isen.blog

Eli Noam is a wise observer of the Communications Revolution, but he seems to see the world through incumbent-colored glasses -- glasses with dark lenses that are uncorrected for myopia. Through them, the information economy is "a volatile, cyclical, unstable mess." Nevertheless, his most recent Financial Times column usefully elucidates and extends the central theme of The Paradox of the Best Network -- that marketplace nirvana does not necessarily follow from rapid technology advances, that disruptive technology is not a tea party -- it really disrupts things! Noam's litany begins:

• the dotcom bubble;
• the telecoms crash;
• the music industry bust;
• the advertising downturn;
• the e-publishing revenue stagnation;
• the PC slowdown;
• the wireless saturation;
• the semiconductor slump;
• the newspaper recession;
• the R&D retrenchment.

Noam sees market failure, which "exists when market prices cannot reach a self-sustaining equilibrium." He doesn't see a paradox, because he fails to acknowledge the beauty of a world where barriers to communication -- not to mention music, news, video entertainment and product information -- fall away.

Noam sees that:

The basic structural reason for this problem [sic] is that information products . . . are expensive to produce but cheap to reproduce and distribute, and therefore exhibit strong economies of scale with incentives to an over-supply . . . prices for content, network distribution and equipment are collapsing across a broad front. It seems to have become difficult to charge anything for information products and services.

He vividly describes how these disruptive technology will disrupt things:

[IT companies will] cut costs, outsource, hedge, diversify and use new processes such as micropayments. They will try to innovate to differentiate their products. . . . the main strategy will be to consolidate and cartelise in order to maintain pricing power. As a result, prices and profits rise (as well as media concentration), which will lead again to expansion, entry, and by the same economic logic, to a new price collapse, with a general downward trend in prices . . . [and] price deflation oscillating through the information sector will drag down the rest of the economy . . .

Noam's plausible but disturbing conclusion is that "as countries rely more on information-based activities, their economies become more volatile." [Note that an empirical test of this statement is whether the economies of Korea, Finland, Switzerland and Japan are more volatile than the U.S. economy.]

Noam continues,

. . . governments will inevitably be drawn into the business of stabilization. But this is easier said than done. Classic approaches such as Keynesian demand stimulation, or monetary policy or industrial strategy do not address the core problem of the information sector. That problem is not inadequate demand or investment, but over-supply, competition and structural price deflation.

I really like Noam's suggestion that:

Perhaps the most effective thing that government can do . . . is to help diversify the economy to a more balanced portfolio. This means encouraging manufacturing industries that are not closely correlated with the health of the information sector, often low-tech industries.

Good thinking.

Noam's incumbent slant shows most clearly when he says that

[v]olunteerist activities such as open-source software, shared information or public hotspots will not solve the problem, because they, too, are subject to the instability known as the "tragedy of the commons" . . .

He fails to admit the possibility that such activities might actually seed a new stability. Ethernet was licensed openly, but was not trampled by free riders. The Internet itself, as commonly owned a property as can be, shows rock-solid stability despite 20 years of triple-digit growth and relentless trampling by herds of bad actors.

Sure, the Internet will destroy the telephone business -- but let's cheer, not wring our hands, as we email, blog, and call halfway around the world for free. And that's not the only plausible positive outcome -- there are more moderate ones. For example, the open-source software movement is maturing into an institution that could live co-dependently alongside commercial software much as the Red Cross coexists with commercial hospitals, big pharma and the HMO business.

UPDATE: Russ Nelson sent me email to say:

The opposite of open-source software is proprietary software, not commercial software. Red Hat only sells open source software. If you sell open-source software, it's commercial open-source, right?

Right.

There is a nice historical parallel in the oil business. It too had high fixed costs and low marginal costs. It struggled with oversupply in its first decades. It destroyed the whaling industry. Once pipeline and refinery were built, energy was practically free. As a direct result, over the next decades sailing and horseback riding morphed from essential businesses to hobbies, much as news gathering and movie making appear to be doing today. New business models take time. [Today you don't hear anybody accusing the oil industry of fostering economic volatility, do you? Well, do you?]

Noam's current article has provoked great dialog in Blogistan. Jeff Jarvis pointed it out to me, and Om Malik has some thoughtful comments and pointers to many others. Eli Noam is one of the great policy minds of the communications revolution. I'm becoming a Noam fan. But I have another set of glasses that I wish he'd wear occasionally -- they have rose-colored lenses, and they can help you see over the immediate horizon.