 Okay, everybody. It is nine o'clock And I think we should go ahead and start to keep on time I'm glad to see so many of you here this morning having made it through To the Friday Saturday morning of Mises you probably we can find a few more bodies You know in the gutter near the near the bar downtown. We'll go retrieve them later One thing is I hope that you've been Checking reminders and so on on the the Mises Academy page for Mises you about getting copies of the PowerPoint slides So most of the faculty who have used these kinds of visuals have made them available for you to access on The Mises Academy course page for Mises you have people been able to access those Have you tried? Okay, so for example in in the case of my talks You don't have to write down every quotation or you know check the spelling of every name or whatever because you can just download the entire PowerPoint file as a PDF and have it for your collection It doesn't mean you shouldn't take notes, but it just means you can be judicious in what you write down I will say that a couple years ago. I made my The actual PowerPoint files themselves available to the other faculty Because we were going to sort of see what everybody else was doing and make sure we were on the same page And I noticed that a couple of the other faculty members stole my PowerPoint template so Professor Herbner for example has been using the same fonts and footers and colors and so on that I use not as not as well, but In an attempt to imitate my style so of course I I We all recognize this as a theft of intellectual property and I've already retained Stefan Kinsella as my attorney In my legal case against Herbner to make him stop using my PowerPoint template Anyway, speaking of PowerPoint this morning's talk is about technology Not educational technology per se, but a variety of issues associated with the relationship between technology and economics Now one of the reasons that that's important is because you know over the last decade or two with the internet revolution You know the rise of what some people call the knowledge-based economy or the networked economy There's there's often a lot of discussion about how things are so radically different The way goods and services are produced the way people interact with each other You know the nature of exchange and so on is so radically different that these old models old theories that we have about Prices about exchange about the division of labor about production You know a lot of the stuff that you've been learning about this week is somehow obsolete or is at least less relevant than it was before right that yes, you know Carl Manger and Ludwig von Mises and Murray Rothbard and these guys they developed their theories in the age of the old economy You know the manufacturing Economy the brick-and-mortar economy and now that the economy is so new maybe those theories don't apply anymore Maybe Mises was wrong about the laws of praxeology being universally valid Maybe they only apply to specific times and places and we need a new body of theory now You know what are some of the characteristics of this so-called new economy knowledge-based economy networked economy Some people have gone so far as to say that well, maybe even scarcity is a thing of the past. I Mean it's true. I if those of you who were in the panel discussion last night the upstairs panel There was one one I think after the break someone asked a question about you know a kind of a future society Where we have robots and artificial intelligence and nanotechnology or something such that basically we can just have whatever we want Assembled out of molecules or something, you know what that means the end of scarcity and there was some discussion Arguing that no there would still be scarcity. I won't repeat it exactly because Walter Bloch's answer involved Blow up Marilyn Monroe doll and I don't want to go there, but But you do hear these kinds of claims that maybe scarcity at least isn't such a big deal anymore You know knowledge is a resource and knowledge isn't scarce We can copy it at no cost and so on so so why do we even need the economic laws that deal with the world of scarcity? There's a lot of emphasis a lot of discussion on knowledge Claims that knowledge is somehow more important today than it was in the past You know, I mean right away you think well, it's not obvious how you would measure that Right knowledge is not something easily quantified But but there's often an implication that You know the key to being a successful producer in the old economy was you know to have more a bigger factory and more land and More machines and stuff and so on but now the key to being a successful entrepreneur is to have more knowledge than other firms or to have better knowledge workers this sort of thing that maybe Maybe this implies something different about marginal productivity or or that you know determinant of wages or something like that Some of the discussion focuses on more technical aspects of production so-called increasing returns to scale It's claimed that you know when you're selling a network good. We'll talk about that a little bit more in just a moment You know Facebook or Google Plus or whatever where the value of having it depends on how many other people also have it That it just sort of once a lot of people get it. There's sort of a tipping point and then it explodes and it becomes you know It becomes cheaper to produce it on even a larger and larger scale And so you end up with a few large firms that dominate the entire sector You know Mises and Rothbard talk about the law of returns the law of diminishing returns meaning that In the use of fixed factors of specific factors when there are other factors that are complementary You know eventually the diminishing returns to a factor the returns to a factor diminish go down and that ultimately Production always takes place at the level of constant returns to scale people have challenged that and said well Maybe that doesn't apply anymore if you're talking about knowledge goods information goods There's been some discussion about organizations. You