Anomalous Presumptions

Wow! Lots of people came to see Capitalists vs. Entrepreneurs, via great responses by Tim Lee, Jesse Walker, Tech and Science News Updates, and Logan Ferree (scroll down) and maybe others I didn’t see. Thanks! Reading over those posts and comments, I think perhaps the issue is simpler than I realized, although the implications certainly aren’t.

Really we are talking about a very basic idea: Capital is just another factor in production, like labor or material resources.

Since capital is just a factor, its importance in production will change over time. Specifically now, the importance of capital is falling. As we get richer and industry gets more productive,any given capital item gets cheaper. Things like a fast computer, a slice of network bandwidth, etc. are so cheap that any professional in a developed economy can do their own production of information goods with no outside capital.

It seems that we’ve confused free markets with “capitalism”. This only makes sense as long as the key issue in markets is the availability of capital. From a long term perspective, naming our economic system after one factor of production is just silly.

On the other hand, free markets depend essentially on individual judgment, choice, creativity, and on people’s ability to sustain a network of social relationships. These make free markets possible, and taken together they constitute entrepreneurship.

So unlike capital, entrepreneurship is central to any possible free market system.

The inevitability of peer production

In this context, rather than being strange or subversive, or even needing to be explained, peer production is viable when:

1. capital costs (needed for production) fall far enough and
2. coordination costs fall far enough.

Cheap computing and communication reduce both of these exponentially, so peer production becomes inevitable.

This was not apparent until recently, and even now is hard for many people to believe. People are still looking for an “economic justification” for peer production. “How does it help people make money?” they ask. But this confuses the means with the end. Money is a means of resource allocation and coordination. If we have other means that cost less or work better, economics dictates that we will use them instead of money.

A digression on coordination

Economists typically talk about “transaction costs” but I’m deliberately using the term “coordination costs”. Transactions (a la Coase) typically involve money, and certainly require at least contractual obligations. Coordination by contrast only depends on voluntary cooperation. Transaction costs will always be higher than coordination costs, because transactions require the ability to enforce the terms of the transaction. This imposes additional costs — often enormously larger costs.

As I point out in “The cost of money” introducing money into a relationship creates a floor for costs. I didn’t say it there, but it is equally true that contractual obligations introduce the same kind of floor for costs. Only when a relationship is freely maintained by the parties involved, with no requirement to monitor and enforce obligations, can these costs be entirely avoided.

Not surprisingly, peer production succeeds in domains where people can coordinate without any requirement to enforce prior obligations. Even the most limited enforcement costs typically kill it. Clay Shirky develops this argument in the specific case of Citizendum (a replacement for Wikipedia that attempts to validate the credentials of its contributors).

A shift of perspective

I’m only beginning to see the implications of this way of thinking about capital, but it has already brought to mind one entertaining analogy.

In the late middle ages, feudalism was being undermined by (among other things) the rise of trade. Merchants, previously beneath notice, began to get rich enough so that they could buy clothes, furniture and houses that were comparable to those of the nobility.

One response of the “establishment” was to institute sumptuary laws, strictly limiting the kinds of clothes, furniture, houses, etc. merchants could own. There was a period where rich merchants found ways to “hack” the laws with very expensive plain black cloth and so forth, and then the outraged nobility would try to extend the laws to prohibit the hack. Of course this attempt to hold back the tide failed.

I think that in the current bizarre and often self-damaging excesses of copyright and patent owners, we’re seeing something very like these sumptuary laws. Once again, the organization of economic activity is changing, and those who’ve benefited from the old regime aren’t happy about that at all. They are frantically throwing up any legal barriers they can to keep out the upstarts. But once again, attempts to hold back the tide will fail.

Filed by Jed at 12:33 am under Economics, Social order
2 Comments