Arnold Kling

Standards Create Value

Arnold Kling, Great Questions of Economics
Previous Entry Next Entry

New Growth Theory emphasizes the contribution of ideas to growth, where the previous focus was on capital. James Surowiecke, in an article in Wired, talks about the history of standards from the first machine tools to the present.

the obvious importance of standards in the world of information technology makes it tempting to look to some expert body to lay down the law. But the argument for allowing the marketplace to do the work of rules-making is, if anything, stronger in the case of information technology.

One aspect of standards that fascinates me is the loose relationship between value creation and value capture. The Internet protocols, which made the Internet possible, were created by task forces whose members captured essentially none of the value for themselves. Microsoft's standards, which enabled it to overcome Apple's proprietary system, resulted in the richest capture of value in history.

Discussion Question. Standards have a downside in that they can be used to restrain competition and innovation. If government plays a large role in setting standards, will this increase or reduce the ability of incumbents to freeze out innovations?

Return to top