Infrastructure Commons in Economic Perspective
First Monday

Infrastructure Commons in Economic Perspective by Brett M. Frischmann



Contents

A Demand–Side Theory of Infrastructure
Understanding the Social Value of an Open Internet Infrastructure
Conclusion

 


 

This essay briefly summarizes a theory (developed in substantial detail elsewhere) [1] that better explains why there are strong economic arguments for managing and sustaining infrastructure resources in an openly accessible manner. This theory facilitates a better understanding of how these fundamental resources generate value for society and how decisions regarding the allocation of access to such resources affects social welfare. The key insights from this analysis are that infrastructure resources generate value as inputs into a wide range of productive processes and that the outputs from these processes are often public goods and nonmarket goods that generate positive externalities that benefit society as a whole. Managing such resources in an openly accessible manner may be socially desirable from an economic perspective because doing so facilitates these downstream productive activities. For example, managing the Internet infrastructure in an openly accessible manner facilitates active citizen involvement in the production and sharing of many different public and nonmarket goods. Over the past decade, this has led to increased opportunities for a wide range of citizens to engage in entrepreneurship, political discourse, social network formation and community building, among many other activities.

Infrastructure

The term “infrastructure” generally conjures up the notion of physical resource systems made by humans for public consumption. A list of familiar examples includes: (1) transportation systems, such as highway and road systems, railways, airline systems, and ports; (2) communication systems, such as telephone networks and postal services; (3) governance systems, such as court systems; and, (4) basic public services and facilities, such as schools, sewers, and water systems. I refer to these resources as “traditional infrastructure.”

Two generalizations about traditional infrastructure are worth noting at the outset. First, the government has played and continues to play a significant and widely–accepted role in ensuring the provision of many traditional infrastructures. While private parties and markets play an increasingly important role in providing many types of traditional infrastructure (due to a wave of privatization as well as cooperative ventures between industry and government), the government’s position as provider, coordinator, or regulator of traditional infrastructure remains intact in most communities.

Second, traditional infrastructures are generally managed in an openly accessible manner. That is, they are managed such that the resources are openly accessible to members of a community who wish to use the resources [2]. This does not, however, mean that access is free. We pay tolls to access highways, we buy stamps to send letters, we pay telephone companies to have our calls routed across their lines, and so on. Users must pay for access to some (though not all) of these resources. Nor does it mean that access to the resource is unregulated. Transportation of hazardous substances by highway or mail, for example, is heavily regulated. The key point is that the resource is openly accessible to all within a community regardless of the identity of the end–user or the end–use [3]. As discussed below, managing traditional infrastructure in this fashion makes economic sense.

Infrastructure resources constitute an important class of resources for which society should value nondiscriminatory public access. Yet conventional economic analysis of many infrastructure resources fails to fully account for how the resources are used as inputs to create social benefits. Economists (regulators, politicians, and others) recognize that there is a tremendous demand for public infrastructure and that infrastructure plays a critical role in economic development, but exactly why there is demand, how it manifests, how it should be measured, and how it contributes to human well–being is not fully understood. Critically, many infrastructure resources act as inputs into a wide variety of socially valuable productive activities, including the production of public goods and non–market goods. These activities generate significant social welfare gains generally associated with traditional infrastructure [4].

Commons as Resource Management

This essay uses “open access” and “commons” interchangeably to refer to the situation in which a resource is openly accessible to users regardless of their identity or intended use [5]. I intentionally abstract from the institutional form (property right, regulation, norm, etc.) to focus on a particular institutional function (opening or restricting access), i.e. the management principle itself. Tying form and function together obscures the fact that the management principle can be implemented through a variety of institutional forms, which are often mixed (property and regulation, private and communal property, etc.), and not necessarily through particular forms of property rights [6]. The optimal degree of openness/restrictiveness depends upon a number of functional economic considerations related to the nature of the resource in question, the manner in which the resource is utilized to create value, institutional structures, and the community setting.

The general value of commons as a resource management principle is that it maintains openness, does not discriminate among users or uses of the resource, and eliminates the need to obtain approval or a license to use the resource. As a general matter, managing infrastructure resources in an openly accessible manner eliminates the need to rely on either market actors or the government to “pick winners” downstream. In theory, at least, this facilitates innovation in the creation of and experimentation with new uses. More generally, it facilitates the generation of positive externalities through the downstream production of public goods and non-market goods that might be stifled under a regime where access is allocated on the basis of individuals’ willingness to pay.

