Krugman: Internet’s Economic Impact No Greater Than Fax Machine (1998)
web.archive.orgWhile this article is probably wrong (I don't know what the economic impact of the fax machine was, but I suspect a lot smaller than the Internet), we should probably all be asking ourselves whether the economic impact of our industry is really all that big.
Looking at the profit of companies like Google and Facebook overstates the impact for them. They are making tons of money, but a lot of that is just a shift in the location of advertising dollars. Amazon has lowered prices, and there's real economic impact there, but what is the actual percentage?
In my current line of work, transportation management software, we're giving companies tools to be more efficient and reduce their freight expenditure, but the reductions are really very modest--good enough to keep customers happy, but nothing revolutionary. That seems to be the pattern for an awful lot of software: if you can beat an established industry by a little bit, that's enough for a business, but that's not the kind of revolution that you'd think there is listening to people hyping startups.
And if you think I'm wrong, ask yourself why GDP growth has been so anemic in the age of the Internet.
One must also ask, how much of it is consumer surplus. In just the same way as a disease going away reduces the economic activity associated with managing that disease, information technology and the internet have done away with many previously necessary activities, in the process of creating an overall improvement - potentially "shrinking" GDP, even while it delivers substantial benefits. What is instantaneous worldwide communication worth? What would it have been worth in 1967? It's so common and important now - but it's also very cheap, so it doesn't show up significantly in many calculations of economic production.
This is a good question. I think there is certainly some consumer surplus not captured in GDP statistics, though it doesn't necessarily undermine my point.
That said, your example of curing disease is a bad case of the broken window fallacy. No longer having to combat specific diseases 1) leaves people healthy and able to contribute to economic activity, and 2) leaves the people previously employed in medical fields able to take other jobs.
Maybe in 2016, where there's a seeming lack of jobs in the developed world, that's not a clear driver of economic growth, but in 1916, it was.
Oh, I'm not trying to commit the broken window fallacy. I'm just saying that, for example, if there was a disease that caused a lot of pain, and it was suddenly cured, the reduction in measured economic activity associated with managing that disease might outweigh the measured increased productivity and redeployment of resources and labour. (Maybe something like arthritis, say: usually worst after most people are retired and not measured as workers, doesn't take a huge number of people to manage, but causes a lot of pain.) Obviously curing a disease is an economic good. It's just that we're not terribly good at measuring consumer surplus, or leisure, or various dimensions of satisfaction - especially once you get past basic consumption indicators.
I suspect it's more likely that we're underestimating the consumer surplus from the internet than we are overestimating it. By how much, I don't know.
I think you're still making it, just in a more subtle way. What happens to the money those people spend on arthritis treatment?
Of course, that money is redeployed, which is good. The point is that, in the case of something like chronic pain, it is very difficult to measure the level of pain, but easy to measure the money spent on it. So, it can be challenging to compare.
Or, to go back to technology, take Facebook for example. Perhaps people would have liked to have a social networking site before, but it simply wasn't available. When it became available, many people used it and enjoyed it in their leisure time. Because it's free, and, while large, does not pull very large revenues per user, it doesn't show up as a major economic activity. And because it's used mostly as an end-consumer leisure activity, it is missed by indicators that don't measure this well. So there can be a substantial total increase in services enjoyed, and we might be missing it. Again - might. I cannot say for sure, but it's worth asking.
Gotcha. I definitely agree that there can be consumer surplus not captured by GDP.
Maybe people just don't earn them, since not having to pay for treatment they can now spend time on reading books and watching birds instead of working. I don't say that happens with everybody, just one possible scenario. That's the thing with such global measures - they can't capture things they are not designed to capture.
> And if you think I'm wrong, ask yourself why GDP growth has been so anemic in the age of the Internet.
Global GDP growth has been fairly steady for 40+ years. http://www.worldeconomics.com/papers/Global%20Growth%20Monit...
Yes, but that owes heavily to growth in pre-internet industries in developing nations. Unless the Internet is a crucial enabler of that growth (possible, but not a given!) the more relevant question concerns growth in the developed world, which has been lower.
You're trying to find growth that is directly attributable to the internet, which is fairly futile in my view because the internet is not in itself a means of production.
