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Intangible investment behaves differently
- SQL2219 8y agoPlenty of people are paying attention,and Gates contradicts his own title with this sentence: "The portion of the world's economy that doesn't fit the old model just keeps getting larger." How can it get larger if no one is paying attention?
- imgabe 8y agoEasily, if it gets larger because people are naturally following other incentives. How does the Pacific garbage patch keep getting larger if people are not focused on intentionally making it larger?
- maxerickson 8y agoYou've substituted "no one" for "not enough" in order to gin up your pedantry. The title is "not enough". Or do you think the phrases mean the same thing?
- mmirate 8y ago"Not enough" and "nothing" are usually very difficult to distinguish, since they usually have largely the same effects. (e.g. it doesn't matter if I have insufficient money or no money at all; life sucks in both of those alternate-universes)
- BoiledCabbage 8y ago> since they usually have largely the same effects. They absolutely don't. I'd you have "not enough money" to meet your current monthly budget that means you can't afford to put anything aside for your vacation next year but can still get by. If you have "no money", you can eat or pay your rent. The two phrases have entirely different meanings, and usually with important differences in connotation.
- melling 8y ago“What the book reinforced for me is that lawmakers need to adjust their economic policymaking to reflect these new realities. ”
- TheCoelacanth 8y agoYou don't have to understand how an economy works to participate in it. It helps, for sure, but it isn't required. Trial and error goes a long way. A lot of companies will go out of business because they are doing something that doesn't work, but some will chance upon something that works.
- remir 8y agoI think what Gates is saying is that, while the "bits and bytes" economy is getting larger, perhaps lawmakers are still thinking in the terms of the "old model" which Gates indicates is obsolete. He then says: That has major implications for everything from tax law to economic policy to which cities thrive and which cities fall behind, but in general, the rules that govern the economy haven’t kept up. This is one of the biggest trends in the global economy that isn’t getting enough attention.
- ggambetta 8y ago> it combined Apple’s MP3 protocol WTF, seriously?
- zwily 8y agoYeah, seems unlikely that he wrote this.
- Shivetya 8y agoIt could simply be either from the study he mentioned or be worded as such to make it easier for non technical people to understand, as in more are familiar with MP3 than AAC. It is irrelevant to the greater point of the article
- ggambetta 8y agoI'm sure a man as smart as Bill Gates could find a way to write it in a way that is accessible to non-technical people and still not so egregiously factually incorrect.
- melling 8y agoHere’s another discussion of the book that discusses the same book and example. https://www.imperial.ac.uk/business-school/knowledge/finance/rise-intangible-economy-capitalism-without-capital-fostering-inequality/ https://www.imperial.ac.uk/business-school/knowledge/finance... He’s just using the example from the book and doesn’t feel the need to restate it?
- dwighttk 8y agoGates' says "it combined Apple's MP3 technology...", your example says "Apple combined MP3 technology..."
- melling 8y agoIt wasn’t Apple’s hard drive either. He probably just stuck with repeating what the book said or is just trying to keep it simple.
- mathattack 8y agoI think his straw man for supply and demand is off. Higher demand doesn’t create lower prices. Lower prices creates “more quantity demanded” at a given level. If demand increases, then prices and quantity both go up. This may be semantics, but it isn’t like economics completely falls apart. Similarly, economics is able to handle products with high fixed and low marginal costs. (Natural monopolies) I suspect he gave this book review assignment to an intern that majored in something besides CS, business or Econ.
- occamrazor 8y agoI think he just wrote “demand” instead of “price” in that sentence.
- deleted 8y ago[deleted]
- grosjona 8y ago>> ... as demand for a product goes up, supply increases, and price goes down I think it is fine but confusing because it skips over some steps. A longer version might be: ... as demand for a product goes up, the demanded quantity goes up, which causes supply to increase (to meet the higher demanded quantity) which then pulls the price down (due to the increased size of the market and competition). The net effect of this is decreased price overall due to economies of scale (since the total production volume of the product in the market is now higher).
