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Politics : Idea Of The Day -- Ignore unavailable to you. Want to Upgrade?

To: IQBAL LATIF who wrote (44722)	9/30/2003 3:59:22 AM
From: IQBAL LATIF	Read Replies (2) \| Respond to of 50167

Conclusion-Delong The macroeconomics tends to foresee a future of falling high-tech prices, rising expenditure shares, rapidly-growing capital-output ratios, and fast labor productivity growth. Yet as one looks at information technology, one cannot help but be struck by the fact that the most far-reaching and important consequences may well be microeconomic. Issues of the benefits from the extent of the market, of price discrimination and the distribution of economic well-being, of monopoly, and of the interaction of intellectual property with scientific communication and research are all very important and very complicated. And if governments fail to properly structure the micro marketplace, then optimistic macro conclusions will be immediately cast into doubt. It is obvious that the creation of knowledge is a cumulative enterprise: Isaac Newton said that the only reason he was able to see farther than others was that he stood on the shoulders of giants. Whenever we consider the importance of property rights over ideas in giving companies incentives to fund research and development, we need to also consider the importance of free information exchange and use in giving researchers the power to do their jobs effectively. Can governments construct intellectual property systems that will both enhance information exchange and provide sufficient monetary incentives? It is an open question. One possible solution may be price discrimination. In the past, price discrimination-- charging one price for one consumer and a different price for essentially the same good 41 for another consumer--has been seen as a way for monopolies to further increase their monopoly profits. In the information age the background assumption may be different. We may come to see price discrimination as an essential mechanism for attaining economic efficiency and social welfare. Third, if we call the economy of the past two centuries primarily "Smithian," the economy of the future is likely to be primarily "Schumpeterian." In a "Smithian" economy, the decentralized market economy does a magnificent job (if the initial distribution of wealth is satisfactory) at producing economic welfare. Since goods are "rival"--my sleeping in this hotel bed tonight keeps you from doing so--one person's use or consumption imposes a social cost: since good economic systems align the incentives facing individuals with the effects of their actions on social welfare, it makes sense to distribute goods by charging prices equal to marginal social cost. Since goods are "excludable"--we have social institutions to enforce property rights, in the case of my hotel room the management, the police, and the federal courts--it is easy to decentralize decision making and control, pushing responsibility for allocation away from the center and to the more entrepreneurial periphery where information about the situation on the ground is likely to be much better. In a "Schumpeterian" economy, the decentralized economy does a much less good job. Goods are produced under conditions of substantial increasing returns to scale. This means that competitive equilibrium is not a likely outcome: the canonical situation is more likely to be one of natural monopoly. But natural monopoly does not meet the most 42 basic condition for economic efficiency: that price equal marginal cost. However, forcing prices to be equal to marginal cost cannot be sustained because then the fixed set-up costs are not covered. Relying on government subsidies to cover fixed set-up costs raises problems of its own: it destroyes the entrepreneurial energy of the market and replaces it with the group-think and red-tape defects of admininstrative bureaucracy. Moreover, in a Schumpeterian economy it is innovation that is the principal source of wealth--and temporary monopoly power and profits are the reward needed to spur private enterprise to engage in such innovation. The right way to think about this complex set of issues is not clear. The competitive paradigm cannot be fully appropriate. But it is not clear what is. Consider, for example, the U.S. Gilded Age toward the end of the nineteenth century. The Gilded Age saw the coming of mass production, the large corporation, the continentwide market, and electric power to the United States. You needed more than the improvements in production technology that made possible the large-scale factory in order to arrive at the large industrial organization and the high-productivity, massproduction economy. From our viewpoint today we can look back and say that in the United States this economic transformation rested on five things: • Limited liability. • The stock market. • Investment banking. • The continent-wide market. 43 • The existence of an antitrust policy. Legal and institutional changes--limited liability, the stock market, and an investment banking industry--were needed to assemble the capital to build factories on the scale needed to serve a continental market. Without limited liability, individual investors would have been unwilling to risk potentially unlimited losses from the actions of managers they did not know and could not control. Without the stock and bond markets, investors would have been less willing to invest in large corporations because of the resulting loss of liquidity. Without investment banking, investors' problem of sorting worthwhile enterprises from others would have been much more difficult. Moreover, political changes--the rise of antitrust--were needed for two reasons. The first was to try to make sure that the enormous economies of scale within the grasp of the large corporation were not achieved at the price of replacing competition by monopoly. The second was the political function of reassuring voters that the growing large corporations would be the economy's servants rather than the voters' masters. Last, institutional changes were needed to make sure that the new corporations could serve a continental market. For example, think of Swift Meatpacking. Swift's business was based on a very good idea: mass-slaughter the beef in Chicago, ship it dressed to Boston, and undercut local small-scale Boston-area slaughterhouses by a third at the butchershop. This was a very good business plan. It promised to produce large profits for entrepreneurs and investors and a much better diet at lower cost for consumers. But what 44 if the Massachusetts legislature were to require for reasons of health and safety that all meat sold in Massachusetts be inspected live and on the hoof by a Massachusetts meat inspector in Massachusetts immediately before slaughter? Without the right system of governance--in this case U.S. federal preemption of state health and safety regulation affecting interstate commerce--you wouldn't have had America's Chicago meatpacking industry (or Upton Sinclair's The Jungle). That piece of late-nineteenth century industrialization wouldn't have fallen into place. Because American institutions changed to support, nurture, and manage the coming of mass production and the large-scale business enterprise chronicled by Alfred Chandler-- and because European institutions by and large did not--it was America that was on the cutting edge of the future at the start of the twentieth century. It was America that was "the furnace where the future was being forged," as Leon Trotsky once said. What changes in the government-constructed underpinnings of the market economy are needed for it to flourish as the economic changes produced by computers take hold? Optimistic views of future macro productivity growth assume that government will—somehow—get these important micro questions right.