(Included as a special report on e-business included in several newspapers.)
The adjectives and dollar figures being used to describe the potential of business-to-business Internet commerce have been nothing short of hyperbolic.
Expect “trillions of dollars wroth of transactions” in the next few years, consultants predict breathlessly. Electronic marketplaces “will revolutionize our business, saving hundreds of millions of dollars,” executives proclaim.
The hype clearly could stand a little perspective.
After all, the recent cooldown of the overheated business-to-consumer market showed how easily Internet “phenomena” can sometimes fall far short of predictions.
A simple question, then: Is the “new” Internet economy really new and revolutionary, or is it just another phase in an old cycle of economic growth?
Answering through the lens of history provides some context. But the best that two noted economics historians could offer was reasoned disagreements, as economics are wont to do.
Douglass North, a 1993 Nobel Laureate in economics and a Senior Fellow at the Hoover Institute in Washington, D.C., says there is a solid underpinning to the “new economy.”
For North, the economic changes that are flowing from electronic communication and commerce “are far-reaching, and I don’t think the process is over with. Maybe the boom is going to last longer than any in American history.”
Other economists are less bullish.
Deirdre McCloskey, University Professor of the Human Sciences at the University of Illinois, and a long-time editor of the Journal of Economic History, is one.
She says that while the Internet and related innovations may be important, it has happened before many times before. “And each time, there’s a lot of writing about the New Economy. The most obvious analogy is the railroad boom of the 1840s and 1850s. People did not know how it would turn out. Many fortunes were made in railroad stocks, and many fortunes were also lost.”
North counters that the Internet’s effects on stock markets are different from earlier technologies. Stock in automobile and railroad firms enjoyed similar heydays in their time, but the Internet “is changing capital markets themselves. It is changing access to information and speeding communication across national boundaries. This is new.”
McCloskey doesn’t argue with the far-reaching impact of the Internet on business. But she points out other technologies that had nearly as much hype in their day that turned out to be underwhelming.
“Nuclear power received a vast amount of attention in the 1950s, and everyone believed that it would dominate the industry in the future. Many new firms were formed with great expectations,” she says. “Sure, it generates some portion of the nation’s electricity now, but nowhere near what was expected. And the firms that went into it generally lost money.”
Will firms that rely on some elements of electronic commerce leave their traditional competitors standing in the dust? North believes they will. “Eventually it restructures everything you do, it restructures the whole economic system,” he says.
McCloskey acknowledges that the personal computer combined with the Internet is changing how business is carried out. Though she is quick to point out that economists were generally skeptical about how the personal computer would really change business. For a long time, she says, economists we were right.
“For more than 10 years, businesses were investing huge sums of money putting in PCs, and it was hard to see any effects on productivity. Now we are seeing something similar with the Internet; businesses are making big investments in getting on the ‘Net. I am sure that some time down the road, with 20/20 hindsight, we will realize that many of these investments were money wasted.”
She also notes that when new technologies are adopted, the ones they compete with do not necessarily disappear. She cites canals and railroads in the first half of the 1800s.
“After the railroad was introduced, there was little building of new canals. But most of the canals that already were in operation continued for some time, and several continued to be highly profitable. The Erie Canal was important well into this century.”
Both believe that any episode of adoption of new technology takes time and that there are winners and losers.
“The automobile industry initially went through exactly the same proliferation of firms as the Internet,” she McCloskey. “Then there was a shakeout in the 1920s, and most of the small firms went broke or were bought out. But when these firms were started, it was not obvious which ones would be successes.”
Both also say that the long-run effects on a nation’s productivity are more important than individual fortunes made or lost in stocks of companies in whatever new technology is hot.
“The Internet is certainly contributing to making this recovery such a sustained one,” says McCloskey, “Inevitably there will be a slowdown, but some of the effects will be long-lasting.
Says North: “Stock markets may be too high, but the technology is still transforming. Markets can fall, but the changes in real productivity will remain.”
© 2000 Edward Lotterman
Chanarambie Consulting, Inc.
(Included as a special report on e-business included in several newspapers.)