- BoiledCabbage 8y agoThat's bothered me before. It really seems like economists flipped their axes on a basic supply demand curve. They discuss it as if price is the independent variable and quantity (demanded or supplied) is the dependent, and yet any 9th grader would be marked down for putting their independent variable on the "y-axis". It amazes me how something generally accepted as wrong stays that way.
- grosjona 8y agoI had the same thought. Also, I'm not even sure that this diagram makes sense overall because supply, demand and price are so tightly interconnected (with feedback loops in both directions) that it doesn't make sense to separate them like this.
- madengr 8y ago“It’s a sunk cost. If your investment doesn’t pan out, you don’t have physical assets like machinery that you can sell off to recoup some of your money” That also means it’s cheaper to develop. Software is so popular since it’s only requires a developer and a PC. The return/investment is a lot higher and faster than traditional hardware development. Cheap and fast is what everyone wants. Of course investors are now realizing, in the case of self driving cars (or cars themselves with Tesla), that hardware still plays a role, and it’s not cheap and fast with instant riches. 20 years ago, biotech was supposed to be the hot thing after the internet. Instead it has been software services, focusing on service labor. Biotech is not cheap and fast enough.
- npsomaratna 8y ago^ Exactly. Also, his statement implies that digital assets have no real-world financial value. In practice, even if the investment fails, the codebase of the company, body of active users, and any user data gathered will have some value.
- evrydayhustling 8y agoThis title is kind of uninformative .. how about "the rise of intangible goods requires different economic models"?
- hestefisk 8y agoClick bait title.
- rcdmd 8y agoThis book review has a few economic fallacies and was probably not written by Gates. But, these points are interesting-- "It" refers to "intangible investment" here-- 1. It’s a sunk cost. If your investment doesn’t pan out, you don’t have physical assets like machinery that you can sell off to recoup some of your money. 2. It tends to create spillovers that can be taken advantage of by rival companies. Uber’s biggest strength is its network of drivers, but it’s not uncommon to meet an Uber driver who also picks up rides for Lyft. 3. It’s more scalable than a physical asset. After the initial expense of the first unit, products can be replicated ad infinitum for next to nothing. 4. It’s more likely to have valuable synergies with other intangible assets. Haskel and Westlake use the iPod as an example: it combined Apple’s MP3 protocol, miniaturized hard disk design, design skills, and licensing agreements with record labels.
- jerf 8y ago"This book review has a few economic fallacies and was probably not written by Gates." Dunno if they're fallacies so much as oversimplifications. But the oversimplifications aren't really the point; they're just meant to reference the concepts and give a hyper-quick overview if you've never heard of them. The rest of the review remains a valid point if you substitute more realistic economic concepts. This is my pre-emptive reply to the inevitable dozens of posts arguing about the oversimplifications. None of it matters to the point the author wanted to make. Note I say "valid", not correct. Whether economists are undervaluing intangible assets is a rich and interesting question that I have only vague opinions about personally. I'm just pointing out that the argument itself does not depend on the oversimplified economic concepts used to introduce the point.
- rcdmd 8y agoYou're right to say it's mostly oversimplifications. The fallacy was the first economic concept introduced in the article-- > The first is still more or less true today: as demand for a product goes up, supply increases, and price goes down. Classic econ teaches as demand increases, prices go up. The exception is if the supply curve is flat (for instance, 0 marginal cost).