Not at all. If the Internet changes the way that other goods are produced, that is an impact of the Internet (so I do think the Internet can claim some influence on the growth of international trade, just not an overwhelming percentage).
My company does SaaS for logistics. We lower the cost of moving goods for our customers. I count that as economic impact. It's just that the impact is relatively limited. We can get you lower labor costs, faster planning, more optimal routing, and higher utilization, but we can't make a truck move twice as far in the same amount of time.
I admire your effort in finding something that salvages that obviously wildly misguided prediction by Krugman. But really: if any measure says Internet had no large economical impact on our lives, it's just a bad measure.
And yes, GDP is suffering from some problems. There's huge informational resources that can not be valued the way GDP is calculated. There are many other criticisms of it[1]. OTOH, is somebody gets money for digging a trench in the morning and filling it up at the evening, GDP increases, even though nothing useful were done, the money was just wasted. Don't get me wrong, GDP is a useful indicator, but it doesn't show everything.
[1] https://en.wikipedia.org/wiki/Gross_domestic_product#Limitat...
Your example of the trench is a textbook example of the broken windows fallacy. Digging a trench and filling it up may increase GDP when unemployment is low. It will reduce it when you're near full employment.
>> And if you think I'm wrong, ask yourself why GDP growth has been so anemic in the age of the Internet.
GDP is the wrong figure. As we've pulled up the ladder and pushed people out of the workforce our net GDP has leveled off, but non-farm labour productivity has continued the rapid pace characteristic of the US economy, hitting an all time peak in 2015. We're getting more value out of fewer people. Some part of that has to be attributed to advanced communications, including the Internet.
Krugman has established a long history of embarrassingly bad predictions; this is merely one of the most demonstrably terrible. Also sometimes cited is his advocacy for 'housing bubble' policy and subsequent denials. Krugman doesn't know whats going on. He writes economic red meat for his fellow leftists inside his New York echo chamber. The real world is paying no attention.
Where are you getting your numbers? I've read that productivity growth was quite bad for most of the 2000s (you're right that 2016 was good). Also, you can't just write off decreased labor force participation by pointing to higher productivity, since many times in the 20th century, you had high labor force participation and high productivity growth.
P.S. Attacks on Krugman seem pretty non-responsive to what I said, but this is 1998, prior to Krugman's heavy involvement in partisan politics, an involvement which may not have made him more...careful.
While this is highly embarrassing for Krugman (even if he will never admit it!), he is far from the only person who has fallen for this: Expertise in one area does NOT make you an expert in all.
This year especially should drive that point home. It's best to only make bold statements when you are sure, and when you do so, put your money where your mouth is ("Skin in the game", as Nassim Taleb says). And most definitely do not become a paid opinion writer, or even bother taking any of their pontificating seriously.
I think he does admit his mistakes: http://krugman.blogs.nytimes.com/2010/09/01/mistakes/
He doesn't consider that he made a mistake re fax machines. Essentially, he says he was taken out of context [0].
[0] http://www.businessinsider.com/paul-krugman-responds-to-inte...
"Two mistakes" -- that is a satirical blog post right?
Big, Professional mistakes
He calls it "The Conscience of a Liberal" and then says "So yes, I’ve been wrong. Let those who are without error cast the first stone." Krugman is a good example of what's gone amiss with liberalism.
Even worse than his many errors, is his hypocrisy. He very loudly accused Amazon of being a "monopsony" during Amazon's most recent dust-up with the big publishers, on grounds that its market power would enable it to hurt consumers, although he acknowledged, Amazon hadn't used its economic power that way. https://www.nytimes.com/2014/10/20/opinion/paul-krugman-amaz...
The impetus for Krugman's column was, Amazon's resistance to big publishers using their market power to overprice ebooks. Krugman was on the side of the big publishers for obvious reasons I think. Krugman's own widely-assigned economics texts provide some of the clearest examples of big publishers using monopsony to overprice ebooks. His publisher, presumably with Krugman's support, sells ebooks of these texts for $100 - $200 a copy. A great example of mmonopsony - because students are assigned Krugman's books and therefore don't have choice, Krugman's publisher extracts monopsony profits. This isn't just a little convenient opportunism -- as Krugman surely knows, overinflated textbook prices are a significant burden on many students, who are leaving university with huge debt. Yet, Krugman goes along with this exploitation, and presumably banks very large royalties for himself at student's expense.
