Free Republic
Browse · Search
Topics · Post Article

Skip to comments.

Capitalism Without Capital
Tech Central Station ^ | 1/03/2005 | Arnold Kling

Posted on 01/03/2005 1:51:10 PM PST by BJClinton

"What's really amazing about the Long Tail is the sheer size of it. Combine enough nonhits on the Long Tail and you've got a market bigger than the hits. Take books: The average Barnes & Noble carries 130,000 titles. Yet more than half of Amazon's book sales come from outside its top 130,000 titles. Consider the implication: If the Amazon statistics are any guide, the market for books that are not even sold in the average bookstore is larger than the market for those that are.

...The average Blockbuster carries fewer than 3,000 DVDs. Yet a fifth of Netflix rentals are outside its top 3,000 titles. Rhapsody streams more songs each month beyond its top 10,000 than it does its top 10,000...


When you think about it, most successful businesses on the Internet are about aggregating the Long Tail in one way or another. Google, for instance, makes most of its money off small advertisers (the long tail of advertising), and eBay is mostly tail as well - niche and one-off products."
-- Chris Anderson, Wired


Just over ten years ago, I wrote an essay called The Economic Consequences of the World Wide Web. The predictions I made were rather bold, considering that at the time the typical personal computer running Windows 3.1 or DOS could not access the Internet, and fewer than half a million people in the entire world had access to a graphical web browser.


One of my predictions was that narrow-interest movies and music would be strengthened by the Web. Wired magazine editor Chris Anderson's article on the "long tail" suggests to me that this has occurred.


Looking back on my decade-old essay, I think that it remains fundamentally sound. If Anderson's article tells us how far we have come, I think that relative to my original predictions we still have a long way to go. But the predictions that have not yet come to pass still strike me as reasonable.


Lower Concentration


The distinguished computer engineer Jacob Nielsen

pointed out that the page views on the Web tend to follow a Zipf distribution. Compared with the most visited site on the Web, the second most-visited site gets about half the traffic, the third most-visited site gets about one-third the traffic, and so on.


One characteristic of the Zipf distribution is that it has a long tail (hence Anderson's use of that term). On the one hand, it exhibits extreme inequality. As NYU's Clay Shirky pointed out in Power Laws and Web Logs, it means that the gap between the traffic on a top web log and the median web log will be large.


However, another characteristic of the Zipf distribution is that the tail is more important than the head. That is because as a fraction of the leading site, the fraction of the nth site declines slowly. See the table below.





























The total of value of sites 3 through 13 is 1.6, compared with a value of the top two sites of 1.5. This property holds in general for the Zipf distribution. The long tail accounts for more value than the top. As in the examples cited by Anderson, the chart-toppers do not account for 80 percent, or even 50 percent, of all the business.


This relative significance of the long tail represents a subtle but significant economic change. The industrial economy was characterized by concentrated industries, in media as well as heavy manufacturing. There is no "long tail" in the steel industry. The combined output of all of the steel mills below the top 1,000 is tiny. That industry does not fit the Zipf distribution.


Why the Long Tail?


Why do we see less concentration on the Internet than in the industrial economy? The most fundamental fact about the Internet is that it facilitates capitalism without capital. As I put it ten years ago,


"in building the interstate highway system the challenge was constructing the physical roads and bridges, not in coming up with the rules of the road. With the Information Superhighway, one could argue that the situation is reversed, and indeed that this reversal is one of the major problems with the highway metaphor itself."


The reduced significance of capital means that the cost of entry is lowered in many industries. Today, we see this in the shops that people have set up on eBay or in the blogs that compete with traditional pundits.


Another characteristic of capitalism without capital is less bureaucracy. As observers from John Kenneth Galbraith to Amar Bhide

have pointed out, corporate bureaucracy emerges to regulate risk-taking in an environment in which new projects are very expensive. Think of a new airplane or a new fabrication plant for computer chips.


When a new project can be hatched in a basement on a small budget, fast failure is more efficient than organized planning. Galbraith, writing in an era when the economy was dominated by heavy industry and oligopolies, saw entrepreneurship as little more than a quaint myth. Bhide, writing more recently, sees the entrepreneur as thriving in circumstances of high ambiguity and low capital intensity -- situations that have become increasingly prevalent in the computer age, particularly with the advent of the Internet.


The industrial economy required planning and bureaucracy. The Internet economy instead is better described by Friedrich Hayek's terms spontaneous order and competition as a discovery procedure.


