StartupCamp Day 1 – notes from my session on Economic Networks
Posted by shannonclark on November 3, 2006
I have just this evening returned from the first day of StartupCamp at the Computer History Museum in Mountain View. It was a great first day, lots of engaging conversations and discussions and for myself it started with a session I led during the first timeslot on Economic Networks. This was the first time I have led a discussion of my theory of Economics as Networks or applied it live in a session and especially for a first time I think it went fairly well.
We started with a brief discussion of my theory, then looked at applying it to a number of cases – both broad categories of businesses as well as specific cases drawn from the attendees. I was very happy that I wasn’t the only person speaking, I got multiple people in the session to come up and present their company and lead that part of the conversation.
My theory, in a nutshell, is:
1. All Economic activity can be represented as the creation and destruction of links over time.
2. By looking at the patterns and structures of the network (always over time) new questions can be asked about first the structures around a given entity (a startup company for example).
3. Next we can look at the role of that entity in the networks of the entities in the network – i.e. where your firm is in the economic network of partners as well as investors, employees, suppliers, even local communities.
When you start with this picture of economics as a network you are forced to deal with some aspects of economics in a way that may differ from traditional economics. For example, these networks over time do not suggest ever reaching an “equilibrium” – indeed the fact that not just links but also the entities (nodes) in these networks will be created and destroyed over time makes equilibriums very difficult and possibly impossible (especially given that populations are growing and that the number of non-human entities (corporations, governments, etc) are as well.
As we discussed in the session this morning, this also suggests a view of value that is very different than both our “normal” view and from the traditional economic view (in a simple form). Namely that everything does not have an “intrinsic” value – but that value is ONLY determined within a network context. i.e. that bar of gold in my pocket has no value at all UNTIL it becomes part of the economic networks – at that point it will via these links and relationships get a “value”.
One of the companies that we discussed this morning is working on data systems to help buyers in broad niches online – for example via helping them look at data about what various electronic items have sold for across a large number of electronic marketplaces. In the session the man from the startup used the phrase such as “they will help show what the intrinsic value of an item is” – and one of my points to him is that I would be cautious about that as their approach. For one, it focuses all of the attention on price as the only factor (leaving aside other aspects such as reputation of seller, timeliness, total cost of the transaction vs. the point price of the item, speed of delivery, speed of certainty – i.e. perhaps you use the ‘buy it now’ to be certain of getting it vs. waiting 7 days to possibly save a small amount).
But as well it assumes that the item has an intrinsic value which I would argue it does not. I certainly do not disagree that there may be a historic price trend or range of common prices – but I would also argue that the “value” of the item is that which is set by the transactions around it. This may seem a small, perhaps merely semantic point, but believe that it is a very crucial and important one. Many people today (and much of our current models of economics) build in assumptions that there is some “real” value, some “right” price – that at this “real value” or “correct price” the system will just semi-magically work – everything will be optimal, all trades will clear, etc.
But reality – and thus I also argue our economic models should reflect this – is not at all this simple. Many other, non-price factors impact transactions – as I pointed out, racing to my only sister’s wedding if I broke or lost my camera I would gladly pay quite a lot for a working camera – the “value” at that point in time would be immediate use – and I’m unlikely to dicker over a few dollars, probably not even over a few hundred dollars. Sodas or a cold bottle of water, after a long hike, on a hot summer day – does that extra $.50 matter then? (for some people yes, very much so, but for most – not at all).
Traditional economics does, to be fair, address this point about different needs being reflected in different prices. But there is another, more subtle point that I hope my model of Economics as a Network can address, that all of this value, including money itself, arises out of a network. In the case of money and most currencies, a very large and complex network, but a network. The US dollar does not have an “intrinsic” value – rather it reflects the common agreement of literally billions of people who all acknowledge the link between green pieces of paper and the US Treasury – between electronic records and those same pieces of paper.
To return to this morning’s session, we looked at a variety of firms. We started by mapping out in a very simple format a model of the flow of value through or around the business today. I’ll see if I can get links to the photos from the session – if so I’ll update this post with links to them/embed them here.
Next we looked at where in that flow of activity and value the company was capturing value as well as where value was being transacted. As part of this we looked at the role that the company was playing in the networks around the company – for example helping enable another transaction to occur.
For many companies we then brainstormed about what other sources of value there might be for the company – i.e. what other parties might be interested in some aspect of the business of the firm. Could Edgio (which aggregates classified listings from RSS feeds) build up data from the listings and the content of those listings that might be of value to various Brands or their marketing/sales teams? (for example, helping Sony and Nintendo track how often people are selling older game systems to pay for a new PS3 or Wii).
One of the longest conversations we had and most interesting was a long discussion about how you might model an “Attention” company in this way. (I should have given a shout up to Steve Gillmor during that part of the session). We had a great discussion, one key point which I emphasized being that the point of all of the value that changes hand as a result of attention (from advertisers to an attention firm on to the providers of content and the readers of that content who clearly could be the same people) is funded because at some point in most cases that advertiser had a more direct transaction with some of those individuals. These transactions – the sale of some good (or service) in turn provide much of the value that coul then in part flow through and around the Attention firm.
Again, I’ll see if I can find a link to the photos of our whiteboard notes, they would help illustrate the rest of this conversation.
We ended with a great discussion (which built on a lot of thinking I have done in preparation to writing my book) around the role of credit. Specifically one of the people at the session is working on a new payment technology (using biometrics) which could (they hope) be an alternative to the current credit card (and bank) options. We started by thinking deeply about the current networks around credit card transactions and then tried to think about how a new player could enter the marketplace. I pointed out that and people in the audiance echoed this as well that in many places the new players that are arising are firms such as phone companies (especially cellular phones) which in many places can be used for many different forms of payment already today (for trains in Japan for example).
All in all I am very happy with this morning’s session – I learned a great deal from trying to explain my view of Economics as a Network and I hope it was a useful session for everyone who was there. I may do another session tomorrow as a follow up to this morning’s.