As I discussed in my Hacking Society post, one of the things I'm thinking a lot about these days is how to measure value that isn't directly monetized. There's a related aspect to all of this, as well: recognizing that when you create value, you don't have to monetize all of it directly yourself. Historically, in economics, they've talked about things like "externalities" and "spillovers" when discussing parts of the economic value chain that can't be controlled or monetized directly. However, it seems like a growing number of economists are realizing that this undersells what's happening. Externalities and spillovers often feel like a small thing -- a tangential bit tossed off to the side. But when you're dealing with information and digital goods, it's important to recognize that these things can be a major part of the market, and may not be controllable at all. And that may be a good thing.

In the discussion we had about Craigslist, one of the points was that while Craigslist itself only "captures" a small part of the value it's unleashed, that's not necessarily bad. First, it's good because much of that value to go out to the users of Craigslist themselves. That's why they appreciate and use Craigslist in the first place. If Craigslist tried to capture all of that value itself, people would stop using Craigslist. Now some may argue it becomes a different situation when you have third parties monetizing some of that value, but I disagree. When you look at the most successful companies in the world, they're often platforms -- they create value and capture some of it, but also allow much of that value to be monetized by others.

Look at Microsoft, Apple, Google and Facebook. All of them created a massive amount of value -- and all have become phenomenally successful companies -- but all of them did so by also letting others monetize large portions of the value they created. It's how you build a more long-lasting ecosystem from which you can continue to profit from over time. If you seek to capture all of the value yourself, you don't last very long.

I got to thinking about this more, after hearing the CEO of The Economist (who, one would hope, would understand these economic concepts) complaining about Flipboard capturing some of the value The Economist creates, and declaring it a "competitor" to The Economist's own digital and app ambitions.

“But you’re heading down a route we’ve seen before – giving the opportunity to extract value to somebody else in an area that should be our own – so Flipboard is problematic.”

Of course, that ignores the fact that Flipboard -- an aggregator app -- provides its own value as well. People don't use Flipboard just because it includes content from The Economist. They use it because of the overall experience and the fact that it aggregates content from lots of different sources in one place. As much as The Economist, or any publication, might like to "own" the reader, that's not necessarily what the reader wants. Letting others "extract" some of that "value" can actually be a really good thing. Flipboard provides a useful service for The Economist in not only experimenting with new ways to aggregate and present content -- from which The Economist can learn -- but also in potentially expanding The Economist's audience as well, feeding much greater value back into that ecosystem.

Yes, companies need to look at the overall market and see where it is they can extract value -- but you have to wonder about those who claim eminent domain over certain parts of the marketplace. Letting others extract some (and perhaps lots) of that value can have tremendous benefits for those who do so.

We're told, repeatedly, by some patent system supporters that the whole point of the patent system is really about "disclosure." Of course, this is a myth for a variety of reasons. The biggest, of course, is that in many industries patents are both completely useless to learn anything from and are never used to learn how things are done. This is especially true in software, where you will never hear about anyone learning how to do anything from a patent. A few years back, the US Patent and Trademark Office (USPTO) started publishing nearly all patent applications 18 months after the application came in. This is a pretty common practice around the globe. If a patent system is about disclosure, this makes sense -- and in theory, allows for people to point out prior art or protest certain patents before they're issued. There is a current exception for patents deemed in the interest of national security to keep secret (such as patents on nuclear energy).

However, as Francisco George points us to the news that the USPTO is now considering also keeping "economically significant" patents secret too (pdf and embedded below). They're exploring this after being directed by Congress -- and it's not hard to see the lobbyists' fingerprints on the specific request:

By statute, patent applications are published no earlier than 18 months after the filing date, but it takes an average of about three years for a patent application to be processed. This period of time between publication and patent award provides worldwide access to the information included in those applications. In some circumstances, this information allows competitors to design around U.S. technologies and seize markets before the U.S. inventor is able to raise financing and secure a market.

As far as I can tell, this directive seems to be saying that because patent applications might do what the patent system is supposed to do -- help disclose ideas -- we should keep the applications secret. The problem, of course, is that pretty much every patent applicant is going to think their patent is economically significant. The reality is that pretty much no one knows if their patents are economically meaningful until years later when a product is actually on the market. This proposal seems to serve no purpose other than helping companies not to disclose ideas while still letting them get patents.

I was lucky enough to attend a small gathering of great thinkers put together by Union Square Ventures earlier this week for an event they called Hacking Society -- which was designed to be a one day open conversation on the economics and power of networks, and how to use that as a force for good, in solving economic and social challenges. There were lots of great thoughts that came out of the event (which was live streamed over the web for people to listen in and participate via Twitter -- as many did). It would be impossible to sum up all of the great points in a single blog post, so I'm just going to discuss briefly the larger themes that hit me and helped to connect a few disparate ideas in my own mind.

The first issue was the role of incumbents (of all kinds) in trying to block innovation. As Clay Shirky amusingly repeated the so-called "Shirky Principle" (not named by him, but for him) on command a few times, "institutions will try to preserve the problem to which they are the solution." Economics professor Luigi Zingales made a similar point, but from a slightly different perspective, noting that "All entrepreneurs want a free market when they enter and don't want one after they win." That's just another way of showing the nature of incumbents under crony capitalism. Rep. Jim Cooper also made a similar point, noting that "The past, in general, is over-represented in Washington. The future has no lobbyists."

