http://www.nytimes.com/2001/04/18/opinion/18KRUG.html
April 18, 2001
Chip of Fools
By PAUL KRUGMAN
t the level of bits and bytes, the most surprising thing about the
advance
of information technology has been the absence of surprises. Back in
1965
Gordon Moore, co-founder of Intel, predicted that the number of
transistors
on a chip would henceforth double every 18 to 24 months - and Moore's
Law
has worked like digital clockwork ever since. But the translation of
bits
and bytes into dollars and cents is far harder to predict. And so it is
no
wonder, or cause for shame, when smart people get the economic impact of
technology wrong.
For the last few years, the joke has been on those - including me - who
were skeptical about the economic payoff to information processing. Now,
alas, it is the optimists who look foolish. They thought the "new
economy"
would be not only faster-growing but more stable than the old economy.
What
we've learned in the last few months - most recently in Monday's grim
news
from Cisco Systems - is that they were wrong.
A brief history of the economics of information technology would go like
this: From the early 1970's until the middle of the 1990's technology
was a
big disappointment. Nifty gadgets like the fax machine became widely
available, yet seemed to do little or nothing for the overall
productivity
of the economy. Many of us glumly concluded that the U.S. economy was
stuck
with a disappointing long-run growth rate of around 2.5 percent.
And then, around 1995, everything changed. For reasons that are still
unclear, suddenly all that investment in information technology started
to
pay off. Those who had called the turn correctly - like Alan Greenspan -
looked brilliant, while those of us who had been reluctant to change our
views began to feel silly.
Meanwhile the optimists began to hail the new economy not just for its
growth but for its stability. Articles with titles like "The End of the
Business Cycle" started to receive favorable attention. Even sober
analysts
began to question the classic script for a slump, in which a slowdown in
consumer spending and investment leads to a buildup of business
inventories, and businesses are then forced into severe production
cutbacks
to work off those inventories.
No more, said the optimists. Here's how one starry-eyed observer put it:
"The same forces that have been boosting growth in structural
productivity
seem also to have accelerated the process of cyclical adjustment. . . .
New
technologies for supply-chain management and flexible manufacturing
imply
that businesses can perceive imbalances in inventories at a very early
stage - virtually in real time - and can cut production promptly in
response to the developing signs of unintended inventory building."
Whoops. In fact, as demand from consumers leveled off last year,
American
businesses were slow to cut production, and ended up with huge excess
inventories. And some of the worst stories of excess inventory
accumulation
involve companies selling the very information systems that were
supposed
to make that "real time" management possible.
Cisco, whose equipment plays a key role in the Internet - and which has
presented itself as the very model of a modern e-business - is the case
in
point. The company's woes aren't simply a matter of declining demand; it
also failed to adjust, ramping up inventories just as the bottom fell
out
of sales. Now it has taken a $2.5 billion write-down on inventory that
it
expects to sell only at reduced prices.
It may take some time to figure out what went wrong. Perhaps it was
business strategy: Cisco used the Internet to become a "virtual
company,"
with most of its products manufactured by others, reducing costs but
perhaps also reducing control. And perhaps some of it was sheer hubris:
technology may have given managers the illusion that they knew more than
they did. One friend points out that high-tech managers insisting that
they
had everything under control sounded a bit like old-fashioned Soviet
central planners.
What's important is that policy makers realize that some of the happier
tales of the new economy were only myths. We must hope that comforting
stories that we now know to be untrue haven't bred a sense of
complacency.
And that's where I get a bit nervous. For that romantic fantasy about
"real
time" adjustment was a quotation from Alan Greenspan's testimony on
monetary policy, less than two months ago.
Copyright 2001 The New York Times Company | Privacy Information
-- ----------------- R. A. Hettinga <mailto: rah@ibuc.com> The Internet Bearer Underwriting Corporation <http://www.ibuc.com/> 44 Farquhar Street, Boston, MA 02131 USA "... however it may deserve respect for its usefulness and antiquity, [predicting the end of the world] has not been found agreeable to experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'
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