 

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A Demand–Side Theory of Infrastructure

This part develops a demand–side model of infrastructure that provides a better means for understanding and analyzing societal demand for infrastructure resources. The goal is to better understand how value is created and realized by human beings that obtain access to infrastructure resources.

Defining Infrastructure from the demand–side

Infrastructure resources are resources that satisfy the following demand–side criteria:

  1. The resource may be consumed nonrivalrously;
  2. Social demand for the resource is driven primarily by downstream productive activity that requires the resource as an input; and,
  3. The resource is used as an input into a wide range of goods and services, including private goods, public goods and/or non–market goods.

Traditional infrastructure, such as roadways, telephone networks, and electricity grids, satisfy this definition, as do a wide range of resources not traditionally considered as infrastructure resources, such as lakes, ideas, and the Internet.

The first criterion captures the consumption attribute of nonrival and partially (non)rival goods. In short, this characteristic describes the “sharable” nature of infrastructure resources. Infrastructures are sharable in the sense that the resources can be accessed and used by multiple users at the same time. Yet infrastructure resources vary in their capacity to accommodate multiple users, and this variance in capacity differentiates nonrival (infinite capacity) resources from partially (non)rival (finite but renewable capacity) resources. Simply put, nonrivalry opens the door to widespread access and productive use of the resource. For nonrival resources of infinite capacity, the marginal costs of allowing an additional person to access the resource are zero. For partially (non)rival resources of finite capacity, the cost–benefit analysis is more complicated because of the possibility of congestion.

The second and third criteria focus on the manner in which infrastructure resources create social value. The second criterion emphasizes that infrastructure resources are intermediate goods that create social value when utilized productively downstream and that such use is the primary source of social benefits. In other words, while some infrastructure resources may be consumed directly to produce immediate benefits, most of the value derived from the resources results from productive use rather than consumption.

The third criterion emphasizes both the variance of downstream outputs (the genericness of the input) and the nature of those outputs (particularly, public goods and non–market goods). The reason for emphasizing variance and the production of public goods and non–market goods downstream is that when these criteria are satisfied, the social value created by allowing additional users to access and use the resource may be substantial but extremely difficult to measure. The information problems associated with assessing demand for the resource and valuing its social benefits plague both infrastructure suppliers and consumers where consumers are using the infrastructure as an input into the production of public goods or non–market goods. This is an information problem that is pervasive and not easily solved.

Whether we are talking about transportation systems, the electricity grid, basic research (ideas), environmental ecosystems, or Internet infrastructure, the bulk of the social benefits generated by the resources derives from the downstream uses. Value is created downstream by a wide variety of end–users that rely on access to the infrastructure. Yet social demand for the infrastructure itself is extremely difficult to measure.

From an economic perspective, it makes sense to manage certain infrastructure resources in an openly accessible manner because doing so permits a wide range of downstream producers of private, public, and non–market goods to flourish. The point is not that all infrastructure resources (traditional or nontraditional) should be managed in an openly accessible manner. Rather, for certain classes of resources, the economic arguments for managing the resources in an openly accessible manner vary in strength and substance.

An Infrastructure Typology

To better understand and evaluate these complex economic relationships, I define three general categories of infrastructure resources, illustrated in Table 1, based on the nature of the distribution of downstream activities: commercial, public, and social infrastructure.

 

Table 1: Typology of Infrastructure Resources.
Type Definition Examples
Commercial Infrastructure Nonrival or partially (non)rival input into the production of a wide variance of private goods
  1. Basic manufacturing processes
  2. Cable television
  3. The Internet
  4. Road systems
Public Infrastructure Nonrival or partially (non)rival input into the production of a wide variance of public goods
  1. Basic research
  2. Abstract ideas
  3. The Internet
Social Infrastructure Nonrival or partially (non)rival input into the production of a wide variance of nonmarket goods
  1. The Internet
  2. Road systems

 

These categories are neither exhaustive nor mutually exclusive. Real–world infrastructure resources often fit within more than one of these categories at the same time. For example, the Internet is a combination of all three types of infrastructure, as explored later in this paper. The analytical advantage of this general categorization schema is that it provides a means for understanding the social value generated by these infrastructure resources and identifying different types of market failures.

