05/02/2008 05:12 am ET | Updated May 25, 2011

Digital Music and the Free Market

One of the most fascinating New Economy consequences to emerge from the Eliot Spitzer sex sting is the apparent multi-hundred thousand dollar score bagged by Emperor's Club VIP escort and budding recording artist Ashley Alexandra Dupre. She had a couple of tracks listed on Dragon Slayer upstart and indie music site Her notoriety combined with Amiestreet's underlying economic model combusted to the tune of instant lottery like winnings. For years Madonna had to pretend to be a vamp to make that kind of money. Here's an actual hooker scoring big on the pop charts for her vocal skills.

Let's look at the Amiestreet business model for a moment. All tracks are free at first. Then, if the demand picks up, the price starts to rise topping out at just under the psychologically important $1 (imagine if the Federal Reserve Bank under Greenspan and Bernanke operated like this, the dot-com and sub-prime bubble and burst would never had happened as the demand for credit would have raised interest rates in time to avert the bubble).

Economics is a social science and not a physical science, meaning there are no absolutes in economics. The unpredictability of psychology counts (per George Soros' theory of 'reflexivity'). And this is as important in the virtual economy as it is in the analog economy but with a caveat.

The actual cost of digital entertainment is virtually zero. Electrons are virtually free. The only thing that matters is perception and psychology in an economy that is 100% demand driven.

The number of bands looking for attention is never ending. The number of fans looking for new music is never ending. Amiestreet matches these two virtually unlimited quantities via a 'market making' mechanism that finds a price that 'clears' supply and demand at a price that is 'invisible' to use Adam Smith's term (and there is virtually zero marketing costs).

The bands win. The fans win. The record companies close as they should, because they are nothing more than costly intermediaries that add nothing to the process. The record companies waste money trying to fabricate 'demand' via marketing. In fact it can cause 'demand failure' if consumers get the feeling they are being overtly marketed to.

It's sad the way the copyright cartel is fighting free market capitalism in America by suing their customers over their constitutionally guaranteed 'fair use' rights. It's sad the way the cable companies are fighting to shut down the 'end-to-end' nature of the web and kill its ability to support free market enterprises like amiestreet.

With the cost of everything else going up; milk, bread, oil, labor wouldn't it be great if the cost of music, TV and film were allowed to fall along with the cost of the technology that supports it.

As it is now, the cost of processing, bandwidth and storage is falling but instead of consumers benefiting from this trend by having access to cost efficient digital entertainment products for less, the copyright cartel is making sure that the price for all entertainment goes the way of cable TV and inflation in general; higher.

But there is hope, groups like the Swedish Pirate Party in Sweden are fighting the good fight against copyright monopolists and digital monarchs. Misunderstood in America is how groups like the Swedish Pirate Party are fighting for the consumer and the artist. Both benefit if copyright laws are reformed to be less corporate friendly and more friendly to the common wealth and public domain.

In the end, I believe the copyright cartel will go the way of the British East India Company and that groups like the Swedish Pirate Party are the equivalent of American patriots back in 1773 who staged the Boston Tea Party to protest against unfair monopoly rights in America.