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Created 11/4/1997
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Old Rules for the New Economy

J. Bradford DeLong

for David Hudson's Rewired.


"6. The Law of Inverse Pricing: Anticipate the cheap. One curious aspect of the Network Economy would astound a citizen living in 1897: The very best gets cheaper each year. This rule of thumb is so ingrained in our contemporary lifestyle that we bank on it without marveling at it. But marvel we should, because this paradox is a major engine of the new economy.

"Through most of the industrial age, consumers experienced slight improvements in quality for slight increases in price. But the arrival of the microprocessor flipped the price equation. In the information age, consumers quickly came to count on drastically superior quality for less price over time. The price and quality curves diverge so dramatically that it sometimes seems as if the better something is, the cheaper it will cost..."

Kevin Kelly marvels at the extraordinary difference between his vibrant new--network, microprocessor--economy and the old, boring industrial economy, in which "consumers experienced slight improvements in quality for slight increases in price." By contrast, in his vibrant new economy "...price and quality curves diverge so dramatically that it sometimes seems as if the better something is, the cheaper it will cost..."

I rub my eyes. I rub my eyes again, in wonder.

I wonder: "What planet has he been living on?"

Consider cars. The average car purchased in 1906 cost $52,640 of 1993-value dollars (after adjusting for inflation; see Raff and Trajtenberg, 1997). By 1910 the average price of a car had dropped to $39,860 of 1993-value dollars--but in 1910 the quality of the average car was 31 percent higher than in 1906: it seemed as if the better something is, the cheaper it will cost. By the time the heroic, entrepreneurial age of the American automobile came to an end in 1918, an average car cost 53 percent less than in 1906 (in inflation-adjusted dollars) and had a quality 105 percent higher.

A citizen of 1897 did not have to wait until our "network economy" to be astounded by how the best got cheaper every year; he or she would have been astounded by the automobile manufacturing industry within a decade.

Kevin Kelly has made an elementary mistake. He remembers the goods of the industrial revolution--from automobiles to washing machines, railroads to container ships to airplanes to radios--from his childhood. So he assumes that they must have always existed, and that the pace at which they changed must have always been glacial.

But revolutions in productivity in the economy's shifting set of leading sectors have been ongoing since 1760 or so, the beginning of the industrial revolution. In fact, that's why the age starting in 1760 or so is called the age of the industrial revolution. Microelectronics as one of the leading sectors of technological change--microelectronics as an industry--is new to our generation, but productivity advances in leading sectors that are fast enough to be called industrial revolutions have not been news for two and a half centuries. The economy cycles through a number of leading sectors: textiles, transportation, construction, textiles again, watches and jewelry, telegraphs, construction again, telephones, transportation again, household utilities, household appliances, broadcasting, textiles and apparel, and medical care--all before the microelectronics revolution. It will continue to cycle through different leading sectors in the future.

In all of these sectors prices have fallen so much and quality improved so much that any previous century would see the "price" of that sector's output as effectively zero. My wife and I have a small dining room, with a small four-bulb chandelier. But should we go to Monterey for the weekend and leave the dining room light on, by the time we return we have used as much in the way of artificial illumination as an average pre-1850 American household consumed in a year. What would have cost them about five percent of their household income in candles, tapers, and matches costs us so little that we cannot see it in our Pacific Gas and Electric bill (see Nordhaus, 1997).

Kelly's thinking that common features of industrial society are unique features of post-industrial society is a common mistake (see Kumar, 1978). But the fact that he makes this mistake suggests that we should look elsewhere to understand the economy of the future: instead of new rules for a new economy, we need to take a look back at the history of the industrial revolution--and at how productivity advance in the leading sectors of yesterday transformed the rest of the economy and shook society.

We need to figure out what the old rules were,and then we need to apply them to the new economy.

So let me suggest six old-fashioned industrial rules for the post-modern economy:

So what, then, is new about our post-industrial economy? What is new is that for the first time since the invention of printing, information processing and distribution has become one of the leading sectors. Previous leading sectors changed the conditions of life of weavers, spinners, transporters, framers, blacksmiths, and so on. Our leading sectors are changing the conditions of life of those who use information to direct enterprises--managers--and they are also changing the conditions of life of those who use information to decide what to buy--consumers. Perhaps most of interest, however, society's information processors and distributors include its intellectuals.

So we intellectuals are, quite naturally, incredibly excited. And we are very, very articulate.


Francis Bacon (1605), The New Atlantis (New York: Kessinger).

Edward Bellamy (1877), Looking Backward (Harmondsworth: Penguin Books).

Krishan Kumar (1978), Prophecy and Progress: The Sociology of Industrial and Post-Industrial Societies (Harmondsworth, Penguin Books).

William Nordhaus (1997), "Do Real-Output and Real Wage Measures Capture Reality?: The History of Lighting Suggests Not," in Timothy Bresnehan and Robert Gordon,eds., The Economics of New Goods (Chicago: University of Chicago Press).

Daniel Raff and Manuel Trajtenberg (1997), "Quality Adjusted Prices for the American Automobile Industry," in Timothy Bresnehan and Robert Gordon,eds., The Economics of New Goods (Chicago: University of Chicago Press).


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Created 10/17/1995
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Professor of Economics J. Bradford DeLong, 601 Evans
University of California at Berkeley; Berkeley, CA 94720-3880
(510) 643-4027 phone (510) 642-6615 fax
delong@econ.berkeley.edu
http://www.j-bradford-delong.net/