For decades, the economy was viewed as a hydraulic machine—pipes, levers, and flows of money. But by 1980, the machine was cracking. A new force was emerging, one that didn't fit the old models.
The old macro aggregates—GDP, unemployment, inflation—hid the real action. The economy was fragmenting into millions of distinct decisions. Information, incentives, and expectations became the new building blocks.
Personal computers, early networks, and software began to appear. These weren't just new products; they were a new kind of capital. Intangible, replicable, and interconnected.
George Akerlof asked a simple question: What happens when sellers know more than buyers? In a perfect market, good cars and bad cars ("lemons") trade freely at fair prices.
But if buyers can't tell the difference, they won't pay a premium for quality. They assume every car is average. The price drops. Suddenly, selling a good car becomes a losing proposition.
Good sellers leave the market. The average quality drops further. Buyers lower their offers again. The market unravels until only the lemons are left. Information isn't just a detail; it's the glue holding the market together.
In the industrial age, value came from scarcity. In the digital age, value comes from connection. A fax machine is useless if you're the only one who has one. But as more users join, the value for everyone explodes.
This dynamic creates fierce battles. VHS vs. Betamax. Windows vs. Mac. Two technologies compete. Early on, it's anyone's game.
But once a network hits a tipping point, it becomes unstoppable. "Lock-in" occurs. Even if the other technology is better, the network effect of the leader is too strong to overcome.
Solow's model left technology as a "residual"—manna from heaven that just happened. Paul Romer argued that ideas are different. They are produced by deliberate effort.
When we invest in R&D, we don't just get better machines. We get recipes. And unlike machines, recipes can be used by everyone at once without wearing out.
Ideas leak. A discovery in one firm spills over to others. This creates increasing returns to scale. The more we know, the easier it is to learn more.
This means growth doesn't have to slow down. As long as we keep rearranging the world into more valuable forms, the curve can keep bending upward.
Sometime in the 1990s, a crossover occurred. Companies started spending more on things you can't touch—software, brands, training—than on buildings and machines.
Intangible assets are strange. They are Scalable (write code once, sell it a billion times) and Sunk (if the company fails, you can't sell the brand like you can a truck).
At the same time, the cost of handling information collapsed. Storage, bandwidth, and computing power became effectively free. The friction of the physical world vanished.
In a physical market, it's hard to be 1000x bigger than your competitor. You need 1000x more land and workers. In a digital market, the best firm can serve the whole world.
The distribution of firm sizes shifted. The "middle class" of companies hollowed out, replaced by a few mega-giants and a long tail of niche players.
Network effects + Intangibles + Global Reach = Scale without Mass. A few platforms captured the vast majority of the value, becoming the new infrastructure of the economy.
By 2015, we had built a new world. Devices, Networks, Platforms, and Data formed a stack that mediated almost all economic activity.
But data was just the fuel. New algorithms began to turn that data into Prediction. The machine wasn't just processing information anymore; it was starting to learn.
The Digital Turn set the stage for what comes next: an era where capital becomes cognitive. Welcome to the Intelligence Age.