Yesterday’s post on the impact of computers on the return of capital didn’t mention the shift from producer to consumer surplus. Tren Griffin rightly called this out on Twitter. I have written a lot about the rising importance of consumer surplus and should have mentioned it in this context as well. This shift will definitely reduce the return on capital in the long run as we move more information into the commons and as information becomes more important than physical capital or output. It is a good reminder that I also wanted to write about the role of information as a factor of production (and as an output).

In the near term though this very same shift is behind some massive returns to capital. The best way to rapidly build a large and defensible information network is by leaving a lot of the surplus to consumers. Making much of a service free speeds adoption and also makes it more difficult for competitors to come in. Even when lightly monetized, producer surplus in aggregate can still be a huge number as these networks are global. Facebook is a great example of that. And so the returns on capital can be staggering as the VCs who invested in Facebook early have proven (ditto for Twitter, Tumblr and many of the other services that Tren mentions – just because a service was sold early doesn’t change this argument).

In the extreme when everything becomes consumer surplus (eg Wikipedia or a future completely decentralized messaging service) this will no longer be true. But we are not quite there yet. Or to sum it all up: the shift to consumer surplus further strengthens my argument that we are seeing great returns to capital in the near term but that those will decline significantly in the long run.

In the same Twitter thread, Marc was skeptical about the long run decline in returns on capital. As I will write in a follow up post it is possible that something like climate change causes a shock to time preference. Meaning: we will suddenly want to spend massively to avoid imminent disaster which could hugely spike the returns to capital. More to come.