Here’s David Brooks, writing in The New York Times:
In the 19th and 20th centuries we made stuff: corn and steel and trucks. Now, we make protocols: sets of instructions. A software program is a protocol for organizing information. A new drug is a protocol for organizing chemicals. Wal-Mart produces protocols for moving and marketing consumer goods. Even when you are buying a car, you are mostly paying for the knowledge embedded in its design, not the metal and glass. (via Isegoria)
Read the whole thing. The argument that Brooks is making here is very similar to the argument made by Rich Karlgaard of Forbes, which I critiqued in my post myths of the knowledge society.
In summary: The 19th and 20th centuries were also “knowledge economies” (in Karlgaard’s formulation) or “protocol economies” (in the Brooksian terminology). The value of a Boulton & Watt steam engine was not in the “stuff” it was made out of (which could be purchased for a far lower amount than you would pay for the steam engine itself) but rather for the design knowledge contributed by James Watt and the manufacturing process knowledge (protocol knowledge) contributed by Matthew Boulton..and for innumerable additions to that knowledge base by their employees. To take a more recent example, the early 20th century assembly line as implemented by Henry Ford, and the kinds of precise work planning and industrial engineering developed by Taylor and the Gilbreths, certainly represent “protocols” just as much as do Wal-Mart’s supply-chain management procedures.
One could argue that a “protocol” in the form of pure software has no variable cost, unlike a physical product. But in reality, the software is only usable when it is incarnated into a physical device such as a computer. And many of the highest-value forms of software are in fact sold only as an embedded part of a physical device: iPhones, aircraft autopilots, and CNC machine tools, for example. And Wal-Mart obtains financial value from its supply-chain management expertise only when the results of that expertise are sold in the form of “stuff.”
Brooks is correct about the importance of intellectual property protection: however, this is not new. For example–would the General Electric Company (founded in 1890) have been able to thrive for more than a century without strong patent protection? Indeed, the original foundation of the company was the Edison patents.
(Although much “protocol” knowledge is in fact not patent-protected and indeed often not patent-protectable, but rather is embedded in a corporate culture–the Toyota Production System being the most prominent example.)
There’s some truth in what Brooks/Karlgaard are saying, but it’s overstated, and the belief that changes in society are more discontinuous than they actually are is dangerous from a policy standpoint…and from an investment standpoint. (Remember all the “it’s different this time” arguments made during the dot-com boom?) For the last 15 years or so, theories about the discontinuous nature of the modern “knowledge society” have been used to support a deemphasis of–and even a disrespect for–American manufacturing, whether this was the intention of their proponents or not.
For those interested in this subject, here’s a link to my earlier post.
Again I quote Andrew Carnegie, speaking in 1892:
Let flood or fire destroy my plant from the face of the earth, but if I retain my organization, I would be whole again in six months.
The “six months” was surely optimistic. But Mr Carnegie clearly understood that the basis of his business was not the physical assets–as important as these were–but the aggregate knowledge embodied in his organization.