What are we making?

David Brooks of The New York Times meditates on the New Economy:

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.

A protocol economy has very different properties than a physical stuff economy. For example, you and I can’t use the same piece of metal at the same time. But you and I can use the same software program at the same time. Physical stuff is subject to the laws of scarcity: you can use up your timber. But it’s hard to use up a good idea. Prices for material goods tend toward equilibrium, depending on supply and demand. Equilibrium doesn’t really apply to the market for new ideas.

Over the past decades, many economists have sought to define the differences between the physical goods economy and the modern protocol economy. In 2000, Larry Summers, then the Treasury secretary, gave a speech called “The New Wealth of Nations,” laying out some principles. Leading work has been done by Douglass North of Washington University, Robert Fogel of the University of Chicago, Joel Mokyr of Northwestern and Paul Romer of Stanford.

Their research is the subject of an important new book called “From Poverty to Prosperity,” by Arnold Kling and Nick Schulz.

Kling and Schulz start off entertainingly by describing a food court. There are protocols everywhere, not only for how to make the food, but how to greet the customers, how to share common equipment like trays and tables, how to settle disputes between the stalls and enforce contracts with the management.