Inside a given population P we can imagine an I.

This I can stand for inventor, innovator, or simply somebody who possesses operational information, like a skill or a technique, or even some strategic nugget about the trajectory of the world, that the rest of P does not. With this specialist knowledge, a member of I belongs to a natural monopoly who can demand as much in return for their services as the rest of P is willing to put up with.

This state of affairs is not automatically good for I. The rest of P might simply not understand the value I possesses, or not have any use for it. P could also recognize I's contribution as being essential, and deliberately overwhelm I and force them to work as a captive, just as ancient villagers broke the legs of their blacksmiths so that they couldn't trade up by escaping to the neighbouring village.

I'm interested in exploring a common scenario, however, that doesn't involve any ritual maiming. It's when members of P recognize so much value in I that they seek to become part of I. They do this by training, education, tinkering and reverse-engineering, or even some invention or innovation of their own. As time goes on, the set I consumes a larger fraction of P, as more members of P recognize the value of becoming a member of I. Eventually I colonizes a large enough quantity of P that the internal competition makes the decision clear, for most I, that it is more efficient just to pay a member of I when you need them rather than try to become one of them.

This model should be familiar to everybody. I'm just describing specialization and the division of labour, like you'd find in any introductory economics textbook, starring I as a specialist domain or industry. I will of course grow and shrink as a proportion of P with supply and demand, to be sure, as will I's profits. What I'm interested in is this virtual membrane that holds information inside I and keeps them in business at all.

Perhaps put another way: I'm trying to make an information-theoretic account of the phenomenon known as profit. Ever since I read it, I've been fascinated with a certain phrase uttered by Adam Smith: the ordinary profits of stock. He even gave it a figure—roughly in the single-digit percent, say six to eight, per annum. Even two and a half centuries ago, how quaint is it for a person to say that for all I, there is a number which should be considered ordinary when speaking about profit?

Here, of course, we go back to the textbook, and note that competition between members of I drives down prices, which in turn drives down profits, and what you're left with is this single-digit figure. Again, why this model of pre-industrial mercantile exploits interests me in the 21st century is not to parrot back Economics 101, but explore the character of the information in the system.

Smith's notion of ordinary is interesting precisely because he's pre-industrial. He can say ordinary with confidence because he's writing about industries that had already been around for centuries at least: anybody who knows anything about them, knows everything about them. In other words, there is no significant gap in information about how to perform I's function, between individual members of I. With no other means to differentiate, they converge on price, and that's how Smith gets his ordinary figure.

I've written this before and I believe it's so important I'm writing it again: profit is a reflection of information disparity. It's the gap between what somebody else knows that you don't, whether that somebody is a brilliant inventor or a used car salesman.

Some may be tempted to remark that there is no information disparity in the case of government subsidies or intellectual property; everybody has the same information except these guys have a special privilege. I entreat those of you to broaden your concept of information. Possessing a patent, for instance, comes with it the knowledge that you can demand licensing fees or sue anybody who tries to implement your method, and to them the knowledge that they will be punished if they don't pay up. Bam. Information disparity.

I'm not trying to moralize here—at least not yet. There's nothing inherently good or bad about profit being a function of a gap in information. For the moment I'm more interested in the lens this notion provides for looking out onto the landscape.

If profit is a sign of information disparity, then we can say some interesting things about it. We can compare the members of I to each other, as well as their relationship to P, as well as other potential Is within P. If, for instance, the I in question posts an average profit in the ballpark of Smith's ordinary, as well as demonstrating not a lot of variation between the individiuals, we can presume that it is a mature industry without a lot of room left to innovate. If the rate of profit is high and the individual profits are all over the map, we can imagine that it describes a young industry that still has much to learn. If the rate is high and the players are all about the same level of profit, then it could very well be that the members of I are engaged in some form of rent-seeking, because something artificial is either keeping important information from leaking out of the group, or neutralizing it on its way out.

