Comments: /Econ_Articles/newecon.htm : LUSENET : Economic History (and Related Observations) : One Thread

The Next Economy?

-- Bradford DeLong (, May 04, 2000


I believe that what happens to the more than 200 other economies will be the same thing that is now happening to the U.S.--or should I say California? But it will take a long time: three or four generations.

Still, three or four generations is a short time compared to how long it took (and will take) industrial technology to spread around the globe, or how long it took (and will take) universal primary education...

Brad DeLong . . . .

-- Bradford DeLong (, May 04, 2000.

Thank you for creating such an informative web-site. Your reading list was interesting, especially the Diamond book because of its use of evolutionary biology as means to discuss and understand a dynamic system.

Several years ago, I came across a paper published by Thorstein Veblen (1898) in the Quarterly Journal of Economics with a discussion entitled "Why is Economics Not an Evolutionary Science?".

I have argued that Veblen's question is as valid to today as it was 101 years ago. I am just curious, have you dabbled with the notion that Newtonian physics may be an inadequate metaphor for economist and that we might learn more from Darwin? I know there is some work being done in this area but seldom do you see the top echelon of economist like yourself ever address the issue.

I am looking forward to reading your paper referenced in Contributed by Bill Snyder ( on July 2, 1999.

-- Bill Snyder (, May 04, 2000.

It seems to me that there's several ways to approximate the invisible hand even with negligible marginal production costs. We've seen it historically in the production of music, theatre, sermons, scientific papers, education and other socially good, difficult-to-measure information products with positive economies of scale:


Patronage has appeared for software, as well. Much of Linux, the "free OS" is actually packaged, and mirrored (placed on public internet servers) by commercial providers (Debian, Red Hat, Caldera, etc.), who support programmers that provide no clear direct added value to the company: The programs are given away on the Internet. The value the companies gain is rapid service from attentive experts: the traditional reward of patrons.

Another model is the subscription: Free samples (as when we browse magazines), yet charge for a steady stream of value. Many of the books, reviews, etc. on the net seem to take this model.

Software subscriptions have foundered, and I do not know why, although I know that one of my acquaintences has tried to sell such a system. I suspect that it has to do with transaction costs, and the lack of consensus concerning digital money.

You know, it seems to me that a valuable service the gov. could provide would be to mandate a standard e-currency, to facilitate subscription. This suggestion might have more value coming from you. Subscriptions would re-introduce the invisible hand to the information economy. With low-overhead e-cash, and competition by providers, the price of information would fall to its shared cost of production. This might reintroduce social incentives.

Oh well; I'm not an economist. My analysis could well be flawed. I read your site regularly, by the way. ------------------------------------------------------------ ----------

Contributed by Ray Van De Walker ( on July 8, 1999.

-- Ray Van De Walker (, May 04, 2000.

Perhaps we can get to the root of the paradoxical character of information technology markets by asking a fundamental question: Is knowledge an economic good?*

The distinctive characteristic of an economic good is its "scarcity," i.e., the act of making use of one of its possible benefits excludes making use of its other benefits or those of other goods. For example, a piece of land is "scarce" because it can be used as farmland, or as the site of a home or of a store, but none of these three uses can be realized immediately on the ame plot of ground. The uses exclude one another. Or again, an apple may be scarce, because in order to obtain, I must sacrifice some other good or goods, such as the leisure forgone in searching for and picking an apple; or the greater amount of leisure and the expenditure of fertilizer, seeds, etc. necessary to grow an apple tree. These two factors of "scarcity" fall under the same formula: A good is scarce when its use to achieve one end means the sacrifice, at least for a time, of other ends. By contrast, under preindustrial circumstances such things as air and sunlight are not economic goods, because there is no "exclusion of uses," nor can they be "produced" by expenditures of land, labor or capital.

Now, economic knowledge is in one way scarce, in another way not. Hence, it is a quasi-economic good, or perhaps a quasi-commodity, and so falls between the two categories of "the economic" and "the non-economic."

Consider the mere existence of some content of knowledge; say, a design for an internal combustion engine, or a demographic analysis of a certain market. As such, there are no "mutually excluding uses" for a piece of knowledge, as there is for a piece of land, or for a given worker or capital tool. The same piece of knowledge can be a factor in several different productive operations, and can be shared by several people at the same time, without any diminishment. Just as with other common goods, such as peace or justice, my making use of the design of an engine does not prevent someone else from making use of that same design to build an engine.

On the other hand, the knowledge or information that is relevant for economic processes is scarce in its production. We are not born with knowing how to build an internal combustion engine, or with the knowledge of the buying patterns of American 21 year olds. For these bits of information to be made available to society, a number of persons had to expend time, labor and capital to discover them. Thus, "bringing information into existence" does impose economic costs.

