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Sunday, December 05, 2004
The Digital Cottage
Your Curmudgeon awoke this morning with a powerful desire to write about debt monetization and how to predict impending currency inflation, but he sat very still for a long time and the urge went away. Lucky you. So instead, he’s decided to maunder over the changing nature of capital and the ways in which it “forms.”
Time was, we attached the term “capital” almost exclusively to big, heavy machines and really fat bank accounts. Even then, the dichotomy was suggestive. The big, heavy machines were of course paid for out of some fat bank account—you can’t directly make any physical good out of money alone—but there was an undeniable association between the sort of physical plant required to make things and the concentration of money required to finance the plant. It went unquestioned for a very long time that the fat bank account had to come first.
This should have begged the chicken-and-egg question. In the absence of the machines, how would the fat bank account arise? One can only amass so much gelt by abusing the peasants. The overall failure of the European nobility to maintain its financial viability, much less to match the wealth of the capitalist newcomers of the Eighteenth and Nineteenth Centuries, speaks to that point. Of course, it didn’t help much that the landed nobility held the rising entrepreneurial class in contempt. However, the general tendency among men is to emulate conspicuous examples of success, particularly material success. Therefore, we may assume that some members of the aristocratic class did try their hands at manufacture and trade. Appallingly few prospered at it.
Today, matters are more fluid. America has emerged from its Industrial Age economic organization in a remarkable way. New businesses form, dissolve, and reform with astonishing fluidity. The tools they use are infinitely distant from those required by the previous generation of “heavy industry.” Even in the event of bankruptcy, the ability to “recapture the capital”—that is, to salvage all the recoverable value from the failing firm’s assets—is unprecedentedly good. It suggests that we’ve attained a new plateau of economic and commercial efficiency.
Beyond all question, in some ways, we have. There’s a new set of attitudes in town. Possibly the best expression thereof is the oft-heard phrase, “Brains are expensive; iron is cheap.”
Welcome to the Information Age.
No, the bastions of the Industrial Age haven’t disappeared. Most of them won’t do so any time soon, unless Eric Drexler’s “assembler breakthrough” should come to pass far sooner than your Curmudgeon expects. We still need physical goods. Some of those goods still require massive plants filled with big, heavy, shriekingly expensive machinery to make them. But there’s another factor in the equation that’s seldom addressed explicitly, except by persons arguing over the state of American education: the minds behind those machines.
In a mass production / Industrial Age economy, an innovation or breakthrough by one clever mind still requires a second tier of labor—usually quite a lot of labor—to implement the clever mind’s idea. Mass labor put to work producing physical goods requires mass capital to work with, from which follows the scale and expense of Industrial Age capital. But in an Information Age economy, the clever mind is more closely coupled to the actual production of the good than ever before. The mass labor of the Industrial Age firm is likely to be greatly diminished, if not altogether absent from his chain of production and distribution; therefore, producing the good he’s conceived will require far less physical capital. The ultimate expression of this idea is software downloaded over the Internet, which doesn’t even require a physical medium for its conveyance to the consumer.
Since the majority of new goods are “soft,” Information Age goods, your Curmudgeon surmises that our Industrial Age foundation is likely to grow no further. It might shrink somewhat; at the least, there will be a redistribution of investment among its subsectors. But it is highly unlikely ever again to experience the growth of the late nineteenth / early twentieth centuries, when factories were popping up everywhere and a 6% rate of economic expansion was the norm.
In an Information Age economy, investment capital will congeal around proven clever minds. We’ve already seen some of this: Dean Kamen, Bill Gates, Steve Jobs, and their fellows are unlikely ever to miss a meal, or lack funding for a new venture. Of course, reaching the ranks of proven clever minds will still require effort, but it will be less than in the past, because already proven clever minds are among the nation’s most active venture capitalists. Those gentlemen can sense a kindred spirit.
As for the ability to recapture capital from failed ventures, the principal physical instrument with which new products are attempted is the microcomputer. With the price of computer power dropping steadily, there’s no real need to bother saving computers three or more years old. The critical item to be salvaged from a failed venture is the intellectual capital—the breakthrough ideas and the “scaffolding” that was used to instantiate the goods premised on them. Sometimes this will be algorithms and software; other times, it will be process patents or trade secrets. Plainly, these are things the janitors won’t be throwing away. Firms in comparable lines will snap them up, or the developers will preserve them for use in other ventures.
One of the most endearing consequences of this train of developments will be the return of the true cottage industry: the home-based firm that makes a unique product. However, the cottage industries of tomorrow will be able to do mass production and worldwide distribution quite as handily as any of our Industrial Age mega-corporations, owing to the Internet, the profusion of inexpensive, flexible courier services, and the low cost of significant computing power. To those willing to embrace information technology, the road is wide open for the return of a characteristic American engine of economic advance: the family business. Only modest political changes, mostly the abolition of the inheritance tax, are required to help it along.
It’s a great time to be a technologist, or a consumer...or an American.
Comments
"how to predict impending currency inflation”
I would really like to read this. I almost think currency inflation would not work in the US anymore with TIPS and money market funds and CLOA’s, hard assets ready to anticipatory jump after our past experience with inflation - but I guess wholesale inflation will drain the value out of lots of poople’s assets, like grandma with 1,000 C notes under her bed, people who lease their cars and rent their homes and have everything in financial instruments.
Regading cottage industry, I and many of my friends live it. The first glimmers dawned on me right after law school. For my class and earlier the most desired job short of clerking for a federal SCOTUS feeder judge was associate with a large firm. Maybe doing aintitrust in Cravath or M&A;at Wachtell. Rich salary, work like a dog for 7-8 years,lots of perks, modest chance at partner (hard work, adept politics, good luck needed here) than the institution attracted the clients (no one ever got fired at IBM for hiring Cravath, even if Cravath cost most and lost the case it was the best stockholder’s money could buy) and you got to leverage the work of junior associates until your retirement to make a truly royal partner’s share.
Shortly later I began to notice that the best of the best wanted to strike out on their own, build their own law practice even if it ment litigating a slip and fall or incorporating a start up in a garage. The new paradigm was you needed to have your own clients. If you could make work appear you would be set for life. Put in your years in some giant firm and thee were too many intermediaries to be secure.
In the home cottage industry you not only make your product but you find your clients, you market yourself as you make results. That makes you free.
Posted by Doug_S on 12/05/2004 at 08:21 PMIndeed it is.
Posted by Kathy K on 12/05/2004 at 08:22 PMThat ‘indeed it is’ was in response to your last line, btw.
I’m now working for what you might call a ‘distributed’ cottage industry. It’s online, offers an online product, and when they began to need more help, they didn’t look for physical locals, they looked online (virtual locals?)…
And everyone involved works from home.
Posted by Kathy K on 12/05/2004 at 08:32 PM
