Code Economy ch. 12: How do you LVT a Digital Land?

Welcome back to EvX’s Book Club. Today we are discussing ch. 12 of Auerswald’s The Code Economy: Equity: Progress and Poverty.

We have discussed before the Georgist notion that the increase in poverty that accompanies progress (or development) is due to skyrocketing rents in urban (that is, productive) areas, which lead to rentiers capturing an increasing percent of the wealth created by development.

Indeed, as has been noted elsewhere and in Auerswald’s discussion of Piketty’s Capital in the Twenty-First Century:

The much discussed increase in inequality since the 1970s that Piketty documents is primarily about one thing: the increasing value of real estate, an asset that is disproportionately held by the wealthy.

Auerswald has an interesting discussion of Total Factor Productivity (TFP) that I’d like to pause to discuss:

The calculation of TFP requires measures of aggregate output, capital, and labor. The measurement of each of these is inherently difficult.

Auerswald argues that TFP is particularly bad at measuring the value added by the internet. Quoting economics blogger Justin Fox:

Forty years ago the cost to copy [an S&P 500 firm] as about 5/6 of the total stock price of that firm. So 1/6 of that stock price represented the value of things you couldn’t easily copy, like patents, customer goodwill, employee goodwill, regulator favoritism, and hard to see features of company methods and culture. Today it costs only 1/6 of the stock price to copy all of a firm’ visible items and features that you can legally copy. So today the other 5/6 of the stock price represents the value of all those things you can’t copy.

(Or these companies are massively over-valued.)

In other words, if you owned a textile mill, the value of the company would be based on the value of the physical objects inside your mill. A mill with ten state of the art looms could produce twice as much cloth as a mill with only 5 looms. A mill with 100 looms would produce 10 times as much cloth. The comany’s value and its physical capital would be directly linked.

By contrast, if you suddenly became the sole owner of Twitter, your physical capital and the company’s value would hardly be related. What is Twitter’s physical capital? A bunch of computers in a building somewhere? An entrepreneur could not create a company with twice Twitter’s value by simply buying twice as many computers and putting them in twice as many buildings.

Whatever Twitter’s value may be, very little of it lies in physical equipment. Very little of it lies in buildings or land. Much of it, though, lies in digital land. Just as landlords derive their wealth from the benefits people derive from being near other, economically productive people, so Twitter’s value lies in the desire of people to be near other people in digital spaces:

Economic geography has taught us that the “best localities” will be the place where the returns to density are greatest… Land in “the best localities” increases in value because cities offer people tangible economic returns that derive from density and interconnection.

Please discuss the implications for

1. Third world mega-cities like Karachi or Lagos.

2. Immigration from third world to first world.

3. Digital real estate, like Twitter.

About the digital economy Second Life, Auerswald writes:

Second Life had nearly seven million registered users… Second Life sustained an economy consisting of the production and exchange of virtual goods and service’ it had a GDP equivalent to $500 million, benchmarked by $6 million per month of monetized trade with the real world.

I have been thinking about in-game economies for years, ever since discovering that many online games have their own currencies, which may or may not be legally tradeable for US dollars. But I had not, until this moment, thought of these games as actually modellable like real countries, with economies, exchange rates, and trade with the outside world.

Further:

The virtual and real worlds of entrepreneurship and work are converging in similar ways… “As soon as tens of hundreds of U.S. dollars were sufficient to start a business in Second Life, thousands of people began to tr. Compare this to the real world, where a primary source of funding for small businesses is a second mortgage.” …

Seven years later… The Economist published an article about entrepreneurial startups in the US titled “The Cambrian Explosion,” … This article described how an array of new platforms had dramatically lowered the cost of launching and growing a real-world business: “One explanation for the Cambrian explosion of 540m years ago is that the that time the basic building blocks of life had just been perfected, allowing more complex organisms to be assembled more rapidly. Similarly,t he basic building blocks for digital services and products… have become so evolved, cheap and ubiquitous that they can be easily combined and recombined.”

Auerswald then moves on to the matter of “big data,” which is a big part of how companies like Twitter and Linked In hope to actually make any profits. As I’ve mentioned, I’ve taken a side-tour into “Big Data” that I think was a useful complement to this book; Big Data is the best of what I’ve read so far, nothing has stood out as whiz-bang fabulous. The relevant summary version is that companies like LinkedIn and Facebook are really about the data they gather, rather than the fun you have looking at memes your grandmother reposted. That data, in turn, will probably have a variety of economic uses–though maybe not to you:

And yet, while a large number of people contribute to the value Big Data creates,a relatively small number captures most of the gains. Why is that?

Just as the rentier class gathers most of the benefits from living in a valuable city in close proximity to the engines of human productivity, so do the owners of digital platforms, like Facebook, benefit from the creation of data wealth by their millions of digital citizens.

Digital platforms are the new land; will they also be the new Monopoly?

Auerswald then makes a very interesting observation:

Physical land is yours if, and only if, you have both the right and the practical capacity to prevent other people from accessing it. The same is true of digital land. … That capacity for exclusion–the source of all monetized value derived from digital exchange–depends on the existence of reliable protocols for authentication and verification. … “Open leads to value creation… To capture value you have to find something to close.”

This is so important, I’m tempted to repeat it a few times. Exclusion is the source of all monetized value.

The “brand” (ie, Nike, Apple, Harley Davidson, Harvard,) is modern society’s solution to authentication and verification in modern, anonymous markets. Our ancestors, who engaged primarily in face-to-face transactions with people they knew from their own villages, had no need of brands. They didn’t worry whether they were being tricked into buying knockoff-brand potatoes from farmer Joe; they just bought potatoes.

In the modern economy, it makes a difference whether you get a real Apple computer or a knockoff with an apple sticker slapped on. It matters whether you get real Acetaminophen or a mysterious pill that may or may not contain morphine. It matters whether you buy a brand new Ford or a car cobbled together from the corpses of three totaled station wagons with a new coat of paint.

This, Auerswald argues, is why the government imposes such stiff penalties on people who violate trademarks–violation of the Trademark Counterfeiting act of 1984 can incur a fine of 5 million dollars or 20 years imprisonment.

Yet just as the advance of code has created brands, code is now in the process of undoing them. How? By converting trust directly into code–into algorithmic system for verification and authentication.

Basically, he thinks we’re going to blockchain and Yelp our way into a peer-to-peer economy where people’s online ratings serve as an effective substitute for brands–a world in which angry twitter mobs can crash one’s entire career by giving a bunch of one-star Yelp reviews.

Remember: everything else is downstream from territory.

That’s all for today. Bitcoin and the Blockchain are chapter 13.