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Intangible investment behaves differently

gatesnotes.com

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Re: Intangible investment behaves differently

#61

Post by nv-vn »

orbifold wrote: post #31

The 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,…

The price should approach the limit price if you assume there's no initial cost of making the software. And for most SaaS, there's still an upkeep cost the company must pay. Free software just isn't feasible in the real world past the things that can benefit everyone at a very low cost (where some entities will take it upon themselves to employ people to focus on, for example, the Linux kernel).

Re: Intangible investment behaves differently

#62

Post by crazygringo »

Who 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.

Re: Intangible investment behaves differently

#63

Post by crazygringo »

losvedir wrote: post #53

There 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 pric…

1) 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.

Re: Intangible investment behaves differently

#64

Post by losvedir »

jerf wrote: post #22
rcdmd wrote: post #16

This 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…

"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-e…

> Dunno if they're fallacies so much as oversimplifications.

No, they're far enough off of correct that I wouldn't even call them oversimplifications. The statement of the problem is wrong:

The second assumption this chart makes is that the total cost of production increases as supply increases.

That's simply not what the curve says at all. The curve isn't about any one producer making more of an item (as the Ford example given), it's about how producers with different costs are able to profitably add to the supply or not, based on the price they can get for the product.

The review might be fine otherwise, but there's no reason to throw supply & demand under the bus to motivate it. In fact, if you frame it correctly (say, technical innovations have enabled more people to more easily write software, thereby shifting the supply curve to the right and lowering prices), you can still meaningfully analyze these situations with those curves.

Re: Intangible investment behaves differently

#65

Post by nv-vn »

BoiledCabbage wrote: post #30
mathattack wrote: post #6

I 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 t…

That'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.

I would say there's no independent variable here because the effect goes both ways. Suppliers set their prices based on the quantity demanded, and consumers choose a quantity to purchase based on the price set.

Re: Intangible investment behaves differently

#66

Post by blanderman »

mathattack wrote: post #6

I 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 t…

More quantity demanded = more quantity produced = better economies of scale, in theory https://en.wikipedia.org/wiki/Supply_and_demand

Re: Intangible investment behaves differently

#67

Post by remir »

SQL2219 wrote: post #2

Plenty 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?

I 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.

Re: Intangible investment behaves differently

#68

Post by pwang »

crazygringo wrote: post #62

Who 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 acqu…

I 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-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-econo...

As the world's first and most successful wine bottler, billg might find this perspective illuminating.

Re: Intangible investment behaves differently

#69

Post by [deleted] »

interfixus wrote: post #49
LeifCarrotson wrote: post #34

Earlier quoted context omitted.

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.

At the time of Windows 98 you probably wouldn't have wanted to download the damn thing. If you are of a younger generation, you may not believe it, but many of us in those days made do with something called dial-up connections to the internet. I well remember downloading the StarOffice - precursor to LibreOffice - suite in the days before it was taken over by Sun, meaning 1999 at the latest. Took a little over five h…

[deleted]

Re: Intangible investment behaves differently

#70

Post by Nasrudith »

mathattack wrote: post #6

I 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 t…

There is a lot wrong with the supply and demand description including lack of elasticity and scalability as a factor.

Software is the extreme end of scalability. One good lesser example is manufacturing vs repair. As mass production took off in the time it took to repair one item a worker could make ten new. Wasting some material on defectives made more sense than repairing them usually unless the cost of failure is extra high, inspections more expensive or a more cautious approach yielded better viable output. It is only when the expense of new is high that repair remains intrinsically viable (if you enjoy repairing things economics don't matter as it is its own reward).

If fixed per unit costs are high extra supply does little good - especially if it is durable. You won't be able to buy $100 for $99.

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