The Great Ephemeralization - Timothy Lee

Timothy Lee looks into the corrosive effect of software’s power to unmake tangible goods by creating software that does the same thing on general purpose devices:

Timothy Lee, The Great Ephemeralization

[…] a couple of years ago, Google waved a magic wand that transformed millions of Android phones into sophisticated navigation devices with turn-by-turn directions. This was functionality that people had previously paid hundreds of dollars for in stand-alone devices. Now it’s just another feature that comes with every Android phone, and the cost of Android phones hasn’t gone up. I haven’t checked, but I bet that this wealth creation was not reflected in GDP statistics. And it’s actually worse than that: as people stop buying stand-alone GPS devices, Google’s innovation will actually show up in the statistics as a reduction in GDP.

Cowen writes that the Internet is producing wealth that “is in our minds and in our laptops and not so much in the revenue-generating sector of the economy.” This isn’t exactly wrong, but it fails to appreciate the extent to which the software industry is entangled with the “revenue-generating sector of the economy.” The digital revolution isn’t just introducing novel ways to amuse ourselves, it’s rapidly displacing a wide variety of “revenue-generating” products and services: typewriters, newspapers, magazines, books, maps, cameras, film development, camcorders, yellow pages, music players, VCRs and DVD players, encyclopedias, landline telephones, television and radio broadcasts, calendars, address books, clocks and watches, calculators, travel agents, travelers checks, and so forth.

Paul Graham and Reihan Salam have been popularizing the term “ephemeralization”, originally coined by Buckminster Fuller, to describe this process whereby special-purpose products are replaced by software running on general-purpose computing devices. As the list above suggests, ephemeralization is affecting a growing fraction of the economy. And with technologies like self-driving cars on the horizon, its importance will only grow in the coming decades.

Ephemeralization offers an alternative explanation for the puzzling growth slowdown of the last decade. Every time the software industry displaces a special purpose device, our standard of living improves but measured GDP falls. If what you care about is government revenue, this point might not matter much—it’s hard to tax something if no one’s paying for it. But the real lesson here may not be that the American economy is stagnating, but rather that the government is bad at measuring improvements in our standard of living that come from the software industry.

The most stark everyday example is the cord cutting going on based on high bandwidth connectivity to the home. The first to fall? Landlines and plain old telephones. Next? Blockbuster, DVDs, cable television networks, movie houses. Billions of dollars in stuff no longer being produced, fees no longer being charged, movie seats no longer being filled.

So how to count the benefits if not in GDP? How can we track the value for the individual who has great movie options on his laptop — maybe he doesn’t have a TV, either — in his apartment? The decrease in fees and goods he no longer pays for!

Here we may be seeing the emergence of the no-growth, no-stuff economy. The web converts the old economy of arranging and transporting atoms into arranging and transporting bits, and with that flipflop we need to measure value based on savings to the user instead of earnings for the manufacturer and distributor.