Code is the New Capital

Albert Wenger points out that in the 21st Century, “capital” is increasingly information.  I’d agree with that, and specifically look at code.  What is the value of Facebook?  Its real estate and server farms are real enough, but form a trivial portion of its market capitalization.  Its user base is real enough, but it doesn’t have users without a product (and vice versa).  And its productive assets are its codebase.  That is the productive capital Facebook has.

Code is quite different than traditional capital, but has some similarities.  The biggest similarity is depreciation, believe it or not.  While there’s no wear-and-tear on a codebase, anyone who’s worked at a software company will tell you that the value of the codebase decays over time – databases exceed their scalability limits, incompatibilities with newer software arises, and the volume of quick “fixes” makes finding errors or building new functionality impossible eventually.  Maintenance is also another commonality, for the same reasons.

One neat aspect of “code-as-capital” is infinite scalability, which is really different.  A given piece of computer code can be replicated easily for zero marginal cost.  This doesn’t matter so much if you’re Facebook or another web app, because it doesn’t make sense to compete against Facebook by directly ripping off their codebase.  However, it matters a lot if you’re either buying or selling software!  As a producer, once your capital is in place, you can produce more at zero marginal cost.  As a consumer, it’s fabulous – because prices tend to drop towards marginal cost of production, software is getting cheaper.  If you’ve ever thought even casually about launching a business, you know this fact well – using off-the-shelf software and Amazon Web Services, you can acquire a full suite of business capabilities for basically nothing, including accounting and logistics software.

One under-appreciated aspect of “information as capital” is that thanks to the zero marginal cost of production, it massively increases the capital stock available to everybody.  As an individual, you can easily acquire a tremendous amount of productive capital that people a hundred years ago had to buy at great expense.  Actual machines for mass production aren’t getting any cheaper, but the costs of mass production always involved much more than just the expense of buying machines.  And the cost of production for producing goods (other than heavy machinery) is dropping every day thanks to the falling price of informational capital.  It’s not immediately clear to me whether this will be a force for greater or less inequality.  But it’s worth noting that informational capital, which has some very big differences from traditional capital, is only becoming more important in the 21st century.


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