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Spread the Wealth

March 19, 2001

By Peter W. Huber

If you're rich, go shopping�that's one of the most public-spirited things you can do these days. The best reason for giving you a tax cut, too, is that you'll spend it on a high-performance car, a super-thin laptop, a really neat PalmPilot, a wireless modem and a bioengineered cure for your back pain. Technology has displaced the Treasury as the most effective instrument for redistributing wealth.

In Adam Smith's day the affluent did business with their favorite butcher, brewer and baker, and both sides benefited. But those with neither the coin nor the shop gained rather little from the transaction. The wealth did indeed trickle down sooner or later, but mostly later. Solid things like land and clothes and food just aren't very porous, economically speaking.

Today's rich buy silicon chips along with their bread and beer, and "trickling" doesn't begin to describe how quickly the wealth now streams down. Those of us who were affluent enough to patronize Intel, Microsoft or the early wireless phone companies in the 1980s paid exorbitant prices for laughably primitive technology, by today's standards. We had our selfish reasons for doing so. But by spending lavishly to adopt early, we made it possible for the rest of you to buy the same�or better�technology much more cheaply later on.

The universal law of high-technology pricing is that it starts high, then falls fast. The very same chips that commanded premium prices in the early desktops are now sold dirt cheap to control microwave ovens. Almost all the cost of such chips lies in the initial design of their circuitry and manufacturing plants. So the most profitable strategy for vendors is to soak early buyers who value the technology a lot, then cut prices step by step to sell to a progressively larger but less soakable market.

Today's technology cuts the cost of building tomorrow's, too. Many key layers of logic embedded deep inside the Pentium and Windows 2000 were developed for earlier generations on Wintel products that were sold to consumers years ago. For many high-tech products, progress now centers on adding gates, or lines of code, or amino acids, to yesterday's infrastructure.

It's the same, but even more so, with networked services. The first 100,000 customers pay to develop Web and e-mail protocols. The next million underwrite the development of instant messaging. The next 10 million pay for the streaming audio. And so on. Each succeeding generation gets a free ride on the consumption of all who came before.

Technology-wealth transfers cascade across geographic markets as well. U.S.-supplied software, chips, pharmaceuticals and agricultural biotechs inevitably sell for much less in the Third World than they do here. If the vendors themselves don't slash their prices, intellectual-property pirates do the job for them. Intel, Microsoft and Merck give a lot more foreign aid to India and China than the World Bank does.

The convenience, comfort and entertainment of the affluent now derive in no small part from technologies that can easily be replicated, and at rapidly declining cost. Most of the new "luxury" in expensive cars no longer goes into the leather or mahogany�it goes into silicon and software in the dash and under the hood, into onboard navigation systems, electric braking and steering, active suspension, dynamic cruise control and so forth. Same with smart appliances, online banking services, arthritis drugs and AIDS treatments. The premium you pay to get the best, first, isn't paying for material stuff, it's paying for know-how.

And however extravagantly you may spend on know-how, you don't "consume" it, not in the same way as beer or bread. Self-indulgence doesn't reduce supply or raise price. The earlier and more profligately the rich spend on it, the sooner the less rich will get to buy it, too.

So it's time to update Adam Smith's most famous aphorism. It is not from the benevolence of the lithographer, the programmer or the server that we expect our digital dinner. We expect it, instead, from the inadvertent benevolence of other customers who stepped into the same shop earlier for their lunch.

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