How the Internet killed California’s economy

Douglas Rushkoff’s take on the Crisis of Value created by peer production.

Douglas Rushkoff:

“The real estate crash is really just the second leg of the crash–the failure of housing to absorb the tremendous cash surplus generated by the irrational exuberance of Internet investors.

And it actually goes deeper than this. The Internet is even more directly at fault. The fact is, most Internet businesses don’t require venture capital. The beauty of these technologies is that they decentralize value creation. Anyone with a PC and bandwidth can program the next Twitter or Facebook plug-in, the next iPhone app, or even the next social network. While a few thousand dollars might be nice, the hundreds of millions that venture capitalists want to–need to–invest, simply aren’t required. Entrepreneurs who do accept such exorbitant funds do so knowing full well that they won’t get paid back. The VCs investment is the entrepreneur’s exit strategy.

The banking crisis began with the industry, because here was a business sector that did not require massive investments of capital in order to grow. (I spent an entire night on the phone with one young entrepreneur who secured $20 million of capital from a venture firm, trying to figure out how to possibly spend it. We could only come up with $2 million of possible expenditures.) What’s a bank to do when its money is no longer needed? Especially when contraction is not an option?

So they fail, the tax base decreases, companies based more on their debt structures than their production fail along with them, and we get an economic crisis. Yes, the Internet did all this.

But that’s also why the current crisis should be seen as a cause for celebration as well: the Internet actually did what it was supposed to by decentralizing our ability to create and exchange value.

This was the real dream, after all. Not simply to pass messages back and forth, but to dis-intermediate our exchanges. To cut out the middleman, and let people engage and transact directly.

This is, quite simply, cheaper to do. There’s less money in it. Not necessarily less money for us, the people doing the exchanging, but less money for the institutions that have traditionally extracted value from our activity. If I can create an application or even a Web site like this one without borrowing a ton of cash from the bank, then I am also undermining America’s biggest industry–finance.

While we rightly mourn the collapse of a state’s economy, as well as the many that are to follow, we must–at the very least–acknowledge the real culprit. For digital technology not only killed the speculative economy, but stands ready to build us a real one.”

The theme of the un-measurability of the Web’s value is also taken on by Tyler Cowen. Like Rushkoff, he shows how all kinds of value now escape the monetary economy:

Online, you can literally create your own economy. By that, I mean you can build an ordered set of opportunities for prosperity and pleasure, analogous to a traditional economy but held in your head. There is no obvious monetary transaction, but you’re using your limited resources to get a better deal — the very essence of economics.

“The traditional gauge of economic success is profit, but over time we’ll find that such statistics as measures of GDP tell us less and less about broader efforts to improve human well-being. Much of the Web’s value is experienced at the personal level and does not show up in productivity numbers. Buying $2 worth of bananas boosts GDP; having $20 worth of fun on the Web does not. And this effect is a big one. Each day more enjoyment, more social connection, and, indeed, more contemplation are produced on the Web than had been imagined even 10 years ago. But how do we measure those things?

That question — and I don’t yet have a full answer — reflects the state of flux we’re in today. We’re going through a lot of adjustments, and not just in real estate and finance. Free stuff on the Web has made this economic downturn more severe. For many of us, the Web really is more fun than a trip to the store, which makes it easier for us to cut our spending. Although the iPhone has been earning lots for Apple, our spending on high-tech goodies does not make up for falling demand elsewhere. A PC and broadband cost something, but for those millions who have paid up, further exploration is essentially free.

Nor do most Web activities generate jobs and revenue at the rate we saw with past technological marvels. When Ford was growing early in the 20th century, it created millions of jobs and helped to build Detroit into a top-tier city. Today, Facebook creates lots of voyeuristic pleasure, but much of the “work” is done by software and servers, and the firm hasn’t transformed Palo Alto. Web 2.0 is not filling government coffers or supporting many families — and may be hurting some. (Just ask a newspaper reporter.) Everyone on the Web has heard of Twitter, but as of this spring, fewer than 50 people work there.

That all sounds scary, yet there is a bright side; I call it the “human capital dividend.” The reallocation of consumer time into the “free sector” on the Web will liberate the efforts of many producers and intermediaries, just as the automobile’s advent shifted workers out of making buggies for the horse. In fact, it’s an economic miracle that Twitter can get by with no more than 50 employees. It’s not quite a perpetual-motion machine, but if other parts of the economy were equally efficient, we’d all be swimming in free or near-free stuff.

A second part of the human capital dividend comes from our productivity as Web consumers. Billions of people are rapidly becoming more knowledgeable and better connected to one another. Self-education has never been more fun, and that is because we are in control of that process like never before.”

1 Comment How the Internet killed California’s economy

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