know that maybe the hierarchical firm is obsolete Because instead of having one you know these large organizations where managers tell other people what to do and so on now Everybody can be his own firm right a firm is just one guy with a laptop and Sourcing his production from some place in China and now sourcing his distribution to FedEx and You know his payment collection his finances to PayPal or whatever and we don't need firms with groups that are bossed around by bosses Firms can be more decentralized or in the language of you know management jargon the hierarchy can be flattened What we want to ask today is first of all to what extent are these phenomena real? Do we have any evidence for the extent of these phenomena for the magnitude of these phenomena have they been exaggerated or is the discussion realistic? How important are they are they really something fundamentally new or do they just represent small marginal changes over the way things more or less I've always been and Particularly of particular interest for us this week, you know, do we need a new kind of economics? To explain all this or can we still use regular old old-fashioned economics? You know does does Manger and Bombavik and Mises and so on do these guys still have something for us to say Something to say to us today are these theories still relevant or do we need a new economics? I mean, I'm not I'm being deliberately provocative in the way. I pose these questions, but I'm not just I'm not making this up as I go along I mean, you know, there were a lot of books in the 1990s late 90s early 2000s like this book by Kevin Kelly who writes a wrote-for-wired magazine some of you may have seen this stuff You know new rules for the new economy Essentially claiming that well scarcity isn't important anymore and decreasing returns aren't important anymore and so on a more recent book by a couple of management Professors is called Wikonomics You know the economics of the Wikipedia world that they're focusing on You know this idea that you can produce stuff with highly decentralized networks of individual volunteers Right just as Wikipedia is produced by like it just like an open-source project Is produced not by employees, but by volunteers who donate their time and there's no boss and it's it's kind of a Hayekian spontaneous order if you like and so these guys wrote a whole book on you know the economics of the wiki world We need a new wiki nomics. I'm not particularly enthusiastic about either of these two books I present them to you as examples of the kinds of claims that people make Let's start with some facts Right people sometimes accuse Austrians of being you know anti-empirical But of course the truth is really the opposite as it came out in the advanced seminar that we had yesterday I'll just ask does anybody remember not those of you who were there yesterday What was Carl Manger's profession before he wrote the principles of economics and became an economics professor? Yeah, he was a journalist He was a financial journalist The equivalent of the guys you see nowadays on CNBC, you know talking about what the what what happened in the corn market yesterday That was what Manger did he was used to explaining real-world phenomena and he developed his theory His theories Specifically to explain reality. That's why we use the term earlier in the week causal realist Austrian economics as a causal realist discipline In fact just as a footnote one of the terms that was used to describe Manger's approach by his contemporaries Was the empirical school? Did you know that some people in that day called Manger's approach the empirical school in contrast to Varaz and the mathematical economists who were Describing completely abstract hypothetical situations. No, Manger was describing real prices and real markets and real actors So tell that to your friends who say Austrian economists aren't interested in empirical research Manger was an empiricist by that standard anyway, so here are some facts here are some empirical facts as good Mangerian journalists will start with those It certainly is true by any objective measure that you know what what we might call the IT producing sector Hardware companies software companies telecommunications companies and so on I mean has grown dramatically in the last three decades You know measured by sales measured by assets measured by employees or whatever So there's no doubt that the computer industry and the telecom industry and so on those have grown rapidly There's also a lot of evidence that The use of information technology by firms has gone up, right? I mean The ever you know see pictures of an office from 30 years ago, and you know nobody has a computer on their desk Right the diffusion of information technology into the workplace has been rapid and in many cases quite dramatic So there's no doubt about that There's there are many claims so these are a little bit more difficult to substantiate that The value of networks is greater than it was in the past Right, I mean the internet itself of course as a network of networks The value of which depends on the size of the network, right? That's the most obvious example of this phenomenon But you know instant messaging and Facebook and so on are all examples too of so-called network goods so people claim that you know the Ability to be successful as an entrepreneur The utility that consumers obtain and so on in many cases is a function of their networks The size and characteristic of the networks that they belong to Now this claim is a little bit more difficult to assess in terms of its magnitude and its novelty Right, I mean human beings have always been networked. That's Mises very definition of society, right? Human beings who cooperate with each other by exploiting the greater productivity of the division of labor So any group of individuals participating in the division of labor are part of a network Okay, is it exactly the same as being part of a social network or a communications network like the internet? No, it's not exactly the same But it's not as obvious what kind of numbers you would use to say