These are all variations on the same basic theme -- which all of us know is a significant problem. Of course, we've seen this many times over -- and it's certainly true on one of the key issues we talk about, intellectual property. If you look through the history of intellectual property expansion, it tends to slow innovation. That is, you get areas where there is great innovation, often with little to no protections, and it's then that incumbents demand protectionism in the form of greater IP laws and enforcement. It's a way to lock in their success, and limit disruptive upstarts. It is, as Zingales was saying, a case where the free market is useful until they've won -- and then they use the laws to try to protect their position.

But how do we deal with this problem?

That's where things (not surprisingly) seemed to get bogged down. Some suggested having to play the game the way it's done today -- setting up a SuperPAC, hiring lobbyists, and having "the future" represented in DC. That idea didn't go over too well with the rest of the room, who felt that the power of networks might enable something different and something new. I'd argue that it's even more than that. Because of the power of the incumbency, there's simply no way that anyone could effectively represent "the future" long term from a traditional lobbyist role. You'd always have some who could do it some of the time, but it wouldn't be sustainable -- either due to a lack of true funding to the level of the incumbents, or (worse) having the "representatives of the future" get "captured" by the incumbency.

However, as the discussion danced around this question, something interesting happened. Fred Wilson, from Union Square Ventures, suggested that Craigslist went against the traditional "capitalist" model of maximizing revenue. And while Craig Newmark (in his usual fashion) wouldn't make a direct statement on this, I challenged the assumption -- as I did in writing many years ago -- noting that this claim ignores the function of time. Those who think capitalism is about maximizing all revenue at this second are missing out on what it means to maximize revenue over time. That is, if Craigslist raised rates on everything to maximize revenue in the short term, it would almost certainly lead to an untimely death in the long term. That's because it would open up all sorts of opportunities for others to come in and undercut them and take away their business. That gives them the ability to keep customers happy and keep making revenue (and lots of it) in the much longer term. To me, that is true capitalism.

Wall Street thinking is maximizing revenue today -- without consideration for how that impacts revenues over time. That's not strategic and it's not smart. Smart capitalism is recognizing the importance of the time function. It means actually aligning your own best interests with the public's -- because if you don't it just opens up an opportunity for others to better serve the public. So when people suggest (as they did) that companies like Craigslist and Kickstarter are not "maximizing revenue," I disagree completely. They absolutely are, because they're providing so much consumer value, that they're able to continue to make a ton of money themselves, because the public wants to come back and wants to support them. Not because they have no other choice.

In effect, what companies like Kickstarter and Craigslist have shown is the way in which a more strategic player avoids the trap of the incumbent. By thinking that they're not trying to maximize revenue, they actually do end up maximizing revenue, because they take more of a public-first mentality, which drives more business and more opportunity... in part because so much of the value flows back to the public.

And therein lies the challenge of measurability. There is all sorts of economic activity that isn't properly measured today. When people look at Craigslist and say it's not maximizing revenue, that ignores the massive value that it has created, in part by leaving money in the pockets of others (who used to have to pay for similar services) while at the same time providing a tremendously useful service. But, because it's not a direct transaction, it doesn't get "counted" in the traditional sense. Tim O'Reilly really drove this point home in the discussion, talking about how we need to better measure that "hidden economy." That is, we need to measure the true value of something over time, rather than the limited value of just the direct cash transactions.

To some extent, this is a fault of economic linguistics. We measure economic value in monetary value -- even when it doesn't involve money directly. And, yet, because of this, we often forget that non-monetary transactions have tremendous costs, price and value as well. Thus they get ignored. Economics is supposed to be (in part) about that intersection of cost and benefit -- but a very, very large percentage of the economy is not about monetary costs and benefits, even if that's how it's often measured.

The end result, then, is that we're not properly recognizing the benefits (or, indeed, the costs), because we're ignoring the vast majority of those in assuming that anything that doesn't involve monetary exchange has no benefit or cost.

If one thing comes out of this discussion is that I think it's time we start looking for ways to change this. I'd like to start. We've already been doing some research that hopefully highlights costs and benefits in ways that weren't clearly stated previously, but that was very narrowly focused. I'm hoping that as we move forward, we might be able to start to construct new models and new research that really explores the true value of all the benefits and costs of such things. If that, alone, can help companies recognize that the path of incumbency is actually not the best one for long term maximization of benefit, then perhaps we can get more companies to act like Craigslist or Kickstarter -- where even they don't think that they're maximizing revenue, because they choose not to seize the largest possible percentage of the pie today, knowing that by allowing much greater consumer surplus, they're actually expanding their own opportunity for tomorrow.

There was a lot more discussed during the day (and into the evening over drinks and dinner), but this is the line of thinking that has me most interested, and it's an area that I hope to continue to explore -- with your help.

A constant theme here on Techdirt is that it's not the idea that's crucial, but the execution. Here's someone who seems to agree:

People like to idolize the "ideas" and "inspiration", but in the end, almost anybody can have an idea. Getting things actually done is where people stumble.

The person speaking those words -- Linus Torvalds -- certainly hasn't stumbled much. In January 1992, only about 100 people in the world were using his Linux kernel, which he had written as a 21-year-old student in his Helsinki bedroom, on a PC with 4MB of RAM. Twenty years later, Linux sits at the heart of some 300 million Android devices, with 850,000 more being added every day, and runs 91% of the world's top 500 supercomputing systems.

The idea of writing a kernel for Richard Stallman's GNU operating system was obvious to everyone -- it was the key piece still missing. In fact, a year before Torvalds started Linux, Stallman himself had begun working on a version called the Hurd, along with a few fellow coders of his Free Software Foundation.

Despite this impeccable pedigree, the Hurd is being used today by only a tiny fraction of the hundreds of millions running Linux -- further evidence that it's really not the idea, but the execution that counts.

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