The Economy of Bits

Why this newsletter exists and why you should (maybe) subscribe

I.

Imagine that far in the future, a galaxy-faring human civilization landed for the first time on a new planet outside of our solar system. Now this planet, unlike the earth-like ones closer to our home, has an atmosphere that coats everything on its surface with a thick, slick fog. Everything is slippery; if you throw a rock across a field, it keeps tumbling until it hits a slope in the terrain. Geological structures, ecosystems, whatever forms of life exist on this planet have all evolved in the complete absence of friction.

The second we touched down on this planet we would fall flat on our face — first literally, then metaphorically as we discovered that absolutely nothing works. Motorized vehicles spin their wheels fruitlessly and careen off paths. Buildings held together with screws and nails collapse soon after being erected. Even our hands become useless as anything we pick up quickly slips out of grip. Many would probably advocate forgoing this planet all together. “How can we expect anything to function here?” they would ask — and there wouldn’t be an obvious answer to them. After all, pretty much all technology that we have built is in one way or another predicated on the existence of friction.

However, as humans started to familiarize themselves with this alien environment, something surprising would happen. While at first we only encountered obstacles, increasingly people would begin to discover opportunity. Transportation on this planet is insanely cheap: a single push off of is enough to move a container ship’s worth of cargo miles. Structures are fluid in ways impossible on earth: you can reorder city blocks with a crew of a couple people. Slowly, people would realize these benefits and create new technology to harness them to do things previously impossible. Eventually, entire industries might move solely to this new planet, abandoning their earthly shackles.

II.

We are many years away from exploring the galaxy, but the above scenario is more than a hypothetical. Instead of two planets, we live in an age of two economies: one made of atoms and one made of bits. The economy of bits embodies all of the creation, consumption and transaction that occurs in the digital realm, enabled by computers and the networks that connect them. We can trace its origin back to 1972 when a pair of Stanford students sold an undetermined amount of marijuana over Arpanet, an early predecessor to the internet. Since then it has grown exponentially, both vertically as new technologies and products have been invented to be bought and sold and horizontally as billions of new people have came online.

While our theoretical planet lacked physical friction, the economy of bits lacks economic friction. The cost of sending information between computers over the internet is effectively zero. This means there is no marginal cost to distributing content, whether it’s text, video, or software itself. Once the content is distributed, it is similarly costless to change those bits: to update software with new features, or post new content to a blog. Moreover, the elimination of this cost means that anyone can contribute to the system, severely weakening geographic and institutional barriers that persist in the economy of atoms.

At the same time, the removal of friction has led to the collapse of many business models that were predicated on atom world assumptions. No friction means no opportunity to charge money for access to information. So far this has most acutely affected the industries whose information has been easiest to translate to the world of bits — video rentals, travel agents, publishing — but there’s no reason to think it will stop there.

As you can see, just as in our planet scenario, the removal of preexisting friction has both ruinous consequences and profound opportunities. We as a society are currently in the midst of reckoning with both sides of that coin. What new things can we invent? What new experiences can we enable? And how can we fix what’s been broken? These questions are why this newsletter exists.

Every Sunday Morning I will explore the questions that get at the heart of where the economy of bits is heading: What is the gini coefficient of YouTube? What would it mean for commerce to be a “native” part of the digital world? What is the current GDP of the internet? Why is every tech company launching some kind of financial product?

Fundamentally, I am an optimist about this new economy. I think that it has the potential to change the world for the better, to enable new creativity and jobs at a scale impossible in the world of atoms. However, I don’t think that this is guaranteed. The future doesn’t just happen to us: we invent it. This newsletter is my small contribution to that collective invention, an attempt to understand the present and think about out how we can improve what lies ahead.

I hope you’ll join me.

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Trying to understand the present and the future of the internet