DEVISE AND CONQUER It is no longer enough for a company to simply make things. The most successful enterprises create something else, such as name brands or aesthetic designs, intellectual property, or electronic data warehouses. Danny Quah, a professor of economics at the London School of Economics, argues that it is this 'weightless economy' that will really matter.

As modern economies undergo the wrenching structural changes we see happening around us, there is no doubt that economic value is picking up and moving on - away from manufacturing and construction and heavy metal industry, and over to something else. Most successful enterprises are not ones that make anything and they are not in industries that are recorded as manufacturing objects. They create something else instead. This something else might include computer software, name brands and aesthetic designs, information technology, intellectual property, new media, or electronic data warehouses. This something else is intangible and weightless. This something else is not, however, knowledge - at least, not in the conventional sense. I find it useful to think of this circle of developments as the weightless economy. Sometimes, it's called the new economy, but every year most things important are new, so the new economy might not be a particularly helpful label. Why isn't the weightless economy the knowledge-based economy? The knowledge-based economy is a concept that is elitist and offputting. It suggests that science boffins and eggheads will be running the economy. Nothing of the sort will happen. But things can be even more insidious. Embedded in the idea of a knowledge-based economy is the suggestion that creating knowledge is also how economic value is created. By implication, one's place in the new emerging economic order is threatened when one is recognised not to be creative, not to have the ability to make up nifty new pieces of knowledge. Sure, knowledge is important, but it has always been so. What is different now is, well, different. Economic activity became knowledge-based the day the ancient Sumerians started carving out their trade accounts on clay tablets in the Tigris-Euphrates basin 5,000 years ago. Clay tablets are perfectly respectable carriers of information, but they're a far cry from data warehouses that need to be firewall-protected to prevent wholesale copying over the Internet. Clay tablets are a different animal altogether, compared to software products over which intellectual property rights are heatedly debated. Unlike a software developer, a clay tablet producer does not fear loss of economic value from reproduction being instantaneous and perfect, ie, from the marginal costs of reproduction being zero. We can push things back even further. Human society became knowledge-based once early homo sapiens triumphed - by some very clever piece of knowledge - over the Neanderthals, who, the evidence suggests, were both stronger and bigger than us. Here we are, and they not. Whatever that critical item of knowledge was, human welfare has benefited more from it than from any agricultural plot of land cultivated, any mineral dug out of the ground, or any heavy-metal construction crane built since. James Watt's steam engine sparking off the industrial revolution in late 18th century Britain was a marvellous putting together of knowledge. Its economic value came, however, from moving pieces of heavy metal from here to there, and then back. That is the antithesis of the weightless economy, where value comes from shifting bits of logic, not atoms of physical material. Produce or reproduce This observation produces a key insight for doing business in the weightless economy. Economic exchange is creating a new copy of a product, not handing the product over. Such exchange occurs whenever a piece of video entertainment is sold, whenever computer software is installed, whenever a new item of information is downloaded from a data warehouse, or whenever a pair of running shoes is sold thanks to some name brand (the last never having had anything to do, incidentally, with manufacturing that pair of shoes). What is the economics of this new, weightless economy? The weightless economy is about using products. It is not just about creating knowledge, nor about being clever. The products that figure prominently in the weightless economy happen to look and feel a lot like pieces of knowledge, but that's it. There are insights to be gained, sure, by taking analogy with knowledge. But the usual focus on the knowledge-based economy is just plain wrong. Take computer software, an important chunk of the weightless economy. Software shows infinite expansibility - a single piece of software can be run everywhere simultaneously, without it being any less useful to any single user. This is also the case for a piece of knowledge, and video entertainment, name branding, data warehouse packets. Computer software shows priority-significance - only the first successful instance of software performing a well-defined task is socially useful. The same dynamic works for a piece of knowledge. Me-too imitators that follow, even if they acquire an attractive appearance, are not the principal contributors to social welfare. This winner-take-all behaviour is not just to be expected in this world - it is efficient. Superstar rewards, where one or a few own the whole market, can be optimal for society's welfare. Computer software is differentiably knowable. Outside its originator, users need to expend effort to make the software really useful. Similarly, with knowledge, and other sophisticated goods produced in the modern weightless economy. The demand side in the economy therefore becomes critical. If ongoing innovation and provision of weightless-economy products are to be profitable, the demand side (consumers and users) have to be brought along as well to appreciate the utility afforded in these new products. It is not just a matter of building up technology on the supply side. The same applies with the knowledge industry and its practitioners. In software, as in telecommunications, new media, advertising, brands, designs, and of course knowledge, standards and paradigms matter. These provide an organising principle, modes of thinking and acting, social mores along which