Tuesday, April 27, 2004

Capitalism's challenge: attaching value to public goods

Brad DeLong's Semi-Daily Journal (2004): a Weblog
Social value is drifting away from potential profitability, and this threatens to become a huge problem in our collective social resource allocation mechanisms. Google needs to grow to approximately ten times its current profitability and then maintain its market share and margins indefinitely in order to justify the $20 billion valuation. And that's hard to see: high sustained profits are the result of effectively-maintained barriers to competitors--think Microsoft, think Intel. What is going to be Google's counterpart permanent edge?

Writers are compelled to communicate. Coders are compelled to code. If writers and coders aren't paid for what their compulsions, they exercise them anyway. Writers create blog entries for their mothers and spouses, coders (being more useful) produce open source applications.

The internet allows the more marketable writers to reach an audience, and it allows distributed collaboration on software projects. Complex systems interact over time and produce new adaptations, such as very complex distributed software collaborations.

None of this activity is following market demands. It is compulsion-driven (historicallly always true for art and writing). The modern difference is that software creation can have large economic consequences (eg. Linux). To some extent the writing compulsion may also propagate memes at higher velocities, raising the "world IQ".

It would be historically consistent that even as capitalism stands unrivalled, odd cracks in the facade are emerging. These cracks are of great interest to economists, much as physicists are thrilled by miniscule errors in the predictions of the "standard model".

See also my post on market failures and a recent personal experience with a toy bank.

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