How Technology Erodes the Free Market
As our way of living grows more complicated and interconnected, new ways of understanding what it means to have a free economy will be necessary to preserve basic freedoms.
In today's world there is too much knowledge to expect yourself to deeply understand every topic. But there are some ideas that are so fundamental to our way of living that misunderstanding them can be woefully dangerous.
One of my favorite such ideas from economics is that there's no such thing as free lunch. The idea is basically that money only exists to facilitate an exchange of value, and value can never be arbitrarily assigned. It has to be based in how hard something was to achieve.
That probably mostly makes sense intuitively, but consider this simple example. You're a hunter-gatherer who is trying to make a trade with a traveling merchant. You have a few buffalo pelts, and they have some medicinal tea. If buffalo pelts are hard to come by for you, and the tea is easy to come by for the merchant, then you wouldn't want to give away many buffalo pelts for the tea.
Imagine that to you the tea seems remarkably rare and you saw it helped cure some terrible disease your people are afflicted by. But the merchant just happened to recently pass through a land where the people have developed highly effective farming techniques making the tea very easy to cultivate, and hence abundant, so it was really cheap for them.
You wouldn't be getting a very good deal if you gave away many pelts for the tea, and the merchant would be getting many free lunches. This isn't meant to be a historically accurate example, but the core principle is very real and there are many concrete examples in our day-to-day lives.
In this example the principle that there's no such thing as free lunch is fairly obvious, but this idea is central to parts of our lives where its relevance is much less obvious. And with each technical advancement it becomes less and less obvious.
Say you offered to wash someone's clothes. A few hundred years ago this would've involved a quite complicated manual process that was much more labor intensive than it is today. If your business was washing other people's clothes you could probably charge a decent amount considering the amount of work involved and the fact that people had to perform that work by hand.
But after automatic washing machines were invented the process became far more simple, the main task went from cumbersome manual labor to lugging clothes to a machine and pressing a button. It wouldn't make sense to charge the same amount considering all that's required at that point is some electricity and a much smaller amount of manual labor (and the upkeep of the machines).
From the perspective of the business you could hide the machines and continue charging the same amount - leaving your customers under the impression the machine doesn't exist, but then you'd be getting many free lunches (and ideally someone else would come into business and offer them a fair price).
This is another simple example, but it's also realistic. Every day, as the world around us grows more and more technical, the value of things around us changes. But how do we assure the prices reflect those changes? And how would we know if they don't?
Well, the best way we've come up with managing this problem is by basically letting the market regulate itself, meaning prices are set by the people making the things they offer, and they can be as high as those people want as long as people will pay for them.
The reason this is supposed to avoid people setting arbitrarily high prices is because, as in the clothes washing example above, it's supposed to be possible for someone else to create a business and offer a fair price, putting the person arbitrarily creating a high price out of business.
In practice things aren't that simple. The modern world is so complicated, and modern businesses so tightly integrated and dependent on such technical principles (mechanics of assembly lines, material science, digital technology, economic and political relationships), that there are barriers to new businesses being able to offer alternatives which prevent arbitrary increases in price.
Sometimes the simple lack of competing businesses makes some companies so large and resource rich they can buy the new, competing business outright, while the up-and-coming business is still working on bringing their product to the masses. Or the larger businesses can reverse engineer what makes it possible for the competing business to offer a lower price or better product and offer it to their existing base more quickly than the up-and-coming business can gain a foothold.
This is an unfair advantage since the existing business didn’t come up with the product and removing or absorbing competition sets the stage for systematic unfairness since the existing business was able to use their tradecraft (established channels of distribution, well developed brand recognition and high manufacturing capacity) to prevent a new business in their market from growing and acquiring market share it deserves (which, if you remember from the discussion above, is the only mechanism which prevents arbitrary prices in modern markets).
Sometimes the very nature of the business presents opportunity for a company to bar incoming businesses and instead offer their own products with arbitrary prices (like a grocery store that only stocks it's own generic brand of products on the shelves for certain types items). And sometimes, as is the case for the industry I've spent my life in (digital technology), the way the products and the laws that govern the economy interact make it inherently possible to systematically offer arbitrary prices.
Most serious technology businesses simply cannot be started on the amount of money you can reasonably expect that a single person has. It requires, often times, tens of million of dollars for all the engineering, administrative and operating costs to get a new technology business off the ground. This is an inherent and major barrier for technology companies to remain competitive.
The only way any business based on technology, or really any business which requires more money than can be reasonably expected for a single person (or a group of people) to have, remains competitive is if the amount of money necessary to start a business is accessible to anyone who wants to start competing businesses, so long as those people have taken reasonably prudent steps to start a successful business (success being defined as a business which provides a product or service that benefits people at a price that is not arbitrary).
That is not a problem that our current world has solved. But that's not the only thing that's causing there to be free lunches thrown around in technology. The other challenge in the current world is that for people to be able to apply their judgment to purchase a cheaper or otherwise better product, it has to be clear to them that there are alternatives and one of the alternatives is better.
People both have to be able to make a decision based on their own judgment, and it has to be reasonably clear to them what is a better decision. Technology advances so quickly and is integrated in society in such a way that most people cannot be reasonably expected to apply their judgment to choose which technology is better for them. This problem unfolds in a variety of different ways. One being that many technologies aren't sold directly to people, but rather to businesses.
When technology serves only a business the pressure to provide a fair deal is applied only indirectly, and only if enough people in the business buying the technology are considering the best interest of their customers and being reasonably prudent in the administration of their business. This is obviously not always the case.
