Re: New Metropoles

["Jose G. Perez" <jgperez@xxxxxxxxxxxxxxxxxx>]

>>The problem I have with your view is the full faith in a boom being
produced
by 'digitization' rather than looking at the boom as related to the
financial markets growth.  I have seen two reports on computing by first the
Fed several years ago, and more recently Scientific American.  I don't have
them at hand.  I could probably dig up the Scientific American article if
requested.  In both cases the main point of the article is that computing
has not produced the efficiencies promised.  Primarily this can be
understood anecdotally by looking at Louis' travails with automating the
archive for this list.  Unanticipated glitches in the software keep causing
disruptions in the system.  On a larger scale this refers to the fragility
of software, for example Y2K is a problem that happens with software and
computing hardware all the time.  It is impossible to humanly understand Von
Neumann sequentially built code with millions of lines of instructions.  So
errors creep in.  Both reports simply point out that computing produces
efficiencies in some areas while offset by errors that keep the system from
performing optimally.<<

Doyle,

    I think the economic boom, the high level of stock market valuations and
the "dot com" bubble are distinct phenomenon.

    The most important of these, without doubt, is what is going on in the
real economy. On that you have little to say, apart from referring to a
couple of studies debunking  the "myth" that computers are a good investment
for business.

    I'm familiar with various studies that fail to quantify the benefit to
corporations and to households of what for convenience's sake let's just
keep calling the "digitalization" of the economy.

    In general, government statistics and conventional econometric
techniques often show that, as computerization sweeps through a sector,
output drops as does output per hour of labor, i.e., productivity.

    Thus we are left with the conclusion that for close to two decades
American businesses have been on an irrational binge of investing in wave
after wave of computer technology that does not even pay for itself; as a
result, government and private statistics show that businesses have suffered
significant drops in output and productivity.

    The only problem with this picture is that it clashes with reality and
common sense at every turn. There isn't single American company of
significant size that's not bought into the computer revolution, there's not
a single one, out of tens of thousands, that's gone back to the "more
productive" pre-1980 way of doing things, profits are up very handsomely,
the economy as a whole is in the midst of a boom with few historical
parallels, and the companies providing the main tools for this technological
revolution --for example Microsoft and Intel-- have been able to reap
staggering monopoly superprofits.

    So it comes down to which do you believe: reams of government and
academic statistics, or your own lying eyes. I believe my lying eyes.

    This is so for two reasons: first economists measure everything in
monetary terms, they are like the cynic of the famous aphorism, who knows
the price of everything and the value of nothing. The second is that even
within the framework of measuring monetary values, they are doing it wrong.
And the statisticians themselves have recently confessed that their numbers
make no sense, that the methodology they use is arbitrary and the actual
results nonsensically outlandish.

    Consider the case of the encyclopedia britannica. A few years ago it was
worth $2000. Today, it isn't worth anything, the entire contents are online
freely from its web site. Some statistician is going to look at that and say
the output and therefore the productivity of the people who produce the
Britannica  have gone down to zero. The more careful one will impute to the
content the value of the advertising sold on the site, but since the
Internet is still a much cheaper way of delivering than content than books,
there were still be a huge decline in the monetary value and the
productivity of labor associated with producing the Britannica.

    But in reality, is the population any poorer in any meaningful sense? I
would contend, if anything, what had value for us as human beings in the
Britannica has multiplied a hundred-fold by its availability.

    In general, as it was being measured until recently, the productivity of
labor in the service sector of the economy as a whole had been stagnant or
declining for a quarter century. Supposedly banking productivity had been
going down at a rate of something like 1%/year.

    The latest revisions of GDP figures are a recognition by the government
statistical departments that this view of things is simply untenable. If
your measurements show that banks a quarter of a century ago were massively
more efficient than the ones today, then what we have are worthless
measurements, not a worthless technological revolution. Because this drop in
output and output per unit of labor would show up as a drop in
profitability, in capitalization, and as an increase in bankruptcies. That
simply hasn't happened. And all sorts of other measures, such as the drop in
the average cost of a banking transaction from more than a dollar in the 70s
to a few pennies today, suggest tremendous advances in efficiencies.

    My opinion about the nature and character of what digitalization is
doing to the economy is based first and foremost on my own experiences and
observations. Every day I go to work I see the tremendous labor savings
effected through the use of Internetworked computers. Your guess that this
infrastructure is as expensive to keep up as it cost to do things the
old-fashioned way is wildly off the mark. The half dozen extra people it
used to take to fully staff a control room 10 years ago have mostly been
realized as net savings to the company. Yes, there are programming, hardware
and maintenance costs associated with all these computerized systems, but
they are much lower than the costs of the previous setup.

    Control rooms for newscasts are one example but I could give you tons
more from virtually all aspects of information gathering, processing, and
publishing/broadcasting. Similar examples are offered by those involved in
manufacturing, such as the elimination of stockpiles of finished goods and
raw materials, just in time ordering all around, taking out a lot of costs
associated with the degree of uncertainty that prevailed say, 30 years ago
as opposed to today about how many Star Wars kids bubble bath bottles were
being sold as compared to, say, Winnie the Pooh ones. In the case of
manufacturing, however, the measure of output is transparent and
straightforward, and thus the 90s have seen higher growth of manufacturing
productivity, to around 4% or so.

    I disagree with the new paradigm people because I do not believe this is
a permanent condition. The higher growth rates of today are associated with
the introduction of technology that represents a "leap" or "jump" in what
we're able to do. I do not see a basis for a forecast that once this
technological advance is fully deployed, somehow it will make possible
continuing advances in productivity at the same sort of rhythm.

    The boom in the financial markets is not the cause but rather a
reflection of the boom in the real economy. The investment that is leading
to the expansion of the real economy is not being financed by the issuance
of stock but rather by retained earnings, or in the case of startups, by
direct investment. What's going on in the financial markets is all about how
the surplus value being generated is going to be divvied up.

    On the financial markets in general, I would say that the relatively
high valuations we see today do not seem to me to be totally irrational,
give or take 10 or 20%, and especially if you have the perspective that the
next five or ten years in the U.S. economy will be like the last 5 or 10
years. This kind of economic boom justifies, in my opinion, a significant
premium over the historic average valuations of, say, a price/earnings ratio
of 15 or 17.

    As for the dot-com craze, there's no question in my mind that this is a
bubble. However, it is very difficult at this stage to say whether its
collapse would affect the rest of the stock market, never mind the economy
as a whole. In the early 90s there was a similar though smaller bubble in
biotechnology stocks; it collapsed and no one even noticed much, except
those that got their fingers burnt.

    I do not, as you do, believe there is a bubble in the entire computing
sector. Much or most of the sector is as rationally valued as any other in
the stock market. And what may seem like insane valuations --e.g.,
Microsoft-- are rationally based given that Microsoft is a totally
unregulated monopoly. The real bubble is in the Internet sector.

Jose


---

Free computers.  Free Internet access.  I don't pay -- why should you?
Click on www.free-pc.com to get started today!