defining information and data: the economics of information, part 1

Other parts (since blog entries are consumed in reverse-chronological order, the parts are posted in reverse-chronological order):

Part 2, valuing information
Part 3, trading information

Disclaimer: I'm not an actual theorist or scholar of anything. If any of the following series seems derivative, that's because it is. Moving along...

introduction

Per usual practice, I'll use the Thomas Jefferson quote as a preface:

If nature has made any one thing less susceptible than all others of exclusive property, it is the action of the thinking power called an idea, which an individual may exclusively possess as long as he keeps it to himself; but the moment it is divulged, it forces itself into the possession of every one, and the receiver cannot dispossess himself of it. Its peculiar character, too, is that no one possesses the less, because every other possesses the whole of it. He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.

Techdirt's "The Grand Unified Theory on the Economics of Free" (and its thesis-defense comments) prompted me to ponder some general questions about information, especially digitally-encoded information. What is it? What is its value, and how is that value derived? How could the answers to those questions tie together into economics, whether in conventional terms or the terms Techdirt's article laid out? I proceeded in careful steps, philosophy-style. The result is loooong but divisible by topic, so it's a series.

defining information and data

As Jefferson hinted, information (what he calls an idea) is fundamentally different from matter. Specifically, information can only be manipulated by a mind. As many minds exist, so can many copies of information exist. Rather than attempting to define "mind", and potentially become mired into a discussion about the nature and origin of consciousness, I'll resort to circular definitions: "mind" is defined as that which understands and manipulates information, and "information" is defined as the material which minds understand and manipulate. (Someone may break in at this point to protest that human minds also manipulate human bodies. Wrong! Brains manipulate human bodies. Note that I'll also not consider the relationship between the brain and the mind--I don't wanna. However, for extra credit, the reader may ponder this oft-explored hypothetical: given two humans, how much about them must be identical for them to have identical minds? Identical synapses? Identical bodies? Identical experiences? Identical surroundings?)

The next step is to recognize something else the Jefferson quote expresses: a mind can either hoard information, or it can communicate the information to another mind (letting the brainwaves ripple, so to speak). Communication is necessary because minds are disconnected, separate. (By the above circular definitions, two or more minds could only be considered a single mind if all the minds understood and manipulated the exact same set of information, which is not the case. I am Hugh.) Since minds are separate, the separation material must consist of matter. Therefore, communication has multiple steps: 1) the sending mind encodes the information into matter, 2) the matter travels to another mind, 3) the receiving mind decodes the matter into information. Nothing in this model is controversial, aside from being a blatant oversimplification compared to real communication theories/models. For clarity's sake, "data" shall refer to the matter representations of information, used in communication.

In passing, for the sake of full disclosure, note that real communication is implicitly imperfect, ultimately stemming from the difference between, or the boundary of, mind and matter. (One might say, "the map is not the territory".) Perhaps the original purpose of minds is to do what matter on its own cannot: apply information to other information, "annotating" new information with meaning, forming context, birthing information of greater worth than the individual bits. To communicate is to dislodge a subset of information from outside of its original context within a mind. The very first step of information encoding is lossy. The very last step of information decoding is extrapolation. Strictly speaking, mental information (as opposed to sensory information recorded almost perfectly by technology) isn't duplicated; it's torn out, encoded to data with approximations, sent, decoded from data approximations, and interpreted. "Reproduction" of information, via a communication channel of data, is not really a "magical" loophole of conservation laws.

Data's most basic form is personal interaction such as gestures, vocalizations, and speech. A variety of creatures create and consume this form of data through a variety of methods, but its expression peaked in humans: spoken language, which has stunning complexity. Advances in communication have at least partly been refinements in data: pictures, stylized/standardized pictures, phonetic pictures, characters/alphabets, the printing press, photography, the phonograph, the telegraph, the telephone, radio, cinema, television, modems/faxes, broadband networks.

Most importantly, data manipulation changed forever once humans realized that by translating or encoding data into a digital (binary-series) form, meaning a succession of either 0/1 or off/on or no/yes, any technology which can handle the digital form can therefore handle the data. And since the presence and absence of an electric current are excellent ways to represent 0/1, the data could also be "electrified", which enables quick transmission, storage, and modification. Experts may smirk at someone who simplistically asks "how to quickly show, to my relative in the other half of the country, a picture I took from my new itty-bitty camera" or at someone who asks "how many songs can my portable music player contain", but that level of abstraction better illustrates the profound communication effect of digitized data. On some level, all websites, within and without the Web 2.0 bubble, are "social".

Digital data's technologically-achieved processing efficiencies naturally extend to yet another operation: copying, which is just retrieving, transmitting, and re-storing the data. Moreover, unlike both the manual and mechanical copies of past forms of data, the copies can be identical: all that's necessary is reliably duplicating each 0/1 in the series, by repeating the procedure bit by bit. For humans, who really only care about the information rather than the data, it would be an excruciating way to copy, but it's ideal for the purpose of automation. Besides greater speed and accuracy, digital data copying also has become quite cheap in cost. The number of 0/1 bits per unit of currency keeps increasing across the range of all devices, while the cost of each data operation is tiny (the cost as in watts of power and common device wear and tear).