As I wrote ten years ago, "More of the value of a product will be created outside of the firm." The firm's executives and committees are now less well-positioned to make decisions than are its consumers and others on the periphery. The Hayekian consequences of the Internet include outsourcing and Free Agent Nation.


Economics of the World Wide Web, Revisited


A decade ago, there were only a few thousand Web sites, but I predicted that as the Web grew that "Consumers will be highly dependent on agents of various sorts, including catalogs, search tools, and 'best of' lists." Since then, sites have emerged, such as Google, which are now important not only to the Web but to our entire economy.


I foresaw a reduction in the need for sales clerks, as online ordering and self-service would increase. This is taking place, but at a much slower pace than I would have predicted. My guess is that sales clerks' main role these days is to talk people into buying more than they intended. For example, at fast food restaurants, why is the line that says "place your order here" staffed by a human? The only reason that I can come up with is that humans are better at suggesting to customers that they should buy a soft drink.


I predicted that consumers would "start to make 'end runs' around professional lawyers, doctors, real estate agents, stock brokers, insurance agents, etc., because the demand for these professions is a function of consumer ignorance." Internet sites with medical, legal, and real estate information have turned out to be extremely popular, and many consumers do seek their own information in these areas. However, the professionals have retained their gatekeeper roles to a greater extent than I would have expected. It is difficult to assess how much change has been hindered by consumer inertia and how much change has been hindered by regulators who in turn have been captured by the professional trade associations.


I also predicted that consumers ultimately would be able to find alternatives to obtain "effective and credible education." Today, nontraditional education still has a tremendous credibility problem. If and when that problem is solved, my prediction is that traditional institutions of higher education will take a very hard fall. I think that one of the sources of tension between professors and conservatives is due to the fact that colleges and universities have lost their near-monopoly on intellectual talent to a long tail outside of the academy, yet many faculty act as if this nothing has changed.


Information-age Government


Our government is much more at home in the industrial age. It is familiar with taxing and regulating concentrated industries. It is not at all used to dealing with the "long tail."


The philosophical and technical differences between regulating a concentrated industry and a long-tail industry are enormous. For example at the Federal Communications Commission, as even Chairman Michael Powell is aware, the expectations for regulation of telephony and broadcast indecency are increasingly anachronistic.


As more workers join the "long tail" of small business and self-employment, what will happen to our system of employer-provided benefits, especially health insurance? Economist Brad DeLong thinks that without corporate provision of a collective safety net, we are headed toward a larger welfare state. He writes


"The coming generation will be one of massive downward mobility for many Americans. The political struggles that this generates will determine whether America

will move more closely to the social-democratic norm, or find some way to accept and rationalize its existence as a country of high economic risk and deep divisions of income and wealth."


As the industrial age gives way to the information age, the S&P 500 are under more competitive pressure and will lose market share to the long tail. Therefore, I agree with DeLong that the ability of corporate America to provide welfare-state type benefits is eroding.


However, my reading of history is that American affluence has consistently grown in spite of the alleged perils of structural change. For example, after decades of warnings that the middle class depended on manufacturing jobs, we have reached the point where less than 10 percent of the work force is on the production line, and yet most indicators of economic well-being, such as the home ownership rate, suggest that prosperity remains broad-based.


It is always possible that this time the doomsayers are right, and that widespread downward mobility is just around the corner. However, I think that what we will see instead is widespread upward mobility among the self-educated and self-starting people of the world, due to the reduced requirement for huge concentrations of capital. It will be less important to be born into affluence or to please the boss at a well-known company, and more important to enjoy a measure of economic freedom with reasonably unfettered access to people, technology, and markets.


In my view, capitalism without capital could prove to be a golden age. It provides self-educated self-starters with opportunities that never existed in the industrial economy. It offers the potential for individuals in the poorest nations to plug into the affluent world.


Government in the information age could go in one of two directions. One direction, advocated by DeLong and others on the Left, is for a larger welfare state to try to fight the tendency toward inequality. The other direction would be toward more of what I've called a Bleeding-heart libertarian state, without concern for inequality between the top and the middle.


My belief is that this is the wrong time in history to adopt European-style democratic socialism. Under capitalism without capital, we should encourage people to be self-educating and self-starting, not state-parented. Our government should be compassionate and generous to those with mental illness and physical disabilities, but otherwise it should have a smaller footprint, not a larger one.

TOPICS: Business/Economy; Culture/Society; Editorial
KEYWORDS: economics; neweconomy; tech; zipf
Navigation: use the links below to view more comments.
first 1-2021-31 next last
Explains a lot. Barnes and igNoble won't carry many conservative texts yet they are still best-sellers.

