Peter Klein Throws Cold Water on New Economy Talk

Josh Wright —  25 May 2009

Peter Klein of Organizations and Markets blog-fame kicked off the George Mason/ Microsoft Conference on the Law and Economics of Innovation a few weeks back with a talk on “Does the New Economy Need New A Economics?”   His answer: No.  This week, Peter takes aim at Wired’s Chris Anderson who predicts a massive shift toward “small” in the new, new economy led by a reduction in transaction costs created by information technology and reduced startup costs.  The whole thing is worth reading, but here is an excerpt:

Wired’s Chris Anderson drinks the New Economy Kool-Aid. It’s the same old argument — information technology reduces transaction costs, leading to a radical disaggregation of industry and society — still supported by little more than a few colorful anecdotes, not any kind of systematic analysis. The new twist is the financial crisis, described by Anderson as “not just the trough of a cycle but the end of an era.”

What we have discovered over the past nine months are growing diseconomies of scale. Bigger firms are harder to run on cash flow alone, so they need more debt (oops!). Bigger companies have to place bigger bets but have less and less control over distribution and competition in an increasingly diverse marketplace. . . . The result is that the next new economy, the one rising from the ashes of this latest meltdown, will favor the small.

Nonsense. The major banks, the Chrysler corporation, and whoever is next to fail have not become nimbler and smaller, but larger; they have become part of the Federal government. Fannie and Freddie have swollen and taken on additional responsibilities. The financial crisis, as argued repeatedly on these pages, was spawned by a credit bubble brought about by loose monetary policy and massive government subsidization of the home mortgage market. It has nothing to do with firms being too large or somehow failing to take advantage of the Next Big Thing in social networking or cloud computing.