“Protocols” and Wealth Creation

Wednesday, January 6th, 2010

We used to make stuff, and now we make protocols, David Brooks recently claimed. But the 19th and 20th centuries were also “knowledge economies”, David Foster says:

The value of a Boulton & Watt steam engine was not in the “stuff” it was made out of (which could be purchased for a far lower amount than you would pay for the steam engine itself) but rather for the design knowledge contributed by James Watt and the manufacturing process knowledge (protocol knowledge) contributed by Matthew Boulton..and for innumerable additions to that knowledge base by their employees. To take a more recent example, the early 20th century assembly line as implemented by Henry Ford, and the kinds of precise work planning and industrial engineering developed by Taylor and the Gilbreths, certainly represent “protocols” just as much as do Wal-Mart’s supply-chain management procedures.

One could argue that a “protocol” in the form of pure software has no variable cost, unlike a physical product. But in reality, the software is only usable when it is incarnated into a physical device such as a computer. And many of the highest-value forms of software are in fact sold only as an embedded part of a physical device: iPhones, aircraft autopilots, and CNC machine tools, for example. And Wal-Mart obtains financial value from its supply-chain management expertise only when the results of that expertise are sold in the form of “stuff.”

The most important “protocols” are the ones that nudge “stationary bandits” — that is, politicians — toward the least destructive means of collecting economic rents — or getting their cut.

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