This is radiclly different with all other economic goods. They are both scarce in their production, and scarce in their use. Even our apple, for example, could be eaten directly, made into apple juice or apple sauce, or be thrown into the pig's mash. Or, even if the only use lies in eating it, one still must choose among the various times when it could be eaten- if all I have to eat is one apple, then I literally must choose between breakfast and lunch. Furthermore, as noted previously, it was scarce in its production, even if the cost was so little as spending thirty seconds to pluck an apple off of a tree in my back yard.

Since economic knowledge is scarce in its production, its producers need to derive revenue from controlling it as if it were a private good; but once produced, it is (at least potentially) common good. Hence, it is difficult to fit into the market, without the aid of such "artifices" as patent and copyright laws.

*(To be a stickler: there is a fundamental difference between two kinds of economic knowledge: one is technological knowledge, such as the knowledge of how to build an operate a machine; and the other is knowledge of a particular fact, such as "this worker has those skills," or "these possible consumers have this much disposable income." The former should be called "technology," the latter "information," and the whole comprehended under "economic knowledge.")

Contributed by James van Boom ( on July 19, 1999.

-- James van Boom (, May 04, 2000.

So, if this new economy thing, is basically, as of today, a very NorthAmerican type of hype, what happens with the more than 200 or so, other countries that also have an economy, is it new, is it old ? How would one describe, this economies?

Contributed by Gabriel Carrraslon ( on July 22, 1999.

-- Gabriel Carrraslon (, May 04, 2000.

The page seems to imply that increased data on customers will lead to price gouging of relatively wealthy customers. I don't see how a company could successfully execute this strategy in the face of competition from other sellers

The page states: "CDNow may use this information fine tune its prices to charge Alice all that her purse will bear..."

True, but how does that change the conclusion of the previous paragraph? " ... filter can be linked to a shop- bot. Once Alice has decided that she will try On Being Blue she can find out who will sell it to her at the best price"

Any company who tries the strategy of the second paragraph will lose all its business to one who never ups its prices in response to knowledge of the customer (assuming the customer always uses a ShopBot.)

The other possibility is that sellers form cartels and agree on prices for given income levels but I imagine there would soon be laws against this which would be easy to enforce.

There's always the possibility that I missed some crtical counter argument in this very thought provoking article... Contributed by George Colpitts ( on July 25, 1999.

-- George Colpitts (, May 04, 2000.

It is very nice page and the Information Economy it is a reality that is changing the prospectives for the Next Millenium,but two crucial points not mentioned: 1) The segmentation of the work force,called the Trasnationalitazion of the Production Processes,a factual transformation of the Multinational Corporations (MNC). 2) And the Globalization of the Financial Markets.

george soros has a very good analysis about this megatendencies.

Professor Jimenez of the National University of Mexico (UNAM)-now with 100 days strike coming from the Ultra-left that is one of the process of this Globalization or New Economy,supported in Mexico by the New Liberals ( or in spanish,Neoliberales meaning ultra-conservatives from the Monetary branch of Ecs).

Contributed by Dr Ramon Jimenez ( on July 27, 1999.

-- Dr Ramon Jimenez (, May 04, 2000.

If you haven't already, you'll want to read Stan Sesser's commentary regarding your article in the Aug. 31 Asian Wall Street Journal. I'm tempted to cc it to you now, but that would violate Dow Jones' copyright, and no doubt illustrate your point about the erosion of excludability in the new cybereconomy. (It's interesting that his article is linked to your site -- and my thanks to the Journal for that -- but I wonder if Dow Jones' online paid subscription site will be so generous in reciprocating.)

Stan takes your views on the new economy as the basis for postulating that journalists, like academics, may find themselves unable to derive an income for their work as all content becomes free on the Net. My experience, at least thus far, has been very much to the contrary. The initial impact of web-based publishing has been to greatly INCREASE the demand for reporters, editors, writers and authors as multiple online ventures eagerly seek to generate content that can differentiate their ventures.

Certainly the payment/revenue models are still evolving and ever-more information is being made available for free. Yet concurrently, very specialized and pertinent information is selling for more money than ever before (see the proliferation of consulting/information businesses like the Gartner Group, IDC, etc., and the plethora of venture capitalists pouring money into online-information ventures these days).

Long-term, there will no doubt be a shakout of weaker web- publishing ventures (as well as of journalists, professors and knowledge-workers who provide little value-added) just as there has been consolidation in traditional "old media" industries. But to extrapolate that ALL information will eventually be free, and that thus knowledge-workers will go the way of medieval opera singers and chair carvers seems counterintuitive to me, considering the rising value of pertinent information and intelligence in today's world.