Interesting how lefties are pessimistic (Socialist state or high economic risk) and the right views it with optimism (ownership society).
1 posted on 01/03/2005 1:51:11 PM PST by BJClinton
[ Post Reply | Private Reply | View Replies]

To: Tolik

I thought you might appreciate this.

2 posted on 01/03/2005 1:51:33 PM PST by BJClinton (65,535)
[ Post Reply | Private Reply | To 1 | View Replies]

To: BJClinton

This just shows that the average mall bookstore, or even the average local specialty bookstore, just doesn't meet everyone's needs, and never will. The on-line capabilities of Amazon and Barnes & Noble give buyers a variety that they never would have dreamed possible 20 years ago; if they don't have a book in stock, one of their used-book affiliates probably does. In the Internet age, if you are looking for a specific book, you are almost sure to find it somewhere on the Net.

3 posted on 01/03/2005 2:06:34 PM PST by Steve_Seattle
[ Post Reply | Private Reply | To 1 | View Replies]

To: BJClinton

The author wonders how we will deal with loss of health care benefits. I suspect that the "long tail" will not have the "deep pockets" of concentrated industries, and thus lawsuits will tumble, making health insurance less risky and more affordable. Lawyers love corporations as targets because they have rich, juicy money centers, and are big enough that settling with the pesky mosquito lawyer is cheaper than fighting it. When lawyers try to sue the "long tail," the smaller companies will find it more cost-effective to fight back, and will not present the cash-rich targets that lawyers crave.</wishful thinking>

4 posted on 01/03/2005 2:12:45 PM PST by webheart (Pajamarazzi Rules!)
[ Post Reply | Private Reply | To 1 | View Replies]

Ping to self

5 posted on 01/03/2005 2:17:26 PM PST by redgolum
[ Post Reply | Private Reply | To 1 | View Replies]

To: Ernest_at_the_Beach

I think you will find this of interest

6 posted on 01/03/2005 2:27:37 PM PST by Libertarianize the GOP (Make all taxes truly voluntary)
[ Post Reply | Private Reply | To 1 | View Replies]

To: BJClinton

This was a great read I read it at the tech station earlier today.

I enjoy comparing these number patterns wherever they are found.

7 posted on 01/03/2005 2:27:58 PM PST by traviskicks (
[ Post Reply | Private Reply | To 1 | View Replies]

To: BJClinton

Good stuff. As von Mises pointed out long ago, capitalism isn't about specie, it's about information, the amount of it and at what level it is processed into an economic decision. And the Internet facilitates the dissemination of information fantastically and in directions that are only now beginning to surface, this being one of them. What we got here is a revolution, folks, and just because the initial enthusiasm for e-commerce gave us a dot-com bubble doesn't mean it isn't real.

8 posted on 01/03/2005 2:42:48 PM PST by Billthedrill
[ Post Reply | Private Reply | To 1 | View Replies]

To: BJClinton
I Blog BooksThe long tail is also driven by smaller sites - how many blogs have you seen with sales links to or B&iN? So maybe what we see is the long-tail squared!

BTW, do you see this according (or not) with the "Third Wave" premise of Alvin Toffler?
9 posted on 01/03/2005 2:43:25 PM PST by dr_pat (the boys i mean are not refined, they shake the mountains when they dance!)
[ Post Reply | Private Reply | To 1 | View Replies]

To: webheart

Might not be wishful thinking. If enough people are hit in the pocketbook they might wake up to the abuse of lawyers and actually do something about it.

10 posted on 01/03/2005 2:57:43 PM PST by BJClinton (65,535)
[ Post Reply | Private Reply | To 4 | View Replies]

To: lepton

bookmark bump

11 posted on 01/03/2005 3:00:01 PM PST by lepton ("It is useless to attempt to reason a man out of a thing he was never reasoned into"--Jonathan Swift)
[ Post Reply | Private Reply | To 1 | View Replies]

To: BJClinton
The predictions I made were rather bold, considering that at the time the typical personal computer running Windows 3.1 or DOS could not access the Internet

I was able to surf the internet in 1995 on computers with Windows 3.1, 16 MB RAM and a 14.1 kb/s modem.

12 posted on 01/03/2005 3:15:52 PM PST by Paleo Conservative (Hey! Hey! Ho! Ho! Dan Rather's got to go!)
[ Post Reply | Private Reply | To 1 | View Replies]

To: Paleo Conservative

I used to dial-up bulletin boards with a 2.4 kbps modem back before this new-fangled internet came around.

