All Terrain Thinking

A Compendium of things I think are Important

Economics: It's not just whats' in your wallet

Overview

Welcome to the course, Internet and the Economy.  As we start out I would like you to think about the title of a book written by Carl Shapiro and Hal Varian, Information Rules.  It's a great choice for the title of a book, one that would be appropriate for much of this course.  The beauty of it is its ambiguity.  Does it mean that information rules - that those with information have power?  If so it is not an old story since we have known it and preached it for years. In fact, this was at the center of the management revolution because information is essential if you are to effectively manage.  In the extreme version we had the management by the numbers and division of labor of Taylorism, the latter based on John Taylor's 1911 book, Principles of Scientific Management.₂ Or it could be the rules for the information society that is emerging on the other side of the Information Revolution. What we could have here is an assertion that contained in their book are the principles that should guide decision makers in the information economy. 

The fact is both interpretations are correct.  Information does convey power, and in the information age information will be available in staggering amounts.  Firms will see their operations drastically altered if they succeed in this new economy while society will need to determine who has the rights to all this information and how it can be most effectively utilized.  When you shop online or travel you leave an electronic trail that could provide potential marketers valuable information they could use to better "target" you. One example would be the electronic billboards that appeared on the highways outside of San Francisco that monitor the radio stations playing in the cars and then show a complementary ad on the billboard. If you happened to be driving down US101 with a bunch of drivers listening to their favorite rappers then you would be seeing different billboards than I would if I were surrounded by easy listeners.  Lisa Guernsey, in her May 1, 3003 New York Times article "Making Intelligence a Bit Less Artificial" wrote about another example - the efforts underway to help improve the customization software that allows companies like Amazon to tailor ads to you based on your past buying or browsing behavior.  We know that when we shop at Amazon we are not seeing the same ads - and we may not be seeing the same prices - but more about that later.  

So maybe we are entering a brave new world where it will be the private sector rather than the government envisioned by Huxley that will provide us with continual pleasures. What is certain is that these are exciting times and traditional economic analysis can be "updated" to provide some guidance for decision makers.  As we set out on this journey of exploration in this unit it is essential to get our bearings, to get a read on where we are and how we got here, to understand some of the "laws of economics" that will help us make order out of the seeming chaos.  This seems particularly important today since we find ourselves "at the dawn of what some refer to as the third industrial revolution, in this case one based on the dramatic reduction of the cost of storing, retrieving, processing, and transmitting information made possible by digital technology. The potential effect of this technology is a virtual revolution in the way we work, how we shop, where we live, our health care, our entertainment, our cultural attitudes, and even our politics."₃  If this is a revolution, then there is much to be learned from earlier revolutions, which is why the course begins here - with an analysis of revolutions and innovations that brought us to where we are today.   

It is also important to know what this is not.  It is not a course in technology so should not expect to learn too much about the technological aspects of the Internet.  In fact some of you with technical backgrounds may know far more than we will discuss and you should feel free to contribute to discussions about technology.  What we will do is try to level the playing field and make sure before we go too far we have a common vocabulary - a jargon that we'll use to make sense of the literature and make it easier to communicate amongst ourselves.  It is also not a course about e-commerce, which many interpret it to be.  While e-commerce is clearly an important feature of the modern economy, it will not be the focus of this course.  For those interested in pursuing the e-commerce angle, you should track down an e-commerce course.  In this course what we will focus on what impact the Internet will have on the economy and what economic theories we will need to make sense of this new world.   

