New Economy
Created: 2000-04-26
Last Modified: 2000-5-04
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New Economy Forum BriefingJ. Bradford DeLong May 2000
Laura D'A. Tyson
Walter Shorenstein
National finance Chair of the Democratic Party: Joel Hyatt; idealab Roger Ferguson
Discussion
Joel Klein
I don't want to defend Microsoft... The possibility of Microsoft's version of Kerberos working with NT only, the fact that Microsoft FrontPage server extensions are extremely difficult to make work under Apache, the fact that I am humiliated every week by my continued inability to keep Explorer from launching at inappropriate moments.... All these make me fear Microsoft... But this discussion seems a little too friendly: so let me try to channel the spirit of some executive two states to the north... You said that Antitrust Division policy in the new economy was unchanged: holders of monopoly power should tread carefully--take care not to take any steps to abuse their market power. For then they will be broken up, for the social losses in terms of reduced economies of scale are small, and the benefits to the consumer in terms of increased competition are large. But in the new economy we have not just the old economies of scale that gave you 20% lower unit costs at twice the volume, we have information goods-based economies of scale where twice the volume gives you 50% lower unit costs. We have economies of standardization and interconnection as well. There is reason to fear that break-ups will sacrifice more in the ways of economy of scale. There is reason to fear that the benefits to the consumer in terms of increased competition will be transitory--for the same economy-of-scale forces that led to the initial near-monopoly will swing into action once again. Shouldn't the balance of antitrust change if the relative costs and benefits of breakup have changed? In the old days, the response to a true "natural monopoly" was regulation. We no longer trust regulation. So what do we do when it seems as if a much larger chunk of the new economy than the old is made up of natural monopolies, disciplined not by other competitors but by their own installed base of previous versions and by possible piracy? Or is the role of the Antitrust Division that of King Canute, commanding and winning only temporary victories against the tide of information-age economies of scale? A question: why didn't Bill Joy or Bob Frankston build a spreadsheet for Berkeley Unix? We economists tend to say that information goods are public goods--should be distributed essentially for free, and produced by organizations like universities. I think that it says something about the defects of that organization model and the advantages of moving R&D into the private sector that Visicalc emerged not as part of freely-distributed BSD 4.3 for IT division-managed minicomputers but as a for-profit program for individually-owned microcomputers.
John Doerr, Roger Altman, Roger Ferguson, Alan Blinder... A brief thought on "leveraging the top line" the business impact of the telephone...
Even after the end of the current cycle, even if the current cycle ends in a full-blown stock market crash, much of research and development will still be handled in a new way: the business of commercializing new technologies will still be rapidly spun-off into new companies, engineers will still be motivated by stock options, venture capitalists will still trawl for good ideas, and new technologies will still be launched into the marketplace in a small fraction of the time that product development cycles used to take. As Venture Law Group principal Tae Hea Nahm has argued, the organizational capabilities and modes of thought that have been created will still be vibrant and useful even if Wall Street ceases to be so eager to snap up IPOs. We often tend to forget how different this new business ecology is from the way things used to be. But the executives and innovators who grew up under the old system remember. Michael Hiltzik's book _Dealers of Lightning_ reports on Adobe Systems' cofounders John Warnock's and Charles Geschke's days at Xerox's Palo Alto Research Center. As Warnock remembers it: "Chuck Geschke and I had a conversation in his office and said, 'You know, we need to go do something else, because we've spent two years of our lives trying to sell this thing [internally] and they're going to put it under a black shroud for another five.'" But at the time the bureaucratic system of Xerox had its rationality. With long product development cycles, little in the way of channels for testing new products, and high costs of ramping up to full-scale production, even a Xerox could not afford to introduce many new technologies. So it made sense to pit ideas against each other internally in a bureaucratic tournament, hoping that the fittest would survive the gauntlet. Moreover, at the time the bureaucratic system at Xerox had--and this was not clear to me until I read Clayton Christensen's brilliant _The Innovation Dilemma_--a necessary irrationality as well. A strong, competent, successful organization It was also a place where the launch of a disruptive technology was likely to be hobbled. Such a technology means that old divisions shrink and old customers are told to buy new products. But the more competent are the engineers and managers running the old divisions, the greater is the number of reasons--good reasons--they will think of that the new technology won't work. The more the company listens to its customers, the less will it be open to engineers proposing radical shifts. The things that had made Xerox successful made it hard for it to adopt disruptive technologies. Warnock's and Geschke's company, Adobe Systems, came in the early days of our new business ecology. They were in perhaps the second generation of development of what we now see as the Silicon Valley System: rapid prototyping, short product-development cycles, early test marketing, options-based compensation, venture funding, early corporate independence, and so forth. It seems to be a highly successful system for launching new technologies into the marketplace. Diminishing Returns? Capital Spending Boom? Magnitude of Inventory/Sales Ratio Decline? How Well Do We Measure Output? Who Pays for the Internet Boom?
Larry Summers:
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There seems a widespread agreement among economists like yourself both that the internet (and related) booms resulted from open standards, and that, in the larger scheme of things, the twentieth century has grown wealthy as a result of science. The common feature of both of these is publishing of knowledge which can then be critiqued by others.
As a corollary to this, the computer software industry is largely driven by trade secrets. While economists have criticized Microsoft on the grounds that it has abused its position as a monopoly, and while many zealots have simply claimed that Linux is the future, I have seen no reputable academic studies looking at this issue. I contend that rather than yet another study arguing whether computers are or are not driving the US economy, what is really needed is a study discussing the extent to which closed software (with all the attendent evils---lack of peer review, lack of interoperability, low standards of quality compared to other engineering disciplines, problems when the person who wrote the code leaves the company etc) are consequences of - an immature industry that is changing constantly or - inevitable given the nature of software or - a consequence of the fact that the software industry is governed by trade secrets rather than open exchange of information, implying that a change in the legal environment might drastically improve software quality (and thus overall GDP growth) although a consequence would, of course, be the loss of monopoly rents by Microsoft and friends.Contributed from 17.202.32.93 by Maynard Handley (handleym@ricochet.net) on July 25, 2000.
Well done, a lot of food for thoughts
Thank you, Hans Kaufmann, Member of Swiss ParliamentContributed from 194.235.8.32 by Hans Kaufmann (kaufmann@kaufmann-research.ch) on May 12, 2000.
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