13 posted on 01/03/2005 3:27:30 PM PST by BJClinton (65,535)
[ Post Reply | Private Reply | To 12 | View Replies]

To: BJClinton
I used to dial-up bulletin boards with a 2.4 kbps modem back before this new-fangled internet came around.

Well I did the same with 300 bps and 1200 bps modems with an original Compaq portable running Compaq DOS 1.11 with two full height floppy disks and a massive 256 KB of memory.

14 posted on 01/03/2005 3:48:01 PM PST by Paleo Conservative (Hey! Hey! Ho! Ho! Dan Rather's got to go!)
[ Post Reply | Private Reply | To 13 | View Replies]

To: Paleo Conservative
massive 256 KB of memory.

Whoa. That was huge. I remember getting a 4K mem upgrade and being ecstatic at upgrading the mem. Friday I purchased a 1 gig stick.
15 posted on 01/03/2005 3:58:57 PM PST by BJClinton (65,535)
[ Post Reply | Private Reply | To 14 | View Replies]

To: BJClinton

great post thanks.

16 posted on 01/03/2005 4:18:04 PM PST by q_an_a
[ Post Reply | Private Reply | To 1 | View Replies]

To: BJClinton
Whoa. That was huge. I remember getting a 4K mem upgrade and being ecstatic at upgrading the mem. Friday I purchased a 1 gig stick.

Well the 16 MB and 32 MB I had on my computers back in 1994 and 1995 was huge. I needed 32 MB to run AutoCAD 12 for DOS back then on a couple of 486-66 Mhz machines.

When I didn't need to run AutoCAD, they were available to run Windows 3.1. It actually ran fairly well with that much memory if you could afford to put that much on your computer. I remember when I went from 16 to 32 MB, I had to pay $40 per megabyte for a 16 MB module from Crucial Technologies. After I ordered one module, I got impatient after a couple of weeks and it still had not arrived so Crucial redid the order. I finally got the order, put it in my 486 and was really pleased with the added performance. Then about a week later I received another Fedex package from Cruical with another memory module. After my experience with working with AutoCAD with 32 MB I really hated the thought of sending it back even though it would cost me an additional $640 to keep it. I decided to put the other 16 MB module in my other 486-66 so I could have two computers running AutoCAD 12 with 32 MB. Yes I did have two licenced copies at the office. One added benefit was that if I had a really big file I needed to edit, I could rob one of my 486 machines, take out a 16 MB module, install it on the other machine and have one computer running AutoCAD with 48 MB. That really was a lot back in 1994.

17 posted on 01/03/2005 4:29:43 PM PST by Paleo Conservative (Hey! Hey! Ho! Ho! Dan Rather's got to go!)
[ Post Reply | Private Reply | To 15 | View Replies]

To: Paleo Conservative; BJClinton

I remember an excitement back in the college years to have a new punch card machine that typed also the text on the top of the card, so if you drop the stack of the cards, you don't have to read the holes.

Thanks for the ping, BJClinton

18 posted on 01/03/2005 7:41:24 PM PST by Tolik
[ Post Reply | Private Reply | To 17 | View Replies]

To: BJClinton; Lando Lincoln; quidnunc; .cnI redruM; Valin; yonif; SJackson; dennisw; monkeyshine; ...

Food for thoughts!

Interesting article PING.

This ping list is not author-specific for articles I'd like to share. Some for perfect moral clarity, some for provocative thoughts; or simply interesting articles I'd hate to miss myself. (I don't have to agree with the author 100% to feel the need to share an article.) I will try not to abuse the ping list and not to annoy you too much, but on some days there is more of good stuff that is worthy attention. I keep separate PING lists for my favorite authors Victor Davis Hanson, Lee Harris, David Warren, Orson Scott Card. You are welcome in or out, just freepmail me (and note which PING list you are talking about).

19 posted on 01/03/2005 7:45:36 PM PST by Tolik
[ Post Reply | Private Reply | To 1 | View Replies]

To: webheart

I don't know --- I think we're about an inch away from the complete government take-over of health care. In this region -- which isn't small and is rapidly growing in population, already 2/3 of the population depends on the government for it's health care, only 1/3 bothers with private health insurance.

20 posted on 01/03/2005 7:54:37 PM PST by FITZ
[ Post Reply | Private Reply | To 4 | View Replies]

Navigation: use the links below to view more comments.
first 1-2021-31 next last

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.

Free Republic
Browse · Search
Topics · Post Article

FreeRepublic, LLC, PO BOX 9771, FRESNO, CA 93794 is powered by software copyright 2000-2008 John Robinson