As a freelance writer and editor with a clear self-interest in the matter, perhaps I'm being Pollyannna-ish. But my own experience suggests that the need for skilled knowledge workers, authors, professors etc. will only increase as the Web deluges us all in an onslaught of indiscriminate information. In the end, none of us wants to offer our services totally for free, so systems of payment/compensation will have to evolve to support the continued provision of our services.

By the way, this is a very interesting, easy to use, website. May patronage and plaudits flow your way . . .

-- Russ Arensman (, May 04, 2000.

I don't think that services like BargainFinder will turn out to be as destructive to the dynamic storefront story (including collaborative filtering) as you fear. I'll use my experience with to illustrate the point.

I agree with you that a dynamic storefront is a valuable service; it attracts me back to I also agree that if started charging for their recommendations I would think twice (or maybe three times) before paying.

However, cleverly updates their database about me *only if I buy from their Web site*. So when recommends a truly fascinating book to me, I want to purchase it at so the next recommendation will be even better. I'm vaguely aware that there are shop-bots available, but I find myself thinking that I should go ahead and buy from Amazon because (1) the price difference will be small compared to the hassle of getting competitive quotes for my book (especially since Amazon's super-easy one-click ordering involves no hassle at all), and (2) I'll screw up the dynamic storefront if I buy elsewhere.

I regard shop-bots more as a guarantee that won't rip me off too badly, or as a way to validate the true market value of my potential purchase if's price seems outrageous.

I'm sure the super-frugal buyers out there will be using shop-bots for every purchase. But to me it's like switching long distance companies -- the fact that some frugal consumers switch long distance service at the drop of a hat means that the market is competitive, so I am (rightly or wrongly) confident that I can just sign up for a decent plan with a reputable company, and get a good deal without having to switch all the time. I'm sure I'm not getting the absolute best possible deal, but it's close enough - life is too short for me and probably lots of other consumers to put the time and effort required into long distance offers or shop-bot listings to save those last few cents.

Thank you for an interesting and informative article.

-- Mike Gilbert (, May 04, 2000.


In light of the recent Jackson finding of fact in the MSFT your analysis was truly exceptional and prescient.

Anyone who has spent time with your work on transparency, excludibility and rivalness was not at all surprised at Jackson's ruling.

Well done, this is perhaps one of the finest applied economis analysis that was in front of us these years. Right up there with a certain guy at MITs callon Japan that he wrote in the 1994 Foreign Affairs.

Well done!

Mac Robertson

-- G. Robertson (, May 04, 2000.

Some random comments, with references to essays that I have written on these topics. The essays are at The number of an essay is given in brackets [].

1. I believe that the most fundamental problem of the information economy is not the problem of information goods but the fact that the critical resource to be allocated has changed from capital to human talent. [12] The institutional changes needed to solve this problem are interesting topics for speculation. [44], [49]

2. Different methods of allocating information goods solve different problems effectively. For example, a "pay by the drink" approach to using Internet content is good for the incentive to produce content, but it can be costly to enforce. See also the idea of "clubs" [9] [10].

3. In this context, "open source" is over-rated. See [34]. Also, I am not excited about the various shopping fads (bots, auctions, etc.) See [43].

-- Arnold Kling (, May 04, 2000.

Nice article, I like the idea of digital currencies, although they will take some time to develop, if any country supports a national digital currency, this will boost the currency.

The approach to the new economy paradigms and the free market it is interesting, and I think there is a need to develop a frame work to explain and developed it even further.

-- ANDRES SALDARRIAGA (, May 04, 2000.

The logical extension of shop-bots and auction sites would be commodities exchanges -- except that the commodities exchanged would be books, records, chocolate bars, and other consumer goods, rather than gold, T-bills, shares of IBM, and other investment instruments.

For example, in such a commodities exchange, I could buy bonds for 1,000 gallons of milk from XYZ Dairy at 5% interest. Every week (roughly), this bond would appreciate by one gallon, regardless of how the "spot price" of milk changes. (The cost of delivering the milk from XYZ Dairy to my fridge would be separate from the cost of this bond; perhaps my local grocery would accept coupons from the bond plus a small service charge.) I could have a whole portfolio of investments, so that as prices shifted, I could, say, sell off some of my milk bonds and buy orange-juice bonds. I could have a broker, or a shop-bot, manage my grocery investments based on my (financial and gustatory) preferences.