networks are more important now than they were before There's some evidence that Private firms have increased the proportion of their budget they allocate to research and development Suggesting that maybe innovation is somehow more important than it was in the past There certainly is evidence of you know some firms becoming smaller flatter more disaggregated You know the importance of particular open-source technologies is is hard to overstate Right so again There's the evidence on this one is not crystal clear But certainly we do see some new forms of organization that we didn't that were less important or seemingly less prominent in the past You know there's lots of a Lot of resources being devoted to news to startup companies and new projects You know the venture capital sector grew dramatically over recent decades So there's been some important changes just in the last couple years Or so-called angel investment wealthy Entrepreneurs who invest their personal resources in startup companies of newer, you know younger entrepreneurs So the rise of the venture finance sort of early-stage private equity sector is often taken as an Argument for the new economy that there is a new economy and certainly that sector has grown and there are some new Ways of doing business. I don't know if any of you saw the book by Wasn't Kevin Kelly. I guess I forgot. I think it was Chris Anderson who also writes for Wired called free Claiming that you know the way to make money nowadays in the you know in IT businesses to give stuff away for free Right, you know Google gives all its products away to us for free and Facebook is free You know a lot of most instant messaging programs are free and so on that in order to make money you should Give away most of your stuff for free and then try to sell some ad raise running money through advertising Maybe sell some ancillary products, you know deluxe versions of things and charge money for that But basically the way to get rich is to give away a lot of stuff to build up your you know your user base That's an example of what people describe as a new business practice that wouldn't have been profitable 50 years ago 100 years ago, but now it is so the very way that firms do business Allegedly has you know sort of changed in a substantial way You know it Just a little bit of here's a chart that gives you the flavor of the kind of things that people talk about When they have the new economy in mind and this is data from the 80s and 90s So it's a little bit obsolete, but the trends have more or less continued over the most recent two decades I happen to have this chart handy You know it's trying to measure it the curve that's going down is that price index showing kind of the real inflation adjusted price of Computer hardware and software Right, so it's showing you that you know in real terms the prices that we pay for information technology have gone down And of course we all recognize that right, you know one 20 years ago you'd pay, you know, $2,500 For a PC that had you know 640k of RAM and two floppy drives and a monochrome screen You know now for three or four hundred dollars You can get a machine that you know is more powerful than the fastest super computer that existed in 1990 or something Is it so we all recognize that the good stuff is getting cheaper in real terms? Okay? These these curves that are going up are showing Investment in information technology by firms how much do they how much computer equipment do they buy? How much telecommunications equipment do they use in their business and so on essentially what you see is you know the good stuff is getting cheaper and firms are using more of it Okay, this is exactly what we would expect if we think that the IT sector is becoming bigger and more important And we're seeing a lot of technological progress and advance and so on. Okay, but let me offer some qualifications Right being a good contrarian curmudgeonly type as we Austrians typically are You know is Some of this hype how much is hype and how much is reality? well first thing I want to suggest is that Things that appear to be new are not always completely new Okay People talk about the web. In fact Gary North mentioned in the debate with Walter Block right about you know Everybody can have a YouTube channel. Everybody can have their own WordPress site Everybody can have you know so-and-so comm and you can write your articles and spread the word and so on I mean that is certainly true But one thing that Gary didn't mention is you know the so-called long tail phenomenon Do you know what they mean by the long tail? if you plot you know if you if you look at all blogs and You rank them by the number of hits and then you plot it on a graph There's a really steep drop-off Like there's a few blogs that get lots of hits, but then most blogs get like two hits a month or something Right, so it's true that anybody can try to get the word out But it isn't true that everyone will be equally effective in doing so right in terms of attracting readers But the point is this has been true for a long time, right? I mean a You know a lot of important political movements in history You know the American Revolution in the 18th century was largely fueled by propaganda that was printed in these little pamphlets or they called them handbills once with the advent of the printing press or people could produce at low cost a large volume of little notes, you know denouncing the king or You know arguing For this or that you know Thomas Paine's common sense and so on you know These were not published by Oxford University Press and distributed in beautiful hard bounds Now these were little pamphlets that were mass produced little flyers that were you know put on bulletin boards So to speak handed out at the local tavern and so on so almost anybody could Say something and try to attract a readership at pretty low cost Anybody could stand on the street corner and shout out, you know his opinions and his views and try to get somebody to listen so In a sense, you know the cost of production or Creating a newsletter if you'll have me is it is lower now than