Commercial infrastructure resources are used to produce private goods. Consider the examples listed in Table 1. Basic manufacturing processes, such as die casting, milling, and the assembly line process, are nonrival inputs into the production of a wide variety of private manufactured goods. Basic agricultural processes and food processing techniques similarly are nonrival inputs into the production of a wide variety of private agricultural goods and foodstuffs. Many commercial infrastructure resources are used productively by suppliers purely as a delivery mechanism for manufactured goods, agricultural goods, foodstuffs, and many other commercial products. A cable television system, for example, acts as an input into the delivery of content purely for consumption by an end–user. Content providers use the infrastructure to provide a private service to the consumer (delivery of content for consumption) under conditions that render the output rivalrous and excludable. At least in theory, a wide variety of content suppliers can deliver a wide variety of content under such conditions. The Internet and road systems similarly are used by a wide range of suppliers to delivery private goods and services.

For pure commercial infrastructure, basic economic theory predicts that (1) competitive output markets should work well and effectively create demand information for the input; (2) market actors (input suppliers) will process this information; and, (3) satisfy the demand efficiently [7]. Simply put, for commercial infrastructure, output producers should fully appropriate the benefits of the outputs (via sales to consumers) and thus should accurately manifest demand for the required inputs in upstream markets. Therefore, with respect to demand for commercial infrastructure, the key is maintaining competition in the output markets, where producers are competing to produce and supply private goods to consumers. Competition is the linchpin in this context because the consumptive demands of the public can best be assessed and satisfied by competitive markets.

Public and social infrastructure resources are used to produce public goods and non-market goods, respectively. For both public and social infrastructure, the ability of competitive output markets to effectively generate and process information regarding demand for the required input is less clear than in the case of commercial infrastructure.

Infrastructure users that produce public goods and non–market goods suffer valuation problems because they generally do not fully measure or appropriate the (potential) benefits of the outputs they produce and consequently do not accurately represent actual social demand for the infrastructure resource. Instead, for public and social infrastructure, demand generated by competitive output markets will tend to reflect the individual benefits realized by a particular user and not take into account positive externalities. To the extent that individuals’ willingness to pay for access to infrastructure reflects only the value that they will realize from an output, the market mechanism will not fully take into account (or provide the services for) the broader set of social benefits attributable to the public goods or non–market goods. Infrastructure consumers will pay for access to infrastructure only to the extent that they benefit (rather than to the extent that society benefits) from the outputs produced. Difficulties in measuring and appropriating value generated in output markets translate into a valuation/measurement problem for infrastructure suppliers. Competitive output markets may fail to accurately manifest demand for public and social infrastructure because of the presence of demand–side externalities.

The Case for Infrastructure Commons

The case for commons management must be evaluated carefully and contextually. Broad prescriptions are not easily derived. To facilitate analysis, I developed an infrastructure typology to distinguish between commercial, public, and social infrastructure, based upon the nature of outputs and the potential for positive externalities. This section briefly sets forth the economic arguments for managing these different types of infrastructure in an openly accessible manner.

For commercial infrastructure, antitrust principles provide a sufficient basis for determining whether open access is desirable because competitive markets (for both inputs and outputs) should work well. Downstream producers of private goods can accurately manifest demand for infrastructure because consumers realize the full value of the goods (i.e., there are no externalities) and are willing to pay for such benefits. Accordingly, from the demand–side, there is less reason to believe that government intervention into markets is necessary, absent anticompetitive behavior.

For public or social infrastructure, the case for commons management becomes stronger for a few reasons. First, output producers are less likely to accurately manifest demand due to information/appropriation problems. It is difficult for these producers to measure the value created by the public good or non-market good outputs; producers of such outputs are not able to appropriate the full value because consumers are not willing to pay for the full value (due to positive externalities); and such producers’ willingness to pay for access to the input likely will be less than the amount that would maximize social welfare.

