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Value Creation vs. Value Capture: Musings on the New Economy, by Tim O'Reilly | LinkedIn


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Great thought piece by Tim O'Reilly:

In the world of discovery and intellectual innovation, there are those who create value, and those who merely extract it.

Consider this: when John von Neumann and his team at the Institute for Advanced Studies at Princeton developed the fundamental architectural approach of modern computing, they put their work into the public domain. When Paul Baran developed the fundamental concepts of packet networking that underlie the internet, he did the same thing. So too did Vint Cerf and Bob Kahn with the TCP/IP protocol, and Tim Berners-Lee with HTTP and HTML, the technologies that underly the World Wide Web.

These pioneers created enormous value, yet they didn't capture very much of it for themselves. That was left for others who built on what they gave to the world for free.

On the other side of the ledger, consider the Wall Street mavens who created new instruments to suck value out of the financial system while damaging the economy as a whole, culminating in the 2008 financial crisis that the world is so painfully digging itself out of today.

Consider the patent trolls who invent nothing, but file patents in legal language so broad that they constitute a drift net in which real inventors who later come up with actual new inventions successfully put into practice can conveniently be caught and shaken down.

We need to begin studying the economics of value creation, not just the economics of value capture.

In a recent series of talks, I've invoked an article written nearly forty years ago by alternative energy activist Steve Baer entitled "The Clothesline Paradox." Baer noted that when you put your clothes in the dryer, the energy you use is measured and counted, but when you hang them on the clothesline, the energy you save simply "disappears" from the economy. Of course, it doesn't disappear, but shows up in money that was saved and thus spent elsewhere.

We recently wrote an O'Reilly Radar report about the Clothesline Paradox with regard to open source software and the web hosting industry. Web hosting is a simple subscription model for access to free and open source software like Linux, Apache, MySQL, PHP, Wordpress, and the domain name system. The value created by these open source projects was captured in the economy not just by hosting companies like Bluehost, our partner in the study, but also by internet service providers ranging from Comcast to local companies like Sonic.net, our internet provider at O'Reilly. But more importantly, the value was captured by every business for whom having a website is now an important way to reach customers and grow their revenue and profitability.

You can imagine how a policy that encouraged the growth of ISPs might have had economic benefits. But how much more benefit would be policies that encouraged the development of more open source software? Favoring a particular industry is a recipe for economic distortion. But policies that favor precursors to economic activity - value creation without value capture - don't pick winners. They enrich the soil in which anything can grow!

The concept of Clothesline Paradox is a good one.

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