- sonnyblarney 8y ago1) The first two paragraphs about 'assumptions' are essentially false. There are no assumptions in supply and demand, it's not a dynamic equilibrium, it's a snapshot. Yes - over time supplies tend to change due to demand, of course, but that's 'long run' stuff ... not in that chart. The author is kind of misinterpreting the chart. 2) It's not 'sunk cost' that's the issue, this is about 'fixed' vs. 'unit' cost. Software is all 'fixed' (i.e. setting up the production line) whereas most material things are mostly about 'unit' costs (i.e. the cost to make an item) 3) Software sales are a tiny fraction of the economy because almost nobody is selling software. People are selling 'services', basically products that 'do stuff using software'. The 'key ingredient' is usually some type of business or experiential knowledge, not some algorithm. 4) Software development doesn't finish at v1, it's ongoing.
- maxerickson 8y agoI think the idea is that the fixed cost of failed software is (largely) sunk. You can sell a big industrial motor or fork lift that might be part of the fixed costs of running a small factory.
- misja111 8y agoYes and there's more that is wrong in the article: "as demand for a product goes up, supply increases, and price goes down" No, when demand goes up, the price will go up as well unless supply increases by the same amount. The price will only go down when supply increases and demand doesn't keep up with it. "the tools many countries use to measure intangible assets are behind the times, so they’re getting an incomplete picture of the economy. The U.S. didn’t include software in GDP calculations until 1999. Even today, GDP doesn’t count investment in things like market research, branding, and training—intangible assets that companies are spending huge amounts of money on." First of all let's skip the part about what the US did until 1999 because we're living in 2018 at the moment. And then the fact that market research, branding etc. is not included in GDP calculation has little to do with the digital age. There has always been market research and branding, not just now. One might argue that it should be included but that is really a separate topic. "It took time for the investment world to embrace companies built on intangible assets. In the early days of Microsoft, I felt like I was explaining something completely foreign to people. Our business plan involved a different way of looking at assets than investors were used to. They couldn’t imagine what returns we would generate over the long term." No doubt things were like that in the 80's. But just take a look at the most valuable Dow Jones funds now and it's clear that intangible assets are valuated well nowadays.
- sytelus 8y agoWhen I first learned that software had a price during my very young years, I was in quite disbelief. Isn’t it just bunch of invisible bits? Can’t it be copied with almost zero cost? Why someone would pay for it anyway when kids like me can make it? It’s hard to charge money for things people can’t physically posses. In early years, almost all software companies employed a trick to design big attractive boxes with bit of goodies. When Gates wrote BASIC, many programmers themselves in the community didn’t thought any software was worth paying for. It has taken almost a generation to internalize that bits have price and we have got rid of most of those boxes finally. On the side note, crypto currency is the new new intengible assets that is hard to internalize. Ironically, Gates has wrote them off as not worth calling them assets because they aren’t store of a value.
- MoBattah 8y agoElaborate on the boxes? This isn't the old trope by Bob Wallace about 'I sell manuals'?
- LeifCarrotson 8y agohttps://i.ebayimg.com/images/g/azAAAOSwD99av12v/s-l1600.jpg https://i.ebayimg.com/images/g/azAAAOSwD99av12v/s-l1600.jpg There's a shrink-wrapped cardboard package that contains Windows 98. It's the size of a cereal box, and at least as colorful. Today, I'd be intensely annoyed if I had to wait for and pay for a large box to ship - I'd much prefer an instant download, but the box was much more tangible than an email with a download link and license key.
- LeifCarrotson 8y ago> Imagine Ford releasing a new model of car. The first car costs a bit more to create, because you have to spend money designing and testing it. But each vehicle after that requires a certain amount of materials and labor. The tenth car you build costs the same to make as the 1000th car. As someone with software and hardware at Ford in Dearborn and at many of their suppliers, this is not true. Ford knows that the costs decrease over time, and demands part of this cut from their suppliers. The contract includes a decreasing price over time or over quantity, because ostensibly you're increasing efficiency and writing off initial engineering costs. I imagine that Microsft does the same with their hardware division, and agree with the sibling comments that Gates probably did not write all of this.
- TheBeardKing 8y agoIt's ok to editorialize the title when it's this click-baity, right?