Social surplus (i.e., the amount by which the social value exceeds the private value) may result from a “killer app,” such as e–mail or the World Wide Web, that generates significant positive externalities or from a large number of outputs that generate positive externalities on a smaller scale. That is, in some situations, there may be a particularly valuable public (or non–market) good output that generates a large social surplus, and in others, there may be a large number of such outputs that generate small social surpluses. Both types of situations are present in the Internet context. While the “killer app” phenomenon appears to be well understood, the small–scale but widespread production of public and non–market goods by end–users that obtain access to the infrastructure appears to be underappreciated (and undervalued) by most analysts. Yet in both cases, there may be a strong argument for managing the infrastructure resource in an openly accessible manner to facilitate these productive activities.

The social costs of restricting access to public or social infrastructure can be significant and yet evade observation or consideration within conventional economic transactions. Initially, we may analyze the issue as one of high transaction costs and imperfect information. Yet, even with perfect information and low/no transaction costs with respect to input suppliers and input buyers, input buyers would still not accurately represent social demand because it is the benefits generated by the relevant outputs that escape observation and appropriation.

To the extent that infrastructure resources can be optimized for particular applications, which is often the case, there is a risk that infrastructure suppliers will favor existing or expected applications. If we rely on the market as the provisional mechanism, there is a related risk that infrastructure suppliers will favor applications that generate appropriable benefits at the expense of applications that generate positive externalities. Even putting aside the generation and processing of demand signals, it remains unclear whether markets will operate efficiently with respect to the supply of public and social infrastructure. There may be significant transactions cost problems that may hamper markets. For example, transaction costs associated with price setting, licensing, and enforcement (may) increase as the variance of public good and non-market good outputs increases.

Economists recognize that there is a case for subsidizing public and non-market goods producers because such goods are undersupplied by the market. The effectiveness of directly subsidizing such producers will vary, however, based on the capacity for subsidy mechanisms to identify and direct funds to worthy recipients.

In some cases, open access to the infrastructure may be a more effective, albeit blunt, means for supporting such activities than targeted subsidies. Open access eliminates the need to rely on either the market or the government to “pick winners” (or uses worthy of access). On one hand, the market picks winners according to the amount of appropriable value generated by outputs and consequently output producers’ willingness to pay for access to the infrastructure. On the other hand, to subsidize production of public goods or non–market goods downstream, the government needs to pick winners by assessing social demand for such goods (based on the social value they create). The inefficiencies, information problems, and transaction costs associated with picking winners under either system may justify managing public and social infrastructure resources in an openly accessible manner.

 

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Understanding the Social Value of an Open Internet Infrastructure

The Internet consists of many infrastructure resources. Scholars have delineated two macro–level infrastructure resources. The physical infrastructure consists of a wide variety of physical networks interconnected with each other, while the logical infrastructure consists of the standards and protocols that facilitate seamless transmission of data across different types of physical networks [8]. The physical and logical infrastructure both act as essential inputs into downstream production of applications and content. Thus, the physical and logical infrastructures are the foundational layers upon which the Internet environment we experience has been built.

The Internet meets all three demand–side criteria for infrastructure. The Internet infrastructure is a partially (non)rival good; it is consumed both nonrivalrously and rivalrously, depending upon available capacity [9]. The benefits of the Internet are realized at the ends. Like a road system, a lake, and basic research, the Internet is socially valuable primarily because of the productive activity it facilitates downstream. End–users create demand for Internet infrastructure and generate value through their activities.

The Internet is a mixed commercial, public, and social infrastructure. The public and social aspects of the Internet infrastructure are largely undervalued in current debates. Bringing these aspects of the Internet into focus strengthens the case for preserving the end–to–end architecture of the Internet.

Consider what makes the Internet valuable to society. It is very difficult to estimate the full social value of the Internet, in large part because of the wide variety of downstream uses that generate public and non-market goods. Despite such difficulty, we know that the Internet is “transforming our society” [10]. The transformation is similar to transformations experienced in the past with other infrastructure, yet things are changing in a more rapid, widespread, and dramatic fashion.

The Internet environment is quickly becoming integral to the lives, affairs and relationships of individuals, companies, universities, organizations, and governments worldwide. It is having significant effects on fundamental social processes and resource systems that generate value for society. Commerce, community, culture, education, government, health, politics, and science are all information- and communications–intensive systems that the Internet is transforming. The transformation is taking place at the ends, where people are empowered to participate and are engaged in socially valuable, productive activities. As Jack Balkin has observed, the “digital revolution makes possible widespread cultural participation and interaction that previously could not have existed on the same scale” [11].