The problem is even worse if the money paying for the service is taxpayer money. If the people paying for the technology are never going to be beholden to the pressure of people choosing between alternatives, then there is no competitive pressure at all - only subjective assessments of what is considered efficient.
Even when a technology is sold directly to people, the number of advancements that have gone into a technology as complicated as a smart phone or a laptop before they reach the consumer are so many, and those advancements are so complicated, that no one can be reasonably expected to independently perform a deep technical assessment of whether or not the product they're buying it's truly a fair deal, or even whether it’s well made and safe.
They will basically only be able to figure out whether or not it should do something they want it to, and whether or not they can afford it. But not if it will last, if it was built to last or if it has defects or inherent design flaws that could put them at risk. They also certainly could not tell if the technology was produced in a way that was simple and easy to produce due to advances in technology or changes in business laws. If it was, and it was sold at a price that people could afford, but that price really didn't reflect the challenge of creating it, then someone is getting a lot of free lunches.
And there is nothing and no one in our modern world that is holding technology companies accountable to be offering what they sell people at a price that reflects the challenges of building it and offering it.
As technology gets more and more integrated into our modern lives, and more and more efficient, this problem will only become more and more pronounced. So pronounced, in fact, it leads one to wonder about whether or not the foundation of our ideas of ownership and economics will allow us to avoid the problem of free lunches.
Take, for example, the case of the Linux operating system. To provide some background, an operating system is basically a bunch of complicated software that makes it possible for your computer to run applications like web browsers and word processors. If you compare a computer to a home the operating system is like the foundation - a core component on which everything else is built.
The term "Linux operating system" is a broad term that basically encompasses any operating systems built on the Linux kernel. A kernel is a core portion of the operating system - it performs and facilitates the fundamental functions of the operating system.
Linux operating systems are notorious for being open source (meaning the source code is openly available). They are called "Linux" because they are based on a kernel written by a solo developer named Linus Torvalds who created the Linux kernel over a series of years while getting his masters degree in computer science. He eventually made the source code for the Linux kernel openly available and it became widely adopted by hobbyist, users and businesses all over the world.
Now, the Linux kernel, and Linux operating systems are incredibly popular (1). You'd probably never realize it as a consumer or user of technology, but if you use modern smartphones, tablets, interactive devices like touch screen displays in malls or airports, or browse the web, you are almost certainly relying, in one way or another, on the Linux kernel.
If Linus Torvalds was somehow able to declare that every time the Linux kernel was used, he personally benefited financially, the amount of money he would have would be staggering - truly unimaginable. It is not an exaggeration to say it is reasonable to expect it would easily make him one of the richest people in the world.
But would it really reflect, in a fair way, the challenge associated with creating the Linux kernel? Of course it was quite a feat, but it was only possible because of decades of research and innovation by countless scientists who preceded Linus' efforts, and, it reflected only a portion of Linus' life (a set of years). It was indeed remarkable, but was it so remarkable to warrant the amount of money that could be retrieved based on the state of the world today?
Would it be possible to retroactively go back in time and award some of that money to all the researchers whose technical advancements made it possible to create the Linux kernel? What about the parents of those researchers, or the people that maintained the office they worked in, or that managed the finances of the institution they worked for, or protected them from the violent criminals where they lived? What about the people who fought and died in wars in ages past to even afford the academic institution the possibility of existence? Would they deserve anything for their efforts? What role did they play in the invention?
At a certain point, the ideas that we use to map contributions to ownership, and ownership to reward, start to fall apart. We don’t live in an era where anyone with ambition, dedication and character could apply themselves, dig in, and build a successful small business doing a craft, farming, or providing a service anymore.
We live in a world of machines and science, steel and silicon, factories and labs. Our world has grown so complicated and interconnected we have outgrown our ideas of what it means to own a stake in your livelihood. And if the world around us changed, and the machines and factories grew quicker than our ideas of ownership evolved, then many of us would wind up stuck in a world where we are unable to apply our natural talents to assure our futures.
The tragedy of such a fate is that it is worse than if we had been left to our devices in nature and the dawn of civilization had never come.
The world around us is changing quickly. The ideas which we all have agreed should shape it are not. The idea of free lunches being baked into our economy might sound like a folksy or overcomplicated diatribe about an unimportant, boring topic (business law), but it’s actually interesting and intricate, and very important to be aware of. You don’t need a deep technical understanding of economics or law to understand the fundamentals of how an economy should work, or to take steps to advocate for an economy that works for you.
It's not just about money or material success either. A broken economic system brings very real, very dark things. It isn’t just things getting more expensive, it’s getting fired for doing a good job, it’s getting that life-saving insurance claim denied, it’s never owning a house or being able to pay for your children’s college. And, more seriously, it’s a major factor in the process of social breakdown, where the polar opposite of honor and integrity come to dictate the course of the most important institutions, and a long, slow slide into the twilight of chaos, destruction and violence begins.
Hope for a brighter future is only present in a world where people are empowered to live by the means of their determination, grit, passion and ingenuity. As the world around us changes, so to need to our ideas of how we live together. A failing system can rob us of so much, but it can never extinguish the quiet light within us that allows us to determine our future and set the course of our fate, even amidst unthinkable treachery.
And it is that light that can show us a way to a world where we once again are free to live, grow and love.
References
1) See https://www.enterpriseappstoday.com/stats/linux-statistics.html for some cursory statistics describing this although it is a well accepted fact in the industry. All Android operating systems are Linux operating systems, for example.