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Created: 2000-03-05
Last Modified: 2000-03-05
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The New Economy--Some Theses

J. Bradford DeLong
http://www.j-bradford-delong.net/
delong@econ.berkeley.edu

 

--The economic changes new technology has set in motion are more interesting
and important than the technology per se.

--The technology makes possible new forms of employment, new approaches
to compensation, and new ways of launching enterprises--what is
often referred to as a Silicon Valley System

--Note that this "Silicon Valley System" spreads across the country
and the world, with nodes in Boston, Austin, Helsinki,
Singapore, and elsewhere.

--Leading-edge users and their innovative applications have created the demand
and the markets that have sustained technological development. Leading-
user industries discovered just what advancing information-processing
technology was good for.

--In the beginning computers were seen as powerful calculators performing
complicated or tedious and lengthy sets of arithmetic operations.

--But by the 1970s it was clear that the computer was at least as useful in
stuffing information into and pulling information out of large data
bases as in being a large calculator.

--In the 1980s computers became ubiquitous in the office because they had
another powerful function separate from computation and sorting:

--The office applications used the microprocessor and memory
not as a calculator or a sorter but a trial-and-error device,
a possibility generator, a way of rapidly manipulating a
virtual document to see what the final physical document
might be.

--In the 1990's the computer has evolved two new major functions:

--It has burrowed inside conventional products as embedded systems
have begun adding intelligence to manufactured goods.

--It has connected outside to create the world wide web of network-
accessible information.

--Back in the 1950s the discoverers of the tools of modern quantitative finance
dismissed them as theoretically interesting but of no practical use--the
calculations required to figure out what an optimally diversified portfolio
would be were totally impractical.

--They did not foresee the implications of the computer revolution.

--Today "rocket science" applied to financial management has created a
new range of financial products.

--It is transforming the management and organization of financial institutions.

--It is not just robotic painting or robotic assembly in manufacturing that has become
possible with the explosion in computing power, but deeper and in the end
more far-reaching applications:

--Robot-guided hip surgery.

--Scanner-based retail quick-turn supply chains.

--We complain about the worldwide wait--but when the conversation at Internet
pioneer Vinton Cerf's dinner table turns to the Chisholm trail, he can
display a map of the trail within sixty seconds.

--As the telecommunications pioneers of AT&T's drive for universal service knew
very well early in this century, the more people there are on a network
the greater is the value of a network to each user--a principle that we
now call Metcalfe's law.

--The full story of the emergence of E-conomy lies in how the growth of the network
will transform business organization and business competition.

--The technology-enabled reconfiguration of existing economic activities--from
package delivery to customer support-makes clear that there is a wave
of innovation that is going to greatly amplify productivity practically
everywhere.

--Wal-Mart's image is not that of a dot-com company.

--Between the turn-of-the-last-century Sears catalogue and today, many
entrepreneurs have thought that there should be a way to combine
economies of scale in purchasing with economies of scale in distribution to
satisfy small-town and rural consumers at significantly lower cost.

--But until the coming of Wal-Mart no one had managed to solve the associated
problems of control and distribution.

--Wal-Mart's extraordinary efficiency advantage can be credited in large part
to its early investments in modern information technology, and to
careful thought and skilled execution of how modern information
technology can achieve economies of distribution.

--As Sam Walton wrote:
"Nowadays, I see management articles about information
sharing as a new source of power in corporations. We've
been doing this from the days when we only had a handful
of stores. Back then, we believed in showing a store manager
every single number relating to his store, and eventually we
began sharing those numbers with the department heads in
our stores. We've kept doing it as we've grown. That's
why we've spent hundreds of millions of dollars on computers
and satellites­to spread all the little details around the company
as fast as possible. But they were worth the cost. It's only
because of information technology that our stores managers
have a really clear sense of what they're doing most of the
time."

--Thus there is a sense in which the first .com deka-billionaire was Sam Walton,
who captured in his personal fortune a small amount of the
increased efficiencies in distribution from the information
management and goods shipment control systems that his
people developed.

--The rest of the increased efficiencies went to boost the real
incomes of shoppers in rural and small-town America
who benefited from Wal-Mart's lower prices.

--These increases in real incomes were missed by the
Bureau of Labor Statistics' statistical system,
which did not take account of the rise of discount
stores like Wal-Mart in its estimates of the cost
of living.

--And, of course, the decreased prices for consumers came at the
expense of the competing merchants of Main Street, U.S.A.

--We already see the coming of the broadband Internet to America's businesses
and residences. But we cannot see what uses of their future capabilities
businesses and consumers will value most.

--These uses will emerge only at the end of a process of experimentation
and search-and may well be something that we do not now expect.

--Economic historian Paul David points out that it took nearly half a century
for business users to figure out the possibilities for increased
efficiency through factory reorganization opened up by the
small electric motor. When they did it turned out to be a big
deal: mass production.

--Indeed, if we are wise we should expect to be surprised by what will
be the most valuable uses fifteen years from now.

--Who in the mid-1970s before VisiCalc understood that the
greatest value of a computer to an office worker would
come from a spreadsheet program?

--Who at the start of 1980s--besides the founders of Adobe--thought
that desktop publishing would be important?

--Who at the start of the 1990s understood that proprietary on-line
services--no matter how good their content and connectivity--
would be doomed by the end of the decade unless they
offered transparent e-mail- and browser-access gateways to
the broader network outside?

--Often large stablished firms are not very good at incorporating technologies that
disrupt their existing markets and procedures.

--New markets are hard to imagine.

--New markets are even harder to quantitatively assess.

--Thus start-ups--entrepreneurial companies--have driven much of the
radical innovations in this transition to the E-conomy.

--But start-up companies face substantial problems. They require money,
help developing business plant--the list is long.

--America in the 1980s and 1990s is unique in having built up a business
ecology that makes it not easy and straightforward but possible to
establish an entrepreneurial start-up.

--American companies in the 1990s have proved remarkably successful at
adopting "lean production" innovations.

--The Japanese manufacturers may have taught American producers a
painful lesson. But the American producers really learned.

--A large part of the change came with a finer division of labor. Producers
lowered their costs by concentrating on what they did best, and contracting
to buy the rest from those with a firm-specific advantage in productivity or
a nation-specific factor cost-based comparative advantage.

--The production dilemma has been solved via a finer division of labor--contract
manufacturing and cross-national production systems.

--Firms can outsource only because of better communications. In previous
generations much tacit knowledge gained only through long
experience was essential to creating the value chain.

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Professor of Economics J. Bradford DeLong, 601 Evans Hall, #3880
University of California at Berkeley
Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net/

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