it was in those days It's it's basically free except for your time But you know, this is a quality. This is a difference in degree not a difference in kind, right likewise, okay You know the internet of course, it's hard to compare the internet to anything But but people have compared it to older communications networks like the telegraph The telegraph was introduced well that the visual telegraph goes back to the 16th 17th centuries the electric telegraph of the Victorian era was considered in its day every bit as radical and Revolutionary as the internet is considered in our day I mean think about it in the 19th century you go from, you know Communication by stagecoach giving a letter to a rider and it would take a month to get from here to here You know to being able to send out mess short messages in code Almost instantaneously, I mean think how radical that would have been And since that's more of a radical change than when we went to calling somebody on the telephone to sending them an email We're already used to rapid communication, but that was unheard of in that day And there were there was if you look at the newspaper articles at the time Speeches books people were saying exactly the same thing that they say now That they were saying in the 90s. Oh my gosh the whole world has changed the globe has become smaller now We can all communicate with each other. We're part of one global community, you know People are now war will end and everyone will get along and kumbaya and all that stuff There's actually a fascinating book by a journalist named Tom Standage. I forgot to get a picture of the book It's called the Victorian Internet and it's about the history of this period. It's fascinating He describes how you know Telegraph enthusiast clubs emerged with their own lingo and their own way of dressing and talking They had, you know, the equivalent of texting language They had the lol, you know of Morse code and so on and the same kind of culture that emerged among internet geeks In the 90s, it's almost the exact same thing back in, you know, the 1860s 1870s really very interesting What about You know providing information it will say well, you know a web page When you when you when you purchase the services of an information provider, you're not buying a tangible good You're just buying information, right using an online directory is consuming information Rather than consuming a tangible good or service. Is that still a consumption good? Can we still do this marginal utility still apply to it? You know this sort of thing? Well, I mean Information goods are not new either. I mean the tell the the telephone book the phone book that you might have seen in your grandmother's house You know an actual book where you could look up phone numbers. That's an information good And any book is an information good Know people who are buying the Gutenberg Bible were buying information, right? I mean they were buying a tangible thing, but they weren't buying it for the for the paper for its physical attributes They're buying it for the information embodied within in the words What about things like the PC and you know Cell phone mobile phones smartphones instant messaging and so on where the rate of diffusion has been very fast Right, so a lot of attention is devoted to technologies that have this very rapid rate of diffusion Like I mean you guys can probably remember when Facebook was new I Remember hearing about Facebook, but I don't probably five years ago and thinking all this looks dumb poke, you know, what's the point of that and you know, I got on it because a Friend encouraged me to do so, but there was I didn't know anybody else on it And it was kind of useless then all of a sudden there was a point You know about three years ago when all of a sudden everybody I knew was on there And they were all posting pictures and jokes and stuff and it's like, you know now everybody's on it Right, there's probably one or two of you who are not on Facebook And it's because you never will ever go on it, right and anybody who's ever gonna get on Facebook is probably on it already So it's like you go from almost no users to whomp almost everybody Using and there's actually a whole theory about this developed by a guy named Rogers in the 60s I don't know if you've heard of the so-called s-curve The s-curve is supposed to describe adoption rates. I think I have another picture of the s-curve Yeah, so the s-curve looks something like this Here's here's time and here's the number of users, right? So if you look at sales of a particular product over time, you know when the product is introduced It doesn't have many say it's not not many people want it, right? There's only the so-called early adopters You know that term and you probably know people like that whenever the newest Gadget comes out they have to be the first in line to get it, right? But most people don't most people wait a little while to make sure it's okay And to see what other people say and read the reviews and so on so Eventually the amount of sales per time period goes up then you reach a kind of a peak and then it goes it tails off right so something like You know think of a little a slightly older Technology like you know the Nintendo Wii So I've got a Wii right I mean I didn't buy the Wii right when it came out But I was one of these people who bought a Wii here And I don't think the Wii has much sales now because most people who are interested in the Wii have already got one and Nowadays people want the next generation of thing Xbox 360 or whatever it is If you if you plot the curve as cumulative adoption so total number of users over time it looks kind of like a letter s Right so they talk about the adoption rate You know how steep is the adoption rate adoption is slow in the beginning it really takes off Then it tapers off at the end if you look at the introduction of the personal computer the original PC in the 80s It follows this kind of pattern You know social networks a mobile telephony lots of communications technologies lots of computer-based technologies have shown this same kind of Characteristic a