09/13/2009 05:12 am ET Updated May 25, 2011

Free and The Search for Economic Innovation

Smokin' in the boys' room
Smokin' in the boys' room
Now, teacher, don't you fill me up with your rules

-Brownsville Station

For the past decade, our leaders decided that the rules of economics didn't apply. It got us into a financial crisis.

Washington and Wall Street rewarded bad behavior instead of providing incentives for doing things right.

I had two relatives who were chain smokers and I offered them an incentive to quit. I agreed to give them $1000 if they could quit for a year. If they started smoking any time during that year, they had to give me $50.

It worked. Both quit. It has been 15 years and neither has gone back to smoking.

It was a great exercise in psychology. By itself, I don't think the $1000 jackpot would have worked. The reward was too far out in the future. The $50 penalty, by itself, would not have given enough incentive.

It took an unusual combination to make it happen.

I've been reading Chris Anderson's new book, Free. Anderson wrote The Long Tail, one of the best business books of this century. I've given over fifty friends copies of The Long Tail. I won't be surprised if I buy as many copies of Free to give away.

Anderson has a handle on how technology and the future meet. One of the most fascinating points he covers is a topic called "Reversible Business Models." He credits the term to Derek Strivers, the founder of CD Baby.

The idea is to reverse a traditional business model. One example is to reverse the common practice of a bar hiring a band to play for its customers.

Anderson talked about a bar in Los Angeles that make bands pay a fee to play for its customers. It works. The band gets exposure, the patrons get entertained and the bar has income from an item that used to be an expense. Income instead of outgo.

Anderson hit on another topic that has plagued professionals and service providers forever. What and how to charge for their time and effort?

Pricing for professional services isn't easy. You can charge too little, charge too much, or charge for the wrong thing. I've done all three.

People often don't value services that they don't pay for -- no matter how valuable the service really is.

Over 20 years ago, I owned part of firm that did political polling. We were ahead of the technological curve and very accurate. We had a number of paying clients. But we also had several friends running for office who couldn't afford us. Often in doing research, we would find something that could help our friends.

The friends often ignored us while the people actually paying for our surveys never did.

We noticed that one of my friends had a problem in a geographic area. We told him about the problem, but his paid campaign manager had "a gut feeling" that we were wrong. My gut feeling was that the campaign manager was an idiot. But the friend was paying him and not paying me. Our advice was ignored, our buddy lost that area by a wide margin and lost the election by a tiny margin. It was clear that ignoring the free (and, therefore, "worthless") advice cost our friend the election.

Anderson hits on why some free products are embraced and others are not.

Two of the best ideas are wellness related. Anderson writes about doctors in China who are paid monthly when you are healthy. If you are sick, you don't pay. It is the doctor's job to keep you well.

A similar idea is a gym in Denmark that allows you to attend for free if you show up once a week. If you miss a week, you pay for the entire month. It reminds me of the anti- smoking plan I offered my relatives -- a combination of penalty and incentive.

The doctors in China and the gym in Denmark are plans to promote physical wellness. But they are also promoting economic wellness. They are developing models that other entrepreneurs will copy.

As we look at life after the financial crisis, we need to turn traditional thinking on its head.

Picking up a copy of Free is a good place to start.

Don McNay, CLU, ChFC, MSFS, CSSC is one of the world's leading authorities in helping injured people and lottery winners deal with complex financial issues.
McNay is also an award winning syndicated financial columnist and Huffington Post contributor.
McNay founded McNay Settlement Group, a structured settlement and financial consulting firm, in 1983. The company's primary office is in Richmond, Kentucky.
McNay has Master's Degrees from Vanderbilt and the American College and is in the Eastern Kentucky University Hall of Distinguished Alumni.
McNay has written two books. Most recent is Son of a Son of a Gambler: Winners, Losers and What to Do When You When The Lottery.
You can write to Don at or read his column at
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McNay is a lifetime member of the Million Dollar Round Table and has four professional designations in the financial services field.