If most of the products in a grocery store were traded in this way, manufacturers' coupons would become obsolete, since the exchange would be setting the price. On the other hand, if not enough people participated in trading a given consumer product on a commodities exchange, it would be vulnerable to the same speculative shocks and scams that afflict penny stocks.

Now that we have things like online trading systems, it's technologically feasible to set up such a commodity exchange. But under what circumstances, and for what products, would it become economically efficient to do so?

-- Seth Gordon (, May 04, 2000.

In economies where most people do not have telephone access (that accounts for 90% of the world's people), this "new economics" is not going make things better for have nots.

To see exactly what I mean, read the following

-- Tapen Sinha (, May 04, 2000.

I am kinda confused about the rivalry implications of Internet economy. Goods always include fixed cost of know- how that gets amortized over the set of consumers. For intellectual property this fixed part of the cost happens to dominate the per-unit part. This is also true for, for example, books or records. Internet commerce lowers the transaction costs for both digital goods and "meatware". Still, since the market for any good has fixed size, I do not see how it follows that the per-unit price artificially restricts the distribution. Some people are not going to buy the song you produced for any amount of money so you have to amortize your production costs over the population of prospective consumers. Whether distribution cost is near- zero (Internet sale) or not (CD) does not really matter.

-- Leopold The Cat (, May 04, 2000.

Dear Brad,

At the top, I must say that I find dubious your argument that the emergence of digital commodities has undermined what has hitherto been an utility maximizing market system. The best short summary I know of a non-marxist theory of endemic market failures before the rise of digital commodities is Amit Bhaduri's in An Intelligent Person's Guide to Liberalization. But I'll leave that aside for now. It's even in pitched in the same kind of prose you use.

On how the need for advertising revenue given the impossibility of directly charging for programming, you argue that this biased television in favor of least common denominator, mass audience programing while niche markets in which the intensity of demand may have been stronger were ignored. Interesting point indeed. Perhaps television also had to ensure that viewers would be predisposed to be bombarded by manipulative ads by corporations to sell their products. This would seem that systematic anti-corporate messages had to be filtered out as well; else, no rational corporation would purchase ad time during such a show. At any rate, there seems to be possibility for elaboration of the effects of dependence on advertising.

On rivalry, I don't get the operational meaning of the concepts in this formulation: "Charging the ultimate consumer the good's cost of production or the free market price provides the producer with an ample reward for his or her effort. It also leads to the appropriate level of production: social surplus (measured in money) is not maximized by providing the good to anyone whose final demand for a commodity is too weak to wish to pay the cost for it that a competitive market would require."

Either this is a near tautology: money-making is not maximized by producing goods for which money cannot be paid. Or it implies that consumer welfare is maximized by producing that set of goods the sale of which maximizes monetary output. But how do we know maximum money output is equivalent to maximum consumer welfare or that it maximizes the consumers' surplus or whatever?

I don't understand the meaning of this concept of "social surplus (measured in money)". Please elaborate.

It is also true that the private substitutes for public goods may not yield as much utility though the production of the former would maximize monetary output. So in terms of utility calculus there seems to have always been a strong argument that market hegemony is less than optimal.

I don't understand how you think the tensions from prices falling potentially to zero marginal costs will be resolved in a market society. Are you saying that such digital goods will not be produced? Or that they will be produced but social waste will be expended to keep prices above costs, thereby undermining social utility?

And what do you make of Microsoft's evident ability to remain profitable?

Its monopoly position, as well as control over distribution as Robert Teitelman emphasizes, enables it to remain hyper profitable. Is your argument that their price is too far above marginal costs to maximize social utility?

Would you kindly elaborate on this; I don't get what you mean by compatibility advantage or why the dynamic below is somehow unique to digital commodities:

"Competition has been the standard way of keeping individual producers from exercising power over consumers: if you don't like the terms the producer is offering, then you can just go down the street. But this use of private economic power to check private power may come at an expensive cost if competitors spend their time duplicating one another's efforts and attempting to slow down technological development in the interest of obtaining a compatibility advantage, or creating a compatibility or usability disadvantage for the other guy."

On transparency you claim: "The market for software "goods" is almost never a market for today's tangible goods, but rather for a bundle of present goods, future goods, and future services. The initial purchase is not a complete transaction in itself, but rather a down payment on the establishment of a relationship."

This is hardly unique to software; the same problems inhere in an employer's purcase of labor power. That's not a complete transaction either; he still has to see whether he'll be able to butcher the beast for its hide. Haven't Bowles and Gintis written about the peculiarities of the labor power (initial purchase)/labor (service) exchange?

Oh, well, I haven't read sections C and D yet.

-- Rakesh Bhandari (bhandari@phoenix.Princeton.EDU), May 04, 2000.

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