Wind of Change

The public infrastructure of the information age could arise through a series of informed decisions. It could also arise haphazardly, through our inattention. But either way, it will develop within a context set by our education, labor, security, defense, and economic policies.

Our private sector entrepreneurs will adjust and accommodate themselves to whatever public infrastructure we develop. These twin economic pillars then will work together to determine the future. Our prospects for success in the information age will rest upon the combi­nation of public infrastructure and private entrepreneurship. And our approaches to both will rest upon the lessons that we take away from the first, bubble-driven stage of our information economy.

During the bubble, the tech sector’s innovation and entrepreneurship blew a wind of change across the economy, a change whose ripples are working their way throughout our broader social and political worlds. Microsoft, Intel, Cisco, and AOL emerged from nowhere to join the ranks of the world’s most important (and for a while, its most valuable) companies; a cottage industry of dot-coms emerged to emulate them. We learned—slowly and painfully—that their initial flashiness was unsus­tainable. We came to appreciate the misdirection that led us to believe first that we could leave Microsoft’s rights, abilities, and motives intact yet still hope to change its behavior, and second that entrepreneurs could recreate those rights, abilities, and motives easily throughout the New World of the Internet. We invested substantial public resources to restrain Microsoft’s drive to stifle innovation that it couldn’t direct through Windows, and substantial private resources chasing the inevitable monopolists who would become the next Microsoft. And though we did gain some measure of restraint over Microsoft’s behavior, and we did uncover a few Internet gems, the returns on our investments continue to disappoint.

We learned some lessons long known in various academic disciplines, but rarely combined—and never before tested in such intricately inter­woven real-world patterns. We learned of network economics and of evo­lutionary software. We learned of antitrust and IP. But mostly, we learned the lesson that Coase had preached decades ago: reductions in transac­tion costs lubricate the economy. They help us move money, informa­tion, and goods to where they’re most valuable—and most useful. That was the key lesson of the Internet’s youth. We thought that it would make us all rich as investors. We learned instead that it would enrich us pri­marily as consumers.

Armed with that knowledge, we saw information-sector innovators realize that this lubricated world enabled new modes of production and of distribution. Hackers exchanged information freely to form a global bazaar culture. An invisible hand from Helsinki emerged from that chaotic bazaar to develop a robust, powerful product at a mere fraction of the cost of any reasonable competitor. Meanwhile, the pioneers of digital music developed an equally chaotic, yet even more efficient, dis­tribution model. With but a few tweaks to existing technology, they built a global network of peers capable of enriching each other in a virtually cost-free environment. Those experiences led to our next set of lessons. If consumers win, someone must lose. A lubricated world is hardly a perfect world. And though transaction costs always slow us down, many of them exist for valid reasons—reasons that provide us with margins of safety and security, and that serve a number of important policy objectives.

Some transaction costs exist for technological reasons alone. When technology improves, we remove the transaction costs and benefit as con­sumers. The interstate highway system, for example, was a 1950s lubri­cant that made it easier and cheaper to move goods around the country.

People who actually live and work in countries with rotten infrastructure have to cope with the consequences every day. These are as profound as they are malign. So to investigate how bad roads make life harder, [the article’s author] hitched a ride on a beer truck in Cameroon, a pleasant, peaceful and humid country in the corner of the Gulf of Guinea.... The plan was to carry 1,600 crates of Guinness and other drinks from the factory in Douala where they were brewed to Bertoua, a small town in Cameroon’s south-eastern rainforest. As the crow flies, this is less than 500km (313 miles)—about as far as from New York to Pittsburgh, or London to Edinburgh. According to a rather opti­mistic schedule, it should have taken 20 hours, including an overnight rest. It took four days. When the truck arrived, it was carrying only two-thirds of its original load ¹

The ultimate lesson is that “there is no substitute for building and main­taining better infrastructure. In some areas, such as telecoms, private firms will do the work if allowed to.... The private sector does not, however, spontaneously provide roads, because the beneficiaries cannot easily be charged.”² Sometimes collective action is the only way to cut transaction costs. Government investment in such circumstances is critical. The private sector only can take over after the infrastructure is in place. Entrepreneurship unleashed into the wild will falter; entrepre­neurship unleashed into a supportive environment will soar. One of the greatest lessons that the information sector has already taught us is that minds freed from thinking about infrastructure will innovate, advance, and improve society.

Other transaction costs exist to serve public policy. These costs are artificial, imposed as a matter of law. Our securities laws, for example, limit the ways that corporations can raise capital to pursue innovative projects. Though these laws undoubtedly delay, deter, and increase the costs of launching many valuable ventures, they also delay and deter huge amounts of fraud. Yet another painful lesson of our years as tech investors was that we might need more—not less—of such grit in our financial system. The information sector taught us that lesson, too.

The truly perplexing transaction costs exist for reasons of both law and technology. The wide and varied world of e-commerce reveals the vestiges of many such combinations—markets in which our new tech­nologies have reduced information costs, yet laws and policies force them to remain in place. Every major automobile manufacturer, for example, offers customized cars on the Web. You can do everything at their sites except buy a car. The site will direct you to a local dealer because state laws prohibit the direct sale of automobiles from manufacturers to drivers. These are old laws, put on the books to protect local auto dealers, often among the wealthiest and most influential business leaders in fragile local economies. Legislatures likely passed these laws when direct sales seemed important to neither automobile companies nor consumers. Certain transaction costs were inherent in the distribution of automobiles, and a network of franchised dealers seemed to be a rea­sonable distribution model. But technology has improved, and direct sales today could almost certainly remove many costs—leading to appre­ciably lower prices for consumers and increased sales for producers. Yet the laws remain in place, a vestige of another era.

Do we want such transaction costs to remain? Or do we want to reform the laws that impose them? After all, these laws harm consumers and producers.

Transitions always impose pain. Transition management may be the toughest challenge that the information sector poses as it eats more and more industries; it’s easier to lubricate some parts of our economy than others. The information sector long ago ate our financial system. We can move money around the world with the click of a mouse. We can move information outlining our tastes and desires as quickly and as easily. We can shift our investments from tech to autos to pharmaceuticals to retail and back to tech. We can ship packages nationwide overnight, and throughout the developed world almost as quickly. We’ve built an effi­cient, well-lubricated economy. Except for one little item. We still don’t know how to move people efficiently. We are sand in the Vaseline.³ Moving workers or jobs from tech to autos to pharmaceuticals to retail and back to tech is just not possible—at least not at anything like the speed that we’d need to keep up with the rapid drift of finances and resources. We must develop ways to lubricate our networks of human capital as efficiently as we’ve lubricated our networks of financial capital.

Therein lies the key to successful transition management. Our skill at meeting this challenge will determine how well we navigate the transi­tion to an information economy—and even further to an information society. We must develop a “human capital infrastructure” that maxi­mizes every person’s potential, that keeps every person engaged in life­long learning, that helps every person make the most productive use of his or her skills, and that relocates people comfortably to facilitate that productive use. Our current thinking about education addresses the needs of a liberal democratic republic with an industrial economy. In earlier ages, most people were illiterate; they trained as apprentices, often in family businesses. Concepts of universal literacy and of widespread elementary and secondary education arose only with the growth of liberalism and industrialization. We must rethink our approach for the information age. We must transcend the notion of public investment in educating children to begin investing fully in educating citizens. Educa­tion, training, and labor mobility are the lifeblood of the information age. We need to cut transaction costs in these areas as surely as we do in all of the others. Our transition will be complete only when we have devised appropriate models and invested enough to develop a full-blown human-capital infrastructure. And that’s no task for the squeamish.