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Who would have imagined that the “creative
destruction” waged by the dot.com companies upon
the old regime of the bricks and mortar establishment
would, in an Internet minute, consume hundreds of e-commerce
companies?
Today dot.com companies are the butt of bad jokes. In
hindsight, the notion of bypassing the shopping experience
with the click of a mouse appears all too foolhardy. Who
would buy groceries, furniture, pet food or clothes on
the web? A trip to the mall, despite the traffic, is far
more rewarding that the endless search for the best bargain
on Amazon. Moreover, the serendipity of shopping in a
comfortable downtown area is far more enchanting than
losing oneself in a deluge of information.
Yes, the dot.com stock market bubble burst and the cyber-optimists
at Wired magazine look foolish. But that’s missing
the point. The Internet remains a pervasive force in economic
life. That’s the conclusion reached by two astute
economists, Robert Litan and Alice Rivlin , who argue
forcefully in their recent work, Beyond the Dot.coms,
that the economic benefits of the Internet revolution
are as subtle and significant as they are over-hyped and
oversold.
As economists, Litan and Rivlin
do not believe that the Internet has overturned veritable
economic principles. They have a sense of proportion.
In terms of size, e-commerce remains a small part of the
overall economy – accounting for less than $200 billion
in a $10 trillion economy. The Internet will not repeal
the business cycle even though inventory reductions can
be expedited. Nor will Moore’s Law – where computing
power doubles every 18 months – overturn recessions.
Nor are price discounts the perfect measure of performance.
The price reductions promised by the web, while desirable,
are not the Holy Grail.–“Although the Internet
may reduce profit margins among suppliers somewhat, any
resulting reduction in prices that they charge will not
directly reduce the quantity of inputs required to generate
the same level of output – that is, they will not
increase productivity. Instead, any cost savings from
lower supplier profit margins will represent a transfer
of income from suppliers to producers.”
What counts in the final analysis
is productivity, which enables a nation to increase its
standard of living. Once ridiculed, Old Economy companies
like Fedex and GM and older sectors, such as transportation,
and even the government will deploy the Internet to increase
productivity for the benefit of everyone by using fewer
inputs to produce more goods and services. The authors
boldly proclaim that the “Internet is likely to add
roughly 0.25 to 0.50 percent a year to US productivity
growth (above what it otherwise would be) over the next
five years.” Even in sectors that are difficult to
quantify, i.e. transportation, productivity increases
will spill over as inputs into other sectors such as manufacturing.
The authors pose a formidable question:
“Will productivity move back up to the growth path
of the last half of the 1990s, or will it fall back to
the lower rates of the previous twenty years?”
After stalling in 1972, American
productivity roared back in 1996 at a 2.5 percent rate
for five years. Most economists attribute this growth
to massive investment in Information Technology (IT).
This continues to puzzle economists, because computers
appeared on the economic scene far before the latest productivity
surge. This phenomenon led Nobel laureate Robert Solow
to famously proclaim “We see computers everywhere
but in the productivity statistics.”
Nonetheless the authors are optimistic.
“There is every reason to believe that the Internet
will continue to add to productivity growth, regardless
of what happens to the NASDAQ.” Whether this is sustainable
remains, despite the authors’ predisposition, a tough
question.
Some obstacles clearly stand in
the way of the authors’ hypothesis. It is true that
some transactions can be handled more efficiently with
web-based technologies than paper. But American consumers
lack faith in credit card transactions on the web, even
though they are as secure as conventional ones. Secondly,
the American consumer has, despite the latest gadgets
of convenience, a long-standing love affair with paper;
she is not about to throw out her checkbook nor her cancelled
checks. And promises about the paperless office results
in more paper prompting the joke: “We will have a
paperless office when we have a paperless bathroom.”
Litan and Rivlin believe that the
health care sector savings could reach $27 billion if
health insurance claims were shifted to the web. While
they argue this could potentially lower costs for business,
they largely ignore the fact that such cost savings would
be temporary. They also suggest that telemedicine shows
great promise. But one can only imagine the licensing
and liability issues associated with giving medical advice
via e-mail.
Government is an area that, the
authors believe, will realize cost savings. The Internet
helps government disseminate reams of information; but
the Internet has not slowed down the growth of cost of
government at all levels. Dealing with the government
whether in person or on the web appears to be a deadweight
loss. Reforming tax policy would be a good idea. Eliminating
sales taxes would end the Internet state sales tax debate
but place greater emphasis on income taxes.
Litan and Rivlin believe that the successful Dell computer
made-to-order model can be applied to manufacturing, particularly
to the automobile industry. But this is futile thinking
given the general labor inflexibility of the automobile
trade unions. For example, efforts to outsource spare
parts, a key to Dell’s just-in-time success, are
often met with resistance. Additionally disenfranchising
automobile dealerships – that is, taking out the
middlemen – may prove more be difficult than diminishing
the role of a stockbroker.
Litan and Rivlin do not engage
in the kind of irrational exuberance found in numerous
books extolling the radical nature of the Internet. This
is one of the virtues of the book. But their expectations
about productivity need to be tempered. There is some
evidence that the productivity gains of the late 1990s
may be short-lived, if not illusory. One prominent New
Economy critic, Robert J. Gordon of Northwestern University,
has noted that the productivity revival–“is
narrowly based in the production and use of computers”
rather than across all sectors. (1)
Endnote
1 Robert J. Gordon, “Technology
and Economic Performance in the American Economy, ”
in Technological Innovation and Economic Performance,
Benn Steil, David G. Victor, and Richard R. Nelson, eds.,
Princeton, Princeton University Press, pp. 49-73. A version
can also be found at, http://faculty-web.at.northwestern.edu/economics/gordon/Tech&Econ.pdf
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