Greenstein on Innovation

1 May 2010 at 4:34 pm 5 comments

| Peter Klein |

One of my regular lectures at the Mises University deals with the economics of networks and information technology, with a particular focus on the history of the internet. A few years ago I wrote up my notes for a daily article, which appeared as “Government Did Invent the Internet, But the Market Made It Glorious.” Shane Greensteinn’s new NBER paper could used the same title, though he chose something meatier: “Nurturing the Accumulation of Innovations: Lessons from the Internet.” Okay, the paper is a bit meatier too. Check it out:

The innovations that became the foundation for the Internet originate from two eras that illustrate two distinct models for accumulating innovations over the long haul. The pre-commercial era illustrates the operation of several useful non-market institutional arrangements. It also illustrates a potential drawback to government sponsorship — in this instance, truncation of exploratory activity. The commercial era illustrates a rather different set of lessons. It highlights the extraordinary power of market-oriented and widely distributed investment and adoption, which illustrates the power of market experimentation to foster innovative activity. It also illustrates a few of the conditions necessary to unleash value creation from such accumulated lessons, such as standards development and competition, and nurturing legal and regulatory policies.

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Entry filed under: - Klein -, Business/Economic History, Innovation.

Nerd Merit Badges Why People Resist Marginal Cost Pricing

5 Comments Add your own

  • 1. Michael E. Marotta  |  2 May 2010 at 9:03 pm

    “Every packet is assigned an equal priority. A packet containing a surgeon’s diagnosis of an emergency medical procedure has exactly the same chance of getting through as a packet containing part of Coldplay’s latest single or an online gamer’s instruction to smite his foe.” — Government Did Invent the Internet, But the Market Made It Glorious – Peter G. Klein.

    This applies to every open market. On the NYSE, a change in the price of a Blue Chip is just as important as the report of no change in yesterday’s IPO.

    Does it matter if the surgeon’s diagnosis is correct, or if the gamer is modeling a terrorist strike against the homeland? While the surgeon sounds compelling, is this more worthy than the prescription of a holistic practitioner?

    Should the surgeon (i.e., the client or the client’s insurer) pay MORE to gain greater access, or should the gamer be charged more. (And what about that holistic medicine woman? Pay more or pay less?)

    Why don’t hospitals establish their own www5 networks if their work is so important?

    As for CERN, the work on the WWW was not officially a CERN project, any more than the innovations on ARPANET were DoD initiatives. That, of course, validates Dr. Klein’s assertion that the internet as we know it was the result of non-governmental forces.

    That does, however, bring the deeper question: Should the government just “do things” in order to let people be “creative” with the resources? How would that have worked with the Soace Shuttle?… or Yosemite? …

  • 2. Peter Klein  |  2 May 2010 at 10:04 pm

    Michael, not sure I’m following you here. The point in my article about packets was simply that they aren’t priced and therefore, like any common-pool resource, tend to be used beyond the point at which marginal benefit equals marginal cost.

  • 3. Michael E. Marotta  |  4 May 2010 at 8:31 pm

    Well, Dr. Klein, forgive me for always looking at the third side of the coin, but I do, indeed, read and post here specifically because I benefit from your work. That is why I bother to examine the contrary case, because it usually leads somewhere interesting. (On the other hand, the contrary of socialism is just common sense, which is less exciting.)

    In this case, I understand the tragedy of the commons and all, and from that vantage point consider that perhaps many markets or maybe all markets are open to nominally “free” communication, and may depend on that baseline before specialized information can carry its own price.

    I earned my BS and MA degrees in criminology (2008; 2010) because there I was an A scholar. In economics, alas, I was a mere B pupil, undergrad and grad both. So, I grant that I occasionally have missed the point of the posts here.

  • 4. Peter Klein  |  5 May 2010 at 9:34 am

    No apologies necessary, Michael, we very much enjoy your comments! I see your point about communication, but would argue that bandwidth is, like any economic good, a scarce resource, best allocated by the price mechanism. (Of course, in many cases, the marginal cost of sending an additional packet is, effectively, zero, but not always. Anyway, there are well-established pricing schemes to handle these cases.) There were a bunch of papers by Varian and Mackie-Mason in the early 1990s discussing alternative pricing mechanisms.

  • 5. Hendrik Rood  |  12 August 2010 at 8:53 am


    The papers of Varian and Mackie-Mason were too static, due to the fact that they missed the point that the dynamic marginal cost for capacity expansion was much lower than the marginal cost to implement price control or other rationing mechanisms.

    It was far cheaper to boost bandwidth as at that time a flurry of technologies like Dense Wavelength Division Multiplexing were on their way.

    The market solved congestion in a different way, as capacity increase was thus cheaper to install then congestion management.

    We observe today some similar discussions with road congestion pricing. The cost of such electronics comes as a shocker to politicians, who tend to look at the annual road construction budgets. However, installing a device of 100 bucks in every car is very cheap compared to the cost of your typical car.

    The interesting point in that case is that it are socialists mainly who push for road pricing, but as soon as you do have implemented the “cash register systems” in all cars and motorbikes a country enables itself for a massive privatisation of the roads.

    The internet infrastructure however was already privately owned and invested, so there was no tragedy of the commons, just a series of initially clueless owners, who didn’t grasp that agressive capacity expansion was in this case the way forward to grow the business.

    That was however soon discovered after entrepreneurs started running fibre optic cable and entered the market with new price points.

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