Internet Bubble and Growth
By Arnold Kling
Brad DeLong argues that the failure of many Internet-based enterprises does not imply a social loss.
profits are not the same thing as social value…Profit is primarily a signal about the size of a set of enterprises: If too small, then customers are desperate for your products, prices are high, and profits abundant; if too large, then customers are satiated, you can barely give the stuff away, and profits are absent. If profits are high, the industry segment should grow; if absent, it should shrink.
That the dotcom and telecom sectors needed (and need) to shrink has next to nothing to do with how useful their products will turn out to be. The US airline industry is a perpetual loss machine. Yet the service it provides the rest of us is incredibly valuable.
The question of whether the Internet Bubble was good or bad for economic growth will be debated for some time. Another optimistic picture was painted by Steven Johnson.
What the bubble did do, though, is popularize the medium at an unprecedented pace, and explore the possibility space of interesting Net-based models with incredible precision. My 89-year-old grandmother one-click shops on Amazon via her cable modem. Would she even be using email now if it weren’t for the bubble? I doubt it.
Economists taking the contrary position include Stephen Roach of Morgan Stanley, who wrote that
the bubble-induced boom of business capital spending led to an overhang of new information technologies and other forms of capital equipment in the late 1990’s. The result was excess supply, a textbook recipe for lower prices.
…History tells us that when major asset bubbles burst, deflation is often the result.
Another negative assessment comes from D. Quinn Mills:
There would have been a better economy and you wouldn’t have had the economic recession we’re in now with the risk of a substantial decline behind it. So you would have simply have had better economic growth. [The Internet bubble] did not contribute to the success of the American economy during [the 1990s]. In fact, if anything, it constrained it.
For Discussion. Mills is saying that the opportunity cost of the investment in Internet-related companies was investment that might have been made in other industries where it might have earned a decent return. Others might argue that the opportunity cost was low because the resources otherwise might have been unemployed or allocated to consumption instead of investment. Do you think that the Internet bubble took resources away from more productive investments?