Friday, May 18, 2007

[Originally published in June of 2002]

The Net Ecology
Perhaps you are wondering why there is a market. You are sitting at your computer, suffering through a well-titled but rambling article, when it occurs to you that Bruce Sterling just doesn't get it.

A lot of people just don't get it. "It" may be fashion, or Pokémon, or the right way to treat a woman, or hip-hop, or evil. For Bruce Sterling, "it" is the market (or maybe "it" is how to write a novel without sacrificing characterization at the altar of thought-provoking but pedagogical set-pieces on politics and technology). You can read bad reviews elsewhere; this is about trade and technology.

Not only does Bruce Sterling not get the market, he doesn't seem to like it either. He tells us so while talking about Austin's South By Southwest (SXSW) conference and festival.

"SXSW Interactive has suffered surprisingly little from the collapse of dot-communism. The core demographic at SXSW is the woolly-eyed digital creative, a species of creature from way before the Boom. Those characters were never anywhere near the big IPOs. They were all fueled by sheer subcultural coolness.

Back in the Neolithic dawn of the Internet, you see, the academics who built it used to beat the living crap out of a businessman the very moment they saw him. One peep of commercial spam on their stainless not-for-profit network, and the net-gods would reach right into your router and just throttle you, like an egg-sucking dog." (more)

The blog community was abuzz with interest in Sterling's remarks about three months ago. Everyone was talking about it. Doc Searls even talked about it twice, calling it "an approximately perfect piece of writing" because "there's a quotable line in just about every paragraph, and Bruce drives every nail home with a perfect whack."

Well, no it isn't, and no he doesn't.

The key point of Bruce's that I take issue with is the idea that the Internet is somehow antithetical to the market. This has Bruce really excited. I have a somewhat detailed refutation of this notion, but if you're pressed for time, here's the abridged version: oh, come on now.

If you want detail, let's begin.

Bruce thinks the Net is "just plain too much for business to handle." It's "downright toxic to free enterprise." Capitalism's failure to embrace the Internet is the best thing since, well, since the "beached gasping of Marxism-Leninism," for those of you who don't mind a little contradiction with your wrongheadedness.

"When was the last time that you saw commerce, global capitalism, competition, the profit motive, the real deal ... choking on advanced technology as if they'd swallowed a jalapeño? What a spectacle!

Unworkable business models, the squalid collapse of e-commerce plans and b-to-b markets. Hundreds of dead corporations, with e-biz magazines gone thinner than Kate Moss. And those overachievers from Enron, my God!"

There you have it, "the Net has proved toxic to business and nobody's making any money there."

Sterling's euphoric chronicling of the bursting technology bubble is fine up to a point. Criticizing unworkable business models beforehand is commendable. Criticizing them in hindsight is OK too, and easier. The problem is Sterling's conclusion that business and technology don't mix and that the Internet will somehow spell the end of global capitalism, competition, and the profit motive. This is wrong. It isn't just wrong, it's exactly the same kind of hyperbolic, history-ignoring thinking that got us into the tech bubble in the first place.

I'm going to refute Bruce in three easy steps, first with some history, second with some analogy, and lastly with a bit of philosophy. Here is the program:

1. Investment bubbles are a regular historical phenomenon
2. The destruction is the system
3. Commerce is bigger than technology

Investment bubbles are a regular historical phenomenon
Bruce is impressed by the .com carnage of recent years, and rightly so. Money was flagrantly wasted, unsound businesses were pursued with vigor, and an incredible amount of value evaporated, bringing to nothing the vast quantities of capital and human energy that had been devoted to new enterprise. This is a story that deserves to be told, and one that we ought to try and learn from (again).

I use the word 'again' because this movie has been shown before. Anyone who didn't know that was a remake is hereby afforded a little perspective: the Internet bubble is our modern re-enactment of the 1960s airline bubble. Or, if you like, the auto bubble in the teens. Or how about the radio bubble (in the 1920s) and the telegraph bubble (1870s)? I can keep going. There were railroads (in the 1840s in Britain, in the 1860s and 70s in the U.S.) and canals (in the 1790s and 1830s) and turnpikes (in the 1660s). These are technology-driven bubbles, not fad-fueled manias like tulips, or fraud like the South Sea scam.

