[mesh]: The Economics of Ideas

With the mesh conference coming to town in May, I decided I will use the time leading up to it to intensify my research and prepare. Yes, I am a strategy nerd and a political economy geek; I need to get myself up to speed so I can usefully contribute to the conversation. David Crow helpfully posted a good reference to some seminal pieces on Marketing/Web 2.0. I am going to pick up just one thread here: the Economics of Ideas, which really is much bigger than either marketing or the web. Paul Romer argues that [pdf]:

Every generation has perceived the limits to growth that finite resources and undesirable side effects would pose if no new recipes or ideas were discovered. And every generation has underestimated the potential for finding new recipes and ideas.

This has important implications….

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Paul Romer is important for his contribution of the New Growth (or Endogenous Growth) Theory in economics. The basic concept is that the economy consists of both physical objects and ideas. Physical objects are scarce and rival (my use precludes your use), whereas ideas are infinite and nonrival. Romer argues that economic growth comes from ideas and technological change, which have no natural limit. This has tremendous implications to policy, and I’m not sure to what degree our governments have internalized and understood the implications of Endogenous Growth.

Getting back to Web 2.0 and the mesh conference, I believe Romer helps us see Web 2.0 more clearly. Web 2.0 is about ideas, creativity, human talent and human relationships. There are infinite possibilities for new ideas and innovation in a massively networked world of socially-enabled creative individuals where physical limits are quickly falling away as production becomes increasingly digital. This is the design economy.

On the other hand, capital tends toward monopolistic control, which creates barriers to new ideas and innovation. The current sorry state of patent law is one such obstacle to creativity, innovation and economic growth and in desperate need of reform. What does a 20-year patent do to stifle creativity and economic growth potential when innovation cycles are measured in 18-month periods or two-week iterations? Ok, this may be a stretch, but lets look to Battlestar Galactica for some perspective:

You know, when we fought the Cylons, we did it to save ourselves from extinction. But we never answered the question, why? Why are we as a people worth saving? We still commit murder because of greed, spite, jealousy. And we still visit all of our sins upon our children. We refuse to accept the responsibility for anything that we’ve done.
Like we did with the Cylons. We decided to play God, create life. When that life turned against us, we comforted ourselves in the knowledge that it really wasn’t our fault, not really. You cannot play God then wash your hands of the things that you’ve created. Sooner or later, the day comes when you can’t hide from the things that you’ve done anymore.
– Commander William Adama, Battlestar Galactica

The community has been discussing, Can we rename Web 2.0? (I vote for “The Social Web”). We’ve asked “What is Web 2.0?” But have we really asked “Why Web 2.0?“. To what end are we innovating? In order to understand Web 2.0 and its impact on society and business, I believe we must discover and understand the political economy of Web 2.0. There is an internal logic at work, and it is operating inside and in relation to pre-existing institutional and economic structures.

I argue that the Web 2.0 phenomenon is the disintermediation engine of a new network economy. Web 2.0, open source, social media and network economics are in tension with capital and its desire for monopolistic control of technology and markets through patents, vertical integration, scale or other forms of sustainable competitive advantage. I believe this tension is a big reason why the VC/Web2.0 relationship appears broken or dysfunctional. The disruption caused by Web 2.0-style disintermediation is one of the reasons why Web 2.0 startups are being acquired by large companies for “strategic reasons”, followed oftentimes by product and innovation stagnation. In Web 2.0, the only real competitive advantage is talent and continuous innovation, which is very difficult to achieve, much less maintain or sell as if it were a tangible asset.

The question of why is an important one, lest we forget all the lost promises of Web 1.0 that popped or fizzled out only to be followed by a long winter in the desert. The Social Web has come out of this desert with tremendous vitality and promise which is changing business, society and the nature of innovation itself. Failure to understand its dynamics, the tensions within the system and the forces at work put the project at risk.

I welcome the development of new manifestos. I welcome experimentation in new institutional structures, new business models and new forms of economic organization. I look forward to participating, I’ve got a couple of ideas. More from Paul Romer:

Perhaps the most important ideas of all are meta-ideas. These are ideas about how to support the production and transmission of other ideas.

Meta-ideas are very 2.0. Perfect for discussion at mesh.

4 thoughts on “[mesh]: The Economics of Ideas”

  1. The challenge will be the collision and embrace of the disintermediation engine by a capitalistic society. Eventually the change and progression to the Attention Economy may happen, but we are in a transitory period and what does this mean for companies, governments, and people. What can organizations or governments do to leverage the impending changes? Investments in education, opening of boarders, what are the near-term actions to improve the human condition?

  2. David,

    Good point about our entering a transition period. I speculate that during that transition period, new kinds of arbitrage opportunities will present themselves. There may indeed be a role for government here, and I think that role is to support innovation at the “meta idea” level. I think the specific structures that will support long-run sustainable innovation and generate private profits and a social return will need to come from experiments designed by the community itself.

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