refinements and further developments will take place. Eventually, standards get overturned and replaced. The same paradigms occur for knowledge. However, the fact that the weightless economy has its major products, which display the same intricate properties as knowledge, does not mean the weightless economy will benefit only creators of knowledge. This would be the same mistake as manning England's entire World Cup football team with its greatest tennis players, on the grounds they're all just athletes anyway. The road to success What are successful business enterprises in the weightless economy? Adding value and creating wealth in the weightless economy cannot be just a matter of building bigger houses, faster automobiles, or yet more massive construction cranes, and then getting consumers to buy them. Success must come instead from acknowledging the subtle properties of the products we trade in the weightless economy, and then exploiting those properties. One, the demand side must be informed of and made excited by the nifty new bundle of weightless-economy bits of logic we can place in their hands. But what if they don't need those bits? From that point in history when a society was first able to produce more food than it could consume, need has never been paramount. That societies that starve still exist reflects a failure of something other than the economic system. Now, more so than ever, there is little point in thinking that allowing people to learn to like new products is evil or manipulative. Some of the most informing and exciting of consumers might come from just freely giving away our products. This lets customers enjoy those goods, while widening the installed base of users so each might learn from the others, increasing demand further. Netscape did this, giving away 40 million copies of its product. Now it has even made its browser source code available to everyone. How does giving away one's products for free create wealth for the individual? That it adds value to society is transparent, of course, but except in systems of patronage (Bach, Mozart) and procurement (space travel and the military) the individual can always find better use for their time. One immediate possibility is providing the value-added services demanded, hand-in-hand, with sophisticated goods like software, brands, and designs. This provision creates individual wealth. Surprisingly, athletic trainers are a good example, although they wouldn't immediately come to mind when one contemplates the modern high-tech world. About $5 of physical material goes into a pair of trainers selling for 30 - 40 times that price. Labour costs might be another $10, at most. The value of the molecules changing hands when the trainers are sold is negligible. What the consumer buys, however, is a whole package - whether it's from walking into the Nike Experience store in Manhattan or sharing in cachet and powerful image - it is worth every penny to the customer and, to be clear, paid for dearly by the supplier. Nike creates wealth not from trading in physical material, but from value-added in services. The same phenomenon occurs when a piece of software, burnt into a CD-rom's physical material worth no more than a cup of coffee, is purchased. The consumer buys not the molecules, but the (knowledge) experience that comes with the bits of logic. The lesson that emerges is that, in the weightless economy, appearances deceive. What you buy is never what you get. Market value comes from bundling. Successes are the bundles that work. There are elements of increasing returns to scale in this, and some might think that that's all one needs to know about new developments in the economy. The weightless economy perspective says things are more complicated. With increasing returns, the supplier simply sits back, and provided she is the fortunate one on the path-dependent evolution of business history, lets positive feedback bounce off her first-mover advantage to eventually take over the entire market. The supplier achieves such an outcome not just effortlessly, but with progressively greater ease. This is supposed to explain everything from Microsoft to Rupert Murdoch to the success of the City of London in financial markets. The weightless economy, on the other hand, has its players busting their chops to keep ahead of the game, constantly looking for the new bundle that works. In the weightless economy, success doesn't hang about those who have the biggest assembly plants, the largest factories, or the most extensive pieces of agricultural land. It takes only a clever insight, an eye for what consumers want, and a very small production line putting together an intangible commodity - hence no need for substantial inherited wealth - before an entrepreneur breaks free and hits the big time. A weightless-economy industry cannot erect entry barriers in the form of set-up costs to protect its established successes. Rather, ongoing success has to come from continual innovation and perpetual paranoia. The second lesson that emerges. Economic rewards in the weightless economy are not closely tied to the inherent characteristics a producer or entrepreneur brings to the table. Instead, those rewards result from an interplay between individual producers and the market of consumers. In the weightless economy what the producer critically delivers is itself infinitely expansible. The upshot is the economics of superstars, where the top few supply the entire market, and are rewarded far beyond what would have been initially expected of them. But the picture is dynamic. Superstar successes are in turn replaced, and easily. Contrast superstars in the weightless economy with those in opera. In the latter the successes come endowed with natural talents at birth, and are not easily overtaken. In the former, economic rewards might be just as unequal as in opera, but mobility is high and nothing is allowed to stagnate. The poor can overtake the rich. All they need is the right bundle. Copyright by The Economist Newspaper Limited ISSN 1365-6325. No part of this publication may be stored in a retrieval system or transmitted by means electronic, mechanical, photocopying, recording or otherwise without the prior permission of the publishers.

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