There are three books which have changed my thinking about economics over the last few years. I originally questioned whether these books are revolutionary but they have added to my thinking in very basic ways. These books all look to address the economics of information, or the wealth unleashed by I.T. and the internet. My thinking about this started in the early 1990’s, Dan Remenyi at Henley Management School introduced me to the ideas that Information was the 4th Factor of Production, that Industrial Age economics was insufficient as it was unable to explain why companies that invested in negative or zero profit IT projects, as measured by ROI, outperformed those that didn’t, and that an industrial age balance sheet was incapable of evaluating an information system asset.
The three books all relate to the evolution of society and its economics, the empowering of knowledge workers and their relationships with Capital, and hence capitalists.
Benkler explains in the Wealth of Networks, how the massive increase in wealth (in the USA and the West), capital productivity, and hence the falling cost of productive capital enabled a revolution in the power of the knowledge worker, enhanced by acts of collaboration. I see the crux of his argument is that we no longer need joint stock companies to raise the capital to innovate our society and its productive means. Knowledge and minds is what drives today’s productivity. The owned joint stock company is to be replaced by the productive commons, and co-operative collaboration. He also clearly articulates that the other input into today’s productive processes, i.e. apart from the minds of today’s innovators is today’s knowledge, i.e the minds of our predecessors.
David Warsh in Knowledge and the `Wealth of Nations’, argues that knowledge is a public good and that information economy goods have unlimited economies of scale, to the extent they become a public good. The key contributor to this insight was Paul Romer in his 1990 paper [http://www.jstor.org/stable/2937632], Warsh’s book was reviewed by Paul Krugman in 2006, where he focused on the issue of unending economies of scale, but when finishing the article, I discovered another review by Wolfram Schrettl. He states that,
Warsh ascribes to Romer “a real bombshell discovery . . . that the nonrivalry of knowledge meant that the crown jewels of economics, the Invisible Hand theorems could not stand. Wolfram Schrettl
The key insight to me is that knowledge is non rival and at least partially non excludable. These are the economists words, but these two features means that auction markers and the price mechanism are broken.
Perez in TECHNOLOGICAL REVOLUTIONS AND FINANCIAL CAPITAL: The Dynamics of Bubbles and Golden Ages in a, to my mind, successful, attempt to explain Kondratiev Long Waves, creates a theory of cycles of technology and output. Her arguments of cause, illustrated by powerful historical example are so compelling, I cannot understand why her theories are not more popular. She argues that there have since the turn of the 19th Century been five technology revolutions, of motion and textiles, the original British industrial revolution, followed by railways, steel, oil & cars and latterly silicon, computers and the internet. She argues that each technology revolution has a shape and reasonably constant duration.
She argues that the development of world’s macro economy is a a cycle, irruption, frenzy, deployment/synergy, & maturity – the turning point between frenzy and deployment has been marked by bursting bubbles which Perez’s model determines as a mandatory part of the cycle. The deployment stage is marked by a regulatory reaction, which has usually been progressive. It is also marked by a global roll-out. Each cycle has has a geographical locus, initially Great Britain, but now the USA but we should note that through the last 150 years Germany has also been in competition. There’s always been rapid adoption at the periphery and all cycles have seen profitability migrate to the periphery as, today, we see the emergence of the Asian tigers and latterly China.
One common factor in the evolution of the economy is that the technological revolutions all enable new forms of transport such as trains, cars, planes and now the internet, which all expand markets as well as change the productivity function within the economy; the political or regulatory responses are a reaction to the new economics, mostly progressive: factory acts, universal free education, the prohibition of child labour, universal suffrage, the welfare state, although we came close to disaster at the end of the steel age when liberal democracy contended with fascism and deformed soviet communism to be the dominant political system. One of the factors leading to the welfare state and the increasing working and middle class wealth post-war was that the Oil industry needed a mass market that could afford its cars and package holidays as well as the electricity to power initially the white goods and latterly black goods and gadgets.
One interesting insight is that the steel revolution created the socialist parties, the oil revolution the green parties and the silicon revolution has given birth to the pirate parties; each techno-economy revolution has created its counter movement even if the older political parties have attempted to co-opt the politics of their would be successors.
Peter Drucker & Will Hutton developed and articulated theories of new stakeholder constraints on corporate behaviour, I wrote a little about these theories elsewhere. Of course, as far as Marx was concerned the only moderator of corporate behaviour was the proletariat, the organised working class; but these later theorists argue that suppliers, consumers and neighbours/regulators are also now inhibiting factors on the company and, of course, the influence of neighbours and the regulators/law enforcement is the realm of politics.
Nobel prize winner Paul Krugman in his review of Warsh’s book, sees his story as the coming into the light of increasing returns to scale. He argues increased specialisation leads to monopoly, which then inhibit market corrections. i.e. specialisation conflicts with the hidden hand and for Adam Smith to be right, there must be, at some point diminishing returns of scale. And so economists assumed it and then proved it. As Blackadder might say, there is just one problem with this theory; it would seem that Krugman agrees,
This was originally written in 2012, first published at (http://davelevy.info/influences-on-my-economics/) but not completed until 2018; as is my custom I backdated to the time I started the article. The time taken to finish the blog article means that certain sections, in particular what I say about Warsh’s book is influenced by hindsight and the reviews I quote were found and read in 2018. The original has hyperlinks.
I argue above that Benkler suggested the end of the joint stock companies, it didn’t happen! One reason being that the coming of Red Shift architectures require massive infrastructure and can only be funded by the capital markets. (There’s another blog here, how the mainly US VC market funded the infrastructure providers and the scalable service providers, think Uber, through stock investment.)