers, consumers, prosumers). Who will bear the fixed costs and supply these infrastructures? If the supplier is a private company that owns the infrastructure, how will the supplier manage it? (To lay bare my concerns: Rent extraction and control by private, for-profit infrastructure owners may very well undermine most of Rifkin's dreams.) If the government supplies the infrastructure, how will it raise the funds and how will it decide which infrastructures to build and when to build them? These are familiar questions because I faced them often when discussing my own recent book, Infrastructure: The Social Value of Shared Resources (OUP 2012) , which Rifkin kindly quotes. To be fair, Rifkin does address some supply side issues.

He opens chapter nine with a discussion of the Marginal Cost Controversy (MCC), which was a debate among economists that took place in the 1930s and 1940s. The debate was about Hotelling's argument that government should subsidize the fixed cost of infrastructure so that marginal cost pricing would prevail. Hotelling lost the academic debate. In my book, I also discussed the importance of the MCC. In fact, Christiaan Hogendorn and I soon will publish a retrospective article, Revisiting the Marginal Cost Controversy, in the Journal of Economic Perspectives. We've been thinking that it was unfortunate that the MCC had been lost and that it needs to be revitalized. And along comes Rifkin! Fantastic! And he correctly states at the very beginning of his discussion: "At the time, [the MCC] was more of an abstract issue. Today, it's one of the most important political issues facing society." He goes on: "How we choose to finance a near zero marginal cost society will likely determine the way we organize economic, social, and political life for the remainder of the twenty-first century." And similarly, he says: "Whether the new potential inherent in the [Internet of Things] infrastructure can be realized will be determined by who finances the platform. The struggle for control is already underway ..."

Rifkin, however, makes a few minor mistakes in describing Hotelling's arguments --- Hotelling did not base his argument on the idea that infrastructure and public utilities are public goods or nonrivalrous; those economic concepts surfaced later in the 20 century. But those mistakes do not undercut the key argument for government subsidization of fixed costs. In fact, as I argue at length in my book, they strengthen the argument considerably, at least where infrastructure users produce public and social goods and generate spillovers. Nonetheless, the MCC remains a controversy, and one that must be examined, debated, and evaluated in context. There are various tradeoffs to reconcile. Unfortunately, Rifkin doesn't fully engage the controversy that he identifies as "one of the most important political issues facing society."

Rifkin abandons the MCC and government subsidization of fixed costs too soon (although he returns to it occasionally later in the book). He seems to believe that infrastructure financing will come from "hundreds of millions of consumers and taxpayers." But his arguments don't fully explain how this will happen. He discusses the Internet and emphasizes that is "owned by everyone and no one" because the Internet "is a system organized by an agreed-upon set of protocols that allows computer networks to communicate with each other." While this is true, the physical infrastructure networks are indeed owned by companies. He suggests that these "companies are merely providers and facilitators." But how can that possibly be correct? Ask Netflix whether Comcast is a mere provider or facilitator. The network neutrality debate highlights the fact that physical network owners are anything but passive providers. To the contrary, in their relentless pursuit of profits for their shareholders (a perfectly reasonable objective for for-profit companies, mind you), private companies that own physical infrastructure networks have and will continue to extract rents and exercise control over user activities (by which I mean all higher layer activities by private companies like Google and Netflix and users like you and me) when it is feasible to do so.

If Rifkin's predictions for the future are correct, the network neutrality fight will recur across a range of different infrastructures. As he says later, "the struggle over network neutrality is, at its core, a battle of paradigms." While this is correct, Rifkin adroitly sidesteps the difficult infrastructure supply issues and the difficult governance or management issues that follow. He discusses implementation of smart girds in Europe and the potential for super Wi-Fi networks and open spectrum commons to become the underlying communications infrastructure for the Internet of Things. But these possibilities involve such contentious political, economic, and technological battles! Infrastructure owners are in a position to exert control, extract rents, and price well above marginal cost, and their arguments in defense of such practices can be boiled down to the simple supply side issue of recovering fixed costs. This issue needs to be dealt with.

Rifkin attempts to do so in different parts of the book by appealing to the emergence of the Collaborative Commons. Part II of the book extensively discusses commons. As a scholar who's written quite a lot on commons, I'm happy to go there; I may have the "Commons affliction" he describes.

One telling example is his discussion of the Tennessee Valley Authority project. He returns to the MCC and explains how "Hotelling's contentions and best-case example turned out to be correct." The federal government played a major role in underwriting the rural electrification project and ultimately "threw its support to a distributed, collaborative, laterally scaled economic institution--the cooperative..." This "third approach," he suggests, provides a reasonable way to deal with the supply side questions while sustaining infrastructure commons. This is intriguing but incomplete. Much remains to be seen about how this would play out in various communities and contexts and with respect to various infrastructures. Nonetheless, it, like so much of Rifkin's book, forces you to stop and think about the possibilities for the future.

Brett Frischmann is the author of Infrastructure: The Social Value of Shared Resources. He is a professor at Cardozo Law School in New York City, an Affiliate Scholar of the Center for Internet and Society at Stanford Law School, an Affiliated Faculty Member of The Vincent and Elinor Ostrom Workshop in Political Theory and Policy Analysis, Indiana University, and a Trustee for the Nexa Center for Internet & Society in Torino, Italy. Professor Frischmann holds a B.A. in Astrophysics from Columbia University, an M.S. in Earth Resources Engineering from Columbia University, and a J.D. from the Georgetown University Law Center. More information is available on his website - www.brettfrischmann.com.

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