Each of these investment booms and busts was precipitated by a truly revolutionary invention that did indeed change the world. The human response to these technologies was a myriad of attempts to capitalize on them for good and for profit. The promise inherent in change inspired men (mostly, in those days, though I would be extremely interested in counter-examples) to build, as it always has. Those with energy started companies, those with capital invested in them.
  • Twenty-thousand telephone companies were started between 1894 and 1903
  • At it's peak the U.S. auto industry had close to 2,000 car-makers
  • 1,200 new railroad issues hit the market in 1845 alone
  • The airline industry once hosted over 100 companies

For reasons that don't need to concern us here, new inventions have historically led to overbuilding. Too many companies, too much investment, too little prudence. Every one resulted in a crash.
  • At the end of the 1690s bubble, 70% of all corporations on the English stock market failed
  • Shares in British rail companies lost 85% of their value at the end of the 1840s panic
  • After its share price increased 5,500% from 1914 to 1920, GM lost two thirds of its value
  • After its share price increased 7,600% from 1921 to 1929, RCA lost 98% of its value
Despite the carnage attendant with each previous technology bubble, successful companies emerged to compete in each bombed-out market segment. It would seem silly today to argue that business and technology don't mix if the technology in question is automobiles or radios or railroads, yet such claims are made without irony with regards to the Internet. No technology yet discovered has proved itself in any way antithetical to trade and free-markets. Living now in the wreckage of the Internet bubble, this truth may be hard to apprehend, but as with previous technologies it will become obvious as years pass.

The country may well be headed for five years of recession or even depression. It's hard to argue that what the economy has been through (or is in for) is good. However, it is in rough times that we need a sane perspective more than ever. History provides one, and what it tells us is that technology bubbles do not signal the end of market forces.

Further reading: Lessons from Speculations Past; Trains, Planes, & Dot Coms; The Internet; Technology takes more capital than it gives in returns; Different century, different bubble.

Regardless of why crashes happen, it is clear that many have coincided with the introduction of new technology to the market, and that -- in every case -- the wheels of capitalism have continued to turn afterwards. This is in keeping with the conclusion that one well-known economist came to...

The destruction is the system
Saying that the Net is hazardous to free enterprise is like saying the environment is toxic to natural selection. "But look at all the dying animals, Jim! They can't make it in the New Environment. Evolution is choking on advanced geology!" Please.

The simple point is that failed companies are not an example of the end of the market, they constitute the workings of the market. Moreover, they are a natural consequence of adaptation to new technology. Evolution is not "for bad little boys" -- it is just how things work.

The superficial parallels between natural selection and economics are strong: when variations meet change, a minority of adaptive variations are successful; the rest die. We should not be alarmed (or gleeful) at the number of failures, but rather ask ourselves if anything we observe in the current situation is suggestive of a systemic breakdown. The answer is no.

What we are observing is (mostly) the normal work of an economy. As Schumpeter said, "This process of Creative Destruction is the essential fact about capitalism."

In the natural world, living things have experienced spectacular and fundamental advances in technology: the flagellum, eukaryotic cells, multi-celled organisms, sex, the brain, language. There have been extinctions and even mass extinctions, and to the extent that resources are scarce there is open warfare between most living things. Dramatic upheaval has been a constant in the world of biology for billions of years, but -- just as in economics -- this upheaval represents not the collapse of the system, but its normal and proper functioning.

(Image taken from here)

Often times, the normal function of the system means the loss of something unique and beautiful like Archaeopteryx or These fragile, elegant creatures were simply not cut out for the harsh realities of their environment, and while it is permissible to mourn them, we can't let our grief prevent us from learning by their example. Free delivery of low-margin goods just isn't a workable business model. And chaos is natural.

Except When It Isn't
Chaos is natural. Many factors that contribute to and influence bubbles are endogenous to an economy. A few years of economic growth can produce unfounded confidence that growth is inevitable, leading to a flawed estimation of risk and to over-investment. New technologies open new markets and create uncertainty as to who will capture value within existing markets, which leads to the logical conclusion that a great deal of wealth is up-for-grabs, which leads to many, many different people investing capital in pursuit of that wealth, sometimes to the absurd point where $500 million is invested in order to capture a $250 million market.

Scenarios such as this are common in the history of business. They are not so much a byproduct of any specific technology (like the Internet), but of the way human beings react to the opportunities that technology presents. In other words, bubbles are natural. And yet . . . let us now have it both ways.

Though bubbles are a recurring theme in history, the phenomenon may not be entirely natural -- that is, though many of a bubble's causes are clearly endogenous to economic systems, this does not mean that all of the causes are endogenous.