The Technology

At the center of the course, as well as this New Economy we have heard so much about in recent years, is technology, and before looking forward to where the Internet might take us, we need to look back and examine the path taken to get us here - a path that includes a brief history of computers and communications (telegraph, telephone, and radio), the "parents" of the information age.  For those interested in a review of the past and the path to the present where the focus is on information and information technologies, you should check out A Nation Transformed by Information, edited by Alfred Chandler and James Cortada.  As we head through the history and the evolution of technology, there are a few themes that run throughout.  One is that throughout history, new inventions were often ignored by those wedded to the existing technology - steam engine, computers, phone... and that the inventions often created new superstars and destroyed others.  Some examples would include the reluctance of the  leaders of St. Louis, a key city in the web of inland waterways, to see the advantage of embracing the railroad; the refusal of Western Union, the nation's largest telegraph company, to purchase the patent for Bell's telephone; and the motion picture industry's lack of confidence in the power of television or the gas industry's discounting of electricity as a viable competitor.  The same is true of companies. IBM moved from a second tier data processing company to the computer industry standard bearer in about a decade, and then failed to recognize in a timely fashion the move to microcomputers; Wang Labs quickly became one of the BIG players in the IT industry in the late 1970s and one of the key industries behind the Massachusetts Miracle of the 1980s when it developed a simple word processing machine, but imploded when it was overtaken by more versatile competitors; and Digital Computer orchestrated its meteoric rise by "stealing" business from mainframe manufacturers such as IBM with their minicomputer, but then collapsed as their customers were "stolen" by the personal computers.   In fact it was this transitory nature of monopoly power in the midst of a technological tsunami that was raised by the defense in the Microsoft antitrust case.   

It is also true that the impact or use of new inventions has been consistently underestimated.  There is the story about IBM's initial estimate for the scope of demand for computers - ten to fifteen -  and the story of the steam engine\ that was so central to the first industrial revolution, even though it was originally developed to pump water out of coal mines.  No one ever envisioned the steam engine to be the primary source of power in the nation's factories by the turn of the 19th century.  And finally, it is true that government policy has played a critical role in the process of invention and innovation.  Al Gore certainly did not create the Internet, but there is no question that the government played an essential role in the development of the Internet, just as it did with computers.  For those who want some background information on the advance of technology you may want to check out some of the online timelines including History Channel technology timeline, Modern Inventions (About.com), and Timelines - AlternaTime where you will find a set of timelines in a science & technology section.  

• "This 'telephone' has too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us." Western Union internal memo, 1876
• "The problem with television is that people must sit and keep their eyes glued on a screen; the average American family hasn't time for it." NYT 1939
• "Television won't be able to hold on to any market it captures after the first six months.  People will soon get tired of staring at a plywood box every night."  Darryl Zanuck, head of 20th Century Fox 1946
• "The wireless music box has no imaginable commercial value. Who would pay for a message sent to nobody in particular?  David Sarnoff's associates response to his urgings for investment in radio on the 1920s.
• "Anyone suggesting that artificial satellites will ever become inexpensive enough to permit cost-effective global communications needs to have their head examined..."  NYT 1948
• "There is no reason anyone would want a computer in their home." Ken Olsen, founder of Digital 1977
• "Why on earth would you care about the personal computer? It has nothing to do with office automation... in my opinion we don't belong in the personal computing business." IBM official 1980
• "I see no advantage whatsoever to the graphical user interface." Bill Gates 1983
• "I see little commercial potential for the Internet for at least 10 years." Bill Gates Comdex 1994
• "I predict the Internet will go spectacularly supernova & catastrophically collapse on 1996." Bob Metcalfe, inventor of ethernet at InfoWorld 1995.

And then there is my all time favorites.  The Berlin professor in 1914 who believed "Brain work will cause women to go bald," and the British scientist who believed "rail travel at high speeds is not possible because passengers, unable to breathe, would die of asphixia," and Charles Duell, US commissioner of patents, who shut down the US Patent Office for 3 years in 1899 because "Everything that can be invented, has been invented."

There were also the errors of those who tended to overestimate the power of technology - the technology optimists that Jared Diamond mentions in his June 2003 article in Harpers Magazine, "The Last Americans."  There were a number of optimists who saw the end of many of life's problems - and below are a sample of quotes that capture this technological optimism.

1. Robert Litan and William Niskanen, Going Digital (1999)

2. You find a similar pattern in macroeconomics. Before the Great Depression of the 1930s the US government collected minimal information on the US economy, in part because the prevailing economic ideology was laissez faire which meant there was really no role for active government management of the macro economy because all an expansionary policy would do was crowd out the private sector.  This changed in the 1930s when Keynes came along with his theory of demand management in which the government, with well planned changes in spending or money, could manage the macro economy.  Once a policy maker knew the multiplier and the target level of GDP for the economy, the policy tools could be managed to hit the targets.  

3.  Robert Litan and William Niskanen, Going Digital (1999)

4. There are those who believe that all patterns of change should be set against the backdrop of Kondratieff cycles - a concept attributed to the work of a Russian economist.  The "short" version of the story is that the economy follows a reoccurring cyclical pattern with four phases described by Chapman as follows.

