Entertainment Values
Thirty years ago, when John
Kenneth Galbraith published The New Industrial State , he was sure he
knew where the modern economy was going and was contemptuous of economists who
clung to their old ideas about the primacy of markets. Clearly giant
corporations, driven by the imperatives of technology, were replacing the chaos
of the market with bureaucratic order. The age of business heroes was over:
"With the rise of the modern corporation, the emergence of the organization
required by modern technology and planning and the divorce of the owner of
capital from control of the enterprise, the entrepreneur no longer exists as an
individual person in the mature industrial enterprise." The economy of the
future would be run by faceless organization men, whose ability to manipulate
pliable consumers would eliminate the traditional uncertainties associated with
market competition. In effect, capitalism was evolving spontaneously into
socialism without the justice.
Instead,
of course, only the paranoid survived, or something like that. And yet
Galbraith's mistake--believing that one can discern the shape of tomorrow's
economy by extrapolating from today's iconic corporations--is one that each
generation seems to repeat. Yesterday every industry was going to look like
automobiles, and every company like General Motors; today every industry is
going to look like software, and every company like Microsoft.
Like Galbraith, the prophets of what is variously called
the "business revolution," the Knowledge Economy, the Network Economy, and the
"new economy" (not to be confused with the New Economy I wrote about last month) are likely to
be disappointed. Even though information technology may well be the main
driving force behind future economic growth, it's very unlikely that the
information-technology industry is ever going to be more than a fairly
small share of the economy. In its day electricity changed everything, too, but
there was never a time when most people worked for electric utilities or even
for employers who looked anything like electric utilities. Still, even if every
industry isn't about to look like software, it is worth asking what is
special about those industries that do.
It's
important to get past the obvious, but mainly irrelevant, surfaces of things.
Of course information technology is nifty; but the latest technology
always seems nifty (At the 1876 Philadelphia Centennial Exposition,
triumphant banners proclaimed "All By Steam!"). The real question is whether
there really are, as Wired 's Executive Editor Kevin Kelly put it in the
title of a widely read recent article, "New Rules
for the New Economy."
Kelly manages to come up with no less than 12
such rules, ranging from the more or less incomprehensible ("Embrace dumb
power") to the basically silly ("Follow the free"), all wrapped in trendy
rhetoric about living "on the edge of chaos" and all that. But most of his
rules amount to variations on two themes: In the Network Economy supply curves
slope down instead of up, and demand curves slope up instead of down. At least,
that's what I think he's saying. To the extent that he is, he is actually on to
something--though not something new.
True,
traditional economic theory--the stuff that occupies the first 10 or so
chapters of most introductory textbooks--does assume "diminishing returns" in
both production and consumption. That is, the more units of something the
economy is already producing, the harder it is to produce one unit more; the
more units of something people are already consuming, the less they are willing
to pay to consume one unit more. That is why the conventional supply curve,
which shows how much will be produced at any given price, slopes up; and the
demand curve, which shows how much people will buy at any given price, slopes
down.
But even Alfred Marshall--the Victorian economist who
invented supply and demand as we know it--was well aware that while diminishing
returns are a good assumption for agriculture (The more wheat you try to grow,
the worse the land on which the marginal bushel is grown), elsewhere in the
economy it is quite possible to have increasing returns, in which the
more you produce, the easier it gets. Way back in 1890 he explained that
concentrations of industry (yes, they existed before Silicon Valley--his prime
example was the Sheffield cutlery district) can create a virtuous circle in
which the availability of skilled labor, the presence of specialized suppliers,
and the diffusion of knowledge . Increasing returns to consumption are probably
less common, but can result among other things from "network externalities"--a
bit of useful jargon for what happens when the usefulness of a product depends
on how many other people possess something similar. A telephone is a toy when
only a few people have one; it is a necessity when everyone has one.