The size and character of a boom and bust cycle may be heavily influenced by factors exogenous to an economy. A case can be made that bubbles are the result of government intervention, or at least that small "natural" bubbles become Depression-like catastrophes only when governments tamper with markets -- particularly with regards to the money supply and credit.

In short, governments inflate the money/credit supply beyond equilibrium, and this excess of capital adds fuel to the fire of developing technology bubbles; the magnitude of the resulting damage is a function of how much "fuel" has been poured on. Elaborating that case will have to wait until another time, but for a somewhat technical discussion of current events from this perspective, check out PrudentBear's Credit Bubble Bulletin. For a more thorough academic treatment of the subject, try Hayek and his mentor Mises.

Whether natural or government sponsored, in hundreds of years of history not a single bubble has proved "toxic to free enterprise." Ultimately, this is because commerce is fundamental to technology.

Commerce is bigger than technology (So you wanna be a human...)
Why is there a market? Trade emerges as a response to three fundamental facts about reality. One: humans are contingent beings with survival needs. Two: scarcity is a defining characteristic of the world (be patient, you non-zero-sum advocates). Three: preferences vary.

Let's do a little Ayn Rand and start with the basics.

Humans have needs. You are a person, and your existence as a person is contingent. In order to live you must eat, drink, sleep, excrete, shelter yourself from the extremes of the elements, and breathe.

Stayin' alive requires a lot of verbing around. In pursuing the satisfaction of your needs, you will quickly find that you exist in an environment of scarcity. This scarcity obtains in material objects, in time and presence, and in ability.
  • Material objects -- animals, vegetables, minerals, and land are not infinitely available
  • Time and presence -- we are mortal, we experience time linearly, and we cannot be in two places at once
  • Ability -- some of us are more equal than others

(Image taken from here)
Scarcity is experienced in the context of varying preferences. Human preferences vary because of natural variety in genetics (or character), and because of the differential impact of experience.

In terms of experience, scarcity itself influences our preferences. For example, the human body can survive without food for about thirty days. In this sense, humans face a permanent, near-term scarcity of time: we never have more than 30 days until we absolutely must eat again. As more of this thirty day period elapses without us finding nourishment, time grows scarcer and our preference for food increases. One hour after a meal, we are likely to choose numerous other activities over eating again. But if it has been 240 hours since our last meal, food will probably be at the top of our list. Scarcity has altered our preferences (or, the marginal utility of that next bite has increased).

We appear to be born with unique tastes (babies prefer their mother's voice), but experience has an ongoing effect on what humans desire. Though our biological needs are identical in general, our experience of scarcity will be specific to our individual circumstances.

Pheasants and Boy Bands
The differential experience of scarcity contributes to variations in preferences.

If I expect to be in New York in a few years, and to need to feed myself, I might prefer to do so (in a roundabout way) by getting a degree from Harvard. If you expect to be in the jungle in a few years, also needing to feed yourself, you'd probably prefer an education focused on hunting and survival. You can't kill a pheasant with a Harvard diploma.

If my wedding anniversary is on April 14th and yours is on December 3rd, our preference for anniversary gifts will be highest at different times (this is an interesting kind of time scarcity). If I am thirsty and you are hungry, we will seek to acquire different things from among the world's limited supply of material objects. If I have a date with Mary on Saturday, and your date with her is on Sunday, we'll each prefer to schedule our dates with her sister Anne for different days.

The preference for skydiving may be higher among the terminally ill than it is among pregnant women -- time scarcity influences the actions of the terminally ill skydiver, while scarcity of offspring defines the preference of the pregnant abstainer. Teenage girls are more partial to 'N Sync than the general population is (their preference being the result of a scarcity of sense).

All of this is good news. This variation in interests means we will not all want the same thing at the same time. Situations like that can be resolved (through queuing, price-allocation, or force), but the solutions tend to leave many people unhappy. We are lucky that our preferences vary.

We are needy beings. We have varying preferences. We live in an environment of scarcity. How should we interact?

Force is always an option. Aggression and threats of aggression are common ways that humans interact when seeking to solve their own problems. From the viewpoint of utility, as opposed to morality, the problem with force is that it is costly. Even the winner of a fight may be wounded badly. And if the loser is left alive (as they must be if the winner hopes to make use of their labor, knowledge, or ability) then winning one contest may not be enough. The winner may have to repeatedly assert their dominance, incurring new costs with each such instance, and always risking a loss of dominance to their opponent.