The Internet opens the door widely for users, and, most importantly, it opens the door to many different activities that are productive. End–users actively engage in innovation and creation; speak about anything and everything; maintain family connections and friendships; debate, comment, and engage in political and non–political discourse; meet new people; search, research, learn, and educate; and build and sustain communities.

These are the types of productive activities that generate substantial social value, value that evades observation or consideration within conventional economic transactions. When engaged in these activities, end–users are not passively consuming content delivered to them, nor are they producing content solely for controlled distribution on a pay–to–consume basis. Instead, end–users interact with each other to build, develop, produce and distribute public and non–market goods. Public participation in such activities results in external benefits that accrue to society as a whole (online and offline) that are not captured or necessarily even appreciated by the participants.

Further, active participation in these activities by some portion of society benefits even those who do not participate. In other words, the social benefits of Internet–based innovation, creativity, cultural production, education, political discourse and so on are not confined to the Internet; the social benefits spill over. For example, when bloggers engage in a heated discussion about the merits of proposed legislation or the Iraq war, citizens that never use the Internet benefit because others have deliberated. With respect to weblogs, in particular, political scientists, journalists, economists, and lawyers, among others, are beginning to appreciate and more carefully study the dynamic relationships between this new medium of communication and traditional, offline modes of communication and social interaction (whether economic, political, social, or otherwise).

Consider the fact that a significant portion of the content traveling on the Internet is non–commercial, speech–oriented information — whether personal e–mail and Web pages, blog postings, instant messaging, or government documentation — and the economic fact that such information is a pure public good generally available for both consumption and productive use by recipients. The productive use and reuse of such information creates benefits for the user, the downstream recipients, and even people that never consume or use the information. These benefits are positive externalities that are not fully appropriated or even appreciated by the initial output producer.

It is worth noting that welfare can be ratcheted up in incredibly small increments and still lead to significant social surplus. As participants educate themselves, interact, and socialize, for example, the magnitude of positive externalities may be quite small. Diffusion of small–scale positive externalities, however, can lead to a significant social surplus when the externality–producing activity is widespread, as it is on the Internet. Widespread, interactive participation in the creation, molding, distribution, and preservation of culture, in its many different forms and contexts, may be an ideal worth pursuing from an economic perspective because of the aggregate social welfare gains that accrue to society when its members are actively and productively engaged.

 

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Conclusion

Basic infrastructure is critical to the fabric of our society. That is, basic infrastructure contributes to more than just commercial goods which are often best provided by markets — basic infrastructure also contributes to social and public goods. This means there are significant “non–market” uses for the infrastructure that are not well reflected in demand for and willingness–to–pay for access to infrastructure. Therefore, relying on market provisioning of these goods will result in under–consumption by public/non–market goods producers. Generally, attempts to directly subsidize these public/non–market goods producers are not effective because there are too many and the implications are too diverse. Open access is a fix to ensure that willingness–to–pay is not used to allocate access to infrastructure. By disabling the capacity to exclude on the basis of market–value/willingness–to–pay, access to infrastructure is not biased against uses that produce public and social goods. End of article

 

About the author

Brett M. Frischmann is Associate Professor in the School of Law at Loyola University in Chicago.
Web: http://www.luc.edu/law/faculty/frischmann.html.
E–mail: bfrisch [at] luc [dot] edu

 

Notes

1. This essay is drawn from a much longer and more detailed article, An Economic Theory of Infrastructure and Commons Management, 89 Minnesota Law Review 917 (2005). For my other work in this vein, see also Cultural Environmentalism and The Wealth of Networks, University of Chicago Law Review (2007) (reviewing Yochai Benkler, The Wealth of Networks: How Social Production Transforms Markets and Freedom [2006]); Network Neutrality and The Economics of an Information Superhighway, Jurimetrics (forthcoming 2007) (with Dr.–Ing. Barbara van Schewick); Spillovers, 100 Columbia Law Review (2007) (with Mark A. Lemley); Evaluating the Demsetzian Trend in Copyright Law, Review of Law and Economics (forthcoming 2007).

