Saturday, 16 March 2013

A negative view of the political economy of the internet

So the story about the knowledge economy is that more and more capital is human capital, which is stored in workers' heads. This has benign political effects: human capital, unlike fixed capital or land, is quite mobile, and intrinsically difficult to expropriate. Therefore, greedy rulers (including tyrannous majorities) cannot tax it to extinction. Rulers then focus on more useful activities, like providing public goods to grow the economy. And perhaps democratization becomes easier because the threat of expropriation by the poor is less.

This logic only seems stronger in the internet era of tiny firms of self-motivated geniuses. And as the internet enables not just hierarchy-free production, but also lightspeed self-organization to produce public goods or influence politics, a utopian future seems to beckon.

Well, maybe.

Here's an alternative thought. What is Google, conceptually? Of course it's very innovative and has lots of smart people. But how does Google make its money, really?

i) a huuuge server farm;
ii) some fairly well-understood algorithms to serve search results and ads, which run on the huuuge server farm;
iii) a guy to answer the phones at the huuuge server farm.

Everything else in Google is basically taking money out of that one big money spout. No doubt some of what they do may change the world and keep Google innovating, but the money comes from the spout. Now, to me that sounds completely expropriable. Essentially there is just a big source of rents from network externalities, et cetera, and it is waiting to be fought over. And, guess what, an increasing number of governments have started to levy big "fines" on Google for its "violations" of various vitally important rules.

More generally:
  • A lot of the human capital in the internet is embodied in code. 
  • There is no reason to think that innovation in code goes on forever. There may just be one best way to do a bubble sort or build a search engine.
  • Embodied code is as expropriable as land or machinery.
  • The globalized internet economy generates many winner-take-all markets.
These points suggest that in the end, the new economy may look more like North-east Brazil than Northern California.