very very sudden and rapid adoption But again is that something brand new a great chart that I think it comes from Robert Gordon Plotted the adoption rate of a bunch of technologies going back to the early 20th century including electricity The refrigerator electric refrigerator here's the telephone Here's the the videocassette recorder the old VCR notice that they all have this kind of s-curve pattern Right so when electricity is first introduced not very many people have it and a few homes begin to have it And then all of a sudden everybody's got it and you know by what you know about 1950 1955 Basically, this is US data basically a hundred percent of US households have electricity Right so within a span of just a few years it goes from you know almost zero to almost a hundred percent Look at the refrigerator You know in the early 1930s only 20% of the population have a refrigerator and then by you know 1960 It's almost a hundred percent So my point is when a new valuable technology is introduced It is often adopted very rapidly it diffuses throughout the population very rapidly This has nothing to do with it being an internet technology or a computer technology or even a communications technology per se This is just the nature of innovation at least in the 20th century There's nothing new about this s-curve phenomenon that relates only to the internet or the so-called so-called new economy What about this you know, what about open source a technical term that is used by some riders including a lock the One of the experts in this area is guy named Benkler yokai Benkler Benkler he uses the term commons based peer production What he means is that what is you know like in open source? The the software code that is produced as part of the so-called commons They've ever heard the phrase tragedy of the commons Right meaning property that is not owned by one specific individual or one precisely defined group of individuals It's in the public domain Right, so they're producing commons. They're putting outputs in the commons and it's produced You know in a peer-to-peer decentralized fashion. It's not designed from the top down with the boss, right? It's We we Open source programmers contribute their time and effort to put something in the commons So is commons based peer production the idea that individuals without any central authority Co-operate with each other to produce valuable goods and services that provide benefits to many other people including You know far beyond those who actually provided all the inputs. Is that a brand-new phenomenon? Sometimes I think have these guys ever read eye pencil Have they ever read Leonard Reed's classic article from 1950? I think do you remember Tom Woods last night was talking about the toaster I toaster I mean Econos are very familiar with this side these kinds of examples and the notion that the market system is itself a vast network of individuals who cooperate voluntarily Who contribute their time and energy into the production of goods and services that provide, you know vast benefits? to many many people so, you know commons based peer production is just a fancy name for Decentralized voluntary interaction, which is exactly what the market system is all about We've had things like that ever since the beginning of human society Okay Actually, I'm just gonna go Talk about this very briefly. What about, you know so-called information goods What about buying and selling information as opposed to buying and selling stuff that you can touch? Isn't that different doesn't that mean different rules apply and demand curves? Maybe don't slope down anymore. Maybe they slope up or who knows? Yeah, I mean, I think I think the answer is no that Information goods do have some interesting characteristics, but they are basically economic goods just like any other economic good Right first of all keep in mind that what is traded in the market is not information in some generic sense But specific tangible units of goods and services, right? You buy a book and there's information Embodied in that book you pay to listen to a lecture if you're purchasing or maybe you get it for free You buy access to a network Access to some information again. You're still buying and selling discreet units of goods and services in In which information is embodied but information is this, you know Big amorphous thing you don't buy and sell information you buy and sell economic goods, right and information goods are economic goods Right, they're evaluated Subjectively at the margin by rational thinking choosing decision-makers just like alofa bread or or whatever an automobile Okay, so information goods are not radically different in that sense So if you don't want to go back to you know mangers analysis of Marginal utility what determines the prices that consumers are willing to pay for the marginal unit of a good or service and you know You got five horses and you the first horse is allocated to this use in the second horse to this less valued use and so on You know that whole shtick Right well it applies to information goods the same way that it applies to horses or loaves of bread or whatever else might be evaluated by the consumer, okay As I've already mentioned information goods You know maybe in some sense they're bigger or more important or more valuable, but we've had information goods Since the beginning of human civilization experts guides directories dictionaries You know of course books lectures Maybe maybe music. I mean was paying to hear a concert You know what you're what you're buying is well a particular pattern of tones You know you can represent music as information so as long as people have been consuming music. They've been consuming information Now having said that It is true that if you study Some particular markets for information goods. They have some that has some interesting properties There's a book a good book that came out in the I think about 98 99 by Cross ship here on how variant called information rules describe some of the, you know, you know kind of business strategies pricing and and Having different versions and things