Magic Pudding – A peculiar thing about the Puddin’ was that, though they had all had a great many slices off him, there was no sign of the place whence the slices had been cut.
“That’s where the Magic comes in,” explained Bill. “The more you eats the more you gets. Cut-an’-come-again is his name, an’ cut, an’ come again, is his nature. Me an’ Sam has been eatin’ away at this Puddin’ for years, and there’s not a mark on him.”
Economics is the branch of knowledge concerned with the production, consumption, and transfer of wealth. We use knowledge to turn resources into wealth. The resource might be our labour, or it may be something physical like soil. It is the know-how or knowledge that turns these resources into wealth.
We reproduce knowledge for almost zero cost and in reproducing it make it better. Knowledge is the magic pudding of wealth. The more we use it, the more we have. The more we have, the wealthier we become.
Traditional economics tries to limit knowledge to make it valuable. It does this with patents, trade secrets and copyright to restrict access. Making it scarce encloses it and makes it private property. Unfortunately limiting access reduces its value as its value comes from using it.
The building block of knowledge is information. Information is data that informs or data with meaning. In computing, meaning is given by applications. Applications themselves are information. Many different applications can have the same meaning. Using this property provides a method to make meaning public while enclosing an instance of the knowledge for the purpose of transfer of value. The approach is commonly called branding, and we can use software to distinguish brands and so give value to brands. Brands are a trusted implementation of common knowledge.
When we sell a branded product value is exchanged. A portion of the value transfers to the owner of the brand. In ordinary commerce, money is transferred to the seller. The seller then transfers money to the brand owner or another intermediary. In the software world, money can be moved from the buyer directly to the brand owner. Removing the repeated transfer of value lowers the cost as there are fewer steps in the value chain.
An Example of the Fresh Milk Value Chain
A farmer produces milk. A tanker collects the milk and delivers it to a processing plant. The processing plant puts it into milk containers, and it moves to a wholesaler. The wholesaler transports it to a retailer who sells it to the end consumer.
At each step, there is a minimum value that each party requires to cover their costs. All parties specify this and agree at the time they handle the product. When the consumer pays for the product, the proportion of the amount received is divided according to the average value set by each party in the supply chain and transferred directly to the parties.
For the farmers, their best interest is to have a high minimum value but not so high as to make them uncompetitive with another group of farmers. It means it is in the best interests of a community of farmers to work together to reduce their costs. They still compete on minimum price but are not penalised if the final price to the consumer is high. They compete because the next party in the supply chain takes the lowest cost suppliers first but pays everyone the highest cost.
For the retailers, they have less of an incentive to use some products as loss leaders, and they have less of an incentive to profit at the expense of their suppliers.
The value chain works together because they all benefit from higher prices.
Including Customers as Funders
Discounts can work as Rewards for Customers. Customers pre-pay for their goods. This money goes to those in the supply chain who need the cash. When the customer purchases goods they get discounts. This approach can build brand loyalty for particular products or suppliers or anyone in the supply chain.
Including the suppliers of Capital in the Value Chain
The providers of Capital should be part of the value chain. They can supply Capital at a minimum price and share in the upside and downside. The providers of Capital are Savers. If a party in the supply chain uses Capital they share their income with the Savers.
Including Governments in the Value Chain
Governments collect taxes. They can specify the minimum they will accept but operate the same way. They can also, in some cases, become buyers of last resort. Products where the main resource is human labour are best suited to this approach.
Including the generators of new knowledge in the Value Chain
The Value Chain can include researchers, inventors, education services and research organisations. Research discovers a new lower cost way of processing milk. The creator says how much it has cost to create the invention and to make it work. If it gets included in a value chain, the members of the chain agree for the inventor to get royalties. Payments continue while the invention is maintained and improved otherwise there is a maximum paid from all processors after which the payments stop.
Payments from sales encourage the adoption of innovation and their creators. Linking payments across different supply chains lead to broad adoption.
The details of deploying an innovation will vary but the same principle of encouraging adoption of new know-how applies. Instead of trying to make knowledge scarce we make knowledge abundant so all share in the increase in value.