Tuesday, March 15, 2005

fyi IT's Role In The Technology-Based Economy


Pointer to article:

Kobielus kommentary:
By way of preface to this commentary, I should note that one of my first jobs was as an economic analyst. My undergraduate degree was in economics, from the University of Michigan—Ann Arbor, where I was an honors student and wrote an award-winning thesis on competition in the television industry. Anybody who’s ever really known me knows that once I start covering a topic, I never stop. Which partly explains why I’m usually out of breath. I continue to try to pull my older thoughts forward into my next personal career stage. Per a recent “self” posting, I’ve long regarded my core career as a student of the economic development of mass media—such as, especially, the Internet/Web, which is the first wholly new mass medium since the advent of television 60 years ago.

Anyway, my fundamental feeling is that world economic development is driven primarily by the emergence of new networks, though sometimes at a considerable lag from when the network was first introduced. Go back historically and look at the power of irrigation networks (basis for civilization); maritime, riparian, railroad, automotive, and aviation networks (basis for international trade, exploration, conquest, and industry); and electrical, telegraph, telephone, television, radio, and computer networks (basis for information society). Each of these networks can be associated with one or more “long waves,” per Schumpeter, Kondratieff, and other economists.

Networks drive development. They provide new ways of connecting people to each other and to the resources of the earth and sky. As transaction costs drop, economic development soars. An article I read a few years ago put the right perspective on this all. It provided a broader strategic framework for understanding the transaction-cost impacts of Moore's Law ("Every 18 months, processing power doubles while cost holds constant."), Metcalfe's Law ("The usefulness, or utility, of a network equals the square of the number of users."), and Coase's Law ("Firms are created because the additional cost of organizing them is cheaper than the transaction costs involved when individuals conduct business with each other using the market.").

The bottom line on all this is that:

• Declining transaction costs spur economic activity (per Coase)
• Transaction costs in today's economy keep declining due to declining costs for fundamental resources (processing power, per Moore; network connectivity, per Metcalfe)
• Transactional cost reductions throughout the economy lower the barriers to new competitors, mergers, acquisitions, divestitures, alliances, process reengineering, disintermediation, and other structural innovations
• Transactional cost differentiation (per Michael Porter's competitive/strategic framework) is the most powerful strategic differentiating weapon of all, making and breaking whole companies, industries, sectors, and economies

The fundamental value of networks (and all connected resources) as a resource to the economy/society may not be entirely quantifiable. The best we can say is that networks reduce transaction costs and make new types of transactions possible. And that all of this drives such economic indicators as innovation, investment, employment, and productivity, which can be quantified and satisfy some basic human needs and wants on which we can all agree.

Actually, these "laws" are just rules of thumb for understanding some important phenomena and trends. None of them has any scientific weight as a theoretical assertion confirmed through controlled observation and peer review. It's hard to see what the economic basis for Moore's Law might be, or what the psychological basis is for Metcalfe's Law's equation of squared-humans with some metric of collectivity happiness (after all, squares aren't much fun to party with), or what the sociological basis is for Coase's Law's implicit notion that a firm requires at least two individuals operating as an economic unit (what about us freelance writers? aren't we firms unto ourselves?).

I get the sense that the late 90s dot-com run-up in the market was no fluke, and it wasn't irrational. Collectively, society had begun to appreciate the discounted present value of future economic growth to be stimulated by the new, ubiquitous network (Internet) and transaction model (e-commerce). People bid equities up commensurate with that value. What society didn't figure, though, is that the future value will be driven/realized largely by the successors (or the successors to the successors) to the e-commerce companies who emerged in the late 90s. General rule: In a fast growing but new and volatile industry landscape, success will primarily accrue to the successors.

Microsoft has proved itself the ultimate successor time and again in so many markets. In this context, we can phrase “Gates' Law” as follows: As technology improves, new types of transactions with Microsoft will become more cost-effective, feasible, and, in fact, inevitable (and its corollary: the share of world income flowing to Redmond will increase).

All of which points up the fact that we've never had a "new economy," to use a term favored by many in the media these past ten years. The economy still runs on transaction costs, which juice liquidity. So much of this liquidity now rides the wire, but it still represents the time-old bottom line of balance sheets, financial exposure, and business and personal risk. In another article, Michael Porter and others debate whether there ever was a "new economy" immune to the historical cycles of capitalism. I like Porter's reductive comparison of the Internet to supermarket scanners (though others felt that was a ridiculous comparison): both innovations have contributed to a reduction in transaction costs, by supporting greater speed, flexibility, and automation in mundane buy-sell interactions. Later on in the article, the author notes that banks' cost of processing transactions on the Internet is much lower than through ATMs or human tellers. He also notes that economic development has historically followed the development of new types of networks, including roads, highways, canals, electrification systems, telephone systems, radio, television, airplane flight paths, etc., all of which enabled a reduction in transaction costs across the whole economy as well as greater flexibility in putting together, executing, and reconfiguring transactions and relationships.

The Internet is just the latest networking environment having an impact on economic transactions across the world economy. In that sense, it never created a new economy so much as juiced the one, only, and ongoing economy. And that's a good thing.