Tuesday, March 08, 2011

The Internet and Consumer Surplus

Brad DeLong takes on Tyler Cowen's astonishing argument that the internet is, in Annie Lowrey's paraphrasing, "not as revolutionary as we think it is." Cowen is quoted as saying:
"we have a collective historical memory that technological progress brings a big and predictable stream of revenue growth across most of the economy... When it comes to the web, those assumptions are turning out to be wrong or misleading. The revenue-intensive sectors of our economy have been slowing down and the big technological gains are coming in revenue-deficient sectors."
He contrasts the internet to railroads, which clearly produced substantial revenues and profits for identifiable individuals and companies in the 19th century. By contrast, his argument seems to be, the internet just drives down costs but doesn't create new revenue.

Really? The internet is "revenue-deficient"?

Let me rephrase the question implicit in Cowen's argment: is the internet something that people are willing to pay for? Would anyone reading this blog today be willing to pay for internet access? Does no one reading this post actually spend money to be able to do so?

Based on my experience, the answer is a resounding YES to all of these questions. Of course the internet provides intensely valuable services - services which hundreds of millions of individuals are willing to pay for every day. Add up some of the following, and tell me what you get: monthly internet subscription fees paid to telecom companies; spot charges paid to access Wi-Fi on airplanes and in cafes; purchases of hardware whose primary function is to access the internet; advertising revenue earned by thousands of content sites. Add that up, and tell me what you get. I'm guessing it's a pretty big number. It would not surprise me if it were at least as big, proportionally, as the revenue earned by railroads in the middle of the 19th century.

Yes, the technology revolution of the past generation has driven down the cost of certain things (primarily information) in a relentless fashion. But wasn't the primary contribution of the railroad to dramatically drive down transportation costs? Yes, lots of companies that have tried to make money from the internet have failed. But isn't that true of all competitive industries?

Lowrey makes an astute observation about this in her piece in Slate:
But revenue is not always the end-all, be-all—even in economics. That brings us to a final explanation: Maybe it is not the growth that is deficient. Maybe it is the yardstick that is deficient.
And this is Brad's point, as well. Much of the benefit of the computer and internet revolution of the past generation has been in the form of increased consumer surplus. And that, I would like to emphasize, has everything to do with market structure. The internet is a hyper-competitive marketplace. Intense competition drives down costs, drives prices down to the suppliers' marginal costs, and leaves most of the benefits in the hands of consumers. Can anyone think of a more apt description of what the internet has done?


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