Essentially, digital data resembles information more than any previous form of data, and therefore the machines that manipulate the digital data resemble the mind in the same ways. Given this is the case, the urge to apply the Thomas Jefferson quote to data as well as information is not surprising. Also, digital data prompts a reevaluation of the economics of information as a resource or good in itself, rather than just as a factor in economic decisions.

valuing information: the economics of information, part 2

Other parts:

Part 1, defining information and data
Part 3, trading information

Information has much value, although its value is harder to grasp than the value of other goods. Of course, the same key economic principle applies: value is assigned by a market. The market for information is minds.

Minds value information in the same way any economic agent values any good: for what it achieves. The question of what an economic good, especially information, achieves can be subjective and loosely-defined. If someone says a story made him or her laugh, cry, and think, then the information has definitely achieved something for him or her, and it has proportional value. If someone learns how to play pinochle, then that information has increased his or her capabilities, and it has proportional value (i.e., depending on how much he or she will be playing pinochle). If someone legally hears of a stupendous stock tip, then that information has substantive value indeed. If a spy discovers a long-planned surprise attack from an opposing army, the value is measured in the preservation of human lives (from the perspective of one of the sides, anyway).

All these values happen on the consumer or demand side of the market, but in any (semi-free or more) market, the value has a corresponding producer or supply side. Just as value on the demand side of the information market varies widely, value on the supply side of the information market varies widely. Of course, for the producer, value means cost. Information production has costs. R&D is an example that has price tags. Basic science research has price tags, too--supercolliders and space telescopes aren't free. Less obviously, the creation of "fuzzier" information by artists, writers, engineers, architects, etc., have costs. The creator's time and exertion are far greater than zero.

Another supply-side value which deserves more attention is the expertise of the information producer. Rarity raises value, and the expertise involved in producing worthy information is relatively rare. In my opinion, the spike in amateur videos has confirmed this all too well. For every truly noteworthy piece of creative information, a multitude of mediocre to awful creative information also exists. Still more rare is the information producer whose expertise results in consistently-high output.

So information undoubtedly has value. But the data, the material manifestation of the information which can be seen and felt and heard, has its own components of value. One is fidelity: how well the data reflects the information. Low-fidelity data, like a scratched vinyl album, or a grainy filmstrip, has lower value than high-fidelity data for the same information. A second component of value is utility: how easily, flexibly, etc., the data, and therefore the information represented by the data, can be manipulated. Data which requires specialized devices to read it has lower value than universal data. The point is always the information, not the data. Fidelity and utility describe the degree to which the data doesn't hamper the communication of the information.

Once again, digital data's technologically-achieved processing efficiencies have changed data to more closely match information. On the consumer or demand side, digital data is increasingly easy and cheap to obtain and experience. For instance, not many years ago, communicating a large quantity of video data via priority mail was quicker and cheaper than trying to send it through a line, but more recently the decision has flipped. In the case of data like text, the digital form's proposition was stronger almost from the start (recall the excitement over having an entire encyclopedia on a data CD, including "multimedia"?). The growing ease of consuming data, particularly on an interactive or on-demand basis, in effect makes the data market itself larger and more efficient. In simple terms, this just means that the consumer has more choices. A common term for this is the Long Tail.

Meanwhile, digital data has had similar effects on the producer or supply side. Through the assistance of technology (without which the digital form would be quite useless), data is subject to any modifications of arbitrary precision. People can create new experiences of sound without picking up an instrument, munge pictures, and computer-generate movies and TV shows. Moreover, the technology for doing these tasks has grown steadily cheaper, allowing more potential producers to become real producers. (For instance, anyone can publish through a blog, or calculate finances with a spreadsheet.) As on the demand side, the growing ease of producing data has made the market itself larger and more efficient.

Ultimately, information will remain valuable on both the demand and supply sides. Its market won't vanish. As data better serves its function of communicating information, it will give way to the underlying market, the information market. More to the point, continuing to target the data market rather than the information market will become steadily irrelevant. However, the information market comes along with its own set of conceptual shifts.

coda about software

Software is a unique case of data, in which the data represents information about manipulating data. For clarity's sake, the data manipulated by the software shall be called "work". (Of course, in practice the software is separated from the work for security and efficiency, but all data is nevertheless stored and retrieved in the same general way. Well, software and work have separate caches.) Since the manipulation of the work is the motivation for using the software, the value of the work is thus intrinsic to the software's value. In the opposite way, since software creates and modifies work, the software's value becomes intrinsic to the work's value--if the work can't be manipulated, its information is lost, at least without conversion.

