Hal Varian on Modern Capital
By Arnold Kling
The only thing one could do with those railroad tracks was carry trains. It would have been fantastic if the miles of excess railroad tracks could have been transformed into highways to service the new growth industry coming on in the next decade: the automobile.
But today, if you have fiber you can carry voice, data, audio, video, transactions, whatever…
That’s a prime capability of computers. It means you’re less likely to end up with an oversupply in the classic sense, which we saw in these other historical periods. The technology boom and bust cycle isn’t eliminated, but it will have less of an effect than in prior decades.
The Austrian theory of the business cycle is that businesses over-invest in capital during booms. So you build too many railroads in the 1880’s, and you have a bust later.
Varian’s claim is that the capital we are investing in now is more fungible, so that if you believe the Austrian model then recessions ought to be milder.
I think that in general the economy is more elastic than it used to be. Years ago, a decline in housing construction of the magnitude that we have observed this year would have already caused unemployment to rise by a couple of percentage points.