David R. Henderson, Ph.D. Economics
Is There A New Digital Economy of Ideas
Red Herring Magazine, February 1, 1997
Advances in computer technology will eturn out to be as important as the invention of electricity. In fact, today's digital technology has already revolutionized communications. In the early 1960s, when my father received a long-distance phone call from Peoria, everyone in the family grew silent, knowing that only something serious could warrant a long-distance call. (In fact, my great-aunt had died.) Today, when I get long-distance phone calls in the evening, I often hang up because the caller is trying to sell me something. The difference between the two eras is that phone calls today are much cheaper. Between 1950 and 1990, according to Gary Hufbauer of the Institute for International Economics in Washington, D.C., the inflation-adjusted price of a three-minute phone call from New York to London fell by more than 93 percent. Miraculously, quality improved.
Computers can't take credit for all this, of course--the introduction of satellites and fiber-optics had a lot to do with it--but they have eliminated much of the need for high-cost manpower. Similarly, computers have revolutionized transportation and production, and will continue to do so. The result could well be an economic renaissance. While we're used to considering a 2.5 percent growth rate respectable, the computer revolution could raise that rate for the real gross domestic product to 3.5 or even 4 percent. And as goods become cheaper, even very low-income workers will benefit.
But to say that computer technology will create unprecedented wealth is not to suggest that the so-called old economics will suddenly become meaningless. Ten or even 100 years from now, a few important economic facts will remain unchanged. People will still need money to buy things, which means they will have to continue working, lending capital, or feeding at the government trough to get that money. (In other words, scarcity--people wanting more than they have and being willing to pay for it--will still exist.) People will still want things--man does not live by ideas alone; bread comes in awfully handy too. And finally, the government will still be able to mess things up by regulating and taxing heavily or help things out by reducing regulation and cutting taxes and spending.
The reality is the opposite. Everything that has happened in the last 15 years is consistent with the old laws of economics. Remember all the people who were so excited about personal computers that they went out and--without a business plan or even a sense of business--started their own computer retail stores? They apparently didn't calculate that when lots of other people started similar stores, each store would have to cut prices. Most of the stores went bankrupt fairly quickly. Profit margins were squeezed as the supply of retail outlets increased. A little dose of Econ. 101--increased supply brings down prices--would have saved these folks a lot of money.
In fact, that one simple idea--that when something is abundant, it's also cheap--could serve as an important lesson for young people who think the way to get rich is to become really good at computer programming. The problem for them is that lots of people are becoming computer programmers, and not just here but also in India, where $14,000 a year is a great salary for a programmer (see "Bottlenecked in Bangalore"). This is the competition. So if you move to Silicon Valley to make your fortune in programming, you will quickly find that you'd better build or tap some other skill--a reality no more surprising than the fact that the last 100 years' incredible increase in agricultural productivity brought real food prices down and shrank the agricultural workforce from more than 37 percent of the labor force in 1900 to less than 3 percent today.
The people in the Silicon Valleys of the world who will make lots of money are those who can figure out how to use computer technology in areas where it has previously not been used (or not used well) and who can get their product to market relatively early. Bill Gates didn't make his first billion by simply programming; he made it by using programming to market a product--in his case, an operating system.
this is the old economics: to make a fortune, find a niche that no one
is supplying and do that well. These niches will increase considerably
as people find ways to use computers to replace manpower, which is a
very expensive resource.