Is there an economics of demand-side scarcity?

There's a debate about the meaning of economic scarcity going on all over the Web, most recently set off by Chris Anderson's "Economy of Abundance" talk at Pop!Tech, that David Hornik and Ross Mayfield have commented on and Doc Searls began talking about a while back when he introduced the demand-side intention trope.

There's a debate about the meaning of economic scarcity going on all over the Web, most recently set off by Chris Anderson's "Economy of Abundance" talk at Pop!Tech, that David Hornik and Ross Mayfield have commented on and Doc Searls began talking about a while back when he introduced the demand-side intention trope.

First, an extended excerpt of this piece by Robert Samuelson at Newsweek:

When he died in 1848, John Jacob Astor was America's richest man, leaving a fortune of $20 million that had been earned mainly from real estate and fur trading. Despite his riches, Astor's business was mainly a one-man show. He employed only a handful of workers, most of them clerks. This was typical of his time, when the farmer, the craftsman, the small partnership and the independent merchant ruled the economy. Only fifty years later, almost everything had changed. Giant industrial enterprises—making steel, producing oil, refining sugar and much more—had come to dominate.

The rise of big business is one of the seminal events in American history, and if you want to think about it intelligently, you consult historian Alfred D. Chandler Jr., its pre-eminent chronicler. At 88, Chandler has retired from the Harvard Business School but is still churning out books and articles. It is an apt moment to revisit his ideas because the present upheavals in business are second only to those of a century ago.

Until Chandler, the emergence of big business was all about titans. The Rockefellers, Carnegies and Fords were either "robber barons" whose greed and ruthlessness allowed them to smother competitors and establish monopolistic empires. Or they were "captains of industry" whose genius and ambition laid the industrial foundations for modern prosperity. But when Chandler meticulously examined business records, he uncovered a more subtle story. New technologies (the railroad, telegraph and steam power) favored the creation of massive businesses that needed—and, in turn, gave rise to—superstructures of professional managers: engineers, accountants and supervisors.

It began with railroads. In 1830, getting from New York to Chicago took three weeks. By 1857, the trip was three days (and we think the Internet is a big deal). From 1850 to 1900, track mileage went from 9,000 to 200,000. But railroads required a vast administrative apparatus to ensure the maintenance of "locomotives, rolling stock, and track"—not to mention scheduling trains, billing and construction, as Chandler showed in his Pulitzer Prize-winning book "The Visible Hand: the Managerial Revolution in American Business" (1977).

Elsewhere, the story was similar. Companies didn't achieve lower costs simply by adopting new technologies or building bigger factories. No matter how efficient a plant might be, it would be hugely wasteful if raw materials did not arrive on time or if the output couldn't be quickly distributed and sold. Managers were essential; so were statistical controls. Coordination and organization mattered. Companies that surmounted these problems succeeded. Typical was Singer Sewing Machine. Around 1910, it produced 20,000 to 25,000 machines a month and had 1,700 U.S. branch offices, whose salaried managers supervised an army of salesmen.

Robert Samuelson goes on to say that the managerial capitalism that defined the era Chandler described has given way to something new.

The key to Samuelson's argument, as many argue these days, is the economics of abundance, which some say has transformed the idea of scarcity into generosity ("the economics of abundance," as Chris Anderson put it) as the primary catalyst of business.

I'm not convinced that what has really changed is the scale of coordination, which still requires that we treat the shortage of something--whether physical goods, software or knowledge--in one place as scarcity in all places by managing the costs of delivery so that the largest number are served for the lowest price.

Chris Anderson points for confirmation to this speech by Barry Diller of InterActive Corp. at the Forbes MEET Conference in which he says: "In a world of not only plenty, but the eventual time-shifting – everything will be time-shifted – you’ll be the editor and the master of your own stuff. The single channel, general entertainment approach [isn’t valuable]."

All Diller does is say the mass market channel is dead, not that scarcity is no longer a factor in the economy. Diller argues for increasing emphasis on coordination with a kind of demand-side scarcity, but scarcity nonetheless, bringing people what they want when they don't have it, which is simply a more fluid form of scarcity economics where "I won't give this to you" becomes "I'll hold it for you until you need it." The thing is, the holder wants to know an awful lot about you so that they can suggest other things you might not yet know you want. Someone gets rich on that access to information, which is now the mining of preference instead of scarce materials.

The fact every social networking site attempts to keep its doors closed to competitors so they can monopolize to the greatest degree possible the personal information they collect demonstrates that is is scarcity of demand rather than supply that has become the source of wealth.

A single person can do what John Jacob Astor did, build an unrivaled empire with little assistance because they recognize those inefficiencies and move resources in response. The corporate structure that made wealth possible during the industrial era may not be necessary anymore, but are we not repeating a phase of entrepreneurialism in response to efficiencies created by technology rather than inventing a new economics? And if we're repeating the process that gave rise to the massive organization, what shall we change to produce some new kind of social system that doesn't only produce extremes of wealth in an environment of general want, such as a third of Americans uninsured and half the world living on $2 a day? Calling it something new doesn't change anything.


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