More “New Economy” Hyperbole

25 May 2009 at 12:21 am Peter G. Klein 6 comments

| Peter Klein |

Wired’s Chris Anderson drinks the New Economy Kool-Aid. It’s the same old argument — information technology reduces transaction costs, leading to a radical disaggregation of industry and society — still supported by little more than a few colorful anecdotes, not any kind of systematic analysis. The new twist is the financial crisis, described by Anderson as “not just the trough of a cycle but the end of an era.”

What we have discovered over the past nine months are growing diseconomies of scale. Bigger firms are harder to run on cash flow alone, so they need more debt (oops!). Bigger companies have to place bigger bets but have less and less control over distribution and competition in an increasingly diverse marketplace. . . . The result is that the next new economy, the one rising from the ashes of this latest meltdown, will favor the small.

Nonsense. The major banks, the Chrysler corporation, and whoever is next to fail have not become nimbler and smaller, but larger; they have become part of the Federal government. Fannie and Freddie have swollen and taken on additional responsibilities. The financial crisis, as argued repeatedly on these pages, was spawned by a credit bubble brought about by loose monetary policy and massive government subsidization of the home mortgage market. It has nothing to do with firms being too large or somehow failing to take advantage of the Next Big Thing in social networking or cloud computing. I mean, seriously, is there anything here that couldn’t have been written ten years ago?

To all the usual reasons why small companies have an advantage, from nimbleness to risk-taking, add these new ones: The rise of cloud computing means that young firms no longer have to buy their own IT equipment, which helps them avoid having to raise money or take on debt. Likewise, the webification of the supply chain in many industries, from electronics to apparel, means that even the tiniest companies can now order globally, just like the giants. In the same way a musician with just a laptop and some gumption can accomplish most of what a record label does, an ambitious engineer can invent and produce a gadget with little more than that same laptop.

Bah. Humbug.

Entry filed under: - Klein -, Innovation, Myths and Realities, Theory of the Firm.

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6 Comments Add your own

1. Bart Cart | 25 May 2009 at 5:59 am

Maybe the new economy will favour the small. But only as long as the succesful small companies don’t get big. Afte that it’ll be the same deal only with different companies.
2. Marcin | 25 May 2009 at 2:26 pm

As far as I can tell the only point being made here is about ways of making capital goods available on the basis of a stream of payments, quite possibly with higher utilisation, and consequent lower per-user costs than under a straight hire-purchase agreement. Not exactly revolutionary stuff.
3. Per Bylund | 25 May 2009 at 4:32 pm

Allow me to quote the great Rothbard on the effects of technology on how the market works:

Technological inventions have received a far more important place than they deserve in economic theory. It has often been assumed that production is limited by the “state of the arts”–by technological knowledge0–and therefore that any improvement in technology will immediately show itself in production. Technology does, of course, set a limit on production; no production process could be used at all without the technological knowledge of how to put it into operation. But while knowledge is a limit, capital is a narrower limit. It is logically obvious that while capital cannot engage in production beyond the limits of existing available knowledge, knowledge can and does exist without the capital necessary to put it to use. Technology and its improvement, therefore, play no direct role in the investment and production process; technology, while important, must always work through an investment of capital. As was stated above, even the most dramatic capital-saving invention, such as oil-drilling, can be put to use only by saving and investing capital.

The relative unimportance of technology in production as compared to the supply of saved capital becomes evident, as Mises points out, simply by looking at the “backward” or “underdeveloped” countries.30 What is lacking in these countries is not knowledge of Western technological methods (“know-how”); that is learned easily enough. The service of imparting knowledge, in person or in book form, can be paid for readily. What is lacking is the supply of saved capital needed to put the advanced methods into effect. The African peasant will gain little from looking at pictures of American tractors; what he lacks is the saved capital needed to purchase them. That is the important limit on his investment and on his production

From Man, Economy and State, p. 542
4. David Gerard | 26 May 2009 at 8:44 am

This is such red meat for teaching. I like these quotes about Wal Mart.

A 2001 McKinsey Global Institute study of the boom found that “Wal-Mart directly and indirectly caused the bulk of the productivity acceleration” in its category. How? Information technology, for the most part. Wal-Mart uses IT to help it store and transport goods more efficiently.
– Surowiecki in Wired

The Wal-Mart story is clear refutation of the new-economy hype. At least half of Wal-Mart’s productivity edge stems from managerial innovations that improve the efficiency of stores and have nothing to do with IT.
– Brad Johnson in the McKinsey Quarterly
5. John K | 26 May 2009 at 11:17 am

“Bigger firms are harder to run on cash flow alone, so they need more debt (oops!). ”

Guess Chris must have missed Costco’s quarterly dividend increase last month, its record 71 billion dollar sales level in 08, and net earnings per share of 22%. (oops!)
6. TRUTH ON THE MARKET » Peter Klein Throws Cold Water on New Economy Talk | 17 September 2009 at 2:03 pm

[…] a talk on “Does the New Economy Need New A Economics?” His answer: No. This week, Peter takes aim at Wired’s Chris Anderson who predicts a massive shift toward “small” in the new, […]