A critique of The Big Switch, by Nicholas Carr

Nicholas Carr's The Big Switch: Rewiring the World, from Edison to Google (Norton: New York, 2008) is a well-written and fascinating analysis of the enormous paradigm shift taking place in technology, one that he rightly observes will have enormous sociological ramifications beyond merely changing corporate data centers and the business models of enterprise software (although the consequences of those changes are significant in themselves).

In support of Mr. Carr's book, his invocation of the paradigm shifts that took place around the introduction of electricity at the beginning of the twentieth century is outstanding in its attention to the details of a world-changing transformation that we citizens of today -- who have never known a world before electricity -- take completely for granted.

Indeed, the fact that we barely notice the ways in which our lives are shaped by the consequences of that shift to electric power underscores his argument that the changes the internet has already brought, and the changes that the impending computer revolution will bring about, cannot help but profoundly alter the way we live and even the way we think.

His examination of the shift from on-site electric dynamos and mill-work to the utility electric grid around the turn of the last century, and the parallels he makes to the changes taking place in computing (as well as important differences between the electricity analogy and the networked computer) are important observations for investors to consider, and something we have also discussed in previous posts such as this one, this one, and this one. We would even argue that the economic disruptions at the beginning of the last century had political echoes that manifested themselves in similar political arguments to the ones that are being thrown around today, as discussed in this recent post.

And yet for all its important insights, The Big Switch displays a general attitude towards business that we feel is wrong-headed, and worth discussing because it is a common one among many in journalism and academia. It's not that we don't believe that there can be negative consequences to new technologies: clearly there can be, and attempts to foresee those (such as Mr. Carr's book) are valuable and necessary. But The Big Switch puts forth the common pseudo-economic arguments (popularized primarily by Keynesian economists and especially the late John Kenneth Galbraith) that businesses bend societies to do their bidding, enslaving consumers and forcing them to spend to the detriment of those consumers and to the detriment of society in general.

For example, in discussing the changes brought about by electricity, Mr. Carr complains that because of the new capabilities in ironing and cleaning that electricity enabled, consumers (especially women) in the twentieth century actually became enslaved to the new electric regime. He says: "Clothes had to be changed more frequently, rugs had to be cleaner, curls in hair had to be bouncier, meals had to be more elaborate, and the household china had to be more plentiful and gleam more brightly" (99).

But this line of argument is disingenuous. It ignores the basic fact that businesses make money by providing value to their customers, not by coercing their customers into doing things they don't really want to do. If technology made it possible to have neater and cleaner clothes, businesses would only be able to build a business model selling such a capability if in fact customers wanted that capability. In other words, providing bouncier curls in hair would not be a value proposition for a manufacturer of electric curling irons unless customers actually valued bouncier curls.

And while writers of the Keynesian school like Galbraith would say that nobody really needs bouncier curls, the very fact that people have the luxury to worry about bouncier curls and to exchange money and time in pursuit of bouncier curls is evidence of the progress in standards of living that free-market economies (in other words, capitalism) brings about. It is true that nobody worries about bouncier curls if they are starving to death, but the progress brought about by free economies means that people can pursue more and more things that they value beyond the basic necessities of living -- things like the cleaner rugs, fancier meals, and bouncier curls that Mr. Carr catalogs above.

The Big Switch takes the exact same approach to the new luxuries afforded by the bandwidth revolution, for example in his discussion of YouTube and other sites that enable "user-generated content." Carr writes, "Look more closely at YouTube. It doesn't pay a cent for the hundreds of thousands of videos it broadcasts. All the production costs are shouldered by the users of the service. [. . .] In a twist on the old agricultural practice of sharecropping, the site owners provide the digital real estate and tools, let the members do all the work, and then harvest the economic rewards" (137-138).

But, again, if a business does not provide something that people value, it does not make any money. Nobody holds a gun to anyone's head and forces them to buy an iPod: if a consumer buys an iPod, it is because he judges what he gets in exchange for his money to be more valuable. If the founders of YouTube have a lot of money, it is because they created a service that provides value to a tremendous number of people. And, just as in the discussion above concerning the pursuit of bouncier curls and more neatly-pressed clothing, the very fact that people have time to create user-generated content is irrefutable evidence of the progress enabled by the very free-market economies that critics like John Kenneth Galbraith distrusted so deeply and criticized so vigorously.

We would advise all investors to read Nicholas Carr's The Big Switch. But we would caution that many of the conclusions that it draws err due to a pervasive Keynesianism, and that awareness of this error is important, as it is sadly widespread even today.


For later posts dealing with this same subject, see also:

• "Big changes coming -- part II" 07/08/2008.
  
• "The unstoppable wave" 01/12/2009.
• "Clayton Christensen, disruptive technology, and your portfolio recovery plan" 02/04/2009.
  
• "Revisiting the 'New Economy'" 05/06/2009.
• "The Unstoppable Wave: Revisited" 12/22/2009.
• "Was the decade lost?" 01/14/2010.
• "Exaflood update" 06/01/2010.
• "What battles of the tech titans tell us about investment theory" 09/08/2010.
• "Another wake-up call" 11/29/2010.

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