
Krugman: Internet’s Economic Impact No Greater Than Fax Machine (1998) - jcuga
http://web.archive.org/web/19980610100009/www.redherring.com/mag/issue55/economics.html
======
hyperpape
While 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.

~~~
snrplfth
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.

~~~
hyperpape
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.

~~~
snrplfth
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.

~~~
hyperpape
I think you're still making it, just in a more subtle way. What happens to the
money those people spend on arthritis treatment?

~~~
snrplfth
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.

~~~
hyperpape
Gotcha. I definitely agree that there can be consumer surplus not captured by
GDP.

------
forgingahead
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.

~~~
richieb
I think he does admit his mistakes:
[http://krugman.blogs.nytimes.com/2010/09/01/mistakes/](http://krugman.blogs.nytimes.com/2010/09/01/mistakes/)

~~~
forgingahead
"Two mistakes" \-- that is a satirical blog post right?

~~~
addicted
Big, Professional mistakes

~~~
Booktrope
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...](https://www.nytimes.com/2014/10/20/opinion/paul-krugman-amazons-
monopsony-is-not-ok.html)

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.

~~~
EdHominem
> 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.

------
misiti3780
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.

------
colordrops
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.

~~~
matt4077
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.

~~~
snrplfth
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.

------
sgwealti
Paul Krugman responded to this a few years ago:
[http://www.businessinsider.com/paul-krugman-responds-to-
inte...](http://www.businessinsider.com/paul-krugman-responds-to-internet-
quote-2013-12)

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.

~~~
Torgo
His normal column hasn't been much better, for years now.

~~~
tps5
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.

------
mempko
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".

~~~
snrplfth
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.

~~~
mempko
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.

------
ZeroGravitas
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.

------
jokoon
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).

~~~
cema

      This article was written before the net bubble.
    

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.

~~~
Jtsummers
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.

------
RodericDay
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...](https://www.theguardian.com/technology/2010/aug/29/my-bright-idea-
ha-joon-chang)

~~~
Eridrus
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.

------
rm_-rf_slash
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.

~~~
forgetsusername
> _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.

------
adamnemecek
Also "Why the web won't be a nirvana" [http://www.newsweek.com/clifford-stoll-
why-web-wont-be-nirva...](http://www.newsweek.com/clifford-stoll-why-web-wont-
be-nirvana-185306)

~~~
drzaiusapelord
>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.

~~~
ZeroGravitas
> 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?

------
johnwheeler
> 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.

~~~
tossedaway334
Pretty sure thats the point of the HN post.

------
kurthr
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_

------
Hasknewbie
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...](https://en.wikipedia.org/wiki/The_Road_Ahead_%28Bill_Gates_book%29)

------
mhneu
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....](http://www.nytimes.com/2016/12/19/opinion/how-republics-end.html) [1]
[http://www.salon.com/2008/09/24/mccain_letters/](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.

------
return0
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

------
rectang
After the new FCC kills net neutrality, Krugman will be proven right.