I say presumably a couple of times, because I've not seen anything from Krugman explaining or apologizing for the prices of his own books and the way this exploits students.
> Krugman is a good example of what's gone amiss with liberalism.
The entire left side of the aisle? But, not any other people? Hmmm.
> He very loudly accused Amazon of being a "monopsony" during Amazon's most recent dust-up with the big publishers, on grounds that its market power would enable it to hurt consumers, although he acknowledged, Amazon hadn't used its economic power that way.
Well, they are a giant player with immense power that already dictates things to its supply chain...
And the important thing to do is recognize risks before the problems manifest. It wouldn't be any good to tell you your garage was full of flammable rags after your house burned down.
> Yet, Krugman goes along with this exploitation, and presumably banks very large royalties for himself at student's expense.
Compared to wages, speaking fees, etc? I doubt it.
But nonetheless, you do have a good point about textbooks being exorbitantly priced. When we provide student-loans, schools increase tuition. If we gave children a billion dollars a year universities would still be pretending to be broke and asking for more.
IMHO, that's the racket we need to break. As long as there's a government license to print a "right to work" token (a degree), you'll have players entrench around it - like camping spawn spots. And as always, the less effective the school is at teaching the more resources they have for political battles.
You are confusing monopsony and monopoly. Monopsony is often a government buyer, say of prisons or aircraft carriers, and the monospony puts the buyer in a stronger position. In a monopoly, the power is with the seller.
Amazon may have been acting in the consumer's interest in the fight about textbook pricing, but it's hard to argue they weren't using their monopsony. The publishers were also not cooperating – they were simply setting prices higher than people would like.
I'm also no big fan of these conspiracies where someone like Krugman does something because it may mean a few thousand $ per year for him. That's a cheap attack, and it really doesn't seem plausible that he'd care more about a bit of money than winning the argument.
Fitting I'm currently re-reading "Thinking Fast and Slow" and there is a chapter on expertise:
From the book:
When do judgments reflect true expertise?
An environment that is sufficiently regular to be predictable an opportunity to learn these regularities through prolonged practice. (aka not economics)
When both these conditions are satisfied, intuitions are likely to be skilled.
Intuition cannot be trusted in the absence of stable regularities in the environment.
If the environment is sufficiently regular and if the judge has had a chance to learn its regularities, the associative machinery will recognize situations and generate quick and accurate predictions and decisions. You can trust someone’s intuitions if these conditions are met.
When evaluating expert intuition you should always consider whether there was an adequate opportunity to learn the cues, even in a regular environment.
Despite his impressive pedigree, Paul Krugman is more of a political mouthpiece than an economist. His regular opinion pieces in the New York times or frequently abrasive and wrong.
This article is posted here to embarrass Krugman, but if you look at GDP growth over time, you'd think there should be a kink in the graph /somewhere/ to account for the economic benefits of the internet.
It's possible that growth would have been even more anaemic without the internet, but that's hard to argue from the data.
Well, you could say that the internet was not a totally unique thing in itself, but just another (big) forward step in the ever-improving telecommunications sector, which had already seen the expansion of telegraphs, radio, telephones, and so on, and would also have represented big improvements in communication capacity.
My general sense is that academic superstars who decide to opine on world events generally do slightly better than their Hollywood counterparts ... but not much
On team academia, Linus Pauling, Edward Teller, Bertrand Russell, Paul Krugman, etc. On team Hollywood, Jane Fonda, Clint Eastwood, Al Franken, Madonna, etc. Being tremendously prominent in one domain has only a loose correlation with expertise in something else quite different.
>Despite his impressive pedigree, Paul Krugman is more of a political mouthpiece than an economist.
That's easy to say if all you read are his opinion pieces rather than his academic work.
Paul Krugman responded to this a few years ago: http://www.businessinsider.com/paul-krugman-responds-to-inte...
The article the economic impact of the internet quote came from wasn't a scholarly article or his normal column, it was a fun, let's make some provocative predictions type article.