Force often works, but it's an expensive strategy.

(Image taken from here)

The alternative is trade. Trade is a cheap (efficient) way to convince others to act in a fashion that benefits us, by offering them a benefit in return. Trade arises because it is a good way of solving the problems that result from living in an environment of scarcity. Trade works because we are needy beings with varying preferences. All of the variations in preference mentioned above represent opportunities for mutually beneficial interaction. Each instance of scarcity represents a need that trading could meet.

Capitalism and free trade are the best solutions we've invented so far to handle this problem of convincing people to act in our benefit. Trade is less costly than force, more effective than begging, and more efficient than reciprocal favor-granting. I get value from the system by putting value into the system. Given a medium of exchange (money), people can trade even if their wants and needs don't directly coincide. I can convince farmers to feed me by paying them money even if I don't have that new tractor they want. Money is the symbol of the value I've put into the system. I earn it by meeting the needs of other contingent beings who literally tell me, "I have this need and would like you to fill it. If you do, I will help you fill your needs."

"Commerce ... competition, the profit motive, the real deal" -- the things that Bruce Sterling is ready to commit to history's dustbin -- aren't going anywhere. If we take our heads out of ... the clouds for a minute, we'd see that the Internet is not about to make free enterprise obsolete.

Trade is a strategy for dealing with fundamental truths about ourselves and the world we live in, and it will persist so long as these fundamental truths persist. So long as we have needs, so long as there is scarcity, there will be ways that we can benefit from others whose circumstances and preferences are different from our own.

We have changed our lives in astounding ways since civilization began, and yet commerce has remained a constant. Trade has remained relevant in a period during which we discovered or invented fire, agriculture, the wheel, writing, mathematics, currency, navigation, gunpowder, the printing press, electricity, metallurgy, combustion, flight, antibiotics, microelectronics, plastics, and fission. Is the Internet going to do what these technologies have failed to do?

(Image taken from here)
In fact, instead of doing away with commerce, new technology has introduced commerce into areas where it previously didn't exist. Plato didn't earn royalties on sales of The Republic. He was an aristocrat and the son of an esteemed family in Athens. Eventually he founded the Academy, and might have been paid for his labor as a teacher. Fifteen hundred years later, Robert Nozick was also a teacher, but Nozick could sell his intellectual products apart from his labor. Commerce now exists where it didn't before. It is rooted in fundamental facts of reality. It's here to stay.

Or is it?
Now we're in the 21st century. Shit, there's the Open Source movement; operating systems are free, music is (sort of) free, Wi-Fi will make Internet access free. Maybe the Internet is destroying free-market capitalism. Wait, didn't we settle this? Listen.

If you accept that a market will exist so long as scarcity obtains and humans with varying preferences have needs, then the only way that a technology could prove antithetical to markets is if it altered one of these conditions. Needs aren't going away, and neither is variety of preference. Scarcity seems equally intractable at first -- the Internet is certainly not going to eliminate shortages of material objects or time or ability. Most forms of scarcity are unaffected by digital technology. So what's to worry about?

Information. The Internet seems to hold out the genuine possibility of eliminating scarcity with regards to information products. Software, music, movies, books -- anything amenable to digital duplication and distribution -- can now be free thanks to the Net. The title of the Bruce Sterling piece that started all of this is Information Wants to Be Worthless. As I mentioned once before, Nick Urfé thinks it should be. Some artists think so too, while others inspired a Salon article with the title Artists to Napster: Drop dead!

Gillian Welch even wrote a song about it.

(Image taken from here)

I won't argue shoulds or wants, but I don't think that information will be free in the near future.

Information won't be free for two reasons.
  1. Need is fungible -- scarcity in other areas means that producers of information still need to engage in trade in order to survive
  2. The scarcity of the new -- scarcity will continue to obtain in information products not yet produced
Let's start with the second point.

The scarcity of the new
I can go get Time the Revelator off of Audio Galaxy today and save the $13.49 + shipping that Amazon charges. Music isn't scarce anymore.

But what if I want Gillian Welch's next album? This piece of information doesn't exist yet. Gillian has to produce it. Until she does produce it, her future music is as scarce as anything can be. Now what happens if she doesn't feel like making another album? Or if she makes one but doesn't share it? Well, I could try and force her... Or I could offer something in trade. We are back to commerce.