- orbifold 8y agoThe fact that replicating a piece of software or music digitally has near zero cost suggests that the fair price according to classic economic theory is zero (the argument being, that the price in a competitive market should approach the limit price). Of course what we see instead is a lot of companies that are now rent seeking and that no longer sell a piece of software to you but rent it out for a fixed price (SaS, Adobe Creative Cloud, Jetbrains, season passes in games etc.), similarly with DRM and Music/Movies/eBooks Spotify/Netflix/Amazon. Uber also fits this pattern in that they rent out capital that other people provide to them for free (insane if you think about it). What hopefully will happen over time is that these rent seeking entities are squeezed out of the market over time, otherwise we are entering an area of corporate feudalism. This can be prevented as long as the assets needed for production are easily and cheaply available, which is the case thanks to the Free Software Movement.
- bsbechtel 8y agoI think you are confusing the definition of rent seeking, meaning achieving economic gains by means of regulation that is virtually risk free, with collecting rent as a form of payment for a service or product. These are two different concepts, despite the name they share.
- baq 8y agoPhotoshop, being nearly a monopolist, seems to almost fit the definition. Regulation is the only thing here that doesn't match, but being a de facto industry standard would be close enough for me.
- syrrim 8y ago"rent seeking", in economics, is not limited to regulation. We would distinguish between those who earn money by creating new value - as the inventor makes some process more efficient, and so makes his living - and those who earn a living despite creating no value. The easiest example of this is the man who has inherited some plot of land, and rents out the plot to someone. He might earn a healthy living - but where has he created value? The strongest example of this is perhaps he who earns money by destroying value - say the window repairman who goes out at night and smashes windows - but this is not required to be classed as rent seeking.
- Peopleguyintech 8y agoI generally agree with Gates on a lot of things, but there are some generalizations here that don't apply to a lot of software. 1. While the cost to produce N+1 and N+1000 version of the software is same in terms of producing the code, if you have a piece of software that functions more like a specialized tool, training user N+1 and N+1000 can be radically different and therefore more time consuming and costly. 2. Sunk cost of development: IP has a lot of value. If you work in producing custom solutions a lot of these solutions have components (code) that work across customer needs. Development may fail on one project, but helps in another. Overtime you have the components to sell a COTS 3. Goods actually aren't intangible, value is. Electricity costs money and it takes the infrastructure to support a small city to run a large-scale server farm. What's missing in the economic model are the costs we don't always factor in or more importantly that are publicly subsidized. Look at the breaks companies get at MSoft, Google, etc on utilities and land.
- sharemywin 8y agoThe laws have be setup so, all the value is trapped in the giant network companies. No liability for content. No portability requirements(you can port your phone number, but not your data or messaging addresses). Rent seeking is blocked for utilities, so they don't capture it from google, facebook etc..
- bluGill 8y agoThe costs of producing N+1 and N+1000 should in fact be different. With N+1 you train the user, with N+1000 you bring in some UI experts to design a better interface that doesn't need to be trained in the first place.
- ProfBernardo 8y agoPage doesn't load content area. Adblockers doing their job. :-)
- icebraining 8y agoLoads fine with uBlock Origin on, but not without JS, despite the content being in the HTML :| Firefox's Reader mode can pull it out, though.
- grahamsoni 8y agoHi
- Terretta 8y agoTL;DR: Actually, read this longer thing: https://smile.amazon.com/Capitalism-without-Capital-Intangible-Economy-ebook/dp/B071P3VGHQ/ https://smile.amazon.com/Capitalism-without-Capital-Intangib...
