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The new protocol economy

The new protocol economy
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First Published: Wed, Dec 23 2009. 09 02 PM IST
Updated: Wed, Dec 23 2009. 09 02 PM IST
In the 19th and 20th centuries, the US made stuff: corn and steel and trucks. Now, we make protocols: sets of instructions. A software program is a protocol for organizing information. A new drug is a protocol for organizing chemicals. Wal-Mart produces protocols for moving and marketing consumer goods.
A protocol economy has very different properties than a physical stuff economy. Physical stuff is subject to the laws of scarcity: you can use up your timber. But it’s hard to use up a good idea. Prices for material goods tend towards equilibrium, depending on supply and demand. Equilibrium doesn’t really apply to the market for new ideas.
Over the past decades, many economists have sought to define the differences between the physical goods economy and the modern protocol economy. Leading work has been done by Douglass North of Washington University, Robert Fogel of the University of Chicago, Joel Mokyr of Northwestern and Paul Romer of Stanford. Their research is the subject of an important new book From Poverty to Prosperity by Arnold Kling and Nick Schulz.
The success of an economy depends on its ability to invent and embrace new protocols. Kling and Schulz use North’s phrase “adaptive efficiency”, but they are really talking about how quickly a society can be infected by new ideas. Protocols are intangible, so the traits needed to invent and absorb them are intangible, too.
First, a nation has to have a good operating system: laws, regulations and property rights. For example, if you are making steel, it costs a medium amount to make your first piece of steel and then a significant amount for each additional piece. If, on the other hand, you are making a new drug, it costs an incredible amount to invent your first pill. But then it’s nearly free to copy it millions of times. You’re only going to invest the money to make that first pill if you can have a temporary monopoly to sell the copies. So a nation has to find a way to protect intellectual property while still encouraging the flow of ideas.
Second, a nation has to have a good economic culture. From Poverty to Prosperity includes interviews with major economists, and it is striking how they are moving away from mathematical modelling and towards fields such as sociology and anthropology. What really matters, Edmund S. Phelps of Columbia University argues, is economic culture—attitudes towards uncertainty, the willingness to exert leadership or to follow orders. A strong economy needs daring consumers (Phelps says China lacks this) and young researchers with money to play with (Romer notes that US government grants used to go to 35-year-olds but now they go to 50-year-olds).
A protocol economy tends towards inequality because some societies and subcultures have norms, attitudes and customs that increase the velocity of new recipes while other subcultures retard it. Some nations are blessed with self-reliant families, social trust and fairly enforced regulations, while others are cursed by distrust, corruption and fatalistic attitudes about the future. It is hard to transfer the protocols of one culture onto those of another.
It’s exciting to see so many Nobel laureates taking this consilient approach. But they are still economists, with worldviews that are still excessively individualistic and rationalistic. Kling and Schulz do not do a good job of explaining how innovation emerges. They list some banal character traits—charisma, passion—that entrepreneurs supposedly possess. To get a complete view of where the debate is headed, I’d also read Richard Ogle’s Smart World (2007), one of the most underappreciated books of the decade. Ogle applies the theory of networks and the philosophy of the extended mind to show how real world innovation emerges from social clusters.
Economic change is fomenting intellectual change. When the economy was about stuff, economics resembled physics. When it’s about ideas, economics comes to resemble psychology.
©2009 / THE NEW YORK TIMES
Edited excerpts. David Brooks is an NYT columnist. Comment at otherviews@livemint.com
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First Published: Wed, Dec 23 2009. 09 02 PM IST