There is a constant scarcity of the new. As people's needs change, they will desire information products that do not yet exist. My desire to hear the album after Time the Revelator was very low before I heard Time... and now it is much higher. My need for better blogging software didn't exist before I started (Let's Get) Down with Capitalism, and now I'm willing to pay someone to write an application to suit my tastes.

Absent a market, there's no guarantee that a software developer would create an application to meet my needs of their own accord -- or even that they'd know what my needs are. That's why free enterprise is so useful -- the market functions as a system for conveying information about demand and then rewarding those who provide supply.

There will always be information products that individuals can perceive a need for but that don't yet exist. In theory then, there will always be a reason to trade in order to encourage and reward the creation of these products.

Need is fungible
The other reason why information won't be free is that scarcity persists in everything but information. This means that producers of information still need to undertake the effort of surviving.

Need in one or a few areas (food, water, shelter) affects the ability to take action in other areas (making movies, writing software). The fulfillment of Gillian Welch's basic needs still rests on her accumulation of scarce things in limited time. This is an activity that takes effort -- that could, indeed, take up most of Gillian's energy.

The persistence of scarcity in every area besides information means that the producers of information have to remain a part of the market economy. They must continue to work to produce value, in order to exchange that value for other values that meet their needs.

Stored wealth aside, as long as you need to eat, you have to work. If information is free, then artists and software developers and others cannot work in the field of information production, because adding information products to the world will not result in reciprocal compensation for their value.

(Image taken from here)
Therefore, at the very least, producers of information will have to turn their attentions away from art for some portion of their time in order to survive. But, since they are producers of information at heart, these people will want to spend more time at their craft. They will seek ways to be compensated for it. They will try to make information profitable so that they can quit their day jobs. And as consumers of art and information, we will want them to.

If you and I want to see a film of Tom Stoppard's Rosencrantz and Guildenstern are Dead, we have an incentive to help Tom, Terry Gilliam, Gary Oldman, and the rest of the cast and crew in making the movie. We want to make sure they don't starve while they focus their energies on creating entertainment for us. If only there was some way to share the fruits of our labor with them in exchange for their work in creating the movie...

Perhaps you have heard of such an arrangement. It's called commerce.

A world of abundance
What alternative to trade does technology provide? It will always be possible to share some things freely. The amount and number of those things freely shared grows as societies become more prosperous, but so long as there is scarcity there will be some things that are not free.

However, there can be no doubt that we are becoming more prosperous. It is so staggering how far we have come in the history of civilization; sometimes I have to sit and wonder in awe at the wealth that surrounds me. In the West, we live in a world of abundance.

In the old world, Fertility was the Goddess of abundance. The ancestors saw the root and source of things: people -- each soul a light, each creative mind a fountainhead of potential.

If we are in a new world now, then this world's Goddesses are Technology and Trade. They are not opposed to each other, as Bruce Sterling seems to think. They are siblings, twins, even lovers (don't tut-tut, think of Castor and Pollux, Siegmund and Sieglinde, Van and Ada Veen, Isis and Osiris). They are the wellsprings of our plenty. Through them do we pursue "the enlarging of the human empire, to the effecting of all things possible."

(Image taken from here)

Bruce Sterling doesn't get it, but Brad DeLong does. Read what he wrote.

The end of scarcity
Commerce and technology are creating a world of abundance. Is there a chance that somewhere along the way, we eliminate scarcity?

Nanotechnology might do for matter what the Internet has done for information. This world is coming, and it is a vastly different world. Bruce Sterling could have written about that, he is a science fiction writer after all. I'm just a businessman.

But here is my take: limits are a surprisingly resilient thing. The state of things on the margin tends to shape the rest of the landscape.

The Internet seems like it makes information free, but it doesn't quite. Information won't be free because its creation has costs. At the root, these costs derive from the fact that the production of information takes time and effort, and time and effort are scarce. We can only do one thing at a time, and only so many things in a lifetime. There are opportunity costs, and so there will have to be priorities, choices, things foregone. That means, I will bet, that there will be commerce.

Nano-tech won't make material things free either. Scarcity will find new corners to pop out of. There is a finite supply of matter with which it make things out of, a finite supply of energy. There is friction, entropy.

But what wonderful limits to come up against! How much richer we will be by the time we face these issues as pressing problems and not interesting concepts for speculation. I'd give my right arm to live to see those problems solved (why not? by then it will be trivial to get me a new one). And even if they are not solved -- even if limits and asymptotes and life-on-the-margin all prevail -- well, what of it?

It won't be so bad to have to meet in the marketplace every once in a while.

- FIN -