the decline of newspapers: "creative destruction" or "market failure"?

Former student Ed Lopez in the The Freeman on the decline of newspapers and wrestling with whether this is "creative destruction" or "market failure"...

Over the past year there has been a flurry of government-related activity aimed at stopping the decline of the newspaper business. The Federal Trade Commission (FTC) has held three series of workshops on the subject...released a discussion paper titled “Potential Policy Recommendations to Support the Reinvention of Journalism”, and a week later it held a workshop at the National Press Club, “How Will Journalism Survive?” to discuss its proposals.

This activity has focused on two issues. First, traditional news-producing businesses aren’t making the money they used to make because of competition from new kinds of outlets. Second, this allegedly is a market failure...

Regarding the second, the FTC argues that journalism is a public good, that the severe contraction of the industry proves that the market has failed, and thus that even tirelessly experimenting entrepreneurs have been unable to find new and sustainable streams of revenues for news organizations, especially for traditional newspapers and their online extensions.

Lopez then cites paragraph 15 of the FTC paper...

The news is a “public good” in economic terms. That is, it is non-rivalrous (one person’s consumption of the news does not preclude another person’s consumption of the same news) and non-excludable (once the news producer supplies anyone, it cannot exclude anyone). Because free riding is usually easy in these circumstances, it is often difficult to ensure that producers of public goods are appropriately compensated.

By my count the FTC report contains 30 potential policy proposals, ranging from major new programs to tweaks of existing interventions. I have categorized most of the proposals into six broad areas [where the federal government might artificially help the industry-- at the expense of others].

• Raise revenues to news organizations...
• Reduce costs to news organizations...
• Increase current funding of journalism...
• Create new federally funded programs...
• Offer tax preferences to news organizations...
• Harvest new funding mechanisms for earmarked spending on news organizations...

This is what the best and the brightest have been up to....

Since there isn’t enough space here to talk about all the implications of the FTC report, I will focus on the economic argument that lies at the core of these proposals...

History shows us repeatedly that public goods are often and perhaps even usually provided voluntarily—without mandate or subsidy from government. Toll charges [for] roads and bridges...Beekeepers and orchard growers...Casino hotels in Las Vegas provide free self-parking and security...Neighborhood police forces...

But what about the losses to news producers? This is not pleasant to see unfold, but it is not a market failure. A policy-relevant market failure is the experience of real net losses in society as a result of purely self-regulated voluntary action. When people choose to move away from lighthouses and newspapers, it’s because they’re moving to new and better substitutes. The lighthouse’s loss has been society’s gain....

Market-failure theory is of no help in understanding how markets really work and what is happening to journalism. A better framework is creative destruction. Old journalism is failing not because it is a public good that government has not adequately funded. It’s failing because it is being replaced with more innovative alternatives.