that producers of information goods used to try to make money and They're worth studying. I mean there's a lot of insight that can be gained from that One of the reasons they're interesting is because you know kind of the the production technology for information is It is often a little bit different from the production productive technology for other things right because you know with the book the main The main input into writing the book is coming up with the ideas Right once you've written the manuscript and its typeset the cost to produce additional copies is very low relative to the cost to produce the first one Right same thing with you know computer code the cost to Microsoft of you know producing Windows 7 It's the development cost is the cost of writing the code once you have the code the cost of Stamping yet one more DVD to put on the shelf is you know almost zero is is trivial relative to the cost of Producing the product in the first place. So how does a firm make money? selling that type of good or service well you you know you need to You want to be able to sell a sufficient quantity to recover that initial investment Right and there may be ways that that the firm can do this by applying innovative Marketing strategies pricing tactics and so on you know this idea of giving things away for free Well again, that's hardly a new phenomenon Free promotions, you know get people in the door and in many ways That's what software companies do like Adobe for example They give away Adobe acrobat for free the acrobat reader for free so that anybody can read PDF files, but if you want to produce your own PDF files You either have to have an application that lets you save as PDF or you have to buy the full version of Adobe acrobat Which ain't cheap you know it costs you a hundred bucks or something, right? So you give away one version of the product to try to help make it the dominant standard for that particular niche And then you can make money by selling the full version or selling a complementary product or something like that So called to two-part pricing You may charge different prices to different kinds of users so-called price discrimination It may be the case that there are substantial increasing returns in this kind of an industry such that there's an advantage to being first there's a first mover advantage and Incumbents that are already dominant players in the industry have particular cost or pricing advantages relative to newcomers, right? I mean that's certainly true of computer operating systems Right, nothing prevents me nothing. There's no legal restriction on my writing my own operating system for a PC and Trying to compete head-to-head with Microsoft But it's unlikely that I'll be very successful because Microsoft already has the huge installed base It has the accumulated expertise and so on so there's an advantage to being the incumbent not that's not a praxeological necessity Right, but given the characteristics of these goods in these industries It is often the case that incumbents have strong advantages again. Is this brand new? No, of course not There are many industries going back to the dawn of manufacturing Right in which there are first mover advantages incumbent advantages and in which firms price discriminate and employ two-part pricing and so on so we don't want to get Carried away in saying that these are unique characteristics of the computer age in some sense But they may be a little bit more important a little bit more prevalent than they were in the past What about so-called network effects or as the term is sometimes used incorrectly network externalities What what people mean by a network effect? That's just a fancy name or the attribute we discussed earlier where the value of a network depends on the number of people in the network And of course that makes sense right you You don't want to be You know you don't want to be in a social network you use a social network program that only has five users Right because there's nobody to network with So imagine somebody who was just getting into social networking for the first time and they can choose between you know Facebook MySpace and Google Plus You know they might prefer Google Plus because they like its features But it's more likely that they'll choose one of the networks that already has gazillions of users One of the networks that all their friends Are already on right? Why is this important well in the 80s and 90s a group of scholars came out with some research arguing that Network effects cause problems in markets The presence of network effects leads to so-called market failure When network effects are present we cannot be confident that markets will Choose the appropriate technologies the efficient technologies the technologies that consumers desire Right in the most famous example that they used to illustrate their argument was the layout of the typewriter keyboard The so-called QWERTY keyboard now those of you from the US Understand you know that when you look at the typewriter keyboard the top left-hand side of the first row or has these letters QW We call that the QWERTY layout in some other countries. It's slightly different, but It's almost never you know There's no countries that have a standard keyboard layouts a bcd or something like that right and you wonder Well, where did they get this weird typewriter layout? It seems totally illogical Right. Well if you look at the history of typing It turns out that in the early days of typing there were a lot of different Layouts that were sort of competing against each other Now according to the historian Paul David who famously introduced this example into the economics literature What happened is you know, there was there were some sort of idiosyncratic random events in The 1920s there were some typing contests or they'd you know See who can type the fastest with the fewest errors and all sorts of different layouts were used in one particular typist who happened to favor the QWERTY layout One a contest and then one a few more contests and got a lot of press and people mistakenly thought that this particular