Bill Gates' unlikely economic warning

Co-founder of the Microsoft Corporation Bill Gates. Photo / AP

In the history of capitalism, there have been very few who have reaped the rewards like Bill Gates.

But the man who once carried the title of the world's richest man thinks there's something wrong with our economic model — and it's companies like the one he founded, software giant Microsoft, that prove his point.

A bedrock of capitalism is the so-called law of supply and demand. It's economics 101. But Bill Gates says it's dead. Silicon Valley has killed it.

In a blog post last week, the 62-year-old billionaire argued that the concept is quickly growing irrelevant to today's economy.

Why? Because the way a lot of the top companies make money is no longer tied to tangible stuff, and as a result the modes of production can look very different.

Gates invokes the classic supply and demand chart that you've definitely seen before.

"There are two assumptions you can make based on this chart. The first is still more or less true today: as demand for a product goes up, supply increases, and price goes down. If the price gets too high, demand falls. The sweet spot where the two lines intersect is called equilibrium," he wrote.

This is the coveted point that maximises sales and profits while balancing affordability.

But for a company like Microsoft, or Google, or Netflix, or Facebook, or Amazon, or even Apple (and the list goes on) you can basically throw the chart in the bin.

"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 labour," he wrote.

This is obviously not the case when the product is software-based.

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.

Gates feels that too many politicians and leaders have failed to take these economic shifts into account when developing economic policy, tax systems and laws.

"For example, the tools many countries use to measure intangible assets are behind the times, so they're getting an incomplete picture of the economy," Gates wrote.

These things take time to catch up. For instance, the US didn't include software in GDP calculations until 1999.

"Measurement isn't the only area where we're falling behind — there are a number of big questions that lots of countries should be debating right now. Are trademark and patent laws too strict or too generous? Does competition policy need to be updated? How, if at all, should taxation policies change? What is the best way to stimulate an economy in a world where capitalism happens without the capital?"

Gates points to a new book called Capitalism Without Capital by Jonathan Haskel and Stian Westlake which outlines the problem and why it matters.

The Microsoft boss is not necessarily arguing that these new trends are inherently good or inherently bad. He is merely pointing out that they are different from the way manufactured goods work and the rise of big tech means we need to rethink our approach to economics.

He recalled the difficulty in the early days of Microsoft of explaining the benefits of software to an investment world which was unsure about embracing unfamiliar, intangible assets. Today the company has a market cap of US$825 billion ($1.2 trillion).

"A lot has changed since the 1980s. It's time the way we think about the economy does, too," Gates said.