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The Laws of Disruption (Part II)

In yesterday’s post, we introduced Larry Downes and his insightful new book The Laws of Disruption, discussing the relevance of Moore’s Law, which says that computational power roughly doubles ever 12-18 months while costs stay constant or even fall.  Today, we’re going to pick up where we left off with Metcalfe’s Law.

Mr. Downes writes,

Metcalfe’s Law, formulated by networking pioneer Robert Metcalfe, explains a phenomenon anyone with a telephone already understands.  The more people you can reach, the more reasons you find to reach them.  One telephone is useless.  A few phones have limited value. A billion phones create a vast network.  As the number of connected devices in any network increases, the number of possible connections between them grows exponentially.  Each new connection, therefore, adds far more value than the one that preceded it.  To paraphrase Metcalfe’s findings, the usefulness of a network is the square of the number of users connected to it.

The value of the internet and its related technologies (e-mail, instant messengers, Facebook, etc.) is that everyone is on it.  The web of potential collaborators is virtually infinite.  One of the key concepts of economics is that of diminishing marginal utility.  This is, each additional unit of something is less useful than the one that preceded it.  If you already have five pairs of jeans, that sixth pair just isn’t all that important to you.

But in the information economy, we actually see increasing marginal utility.  The more friends you can reach of Facebook, the more useful that application is to you. (I personally consider Facebook a monumental waste of time, but hey, I seem to be in the minority here.)  The same is true for instant messengers, e-mail, and older technologies like the phone and fax.

In a world accustomed to the economics of scarcity (that is, traditional economics) this is a difficult concept to grasp.  This brings us to Mr. Downes’s third major theme: The Law of Disruption.  This principle is a slight variant of Joseph Schumpeter’s  concept of “creative destruction” that applies to social systems.  Downes writes,

According to the Law of Disruption, technology changes exponentially, but social, economic, and legal systems change incrementally. As the new world runs increasingly ahead of the old, social systems invariably break down, only to be dramatically reinvented to better suit the new environment to which human beings have already relocated. Periodic upheavals are unavoidable; unexpected and unintended phenomena are natural by-products.

Downes is saying here that laws, regulations, and social norms have to reflect reality.  What may be deemed “immoral” by one generation may seem perfectly legitimate to the next.

A perfect example is internet piracy.  Fully 72% of Americans between the ages of 18 and 29 do not care whether the music they download is copyrighted or not (and it almost always is copyrighted.)  And in much of the developing world, respect for copyright for music and media is all but nonexistent.

So, are all young Americans and their contemporaries overseas criminals?  Technically, yes.  But as Downes writes,  “a law that makes felons of everyone is no law at all…[and]  laws that can’t be enforced are laws in name only.”

Copyright is a sensitive issue.  We ourselves are the publishers of a paid newsletter, so this is an issue that matters quite a bit to our continued well being.   We struggle with many of the issues that Downes discusses.  Copy protecting our work to too strict a degree limits the ability of our readers to share it in a beneficial manner to ourselves, but taking too lax a stance allows for mass piracy and undermines our business model.

The times, they’re a changin’.  And much of the new economy will be shaped by these new realities: Moore’s Law, Metcalfe’s Law, and the Law of Disruption.

At any rate, for a good discussion of these issues at work in today’s information economy, we recommend you pick up a copy of Larry Downes’s book.  The first half has a fair bit of “fluff” that probably could have been condensed, but we have to give Downes credit for writing an insightful and relevant book.

Charles Sizemore, CFA

Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy