That Fax Machine Must Have Had Some Kind of Impact!

It seems that Paul Krugman's past statements continue to crop up. His 2003 call for Alan Greenspan to create a housing bubble certainly has dogged him, but something he wrote in 1998 exposes even more of his economic ignorance: He claimed that the Internet would not have much effect on commerce and the economy, or at least be no more powerful than the fax machine.

Specifically, he wrote:

The growth of the Internet will slow drastically, as the flaw in "Metcalfe's law" -- which states that the number of potential connections in a network is proportional to the square of the number of participants -- becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's. (Emphasis mine)

As the rate of technological change in computing slows, the number of jobs for IT specialists will decelerate, then actually turn down; ten years from now, the phrase information economy will sound silly.

At one level, his statement is understandable. There are diminishing returns to any kind of technological progress and diminishing returns to capital. Even Keynesians like Krugman can grasp the concept of the margin, even if they cannot apply that concept to money and government spending.

My sense also is that Krugman was responding to some of the "New Economy" rhetoric that was floating about at the time. (Although Democrats were claiming then that pushing the top tax rate to 39.6 percent was the real reason the economy was doing well.)

However, it is quite clear now that the Internet has had a huge impact upon the economy, and that is because it not only has changed how people receive economic information, it also has vastly changed the extent of what we would call "the market." For example, a local bookstore in Frostburg now does not have to depend upon walk-in traffic for all its revenue, as it can market its products to almost anyone on the Internet.

Like most academic economists, Krugman depends upon static models that give us the four kinds of "competition," models that over time will slowly morph into every industry turning into an intractable monopoly. Unless the government steps in to stop this inevitable slide, economic competition will disappear.

Those models were what enabled Oskar Lange and others who were debating Ludwig von Mises and Friedrich A. Hayek in what is called the "Socialist Calculation Debate." Lange and his allies were claiming that all anyone needed were the four models, and that a government, through central planning, essentially could recreate a market that would be better than what currently existed because governments could enforce those things that would better allow the economy to remain in a state of virtual perfect competition.

That is where Krugman and most other academic economists are today. They cannot fully articulate the role of private property and even prices in an economy, and they certainly cannot fully understand the role of information and even those things they call "market failures" because they cannot comprehend the entrepreneur and the economic role of the entrepreneur.

To Paul Krugman, the entrepreneur is someone who starts a business in the garage, but over time has little economic impact because all the important economic decisions are made by big companies that bear little resemblance to any competitive models. Instead, like many academic economists, he is stuck in the mentality exhibited by John Kenneth Galbraith when he likened the economy to consisting of a few monopolies that competed in a death match with labor unions. Prices don't mean anything because they are administered and because the economy does not exactly match the model of perfect competition and all its inherent assumptions.

Furthermore, Krugman's regulatory models are purely Pigovian in which the wise, omniscient regulator (if the regulator is a Democrat) knows exactly what lines of production are going to be profitable and sustainable (Industrial Policy), so the fact that the Internet could have a huge impact upon information costs is irrelevant.

In short, Paul Krugman sees the economy as a mechanistic entity that is oiled by a circular flow of money. As long as government regulators and central bankers have a free hand, that machine can go on forever, but if private enterprise gets in the way -- as it invariably does -- then disaster strikes.

Thus, a person who views the economy that way is not going to be able to understand the impact of something like the Internet, which to him is a static entity that will be giving decreasing returns to scale. His 1998 statement was his economic logic in action.

The World Wide Web, Wiener, and the dead hand of government

Whenever I read Paul Krugman's articles and posts, I find that there is a constant theme underlying everything: Government in the hands of the Democratic Party is omniscient, utterly wise, and we should submit to the Great Wisdom of the Political Classes. Anyone who might dissent is immediately branded as the worst kind of human being to inhabit this planet.

If there is anything that Krugman hates, it is the presence of markets that are beyond government control. (And I do NOT include the financial markets that went over a cliff with the housing bubble. To claim that housing, with all of its government subsidies, government lending agencies, and government regulatory mazes is a "free market" is a very sick joke.)

Yet, Krugman has become a household word because of the markets that have developed on the World Wide Web, which (despite whatever we might hear from Robert Reich and Robert Kuttner) is not a product of the Wisdom of the State. As Gerard Docherty points out in this article, we have been watching a huge free market experiment for more than a decade, and it has affected our lives in ways we cannot imagine.

(I'm sure that the statists would claim that GOVERNMENT invented the Internet in the late 1960s as a Civil Defense mechanism to provide a way for government agencies to communicate in the event of nuclear war. While that technically is true, government did not invent the web as we know it, and until the advent of computers and fiber optics, the Internet had no commercial use.)

Docherty writes:

Despite its great complexity and rapid development over the last 10 years, the web community works largely without state intervention of any sort. Web designers did not need the hand of government to develop the skills to create ever more complex websites; IT professionals did not wait to read official reports saying they had to adapt as the technology changed; and companies were quick to offer the ever-evolving range of services needed for the web to run smoothly.

In other words, the private sector adapted, and adapted very quickly. Free-market mechanisms did what they always do — they rushed to meet consumer needs. This is reflected not only in the wide range of products available but also in the rapid drop in prices of almost every aspect of the web. Ten years ago, a personal website was an expensive proposition, especially if you needed anything professional or polished. Today, in the form of blogging software or services like Facebook, it is free. The overall cost of entry — taking into account the cost of training needed only a decade ago and now no longer necessary — has not so much dropped as evaporated. This low cost of entry has allowed a wide variety of individuals and companies to trade online, providing considerable choice for consumers.

Although the growth we have seen online is exceptional, it is still only a faster version of something capitalism does well: meeting a myriad of needs in a diverse society. It is difficult to imagine a better example of the free market at work.

The article is very good, as it goes into the details of what happens with the web and how it always is many steps ahead of government agents -- who would love nothing more than to gain control of it simply for the reason that government agents believe they should be controlling our lives.

And what better example of the typical government shyster than...Anthony Wiener, the disgraced former New York congressman who apparently worshiped not only power but his own sexual image. Gregory Bresiger has a great article here about this man who in his adult life has only known the State and his own desire to climb up the ladder of power. Bresiger writes:

Weiner is part of a flawed system that leads to the frequent reelection of career politicians who believe that government will solve every problem. He is also a careerist pol with zero experience in the private sector. Just like his mentor, Senator Chuck Schumer, he came out of college and went straight on the government payroll as an aide. He never knew anything but lusting after power and more power. Weiner was quoted as saying that he couldn't "imagine not being a congressman."

Yet how different is he from the political class of men and women, Republican and Democrat, who rule us today? Not very different. These are people who believe in the perpetual campaign and, by implication, a perpetually bigger government. It has grown into a Leviathan, a Leviathan that is enabled and expanded by people like Weiner.

Noting the slavish devotion that modern voters tend to have with the clueless politicians they follow, Bresiger notes:

The true believers — those who believe in their party no matter what, those who would vote for Idi Amin just as long as he was "one of them" (a loyal party member who won a primary) — will go on in this kind of self-imposed mental slavery that it seems impossible to escape. This problem is aggravated by the power of incumbency.

Indeed, in most of Weiner's seven elections in this district the Republicans rarely mounted a serious challenge. Weiner could be arrogant because he, along with many others, never faced a serious challenge. That is true in hundreds of districts around our nation, a nation many Americans insist is a democratic example for the rest of the world.

That is why it is wrong for our government to ram its version of democracy down on the rest of the world, killing thousands of people in the process. This is an imperial system that Anthony Weiner, too busy running for reelection and appearing on cable-television shows, never seriously considered.

No, I doubt you would read anything like this in Krugman's columns, as Krugman is one of those True Believers, someone who thinks that if Really Smart People Like Krugman have enough control, the world will be a great place.