- losvedir 8y agoThere are two assumptions you can make based on this chart. The first is still more or less true today: as demand for a product goes up, supply increases, and price goes down. If the price gets too high, demand falls. Er, no. I guess even smart people like Gates get simple economics wrong sometimes. It's understandable, though, I've always felt the P/Q axes should be switched, since people always speak about the price as the independent variable. He's conflating the idea of pricing along the line with the demand line itself. Yes, at higher prices, less quantity is demanded and vice versa. Similarly, if you can sell the thing for a higher price, more people will be interested in and able to sell it, so the quantity available will increase, and vice versa. However, "supply" and "demand" refer to the whole lines themselves, not points along the lines. Changing supply and demand means the lines shift. If "demand for a product goes up", the demand line shifts to the right, the equilibrium quantity increases, but so does the price, the opposite of what he's saying. His misconception then leads to an even larger error in understanding with the next part: The second assumption this chart makes is that the total cost of production increases as supply increases. This is false. What it says is that with if the price you can get for a good is high there will be more suppliers. The canonical example is oil: when it sells for $20/barrel, only Saudi Arabia and places with it easily accessible will be able to profitably drill for it, and so the quantity supplied will be low. But at $120/barrel, you can now use fracking, deep water drilling, and other much more expensive processes, and so the quantity supplied will be higher. Supply and demand is not about any individual producer producing more, and so it's not particularly useful in analyzing the behavior of a single firm. It's about the aggregate effect of multiple different parties, each with their own respective infrastructures and costs, profitably contributing to the supply (or not) at different price points.
- crazygringo 8y ago1) Everything you say is correct, and I have no idea why you're being downvoted. 2) In my experience, the supply+demand curve is one of the most misunderstood concepts in economics, and it took me a long time in college until I found an economics professor who could explain it properly. A lot of really intelligent people I know don't understand it (even though they think they do), and in my experience most business people don't actually understand it (that's fine, they don't usually need to), but I am fairly shocked to see Gates misunderstand it... unless this article is written by an intern or something, which I find more likely.
- crazygringo 8y agoWho exactly isn't paying attention? Gates never says. I don't know anyone who is reasonably educated in business/economics who doesn't understand the software/publishing business model, which is taught... literally everywhere. I seriously have no idea what he's arguing against. Even with the supply curve, real-world commercial software virtually always has unit costs. It generally takes marketing and/or sales to acquire new customers, ongoing server and storage costs, customer support... and ongoing bugfixes and improvements merely to remain competitive and not fall behind in the market. When Microsoft calculates the profitability of Word, their costs aren't "virtually free" or anywhere even close to that.
- pwang 8y agoI was first annoyed at the amateur level of analysis in this piece. "Um, it's 2018, open source software runs production workflows in every single business; if you don't realize yet that every industry in the world is being reduced to becoming a commodity machine to run business rules & agreements as fluid software, then you're about 5 years behind the curve." Then I realized it was written by Bill effing Gates. And that made me feel sad. Firstly, because Bill is smarter than this. His lack of awareness of just how pressing this phenomenon is, indicates that he's either had his head in the sand, or the intellectual circles he swims in hasn't been ringing the alarm bells about this. (See my essay on the Changing Nature of Scarcity: https://medium.com/@pwang/the-changing-nature-of-scarcity-fcc09049fbae https://medium.com/@pwang/the-changing-nature-of-scarcity-fc...) Secondly, because of the irony. Bill Gates made his fortune having created a business around selling software. It would be good for him to review John Perry Barlow's "Selling Wine Without Bottles": https://www.eff.org/pages/selling-wine-without-bottles-economy-mind-global-net https://www.eff.org/pages/selling-wine-without-bottles-econo... As the world's first and most successful wine bottler, billg might find this perspective illuminating.
- ethbro 8y agoYMMV, but aside from anyone that started in the Google & Facebook area, huge swaths of the economy are still dominated by closed source software. From personal experience, this covers: any kind of software-driven hardware, health care, tax, CAD, POS, finance, transportation, & retail. They're changing. But I'd estimate most Top 500 companies are at 0-25% open source migration of core business processes.
- ProAm 8y agoWasnt this discussed yesterday: https://news.ycombinator.com/item?id=17761257 https://news.ycombinator.com/item?id=17761257