Unstable Information Economy
By Arnold Kling
Eli Noam says that an economy where the key input is research will be unstable. In industries where up-front costs are high but production and distribution costs approach zero,
the main strategy will be to consolidate and cartelise in order to maintain pricing power. As a result, prices and profits rise (as well as media concentration), which will lead again to expansion, entry, and by the same economic logic, to a new price collapse, with a general downward trend in prices.
…Thus, the information economy is likely to be a volatile, cyclical, unstable mess. The problem is not the “creative destruction” one would expect in an innovative economy, but the structural instability of an economy whose major products have very low marginal costs and hence prices, but are not low-cost to produce.
Even if this research-intensive industries exhibit this behavior, I am not convinced that they will all experience booms and busts simultaneously. Biotechnology does not have to be highly correlated with the communications industry.
For Discussion. Is it more risky for the general public to invest in stocks when there is rapid creative destruction involving difficult-to-understand technological developments?