His normal column hasn't been much better, for years now.
It's a mystery to me how he's gotten away with handing in what amounts to the same column every week for the past couple years.
Whether I agree with him or not, I find his haughty, didactic tone very off-putting.
A "a fun, let's make some provocative predictions type article" sounds like something very unprofessional to me. Also there seems to be a suspicious pattern of claiming exactly that after such an embarrassing prediction is made. I doubt the same would be claimed if he had happened to be right about the internet and the information economy.
> "a fun, let's make some provocative predictions type article" sounds like something very unprofessional to me.
Knuth was published in the very unprofessional Mad Magazine. What's your point?
Knuth wasn't wrong. His potrzebie system is detailed and consistent. ;-)
While he is wrong about the impact of the internet economically. He isn't wrong that technology progress has been disappointing. When you grow up believing you will be driving flying cars and seeing robots help you around the house, how else are you supposed to feel? It is only now that computing power has started to enable old AI techniques such as neural nets, which were once impractical are now starting to be reasonable.
I am also disappointed in how closed and centralized the applications that run on the internet have become since the internet was privatized. Where we used to have decentralized systems in the 80s to late 90s, we now have huge star (wheel and spoke) networks.
The days you get your internet from the weird guy down the street running a rack of servers in his closet are long gone.
We have also re-created old medium and I seriously doubt people like Alan Kay are impressed with that. We have invented the most important tool in the history of humanity and it's being used by billions of people to look at Facebook instead of say, solving real problems like climate change. As Alan Kay said "The computer revolution hasn't happened yet".
> When you grow up believing you will be driving flying cars and seeing robots help you around the house
I feel like this is more a failure of critical thinking than anything else. There has been nonsense about flying cars on the cover of Popular Science since I was in diapers (early 1980's). I am 36 and I think the the progression of technology during my lifetime has been amazing. If you could travel back 20 years and show someone a Google search on an iPhone they would be gobsmacked. (Or maybe they'd just say, but "what about my flying car?")
One of the big problems with people's expectations was, perhaps, a sense that technological progress would involve ever-greater energies, sizes, velocities. This certainly would have made sense in 1967, but what's been done since then has so much to do with using less energy to do more. There's so much to do in computation, biosciences, materials science, and so on - it doesn't look big and impressive necessarily, but it's still major progress.
I think this is definitely something easily forgotten. And it's still a huge problem for both the data center and the computer in your pocket. Makes you wonder if we got off fossil fuels like two decades ago what the progress here would look like here.
We'll get there. We're very close actually. We took a huge hit in the 1990s when Bill Gates use chilling effects to try to own the software industry.
The web finally recovered with things like Chrome that got browser competition going again, and Facebook Apps that reminded us we can make our own stores and ecosystems of import.
The next big hit setback was the cloud transition. Servers are just super useful and they are orders of magnitude harder to administer than a PC. This consolidated power amongst sysadmins (and away from users and coders). That has driven the slide back towards proprietary web apps.
But we have been slowly chipping away at the complexity differential between administering a server and using a laptop. See Heroku, etc. We're not there but we're very close to the world where you can spin up a server as easily as you download apps.
Then of course the most recent hit is Apple and the App Store. We eealized there is some value to having a trusted third party curate a collection of software.
And again, we don't have tools to allow people to do that in a decentralized way, but we'll get there.
The question to me is: will free software always be playing catch up? Is this a forever thing?
I think no: it's a disruptive technology with an inherent differentiating factor (access by default, vs paywall by default). I think we're still getting to feature parity with the proprietary development culture, but when we do I think the fortunes of centralized/decentralized will reverse.
But we'll see! 2043 at the latest, if anyone wants to wager.
> We have invented the most important tool in the history of humanity and it's being used by billions of people to look at Facebook instead of say, solving real problems like climate change.
I think this is a mis-characterization. The Internet is used for all sorts of "good" causes. I think we just take for granted the ease with which it allows teams of scientists and researchers to connect, communicate, and share research.
you, my friend, are taking the 21st century for granted. we already live in the future.
When you grow up believing you will be driving flying cars and seeing robots help you around the house, how else are you supposed to feel?
we have flying cars. they're called private jets, but most people can't afford them. we have to take the flying bus! we've had robots in our homes for a while. do they have to be anthropomorphic to count, or what?
