Anatomy of a collapse

By Lawrence H. Summers
and J. Bradford DeLong
For The NATION

CAMBRIDGE, Massachusetts

The values of the shareholding market of the high technology, why fell as much in the last year and means? The collapse of the Nasdaq (and other dispersed smaller bags of computer science technology by the world), what says to us on the future of the new economy? As we moved away of these events, we can evaluate them with greater clarity.

According to the current interpretation, the fall of the Nasdaq unmasked to the new economy like a ruse of prestidigitador, done of smoke and mirrors. That irrational exaltación incarnated that usually explodes when an expansive cycle culminates and it did not bring deeper permanent changes in the economy. Nevertheless, there is another more probable explanation: the Nasdaq fell because it was obvious that the dominant positions of market of companies based on the high technology were only lucrative if they went accompanied of firm barriers to the entrance of new competitors. And that was being made remarkably difficult to create those barriers.

The efervescencia that impelled so high the beginning and 1999 Nasdaq of 2000 founded on the belief that a jump towards ahead in the technologies of processing and data communication had created an endless number of markets, of the type "the winner takes everything", whose excellent characteristic was the increasing yields of scale. Or a computer science one (a program of computation, an entertainment online or a source of intelligence) takes place a single time; soon, it is possible to be distributed between a potentially limitless number of clients, to a very small or null additional cost. At the most great it is the market, as much greater will be the advantage in the cost.

This is not everything: the produced computer science goods in greater scale also are more valuable for the consumers. The version with greater participation in the market happens to be the standard model. It is easiest to understand as far as his handling, the one of easier maintenance and the one that works better with other products (of course, designed to work with her in optimal form).

In the section of the new economy dominated by the economies of scale of the producers and the economies of reach of the consumers, one company/signature that establishes his primacía as far as participation in the market acquires an almost overwhelming advantage. The first company that affirms a dominant position in the market will harvest numerous gains while the industrial sector lasts to which it belongs, unless their competitors take extraordinary measures by their nature and cost (since Microsoft against Netscape did, their rival in the market of the navigators of Internet, when upsetting a fortune in the creation of their Internet Explorer soon to distribute it free).

But the increasing yields of scale and the markets in which the winner takes everything are not the only consequence, not even the main one, of the computer science revolution. It is equally probable, at least, that the innovations in the computation technologies and communications favor the competition when eliminating the rubbing that in the past granted to almost all the producers one picks of being able monopolistic. Before, we only could compare prices peregrinating of store in store. Now, the World Wide Web makes possible instantaneous searches to us able to reveal the prices and qualities of any producer. The companies must adapt right away or will succumb in the process.

Therefore, the new economy makes more disputables, and not less, to most of the markets. A competitive advantage based on the reputation of yesterday, loyalty to the mark or a beaten publicity will disappear. The gain margins will decay, as it is already happening. The competition will be faster, strong and penetrating, and it will approach more perfectly.

The consumers will win and the shareholders will lose. The applicable products in competitive form will be sold with very low margins. The future of the technology he is shining; the one of the margins of gain of the companies is shady, except for those few that are truely able to use the scale economies to create colossal advantages in the costs. It is possible to ask itself if in truth is possible to obtain significant economies of scale writing a single series of programs that cover the heterogenous requirements with purchase of million companies that they try to modernize his operations resorting to Internet. Can be obtained significant economies of scale distributing by Internet information on warehouse products? The collapse of the Nasdaq happened when the marginal investors noticed that that was very little probable.

But the fall of the Nasdaq almost does not say anything to us on the future of the implicit technologies or its true value. The best analogy is, perhaps, an old raised enigma three centuries back by the classic economists: why they defer so much the price from the water and the one of diamonds? The water is absolutely indispensable to survive and, therefore, immensely valuable for all consumer. However, she is cheap. However, the diamonds have been and continue being expensive. The difference of prices does not mean that the diamonds are useful and valuable, and the water, no, but that, until now, has been easier to maintain the market power and the high margins in the business of the diamonds that in the one of the water.

The analogy with Internet, the new economy and the collapse of the Nasdaq are direct. Not even Internet Explorer, that today occupies in the market of the navigators the dominant position that anyone would wish to have, gives gains (or it still does not give them), nor will give them unless some special function is invented that Internet Explorer can fulfill, and its competitors, no. Our modern technologies of computation and communications simply lower the price of and facilitate too much the distribution of a rival product. Therefore, the fall of the Nasdaq says to us that it is more probable that the new economy presses the gain margins downwards, and not that generates cuasi numerous and lasting yields © Project Syndicate and the NATION

(Translation of Zoraida J. Valcárcel)

Lawrence H. Summers, ex- secretary of the Treasure of the United States, is director of the University of Harvard. J. Bradford DeLong, ex- assistant secretary, he is professor of economy of the University of California, in Berkeley.