The trend to transform the data market ever further into a purer information market will apply pressure to any obstacles which would trap information into data. Consequently, the value of software will lie in how much of the information market it can manipulate. The value of work will lie in what degree it can be treated like information--that is, the degree to which it can be easily manipulated. Minds don't need apparatus like software to manipulate any ideas. Similarly, ideas are much more fluid and interconnected than work, the actual bits of digital data. A second fusion between software and work will probably occur, but not in the rigid co-dependent way as before: "smarter" data, with standardized, replaceable parts. Dare I say Semantic Web? Or the Cloud?

trading information: the economics of information, part 3

Other parts:

Part 1, defining information and data
Part 2, valuing information

Economically considered, transactions in the information market have some unusual properties, due to information not being matter (recall part 1, each time communication occurs, the receiving mind decodes the data and "recreates" the information): 1) the producer's "inventory" of information isn't depleted, 2) the consumption of the information doesn't eliminate the information, 3) the consumer is immediately able (physically, mentally) to use the information in future transactions, this time as a producer.

Taken together, these unusual properties lead to a predictable outcome: the more transactions in the information market which occur, the greater the supply of the information becomes, on a compounding scale. Old-fashioned hearsay, rumors, and gossip can take less than a week to become common knowledge. New-fashioned blogs commenting on blogs produce an "echo chamber" (I WILL NOT use "blogosphere" non-ironically!), rocketing a particular entry to popularity...or notoriety.

Since the data market approaches the information market as data's efficiencies, particularly digital data, approach those of information, the economics relied upon by participants in the data market must adjust. Fortunately for producers who wish to eat (as opposed to having their lunch eaten), information retains the same value it always has had. There isn't a set formula of precisely how to adjust, but some suggestions and observations pertaining to the information market are available. Generally speaking, each one is aimed either toward leveraging a lack of scarcity or introducing scarcity, so the high level of overlap is unsurprising. Naturally, no guarantees are included.

• Produce information whose value to the producer increases as the information is consumed. The traditional example is advertising. "Viral" marketing and product placement are some other techniques.
• Instead of producing information, produce tools and services which empower consumers to manipulate information, whether creating, modifying, storing, sharing, securing, selling. Admittedly, the more these tools and services are offered for free, and the stronger and easier those free tools and services become, the probability of earning a profit here will shrink.
• Ensure that the original producer of the information continues to be the best source for that information. Recommended tactics are offering the most convenient transactions (greater hassle for the consumer equates to greater perceived cost), frequent updates to keep past versions of the information less desirable (note that even information takes nonzero time to indirectly spread, depending on the number of intermediaries/layers), extra benefits to consumers who use the original source (the benefit could even be additional information), greater context for the information.
  
• A more efficient information market means that more choices are available to the consumer. His or her time and attention are limited. This immutable fact presents an opportunity for tools and services that could aid him or her in finding and discriminating information. An information market has less profit in distribution (how expensive is it to distribute something that's ethereal?), but it has more profit in filtering.
  
• On its own, information is inert. "Interactive" information is cleverer at not seeming inert, but only up to a point. By contrast, the greater value of interacting with a mind is hard to overestimate, which is why education will continue to have a deep need for teaching professionals in the face of widespread information. (Of course, some kinds of information are hard-to-impossible to communicate apart from the immediate feedback of a "coach".) A consumer can reuse information in another transaction; he or she can't take and resell the source mind.
  
• The value placed on information, like the value placed on any other resource, has a subjective component. Information producers can drastically exploit the subjective component because information is extremely malleable at low cost. Customized information is simultaneously of higher value to the targeted consumer and of lower value to every other consumer. (Then again, the same malleability potentially makes it easier for secondhand consumers to un-customize and re-customize the information.) Significant customization assumes a corresponding amount of work by the producer, though.
  
• Joint ownership of conventional goods illustrates that simple possession isn't the sole measure or benefit of ownership. So information producers can still trade "ownership-like" privileges for a shared possession like information. For instance, like a stock investment, information could be "pre-sold" before production--the obvious difference being that the investing consumers are expecting a return in information, not currency. (Clearly, the "investors" would need to be convinced that the information will be worthwhile.)
  
• Use a pricing strategy opposite to that of mass production: because large numbers of transactions can't be counted on (due to the potential of cheap duplicates), make up the difference through setting a higher price per transaction. Or go with a "group rate" paradigm, in which the high price could be split among several consumers, but each of the consumers in the group receives the information.
  
• Finally, economic behavior isn't independent of other behavior. More abstract incentives, positive or negative, can affect decisions. Societies function on incentives like those.

summary

A top factor in the dominance of the human species (over other lifeforms and to some degree Earth itself) is its talent for information. Over time, the matter representations of information, data, have grown in efficiency by the advances of technology. Data increasingly resembles information, and people will treat data more and more like information. Thus, the market for data will approach a market for information. Information will remain a market because, though the efficiencies of manipulating data enable large-scale (& decentralized) information production, good information will still have value. Nevertheless, the information market has its own set of challenges for yielding a profit. Those challenges aren't new, but take on more significance.