layout must be more efficient somehow than others and new manufacturers began to adopt this layout now according to David the layout of a typewriter keyboard is Characterized by strong network effects right in other words you could learn, you know now you can program your computer to use whatever You can reprogram your computer to use an alternate alternate layout if you want Most of the windows even has built in the so-called Dvorak keyboard. Have any of you guys heard of Dvorak? That's a different layout that is supposedly faster You can have fewer errors and less wear and tear in your pinkies or whatever people say QWERTY is kind of It seems inefficient because the pinkies do a lot of work with the shift keys and and the thumbs don't do any work The left thumb does nothing all the right thumb does is hit the spacebar people say well It doesn't seem like an efficient use of the hands So he's attempts to redesign a more scientific version that you know more ergonomically correct version But you know if you learn to type on something other than QWERTY When you go to your friend's house, you can't use their computer unless you can reprogram it to your layout Right when you go to the coffee shop or the student lounge on your university. You can't use anybody else's computer, but yours Right so there is value in learning the the keyboard layout that most other people use So that you can switch from machine to machine other people can use your machine and so on So you might choose to use a particular Typewriter layout not because it's best in some objective sense, but because that's what everybody else uses So according to these critics if one particular technology in this case the QWERTY layout Happens to get a little bit of a head start People believe for whatever reason that it's the one that most other people are using then every every newcomer will want to use That one too and it just kind of expands and expands and explodes There's a sort of a tipping point where all of a sudden everybody is using QWERTY and Even if somebody comes along with a new layout that's way better than QWERTY The economy won't switch the market won't switch because it's too difficult to coordinate Getting everybody to switch at the same time Right you don't want to switch unless everybody else switches and nobody and everybody else is in the same position Right the term that was used to describe this kind of case is path dependence Path dependence is the idea the simple idea that you know where we are today Depends on where we were yesterday Right so there's you know We don't start a new every day our actions are a function of actions that we took in the past as applied to technology markets The argument is when network effects are present Particularly the market will choose to the market will tend to choose technologies That are not the most efficient technologies But are the ones that just happen to get a head start for whatever idiosyncratic reason once we go down that path We can't turn back Right we're stuck on the QWERTY path now and no matter how much we would like to switch to something else We can't we're stuck on this path. We can't break out of it The early literature on network effects and path dependence cited The original VHS video recorder almost everybody here is too young to remember this but when that when video recorders were introduced There were two different kinds there was VHS and Betamax and a lot of Experts industry experts thought that Betamax was really better Was more sophisticated higher quality and so on and yet the market converged on VHS and Betamax became an orphaned technology slightly more recent example of that you may remember is Blu-ray Versus the other high definition formats what was called HDDVD. There was a format battle when high definition Players were introduced and after a few years of competing head-to-head Blu-ray one out and HDDVD disappeared Some of the literature even claims that you know the kind of you know The DC power is really better than AC but because some communities chose AC power all of a sudden everybody was using AC power And now we can't switch to DC Paul David also claimed that actually the internal combustion engine It was an automobiles is an inefficient technology that it would have been better if we use steam engines But unfortunately the market chose you know gas gasoline powered internal combustion engines and instead of steam So there's been literature on this the reason anybody cares about it is because according to the critics who introduced These ideas into the literature they show that markets don't work Right network externalities and path dependents represent a new and particularly important kind of market failure We cannot trust the free market to choose technologies when network effects are present Because the market may choose the wrong technology and then we as a society are stuck We're stuck using QWERTY. We're stuck with VHS. We're stuck with AC power The implication sometimes explicit sometimes not is that there should be a government planning agency That is responsible for choosing technologies Right a body of disinterested experts will evaluate all the different keyboard layouts It will choose the one that's the best and everyone will be required by law To adopt that particular technology. That's getting us out of this market failure trap Is this is this true is this a good argument? Well, I mean There's several different ways to it to approach it One is to point out of course that it may very well be true that when we look back on Choices that you know we as individuals that the market as a whole made in the past We may have some regret Gee it would have been better if everybody had chosen the Dvorak layout in the early 20th century rather than the QWERTY layout You know if we knew then what we knew now we would have chosen XYZ Well, we didn't know it then Right and we made the best choice based on the knowledge that we had at the time The fact that we may later come to experience some ex post regret Doesn't by itself prove that the process used to make the choice Originally was flawed somehow but