There's another paper I'm obsessed with, not the least because of its title: Schumpeterian Profits and the Alchemist Fallacy, by William Nordhaus. I got a whiff of it from an offhand comment by yet another economist that an innovator can only expect to capture about 4% of the total economic benefit of their innovation, because nearly all of the other 96% is realized by the customer—that is, through the actual use of the product. (To understand this, we have to remember that money is just a proxy for the potential to get meaningful things done.) The paper then goes on to discuss what might happen at different levels of intervention to try to get a bigger piece. Interventions could be either technical, like DRM, or legal and/or political, like suing alleged IP infringers or lobbying governments for tougher laws or special privileges.

Schumpeterian Profit
Any outsize profit, presumably—though not necessarily—due to the information disparity which is implicitly generated through some kind of innovation. Named after Joseph Schumpeter, popularizer of the phrase creative destruction.
Alchemist Fallacy
The notion that if you could turn lead into gold, you could somehow prevent yourself from causing all gold to depreciate in value—even if you kept the formula a perfect secret. Moreover, if you put any effort into fortifying your house or hiring security to protect you, how do you pay for it? The gold will eventually leak out into the market, undermining its purchasing power.

Obviously, if you put zero effort into getting compensated for your creations, everybody would benefit but you. Nordhaus suggests that you might be able to squeeze 10% of the total economic benefit out of an innovation, which would more than double your revenue, but the cost of policing that revenue grows exponentially and would quickly eat it up. I further submit that diverting your attention to maximizing the rent you can extract from an existing innovation will drain that attention from other things—like new innovations—and it will also likely shrink the proverbial pie of the total economic benefit that you're trying to get a bigger piece of. We can also reason that indelicate attempts to rent-seek could dent sales or goad some other innovator into disrupting your entire business. As such, we can imagine that there is a sweet spot of how much policing effort is appropriate, and given the nature of exponential functions, my bet is that it's near the low end.

Now for the Moralizing Part

As somebody who solves problems for a living, the one thing I'm not concerned about is running out of problems to solve. Plus, I'm a lot happier, a lot more productive, and a hell of a lot more useful to society if I focus my attention on solving problems, rather than solving the problems of maximizing revenue from already solved problems.

Second, I really, really abhor this pervasive culture of rent-seeking that I see around me every day. Don't get me wrong: I'm just as lazy as the next guy—indeed my entire career and area of expertise is predicated on getting more for less—but rent-seeking is more about getting something for nothing. It's about exploiting structures that already exist without creating anything positive. And that, for one reason or another, just bothers me.

Most of the problems that I solve are problems that I have myself. That way I have a personal stake in the outcome. However, I am all the time aware of how a solution to a problem I have might be applicable to other people. Either that, or somebody comes to me with a problem they have which dovetails with a problem I have, and we partner up and solve it. Solving a problem I can't empathize with just leads to crappy solutions, and nothing to look forward to but the money. Solving my own problems—including the problem of getting money—without regard to how the rest of the world may benefit, is the kind of frame wherein rent-seeking behaviour looks rational. One might infer from Nordhaus that there is a point at which rent-seeking ceases to be rational, irrespective of whether or not you can justify it as ethical.

To briefly go back to Smith: the other memorable phrase—invisible hand—which he only mentions once in each of the only two books he ever wrote, is often used by contemporary schemers to justify narrowly self-interested behaviour. I just don't get that impression that that was his original intent.

If you keep a decent pace solving problems, as a byproduct you will always possess information other people don't—information whose results are worth paying for. I've acknowledged before that profit is a necessary condition for an enterprise, if for no other purpose than as a binary signal that the rest of the world appreciates what you do. Profit also generates undeniably useful raw material for solving more problems. The question, assuming you can glean any profit at all, is really what's more important: your money or your life?

I will not be bashful in accepting a windfall as a result of something I create, but I also acknowledge that those returns will trail off as the knowledge of how I did it and what it's worth diffuse out into the world. As it stands, I'm not terribly motivated to try to monetize every burp and fart of my creative process. I'm really only interested in enough to keep me moving forward, plus a little extra.