Deflation is also causing technology's ascent; much of the economy is encountering price constraints that information technology is asked to solve. My underestimation of the recent earnings strength in tech companies was due to several biases, one is my role in the commodity end of the economy where I see deflation, another is not appreciating the leverage information technology is expected to provide. Gary Shilling has written about this; his recent thinking is that deflation will be good for enabling technologies. His calls on deflation have proved correct, and he was among the first to express skepticism of the Asian markets, but where will the money for appreciating equities come from in a deflationary economy? Martin Wolf addressed this in a "show-me" column of the Financial Times last Wednesday. His perspective is easier to understand; margins are in decline so monopolies are the natural result:
NEW ECONOMY: Putting the paradigm to the test
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The Microsoft case, on which a judge has just pronounced, is just one result of these new economics. With zero short-run marginal costs, monopolies in given product classes are almost inevitable. But, because monopolies can keep prices above marginal costs and still deter potential entrants into their markets, they can also make excess profits. The amount of the knowledge that is purchased will then be less than it should be (given the zero marginal costs). Yet, if producers charged short-run marginal costs, they would inevitably be bankrupt in the long run.
What then does the economics of the "new economy" amount to? The answers, in ascending order of importance, are: the decidedly implausible hypothesis of unprecedented economic stability; the less implausible hypothesis of another sustained period of high growth; and the quite plausible hypothesis of a change in our ideas of how our market economies will behave in central areas of activity. Competition will lead to monopoly. The US department of justice is going to be very busy.
copywrite Nov 10, 1999 Financial Times
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I'd appreciate anyone's comments
later, art |