I am also disappointed in how closed and centralized the applications that run on the internet have become since the internet was privatized. Where we used to have decentralized systems in the 80s to late 90s, we now have huge star (wheel and spoke) networks.
internet applications may be closed and centralized, but i think you are forgetting about the mountains of free/open software that those systems are built upon. life-changing mountains of software. foss is the foundation that a lot of careers (including my own) are built upon.
obviously it would be better if we were all on an open source distributed net, but its not like it isn't a solvable problem. we just have to be more creative.
We have invented the most important tool in the history of humanity and it's being used by billions of people to look at Facebook instead of say, solving real problems like climate change.
the internet is a communication network that people use for a lot of different things, including working to solve climate change.
i don't think we've figured out social networking quite yet. or the internet for that matter. i think its all quite exciting! so much new shit happening all of the time. not only that, but i have the opportunity to be a part of it. i may not be the person that ends up in the history books, but i'm here at ground zero.
This is similar to the Robert Solow's 1987 quip, "You can see the computer age everywhere but in the productivity statistics."
Is a big part of this what exactly economists are measuring, and either they're right and we're just too close to see it, or they're missing important stuff when they measure.
And to be fair, I think the fax was pretty big in it's day for business to business communication.
I'm still curious to know what are the "Internet Economic Impact".
This article was written before the net bubble.
So far all I see in the economics of internet is netflix replacing DVDs, twitter/facebook/online presence (which is advertising, which means little to me), and... that's it. Other domains like online gaming are not that great in term of economic impact.
Amazon is closing book and movie stores.
I can see that the internet changed many things, but was it improvement? I don't know. When you account music and movie piracy, credit card fraud, scammers, online security, it doesn't seem so great.
The only improvements I can see is porn (being able to channel your sexuality) and dating websites (more people being able to risk a little more to find somebody).
I think it was in fact written during the big bubble, although my memory may be a bit off. I do remember distinctly having read (and chuckled at) an article by a supposedly serious economist who said something along these lines, but I absolutely do not remember if it was the same article. And the same economist. Krugman's name did not ring a bell for me then.This article was written before the net bubble.You are correct. 1998 is the year of Pets.com and many other internet bubble ventures. Which led to a surge in CS enrollment from ~1999-2005 which really, really sucked for those of us that actually wanted to study CS and weren't in it "for the money". The professional/academic feedback loop also managed to catch me when I tried going to graduate school (again, actually interested in it) and found myself surrounded by people who were in grad school to ride out the (then) downturn in the internet-based business sector (circa 2006). Enrollment numbers were sky high in grad programs so competition for advisors and TA positions was much harder than normal. Very frustrating times.
Go talk to your cable provider or local newspaper about how the internet hasn't had much economic impact.
As I said, impact, not improvement
I much prefer Ha-Joon Chang's "the washing machine changed the world more than the internet" [0], which I think fares a lot better than Krugman's claims.
> When we assess the impact of technological changes, we tend to downplay things that happened a while ago. Of course, the internet is great – I can now google and find the exact location of this restaurant on the edge of Liverpool or whatever. But when you look at the impact of this on the economy, it's mainly in the area of leisure.
> By liberating women from household work and helping to abolish professions such as domestic service, the washing machine and other household goods completely revolutionised the structure of society. As women have become active in the labour market they have acquired a different status at home – they can credibly threaten their partners that if they don't treat them well they will leave them and make an independent living. And this had huge economic consequences. Rather than spend their time washing clothes, women could go out and do more productive things. Basically, it has doubled the workforce.
[0] https://www.theguardian.com/technology/2010/aug/29/my-bright...
On that note, maybe we should not be looking for the economic impact it has had on the US, but the impact it has had on India, China, etc.
I also wonder what we would find if we measured the productivity gains of the washing machine; I'm not sure we would see the rise that economists want to see from computing technology.
It's kind of unfair to point and laugh at the person who didn't predict the future correctly. I don't think anybody could have foreseen the interactive potential for the internet.
