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J. Bradford DeLong
Notes for a talk for the Global Business Policy Council Millennium Meeting, Phoenix, AZ, January 13-16 2000
If the key element of technology in the industrial age was the application of nonhuman energy to production--the creation of tools for shaping matter--the key factor of technology in tomorrow's age looks to be the automation of information--the creation of tools for thought and organization. This doesn't mean that the future will see only innovation in information technologies. But it does mean that innovations in data processing and communication are likely to shape the organization of the economy, and of the rest of society as well.
Let me make four observations about four challenges that it looks like we face as we turn from the end of the second to the beginning of the third millennium, as our new information technologies begin to have a bigger and bigger effect on our world. And let me say that these are challenges that we may or may not successfully meet:
First, where the industrial age has taken us will shape the effects of the revolutions in organization and communication that we expect to be generated by our new data processing and data communications technologies. We now, today, live in a much more productive world than the past--the industrial age has amplified potential human economic productivity and material well-being at least tenfold, perhaps twentyfold--it's hard to even think how to measure how much our material productivity exceeds that of previous centuries. But we also now have a much more unequal world than the past. The imbalance in the diffusion of technology over the past two centuries has been extraordinary.
Our world is now being knit together by data processing and communications technologies. Information processing makes possible new ways of organizing production. Data communications means that there is no reason why a lot of white-collar work cannot be done anywhere in teh world. And India has how many--50 million?--people literate in English. There is an opportunity to use these new technologies to diffuse technology and productivity. There is an opportunity--the opportunity to for the first time create a more human world: a world in which everyone at least learns to read and nobody starves to death. Will we seize this opportunity?
Second, the change in what Manuel Castells calls the technological paradigm is going to carry with it a profound change in industry structure, and in political regulation of industry as well. Now this is not the first time we have seen massive economies of scale and network externalities. A hundred years ago the Gilded Age saw the origin of large-scale industrial enterprise taking advantage of economies of scale, and the consequent problem of how to reap the benefits of both competition and efficient scale.
In the U.S., at least, the Progressive Era saw a tolerable solution: to tolerate oligopoly, but to dissolve monopoly where possible, and to regulate natural monopoly where it could not be resolved. This seemed a reasonable balance: to achieve most of the benefits of competition and most of the benefits of scale economies.
But we no longer have confidence in regulatory authorities. Network externalities do make it easier and easier for the dominant firm to push its market share toward 100%. Thus we face the potential breakdown of the Progressive Era political-economic equilibrium. And governments do not know what to do in response.
Third, we don't know yet how to make the intellectual property system work for the coming e-conomy. Back in the Gilded Age, intellectual property was not such a big deal. Industrial success was based on knowledge, yes. But industrial success was based on knowledge crystalized in dedicated capital. Lots of people knew organic chemistry. Few companies--those that had made massive investments--could make organic chemicals
Now intellectual property is rapidly becoming a much more important source of value. And the political system's response seems to be to tighten up on intellectual property rights. To reinforce the rights of "owners" at the expense of the freedom of "users." The underlying idea is that markets work because everything is someone's property. Property rights give producers the right incentives to make, and users the right incentives to calculate the social cost of what they use.
But with information goods the social cost of distributing information is close to zero. Hence focusing on the rights of owners rather than the opportunities of users may not generate the fastest rate of economic growth, or the greatest wealth. It is far from clear that the political system will successfully handle the task of building the right intellectual property system for tomorrow.
Fourth, high asset valuations are fueling the current wave of investment in data processing and communications technologies. These high asset valuations appear... unstable. The U.S. stock market is characterized by large divergences of opinion. Current .com valuations assume that .coms are going to take massive amounts of market share and profits from existing established firms. But a P/E of 30 for the S&P composite presumes that the profits of established firms are going to grow rapidly.
Both of these can't be true.
So how does this configuration of asset prices sustain itself? Three factors:
- The euphoria that always comes from a sustained economic boom.
- The hazards and difficulties of large-scale short-selling--the only thing that could iron out divergence of opinion.
- Third: the ecology of the market: "growth" has crowded out "value" as an investment strategy.
Which set of beliefs is going to turn out to be wrong? Or will both turn out to be wrong? And what happens after market expectations change? That's the last of the four challenges I see. It will show us how good our central bankers really are.
But remember that--no matter what happens to asset values--the underlying technologies will still be there. And it is the case that societies and cultures are rooted in the structure of the economy, and that the shape of economies is profoundly affected by the technologies they use.
The Neoliberal Bet
- W. Brian Arthur.
- Economies of scale and network externalities.
- Heightened risks and heightened rewards.
- Manuel Castells.
- The economy (and society) are rooted in technological paradigms.
- The industrial economy was rooted in the application of non-human sources of energy to the shaping of matter.
