feat: scaling low-income welfare
you can't just "skip" the diffusion cycle, but you can accelerate it
Ana, whom I regard highly, recently shared this article along with the following social message on LinkedIn:
Products for the rich prioritize innovation but lack accessibility, while underserved individuals face limited access and lower quality. Disparities in education and healthcare exemplify this tradeoff. Market dynamics perpetuate the divide, favoring profitability over inclusivity. Resolving this challenge necessitates research for equitable solutions and reshaping societal structures. A just society should offer quality products regardless of wealth.
I’d like to add my perspective mainly on the italicized sentence. I would briefly add a comment on the final sentence: It seems to me that offering products regardless of wealth entails forced labor on the part of other people, which doesn’t seem equitable at all, but that is a point many others have made and it isn’t my focus here.
With respect to the emphasized sentence, let me first grant the point. Adding my perspective in this case is not to undermine the point, but to qualify it, and also to add some important information that is left out.
A theory of innovation seems to be missing from Ana’s article. I’m favorable to the work of Clayton Christensen. I view Tesla as one of many case studies that validate Clayton’s conceptualization. Tesla did initially offer a novel and costly product, fitting with Ana’s point. As it scaled, it has profited by inclusivity. In the view of Christensen and myself, inclusivity isn’t opposed to profit on the market. It is simply a latter phase in diffusion cycle.
Now consider the alternative to market exchange, nonmarket coordination. At least three important details have previously not been noted:
Diffusion cycles apply to nonmarket coordination
Normal scaling problems apply to nonmarket coordination
Additional knowledge and incentive problems specially apply to nonmarket coordination, and government action in particular, when they try to expedite market scaling
As an aside, we should strive to improve the welfare of the poor, not the equity of the poor. Maximizing the equity of the poor means a number of negative things:
Free exchange in general is disallowed. Some group of individuals is given the authority to exercise physical violence over society in order to prevent free exchange. Further, this central coercive power gets to decide who counts as poor and what distribution counts as equitable.
Any exchange that disproportionately* benefits the poor is disallowed.
Any exchange that benefits multiple parties including the poor is disallowed whenever the non-poor parties benefit disproportionately*.
*Technically, this assumes that the coercive power defines equity using a proportional standard.
If we want to maximize the welfare of the poor, should we use government to massively inject capital into a poor-oriented innovation? Likely not, as such massive infusions are typically failed projects or instances of cronyism, for reasons earlier listed.
If we ponder equity on the following lens, it becomes clear that the market is the most equitable instrument we have to date: “Which firms and innovations deserve capital infusion?”
Scaling and diffusion are painful in some regards, but they are necessary for fair and equitable selection of investment targets. If we want to maximize the welfare of the poor we shouldn’t attempt to step around scaling and diffusion but instead we should accelerate them. There are a number of clear policy changes that would have allowed Tesla vehicles, for instance, to be provided at their current relatively low prices much faster in history. Five broad suggestions:
Incentivize firm formation
Incentivize firm innovation
One approach would be to refactor our research system so that ordinary firms carry out more research instead of special vehicles like nonprofits, universities, and government agencies.
This could be improved through the creation of a new legal business entity that is able to act as both a commercial entity and a 501c3 or university for the purpose of granting.
Improvements to communication technology
This should not be implemented via increased tax-and-spend. This can be handled on the market, or existing state allocations can be rerouted as appropriate.
Facilitated funding for firms
liberalized accredited investment rules are one of many changes that could be made
Product and labor deregulation
Building codes are fairly cross-industrial low-hanging fruit. In the case of Tesla (or any other car manufacturer), faster and cheaper production facilities would have led to faster production of cheaper cars.
Labor regulation is another fairly cross-industrial area. Cheaper labor allows firms to form and scale more quickly, and larger firms are also more durable and resilient to economic fluctuation.
Other forms of deregulation will vary by industry. In the case of Tesla, vehicle regulations drive up cost and slow the rate of iterative improvement and progress.
Thank you for your feedback and opportunity to clarify my argument. In my article, I specifically focus on industries and products that heavily rely on network effects. It is important to differentiate between products that require high costs, both fixed and variable, and those that thrive on strong network effects. Capital-intensive products, like Tesla as you mentioned, follow the traditional diffusion of innovation cycle. They start with a high price point and gradually become more affordable, expanding access over time. I fully support this approach and leveraging economies of scale, as long as it remains competitive.
However, when it comes to products reliant on strong network effects, we observe a different pattern. Unlike capital-intensive products, these "network effects intensive products" typically start off as free offerings. WhatsApp and YouTube, for example, would not have gained the traction they did if they were initially introduced as subscription-based services at a high price point. For instance, a wealthy individual like Alex would not have had all their friends and family on Facebook if it required a subscription fee. After amassing billions of users, it is reasonable to expect these companies to invest more in privacy measures. Yet, is it fair to expect them to completely abandon their ad-based business model? (rhetorical question 🙂)
It is worth noting that we are seeing the emergence of new social media and search products that explore alternative revenue models, including subscriptions or innovative approaches. However, we must keep in mind that these are often more niche products and, interestingly, rely on the mass market success of free products that were initially criticized.