The internet encompasses vast video game experiences, nearly realtime communication from politicians and public figures (without hauling around a C-SPAN 2 camera team), and has even taken on a life of its own with YouTube stars and internet celebrities, completely bypassing the traditional media channels that were usually dominated by the whims of their producers.
Even now I think our impression of the internet is roughly in line with the people of the early 20th century who could not have begun to imagine the vast possibilities provided by mass electrification.
>It's kind of unfair to point and laugh at the person who didn't predict the future correctly.
If you're going to put your predictions out there in the public sphere as an influencer, then I think it's fair (in fact necessary) to judge people on those predictions and their record.
However, I doubt many of us would do better if held to the same level of scrutiny. Two examples from these boards: Dropbox ("it sucks!") and Theranos ("game-changing!") would embarass at least a few of us.
Also "Why the web won't be a nirvana" http://www.newsweek.com/clifford-stoll-why-web-wont-be-nirva...
>What the Internet hucksters won't tell you is that the Internet is one big ocean of unedited data, without any pretense of completeness. Lacking editors, reviewers or critics, the Internet has become a wasteland of unfiltered data. You don't know what to ignore and what's worth reading.
Except he's correct. The web has become a disinformation, fake news, and conspiracy theory bonanza. Finding good information still takes legwork, 22 years after this article was written.
Also to be fair to Cliff, this article was written well before sites like wikipedia had prominence. So yes, back then putting something in a search engine was asking for trouble. The results were very poor because the content was very poor.
>What's missing from this electronic wonderland? Human contact.
Thus the rise of social media.
I think this essay was unusually prophetic and insightful in many ways.
> The web has become a disinformation, fake news, and conspiracy theory bonanza.
By analogy to "net-negative producers" at what point do the conspiracy theories incubated by the internet detract from it's good points enough that it is overall negative, or perhaps only as positive as say, the fax machine?
>The web has become a disinformation, fake news, and conspiracy theory bonanza.
Yes, conspiracy theories like Russia hacked the election.
> 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.
Sort of dwarfs any validity in the article.
Pretty sure thats the point of the HN post.
All of this was written before the Dotcom boom!
Do you remember when you had to .com after every company or had to put www. before every company, because almost no one knew how to search (on AltaVista or redirect in a DNS record), or just restarted their computer to get back to the Yahoo! home page?
If not, then you don't remember this time... but almost everyone remembers the DotCom bust 3 years later, when the nerds got their comeuppance!
Within two or three years, the current mood of American triumphalism--our belief that we have pulled economically and technologically ahead of the rest of the world--will evaporate. -Krugman
Bill Gates himself almost completely dismissed the Web only a couple of years earlier in his book "The Road Ahead"[0], to such an extent that he had to heavily update it in the second edition one year later. With that in perspective, is it really surprising to see non-specialists like Krugman still considering it a novelty in 1998, before Google, e-commerce, e-booking, etc?
[0] https://en.wikipedia.org/wiki/The_Road_Ahead_%28Bill_Gates_b...
Krugman today wrote an article saying that America is at risk because some politicians are prioritizing their own power over the good of the country [0]. GOP politicians in the new cabinet and the White House are named.
Why was the OP posted to Hacker News today? Is it in response to Krugman's dire warning about American democracy and how the GOP is putting us all at risk?
Be careful about politics on Hacker News. The tech industry has an important role to play in media, and we know that the GOP has spent substantial sums to create bias in the media. [1] There is a strong incentive for the GOP to astroturf Hacker News and we should all be careful.
It's true that "reality often has a liberal bias" - and that's because the leaders of the GOP -- politicians and their big donors -- are trying to create their own reality, where they can cut taxes to keep more money in the pockets of the 0.01%. Use your own head when you see links like this.
[0] http://www.nytimes.com/2016/12/19/opinion/how-republics-end.... [1] http://www.salon.com/2008/09/24/mccain_letters/
edit: I expect the vocal right-leaning minority here to vote heavily; if you agree with the above and you're not a frequent voter please upvote posts here you agree with.
To me, all this shows is that economics is very hard. I like krugman although he s a bad public speaker and a sore loser, yet even he cant model long-term effects of things. I wonder where his thought process fails
After the new FCC kills net neutrality, Krugman will be proven right.