The economics of creativity differs from Adam Smith’s conventional economics. The latter revolves around the firm, which is considered more efficient than the individual in identifying and using resources. In the economics of creativity, creative people are not dependent on organizations to the same extent. They do not need large resources of capital and equipment. They often have low transaction costs. The law of diminishing returns, first formulated by David Ricardo, hardly applies. It states that each additional input factor of production becomes harder or more expensive to acquire and that therefore at some point the cost of producing one more unit exceeds the revenue obtained from selling it. The point at which marginal cost meets marginal revenue is called the equilibrium point. This holds true if resources are limited and under price competition. But in an economy based on intangible and often immeasurable resources the costs of production are less important.
In the creative economy, individuals and firms use resources which are not rare, over which they assert intellectual property rights, which may be short-run, and which do not compete primarily on price. The world of diminishing returns and scarcity of physical objects is being replaced by a world of increasing returns based on the infinity of possible ideas and people’s genius for using those ideas to generate new products and transactions. Control of product and price (performed by the company) become less relevant if production resources are freely available, if products are intangible, if price competition is negligible, and if the market is driven by demand not by supply. In the knowledge economy, firms either charge prices well in excess of marginal costs, or they give their products away for free (the case of free software and its mechanism will be approached in the next part of the paper).