Inflationary Growth (expansion): - stable to slow rising prices, low commodity prices, low and stable interest rates, rising stock prices. The period might also be characterized by strong and growing corporate profits and technological innovations.

Stagflation (recession): - rising prices, rising commodity prices, rising interest rates, stagnant to falling stock prices. Stagnant profits, rising debt. This period usually sees a major war that contributes to the commodity and price inflation, and to the rising debt and misdirects business resources.

Deflationary Growth (plateau): - stable to falling prices, falling commodity prices, falling interest rates, sharply rising stock prices, profit growth but probably not as good as in the inflationary growth phase. Sharply rising debt. Possible period of considerable technological innovation. Excess debt contributes to speculative bubbles.

Depression (depression): - falling prices, rising commodity prices (particularly gold), stable interest rates, falling stock prices, falling profits, debt collapse. As the stock market collapses numerous scandals will emerge. A major war occurs that helps contribute to end of the depression phase and the start of the new expansion period.

With four distinct phases in the K-wave a number of analysts have compared them to the seasons. Spring (inflationary growth, expansion), summer (stagflation, recession), autumn (deflationary growth, plateau) and winter (depression).

At the Evolutionary World Politics Homepage you will find the following description of features of the Kondratieff (K-waves).

3. K-waves unfold as phased processes that imply S-shaped growth (or learning) curves, including for each particular sector, and over a period of some 50-60 years, a period of slow start-up, followed by fast growth, and ultimate leveling-off. That is why they are waves of economic activity, each wave different in kind from the last one, rather than cycles, seen as mechanical fluctuations in attainment of some uniform quantity. The start-up period of the next leading sector is also the period of flattening growth rates, declining profits, and severe competition for the previous lead industry; this transition between two leading sectors peak may be known as downswing, and takes the form of generalized slow-down and in the 1930s, of the Great Depression.

4. K-waves arise from the bunching of basic innovations that launch technological revolutions that in turn create leading industrial or commercial sectors. In Schumpeter’s classic formulation, such innovations concern new products, services, and methods of production, the opening of new markets and sources of raw materials, and the pioneering of new forms of business organization. In that sense, K-waves are caused by the demand for solutions to new problems, and the supply of such solutions by innovative firms. Each such wave therefore has its own individual innovative character, and can be named accordingly (consult Table 1 for such a listing).

5. K-waves have their own characteristic location in space and time. Britain’s cotton wave was centered on Manchester. The information K-wave is preferentially seen in such locations as Silicon Valley and Orange County in California.

Alvin Toffler, one of the more well know futurists, picked up on the wave idea of Kondratieff when he suggested we were into something really BIG in the late 1980s in The Third Wave . According to Toffler there have been three waves in all of history and we happen to be living at a time where the societal unrest and structural changes were due to the colliding of the the Second and Third Waves.  "We are the final generation of an old civilization and the first generation of a new one, and much of our personal confusion, anguish, and disorientation can be traced directly to the conflict within us..."  The First Wave was the agricultural revolution that took us out of the woods and put us on farms, while and the Second Wave was the industrial revolution that took us off the farms and put us into factories and offices.  Furthermore, the Third Wave drove a wedge between production and consumption which helped transform society from a set of self sufficient societies with a minimal amount of interaction into a set of interdependent players bound together by a web of markets. 

As a way of envisioning the changes, Toffler suggests thinking of society at any time being composed of two sectors - sector A where work is done for personal consumption and sector B where work is done for exchange on the market.  In the First Wave sector A was dominant, but it lost out to sector B in the industrial revolution of the Second Wave.   In this Second Wave the wedge between consumer and producer expanded as increasingly production for use shifted to production for exchange and advanced societies expended enormous sums to extend the network of markets linking producers and consumers.  A society dominated by personal relationships had been transformed into an impersonal one dominated by contracts.  As for the future, Toffler sees the rise of what he calls the "prosumer" as the wedge between the producer and consumer is eroded. The leading edge of this change can be seen in the growth of the do-it-yourself market - the self-serve gas stations, check out counters, travel reservations... - changes that can be attributed to the cost-disease of the service sector, or what Toffler calls The Law of Relative Inefficiency, and changes that pose serious challenges to the economics profession. 

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