Microsoft founder Bill Gates shares his thoughts on how to behave in a new world where supply and demand no longer play a role. In the second semester of my first year at Harvard, I started taking other people's lectures and very few of my own. The first thing he showed me was a graph of supply and demand. Two conclusions could be drawn from this graph, one of which is more or less still true today. As demand for a product increases, supply increases and prices fall. The intersection of these two lines is the equilibrium point between supply and demand, which is a very important point. In this situation, social value is maximized because there is enough of the product available to make it profitable for the producer. Everyone is a winner.
Suppose Ford launches a new car model. The production of the first car is costly because of the development investment required, but each subsequent car also requires a certain amount of materials and labor. Both the tenth car and the thousandth car cost roughly the same, as do most commodities that were the backbone of the economy for most of the 20th century, such as agricultural products and real estate.
Software, however, is different. Microsoft spends huge amounts of money to develop new programs, but unlike traditional commodities, they are intangible assets and are therefore virtually free from then on. As well as software, data, insurance, e-books and even films are organized in a similar way. The global economy is changing and increasingly does not follow the old model.
This affects all areas, from tax law to economic policy. This is one of the most important and under-appreciated trends in the global economy. They start by defining intangibles as 'things that cannot be touched'.
Without a return on investment, tangible assets such as machinery or shops cannot be sold to recoup some of their costs. Your performance can be exploited by competitors. We know that Uber's most important asset is its network of drivers, but it is easy to see that Uber's drivers also take orders from competitors. They are more scalable than tangible assets. Apart from the cost of making the first copy, the product can be replicated indefinitely and almost for free. Opportunities for synergies with other intangible assets.
This is a very important book, but it requires a basic understanding of economics to read. However, if you have taken a course or read the financial press on a regular basis, you have nothing to worry about. After reading this book, I am convinced that legislators need to adjust their countries' economic policies to reflect the new realities. For example, the tools many countries used to estimate the value of intangibles are outdated and do not correctly estimate the value of the economy. For example, the US did not include software in its GDP calculations until 1999. Even today, GDP does not take into account investments in market research, branding, employee training and other investments in which companies invest significant amounts of money. As well as valuation, there are other important issues to discuss. Is patent law and trademark protection too strict (or conversely too lenient)? Do changes need to be made to competition policy?
How should the tax system be changed, and is it necessary? How to stimulate the economy in a new capitalist world without capital? We need strong thinkers and good economists to clarify these questions. Capitalism Without Capital is the first book to attempt a thorough analysis of these trends and should be required reading for all politicians and officials. It also takes time for investors to learn how to deal with intangibles. In the early days of Microsoft, I felt like I was explaining something completely new. Our business plan took a different approach to analyzing assets, which was alien to investors, and they could not imagine the long-term returns we were talking about. The situation has changed dramatically since the 1980s. Today, nobody needs us to tell them that investing in software development works. It is time to think about the economy as a whole.