The penny has dropped for Bill Gates. The economy is not real. Now what does that mean for property?
Bill Gates is going into statesman mode.
More and more I’m seeing him out there having a ramble about economics or philosophy or politics or whatever.
And some of it’s not actually bad.
Like this piece I stumbled on the other day, where he talking about the rise of the intangible economy.
As he remembers, when he first tried to explain Microsoft’s business model to investors, they didn’t get it. They’d never seen anything like it. It was a company built entirely on intellectual capital – on ideas.
That’s literally all they had.
Fast forward twenty years, and this has become the foundation of the global economy. It’s a big change in a very short time.
By the second semester of my freshman year at Harvard, I had started going to classes I wasn’t signed up for, and had pretty much stopped going to any of the classes I was signed up for—except for an introduction to economics class called “Ec 10.” I was fascinated by the subject, and the professor was excellent. One of the first things he taught us was the supply and demand diagram. At the time I was in college (which was longer ago than I like to admit), this was basically how the global economy worked:
… The second assumption this chart makes is that the total cost of production increases as supply increases. Imagine Ford releasing a new model of car. The first car costs a bit more to create, because you have to spend money designing and testing it. But each vehicle after that requires a certain amount of materials and labor. The tenth car you build costs the same to make as the 1000th car. The same is true for the other things that dominated the world’s economy for most of the 20th century, including agricultural products and property.
Software doesn’t work like this. Microsoft might spend a lot of money to develop the first unit of a new program, but every unit after that is virtually free to produce. Unlike the goods that powered our economy in the past, software is an intangible asset. And software isn’t the only example: data, insurance, e-books, even movies work in similar ways.
The portion of the world's economy that doesn't fit the old model just keeps getting larger. That has major implications for everything from tax law to economic policy to which cities thrive and which cities fall behind, but in general, the rules that govern the economy haven’t kept up. This is one of the biggest trends in the global economy that isn’t getting enough attention.
I’ve made this point before. The current global economy is a fantasy-land. More and more it lives in abstract space – in our heads.
It’s not real. The money driving it is not real. The rules and laws governing it are not real.
We are practically little bots running around in organic computer simulation.
And for me, this is why I take such an interest in ‘real’ estate. Like, it is literally real.
And as the ‘intangible’ economy expands, the ‘real’ economy becomes relatively more scarce, and therefore, more valuable.
The price goes up.
And everyone talks about the bubbles in the property markets – like somehow pretty much every nation on earth happened to find themselves in a property bubble at the same time.
What a co-inky-dink.
They miss the root and common cause. The empire of fantasyland is expanding.
This, more than anything, is driving the long run explosion in property prices.
And it’s only running in one direction from here.