2. Carol Rose, The Comedy of the Commons: Custom, Commerce, and Inherently Public Property, 53 U. Chi. L. Rev. 711, 752 (1986); Yochai Benkler, Property, Commons, and the First Amendment: Towards a Core Common Infrastructure 22-23, 47–48 (White Paper for the Brennan Center for Justice) (March, 2001); Lawrence Lessig, The Future of Ideas: The Fate of the Commons in a Connected World 19–25 (2001) [hereinafter The Future of Ideas].

3. In some industries, however, access to an infrastructure resource is priced at different rates for different classes of users. A.M. Odlyzko, The Evolution of Price Discrimination in transportation and its implications for the Internet, 3 Rev. Network Econ. 323 (2004) (describing the use of differential pricing in trasportation and other industries).

4. I recognize that I am making a very strong claim that requires empirical support to verify. Yet there are significant difficulties in capturing the positive externalities generated by the downstream production of public goods and non–market goods in an empirical study. Economists have attempted to measure the social surplus generated by infrastructure resources, such as the National Highway system. However, such studies generally are limited in scope to macroeconomic measures, such as economic growth or increases in productivity within industrial sectors. See, e.g., M. Ishaq Nadiri & Theofanis P. Mamuneas, Contribution of Highway Capital to Output and Productivity Growth in the US Economy and Industries, Fed. Highway Administration, U.S. D.O.T. (1998).

5. Lessig, The Future of Ideas, at 12, 19–20 (adopting a similar definition); Elinor Ostrom, Governing the Commons: The Evolution of Institutions For Collective Action (1990); Protecting the Commons: A Framework For Resource Management in the Americas (Elinor Ostrom et al. eds, 2001). This may be troublesome to property scholars accustomed to the important distinction maintained between open access and commons within property scholarship: Open access typically implies absolutely no ownership rights (no property rights) such that there is no exclusion from the resource; all who want access can get access. Charolette Hess & Elinor Ostrom, Ideas, Artifacts, and Facilities: Information as a Common Pool Resource, 66 Law & Contemp. Probs. 111, 121–22 (2003). Commons typically involve communal ownership (community property rights, public property rights, joint ownership rights, etc.), such that members of the relevant community obtain open access “under rules that may range from ‘anything goes’ to quite crisply articulated formal rules that are effectively enforced” and non–members can be excluded. Yochai Benkler, The Political Economy of Commons, Upgrade, Vol. IV., No.3 (June 2003). Recent scholarship has analyzed hybrid regimes, such as semicommons, which has attributes of both private and common property. Henry E. Smith, Semicommon Property Rights and Scattering in the Open Fields, 29 J. Legal Stud. 131 (2000); Robert Heverly, The Information Semicommons, 18 Berkeley Tech. L.J. 1127 (2003).

6. Smith, at 131–33.

7. With respect to the third point regarding supply of commercial infrastructure, there is significant disagreement among economists about the need for competitive input markets and the need for government intervention into various input markets. The thrust of the arguments made in that debate concern incentives, the presence of natural monopolies, strategic behavior by monopolists (infrastructure providers), and the effectiveness of government institutions, and generally focus on supply–side issues without challenging the first two points made above.

8. Yochai Benkler, From Consumers to Users: Shifting the Deeper Structures of Regulation Towards Sustainable Commons and User Access, 52 Fed. Comm. L.J. 561 (2000).

9. To be more precise, the physical infrastructure and certain components of the logical infrastructure such as domain name space are partially (non)rival in the sense that (1) the risk of congestion depends upon the amount of capacity, number of users, and other contextual factors, and (2) this risk can be managed in a fashion that sustains nonrivalry in consumption.

10. President’s Info. Tech. Advisory Comm., Information Technology Research: Investing in Our Future 11, 11–20 (Feb. 1999), available at http://www.ccic.gov/ac/report/pitac_report.pdf.

11. Jack Balkin, Digital Speech and Democratic Culture: A Theory of Freedom of Expression for the Information Society, 79 N.Y.U. L. Rev. 1, 2 (2004).

 


 

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Infrastructure Commons in Economic Perspective by Brett M. Frischmann
First Monday, volume 12, number 6 (June 2007),
URL: http://firstmonday.org/issues/issue12_6/frischmann/index.html





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