- The network economy will be rooted in the application of modern computing and communications technologies to the shaping of organizations.
- What is a network economy? Think of the transformation of Hollywood over the past fifty years. Then square it.
- J. Bradford DeLong.
- My thoughts are less organized (hence possibly less useful). I have only been able to compress them into five observations.
- First, I agree with Arthur and Castells.
- Economies of scale and network externalities are key to understanding the future.
- A network economy will be profoundly different from the large-scale organization economy that we have lived in for the past hundred years.
- But the problem--and the source of my uncertainty and hesitancy--is the difficulty of specifying how and when.
- Second, where the industrial age has left us will shape the effect of the revolutions in organization and communications
- We now have a much more productive world than the past.
- We now have a much more unequal world than the past.
- And this world is now being knit together by modern communications technologies.
- Third, industry structure is going to change.
- The potential breakdown of the Progressive-Era political-economic equilibrium.
- Fourth, intellectual property is going to be key.
- But we don't know how to make an intellectual property system for the coming e-conomy.
- Fifth, the biggest source of short-run risk is that asset values will.... fluctuate.
- Inconsistent expectations dominate today's financial markets.
Second, Where the Industrial Age Has Carried Us Shapes the Future
- The industrial age amplified potential human economic productivity and material well-being by a multiple hard to imagine.
- We now have a much more productive world than in past centuries.
- In the past, lots of families couldn't afford to send their children to school
- But we also now have a much more unequal world than the past.
- Extraordinary imbalance in the diffusion of technology
- And this world is now being knit together by data processing and communications technologies
- Information processing makes possible new ways of organizing production
- Data communications means that globalization is a reality
- Extraordinary opportunity
- India with 80 million people literate in English
- Is the problem with the WTO that it is too powerful, or too powerless?
- Is that it constrains what national governments can do too much--"erodes national sovereignty"--forcing Europeans to admit genetically-engineered foods from America?
- Or is it that it doesn't constrain what national governments can do enough--doesn't force India, say, to put turtle-excluder-devices on its shrimp boats?
Third, Industry Structure Is Going to Change
- This is not the first time we have seen massive economies of scale and network externalities.
- The Gilded Age: the origin of the large-scale industrial enterprise.
- Attempted political blocking of continent-spanning enterprise: Swift, Armour, and the FDA.
- How to reap the benefits of both competition and efficient scale?
- The solution to the Gilded Age dilemma: the Progressive-Era equilibrium.
- Tolerate oligopoly but dissolve monopoly.
- Thus achieve most of the benefits of competition and most of the benefits of scale economies.
- Regulate natural monopolies with a very heavy hand.
- But we no longer have confidence in regulatory authorities.
- And oligopolies may be becoming less and less sustainable.
- Network externalities do make it easier and easier for the dominant firm to push its market share toward 100%.
Fourth, Intellectual Property Will Be Key
- Back in the Gilded Age, intellectual property was not such a big deal.
- Industrial success based on knowledge, yes.
- But industrial success based on knowledge crystalized into dedicated capital.
- Today capital is becoming less dedicated.
- Knowledge--information--is becoming less constrained by the factory or by finance.
- The political system's response: tighten up on intellectual property rights.
- The idea: markets work because everything is someone's property. Property rights give producers the right incentives to make, and users the right incentives to calculate the social cost of what they use.
- The problem: with information goods the social cost of what users use is close to zero.
- The problem in particularly acute form: AIDS drugs in Africa.
- We want the benefits of decentralized innovation and development.
- We also want users to have wide and easy access.
- Another example: the world wide web.
- Built on an "open source" base: TCP/IP; http://; Apache; et cetera.
- Yet provides enormous opportunities for using these "open source" tools to add value.
- The political system won't reach the right answer.
Fifth, Asset Values Pose the Principal Source of Risk
- Large-scale divergence of opinion.
- .com valuations assume that .coms are going to take massive amounts of market share and profits from existing established firms.
- An S&P composite P/E of 29 is a valuation that presumes that the profits of existing established firms are going to grow rapidly.
- Both of these can't be true.
- Why this configuration of asset prices?
- The current boom.
- Divergence of beliefs (and the hazards and difficulties of large-scale short-selling).
- Market ecology: "growth" has crowded out "value" as an investment strategy.
- So are the "growth" followers trend-chasers or optimists?
- And which set of beliefs--that established firms will use their position or that .com firms will replace them--is going to turn out to be wrong?
- What happens after market expectations change?
- The technology is still there, and still moving...
- When will market expectations change?
- The most likely moment is when the next recession comes.
- But the next recession may be delayed for quite a while.
- Productivity growth, warranted real wage increases, and unemployment.
- Recessions come--at least since 1950--when the Federal Reserve decides that it is time to fight inflation.
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