Silicon Valley Insights — Network Capitalism
There is a growing debate among Western economies whether property rights have any significant relevance to economic performance in todays’ world.
Some believe we will move from conventional, managerial capitalism to what is now known as “network capitalism”.
Network capitalism is a form of capitalism driven by two main forces: Moore’s Law, which states that computing power doubles every 18 months, and Metcalfe’s Law which is about the value of a network being the square of its number of nodes (in other words, the higher the interconnectivity, the more powerful and open to even more connections the network becomes).
Arguably, with companies likes Uber and Airbnb, we can see the indispensible value of networks and how such companies are reshaping whole economic structures. Proponents of network capitalism believe that, among other things, the formation of business networks stimulates innovation and helps exchange information: both of which are simultaneously drivers and feeders of the digital age.
They believe that, in the next 10–20 years’, true value will come from the abundant resources created by technology above anything else. For example, the importance of which networks you have and how you leverage them will become more valuable than the monetary value of asset ownership.
With technology penetrating every aspect of our life, it is not surprising that conventional economic models will fall behind with time. Almost 30 years ago, economists defined capitalism to the post-communist reforming countries as:
“The hallmark of market capitalism is that private capital has wide autonomy to enter or leave industries by creating or closing enterprises and it has substantial control over the management of the enterprises it owns.”
This emphasis on private ownership and free movement of assets are the hallmarks of capitalism, however, with changing consumer preferences and movement towards more customer-centric business models, it is reasonable to assume we would see a shift in the way western economies function. Uber, for example, does not own any tangible assets required to operate its services; it does not own the cars, it does not employ the drivers. Basically, Uber facilitates its networks to provide a unique experience for two users sets: the customer and the driver. Would Uber achieve such exponential growth if it had to initially invest in thousands of vehicles to operate its business? If forced to take ownership of their vehicles, say for regulatory issues, we would see drastic disruption in its business, that can be felt by both parties.
Uber does not need to own its assets to create value or make the ‘machine’ work smoothly. By leveraging its networks, the company can provide its drivers with preferential loans or cheaper servicing costs, while keeping consumer prices low enough to be attractive and competitive at the same time. Such perks would probably be harder to achieve if Uber had chosen a more conventional business model. The idea of network capitalism is evident in the case of Uber, but it would take a lot of time and effort for the majority of businesses who have previously relied on traditional capitalism to move towards this innovative network economy.
Furthermore, there is another aspect that might potentially block such a move: regulation. Regulation is the arch-enemy of Moore’s law, network capitalism, and most disruptive business models. Of course, regulation is extremely important to maintain markets and trust in the economy, but due to its rigidity, it often crops up as a barrier to innovative development. The Internet and digital technologies are transforming our world dramatically and regulators will have to adapt to increasingly convergent markets, with the confluence of platforms on which the various products are provided. But the barriers that prevent citizens and businesses from fully benefiting from the digital economy are very present. Regulators have a crucial role in eliminating these barriers and creating a level playing field for all players in the market whilst guaranteeing the rights of the end users, especially those who are more vulnerable.
Of course, it is difficult to dictate with certainty that the world is moving towards a network capitalist type of economy– but one thing that is certain is that network effects are transforming the world as we know it. Whatever happens, we are undoubtedly going to witness big changes in policy, regulation and markets.
