“New Economy” Bleg

29 April 2009 at 2:06 pm Peter G. Klein 5 comments

| Peter Klein |

The heady dot-com days of the late 1990s brought breathy pronouncements from journalists and some academics that the “new economy” had changed all the old rules. Intellectual capital, not physical capital, is the source of value, so plant and equipment is irrelevant. Information goods are produced at zero marginal cost so firms should give away, rather than sell, their products. Profits don’t matter, only installed base counts. Managerial hierarchy is obsolete; cost curves are flat; supply-and-demand analysis is passé; even opportunity costs don’t matter anymore. The dot-com crash and subsequent shakeout brought many people back to their senses, but even today we continue to hear hyperbolic claims about the newness of the new economy.

I’d like to include some of these wildly exaggerated claims in my talk next week at the GMU/Microsoft forum. Can readers supply some quotes I can use (the more outrageous the better)? Like this:

[W]hen it comes to technology, even the most bearish analysts agree the microchip and Internet are changing almost everything in the economy.
— Greg Ip, WSJ, 18 January 2000

One curious aspect of the Network Economy would astound a citizen living in 1897: The very best gets cheaper each year. This rule of thumb is so ingrained in our contemporary lifestyle that we bank on it without marveling at it. But marvel we should, because this paradox is a major engine of the new economy. . . . Through most of the industrial age, consumers experienced slight improvements in quality for slight increases in price. But the arrival of the microprocessor flipped the price equation. In the information age, consumers quickly came to count on drastically superior quality for less price over time. The price and quality curves diverge so dramatically that it sometimes seems as if the better something is, the cheaper it will cost.
— Kevin Kelly, New Rules for the New Economy, 1998

Once a marketing gimmick, free has emerged as a full-fledged economy. . . . The rise of “freeconomics” is being driven by the underlying technologies that power the Web. Just as Moore’s law dictates that a unit of processing power halves in price every 18 months, the price of bandwidth and storage is dropping even faster. Which is to say, the trend lines that determine the cost of doing business online all point the same way: to zero.
— Chris Anderson, Wired, February 2008

Why have [stock] exchanges at all? Certainly not to help investors. Exchanges are at last being exposed as anachronisms, sustained by inertia and by the desire of incumbents, with help from regulators, to keep raking in monopoly rents. But the curtain is coming down.
— James Glassman, WSJ, 8 May 2000

I’m sure there are much more colorful statements (i.e., straw men for me to knock down) out there. Any suggestions?

Entry filed under: - Klein -, Innovation, Myths and Realities.

Best Financial-Markets Sentence I Read Today Macroeconomic Policy Quote of the Day

5 Comments Add your own

1. Shawn Ritenour | 29 April 2009 at 4:19 pm

Peter,

This is from the 1999 Annual Report of the Dallas Fed. The issue and the article this quote is from are entitled “The New Paradigm”

“Scarcity, the first assumption of the old economy, isn’t
the dominant feature of the New Economy. Many of
today’s markets are awash with goods and services. Sellers
compete aggressively for buyers. They discount. They cut
costs. They expand markets through relentless promotion
and advertising.

Increasing returns to scale pervade the New Economy.
More of today’s companies and industries thrive on quantity
discounts—the higher the demand, the lower the price.
Decreasing returns to scale dominated the old economy, so
producing more goods and services pushed prices up.”

—W. Michael Cox and Richard Alm

The entire report can be accessed here:

Click to access ar99.pdf

I use this as an example of contemporary historicist economics (if that is not an oxymoron).

Shawn Ritenour
Grove City College
2. Paul Walker | 29 April 2009 at 8:18 pm

Not sure its exactly what you want but take a look at Kenneth Carlaw, Les Oxley, David Thorns, Michael Nuth and Paul Walker, “Beyond the Hype: Intellectual Property and the Knowledge Society/Knowledge Economy“. Journal of Economic Surveys, v20 no4, September 2006: 633-90. In particular Appendix 1 may be useful. One NJ Foss does get a mention!
3. Peter Klein | 30 April 2009 at 10:18 am

Thanks, Shawn and Paul, very helpful!
4. robin gleaves | 6 May 2009 at 8:13 am

I thought a good over-arching quote from Sir John Templeton would be:
“The four most dangerous words in investing are ‘This time it’s different.’”

The increasing returns to scale was a key one as pointed out by Shawn above, the flipside of the no marginal cost and frictionless transactions.

I also found the predictions for changes in B2B markets with metamediaries, online intermediaries (OIs), B2B exchanges, net market makers (NMMs) etc interesting.

From Bear Stearns Internet B2B Report September 1999:

“A POWERFUL BUSINESS MODEL. Because they focus on providing information based services, metamediaries have the potential to achieve very high margins and ROICs. Their business models have network effect characteristics that can drive revenues up exponentially. As a result, we estimate metamediaries will have a valuation of $228 billion in 2002.”

From Morgan Stanley Dean Witter, April 2000:

It’s All Becoming Clear:
The Quest for Transparency
The first problem, the market fragmentation challenge, is
the catalyst for B2B commerce. Efficient markets really
mean transparency, and transparency can be a powerfully
transforming concept.
Transparency is a knowledge-based concept that implies
participants have intelligence about the markets around them.
Market alternatives become transparent, and consequently,
participants change their behavior. Aberrant behavior —
artificially high prices or unusually low quality— gets
isolated quickly and competitive alternatives eliminate the
anomaly.
Efficient markets constantly identify and
eliminate the bottom 10% while pushing the
mean upward.

I have a whole folder of B2B reports from key brokers if you’re really interested.
Hope this helps
5. Peter Klein | 6 May 2009 at 8:54 am

Robin, thanks, these are great!