The
old-fashioned examples are deliberate: Increasing returns have been around for
a long time. And while economists may historically have downplayed their
importance, those days are long past. In fact, by now, increasing returns are
rather old hat. Everybody knows that sufficiently strong increasing returns can
cause discontinuous change, with markets exploding when they reach a "critical
mass," that small events can have big effects when a market is near a "tipping
point," that economic choices (like VHS vs. Betamax, or Silicon Valley vs.
Route 128) can be subject to "lock-in" by past accidents, and so on. Everybody
also knows that while it is easy to tell good stories along these lines, it's a
lot harder when you get down to real cases: It's amazingly hard to identify a
critical mass or a tipping point for an actual industry, even after the
fact.
So what's new about Kelly's New Rules? Well,
for one thing, they may be new to him. Cybercritic Paulina Borsook has pointed
out to me that technology enthusiasts like Kelly are prone to "Luke Skywalker
fantasies," imagining themselves heroic rebels against the empire of orthodoxy.
(The quintessential example of the Luke Skywalker Syndrome is the story of
Brian Arthur, as described in my column last week.) They are so
sure that boring conventional thinkers could not have anticipated their radical
ideas that it would never occur to them to check.
Or maybe
what's new about the rules is the claim that now, for the first time, they
apply to a large part of the economy. However, technology boosters, who won't
stop thinking about tomorrow, often forget to think about yesterday: It's not
at all clear that increasing returns are any more important in software than
they were in the early days of railroads, electricity, telephones, radio, even
automobiles (What good is a car without gas stations? Why open a gas station if
nobody has a car?). And it's very unlikely that in the future everything will
look like software--indeed, it's much more likely that eventually the
information sector itself will turn into a boring mature industry.
If there is something new in the writings of Kelly and
other cyberprophets, it is the fact that they don't just predict a
future in which the curves slope the wrong way, they endorse it. That
is, along with the gee-whiz pronouncements about how the economy supposedly
works goes a pronounced libertarian bent, a belief that the new economy is too
dynamic, organic, or whatever to be regulated from above.
What is
odd about these libertarian conclusions is that they do not at all follow from
the premises. On the contrary: A world in which increasing returns are
prevalent is one in which markets are likely to get it wrong. Products that
should be developed never get off the ground, or do so much later than they
should, because everyone is waiting for other people to move. (I'll buy a fax
machine only when enough other people have them to make it worthwhile.)
Industries can get locked into the wrong technology (Macintosh is better than
DOS, but everyone uses DOS because everyone else uses DOS). Waste occurs
because of coordination failures (In the early days of railroads each line had
a different gauge). Indeed, increasing returns have traditionally been used as
arguments against free markets, for government intervention. You
may not believe that such intervention will work in practice, but that's a
judgment about the rules of politics, not economics.
Of course the information-technology sector has
been wonderfully successful--but that is because it has been in a position to
exploit the extraordinary possibilities offered by photolithography, not
because of any special virtue in the way it operates. Other sectors in which
increasing returns to both production and consumption prevail--and there are
quite a few outside what is normally thought of as high technology--do not seem
especially admirable.
Consider, in particular, an
industry few would regard as a role model: Hollywood. It is obviously
characterized by increasing returns to production: Once you've made a movie,
showing it to another person costs virtually nothing. It is also characterized
by increasing returns to consumption: Many people want to see a movie because
other people have seen it. In fact, by my reckoning, the movie business handily
fits 11 of Kelly's 12 rules. It even fits "Follow the free," which I think
means "Sell your signature product cheap, and make money off accessories";
major blockbusters make much of their money off product placements and toy
sales, and even theater owners depend on sodas and snacks to turn a profit. The
only rule I can't apply to Hollywood is "Embrace dumb power"--but then again,
some of those studio bosses ...
So think of it this way:
While the prophets of the "new economy" may seem to be telling us that we're
heading for a future in which every industry looks like Silicon Valley, what
they are really saying is that we are on our way to an era in which there's no
business that isn't like show business. Let's hope they're wrong.
