<nettime> The New Economy's 'Network Society' Plays by Old-Economy Rules

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The New Economy's 'Network Society' Plays by Old-Economy Rules
Jeff Madrick, NYT, July 6, 2000

[http://www.nytimes.com/library/financial/columns/070600econ-scene.html]

In the relentless search to find something unprecedented in the new
economy, many business gurus, and even some well-trained economists, now
say that the theoretical principles underlying it are novel as well. Don't
bet on it. Increasingly, it looks as if old-economy principles are saving
the day. 

The main claim is that we now live in a "network society," one in which
profits and economic growth can reach heights that will make other
industrial revolutions seem pallid. Lawrence H. Summers, the Treasury
secretary, displayed just such new-age thinking in a speech this spring. 
Citing an example used by many a new-economy guru, he noted that one fax
machine is useless, but when we have two and more, we have a network. If
there are 100,000 fax machines, we have 10 billion possible relationships. 


Because of such networks, the argument goes, profitability does not
diminish as investment expands. (Diminishing returns are supposedly
old-economy ideas.) Rather, there are now "positive feedback loops"
because it costs so little, sometimes almost nothing, to reach a new
customer or make a new connection. Thus, the bigger the network, the
higher the returns on investment. The ultimate network is, of course, the
World Wide Web and the countless private Internet-like systems run by
large corporations and institutions. 

But how new is all this? Has the Treasury secretary ever heard of
telephones? Or television? Or A.& P., for that matter, which was started
in the late 1800's? Granted, television and A.& P. were not the sort of
networks that could isolate 25 or 2,500 people, as ideally may happen on
the Net. But the basic economic advantage was the same: positive feedback
loops. One A.& P was only a large mom-and-pop store. Two or more, and we
had a network. With every additional outlet, the owners increasingly
enjoyed the benefits of large-scale purchases of inventories, aggressive
advertising and the mass distribution of their product. 

The more they invested, the lower their average costs. 

Or consider steel. In 1880, steel rails cost about $68 a ton to produce. 

But largely because of economies of scale, the price fell to about $18 a
ton by 1900. The fixed cost to put up a modern steel mill was high, but
the cost of producing extra rails was small. Thus, the more rails that
could be sold, the lower the average cost for each ton. Those who sold the
most could underprice the competition, spend more on marketing and lower
costs still more. 

The same economies of scale that worked in the late 1800's and throughout
most of the 1900's may also be creating rapid productivity gains in the
new economy. New companies are selling standardized products to enormous
mass markets, just as in the good old days. Industry after industry back
then exploited the advantages of scale, from petroleum companies to
cigarette manufacturers to rail lines to automakers to retail chains. Huge
companies came to dominate their markets. 

In the new economy, standardization and economies of scale are clearly
back. It is too early to get precise data on this. Moreover, many of these
new economies of scale are being earned in service industries, and as John
Kwoka, a George Washington University economist, points out, the
government does not gather data about them. 


But has there ever been a more standardized product in America than
MS-DOS, Microsoft's operating system, or Windows? Consider today's most
successful companies -- Microsoft, Cisco Systems, America Online, Oracle,
Sun Microsystems, Dell Computers, eBay and so on. All have enormous shares
of their particular markets, and all enjoy economies of scale based on
standardized (if complex) products. The more these companies sell, the
higher their productivity as they reduce labor costs per unit to a
minimum.  The national economic data shows that most of the outsize gains
in productivity are being created in just such computer and software
companies. 

Technologists tell us it will be the next generation of software that will
ultimately connect the niche markets. My guess is that true profitability
will continue to come to those businesses that sell products with the
broadest appeal. AOL wants more subscribers, eBay more participants and
Amazon.com hopes to reach the huge critical mass needed to make it
profitable at last. In fact, the Internet probably gives even more
advantage to large companies than they had in the past because the
nonmarketing costs of reaching one additional customer are virtually nil. 
The real advantage will be to those companies that either have a piece of
technology that cannot be duplicated or can afford to advertise
aggressively enough to win brand-name recognition in the mass market. 

For antitrust authorities, old questions, not new ones, are being raised. 

The new networks give rise to monopolies. But the economic benefits of
such big business should not be underestimated. Through economies of
scale, stable markets, uniform standards, investment in R & D, and
permanent, well-trained labor forces, big business has long been a boon to
America. 

On the other hand, monopolies can go too far by suppressing innovation and
keeping prices high. Especially now that size may have a renewed
advantage, the antitrust authorities are correct to be vigilant. Moreover,
there are other traditional concerns. In the pursuit of more scale,
mergers among media companies threaten principles of free speech. The
consolidation of financial services makes us more vulnerable to crisis.
The concentration of wealth has skewed political power toward the rich. 

The real niche economy was the one started by Japanese auto companies in
the late 1970's. Consumers demanded a wide choice of products, and our
sleepy big businesses did respond, albeit slowly, with innovative ways to
meet these needs more productively. But they could not raise productivity
as rapidly as they did in the more standardized century between the Civil
War and the 1970's. In my view, this contributed to America's historically
slow growth from the 1970's to the early 1990's. 

In the mid-1990's, that changed radically. Business again made
standardized products that corporations and consumers craved in mass
volume. For good and ill, welcome back the old economy. 




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