you'd have to come up with a feasible alternative And do we think that a government planning bureau? Or an in a committee of industry experts chosen undoubtedly through some bureaucratic rent seeking process Is likely to choose better technologies on average Or will those choices tend to be politicized bureaucratized Influenced by special interests and so on you know if we would If path dependence is a problem anywhere it would seem to be a problem in politics Right, I mean the person who has the political power is the guy who had it last year and you know We do things the way we always did them Because that's the nature of bureaucracy, right? We wouldn't expect a bureaucratic Government organization to be more responsive somehow to technological innovation to be more nimble And to be less likely to get us locked into the wrong technologies But an even more powerful argument That was first advanced by the economist stan Liebowitz and steve margolis In a famous article on the courty keyboard. Is it the the the these historians basically have it wrong? They claim that The claims that the technologies that the market chose are worse Then the alternatives available often turn out to be false right They went and looked at the history of the typing industry and found that in fact it's true There were lots of different typewriter keyboard layouts in the early days of typing And they were all pretty much just as good In fact, even modern ergonomic experts say that there really isn't a big advantage in switching from courty to devorak or something else A supposedly more scientific alternative Once you learn how to type quickly a skilled typist can type about as fast on any keyboard layout There are some differences in how quickly you learn the layout But there aren't really any big advantages in switching to devorak. In fact, when paul david wrote his initial article On the you know the courty phenomenon He based his case on On claims that in fact courty is very inefficient and that the devorak standard is 30 increase in speed and 20 increase in accuracy something like that Well, it turns out that he based his argument on a navy study written in the 1950s on typewriters and the navy study was written by mr. Devorak The guy who's trying to sell his typewriter to the navy, right? So if you look at the evidence more carefully, it's not at all clear. There's anything wrong with courty. First of all the other thing is What constitutes a Efficient or inefficient technology remember from the economist point of view The better technology is the one that consumers prefer Right is the one that Allows consumers to satisfy their wants better than the alternative technology It doesn't mean the technology that engineers think is better Or that you know experts in the industry think is better like for example with vhs and beta max The claim that the that beta max was really the better technology. This is really an engineering claim. So The facts are that the the beta max cassettes were smaller They were more compact than the vhs cassettes and there was a higher The picture quality was higher with beta max rather than vhs, but The beta max recorders were much more expensive than the vhs recorders and the recording time was shorter You could only only record for I think 15 minutes on one beta max cassette and you could record for 30 minutes on a vhs cassette And then you know, they had different ways to expand that where I think now you can record like up to six hours on a vhs cassette If they still even make them So consumers were evaluating, you know, what I rather have a more compact Cassette that's higher quality, but it costs more the machine costs more and it can't record as long Or what I rather have a lower quality System that is a lot cheaper and allows me to record for a longer period of time. Well, I mean There's no ex ante way to say which of those is better But you know consumers voting with their dollars decided that they preferred the cheaper machine with the longer recording time And the fact that the fact that some experts say well the beta max was really a more technologically elegant solution Well, who cares? I mean, that's not what the market selects for The market doesn't select for technical elegance the market selects for what consumers like what consumers want I don't know if any of you saw the if you follow this stuff, but there was a The company that makes blackberry research in motion in canada has fallen on hard times Stock price has gone way down. I think the company may eventually die and so on A few weeks ago. There was an open letter published shared in the technology press by a An executive with research in motion Saying, you know Complaining about upper management and all the things that were wrong with the company One of the points he made was the anonymous letter writer made was that rim was focusing on you know marketing to consumers All of the technological advantages that it had Which consumers didn't care about For example, the the the new tablet that rim makes the blackberry playbook, you know, they say we have flash Because as you know, the if the iphone and the ipad cannot run flash And this letter writer was saying, you know Consumers don't care about that They want to know what can I use it for? How does it work? Do I like it one of the letter writers a follow-up letter writer said something like, you know My mother doesn't care if it's html 6 compatible. She just wants to know if she can play angry birds on it Okay, and you can't play angry birds on the blackberry device even though it's more sophisticated according to the engineers Right, the market doesn't care about that Consumers consumer preferences are not to be judged ex post by engineers as being, you know, right or wrong Okay, so I think we should not worry about Network effects being a source of market failure. In fact, thinking about this carefully Simply reinforces our belief that The politicized decision-making is more likely to cause error and problem than market-based decision-making. Okay I want just a brief remark about the internet This is a whole subject in itself And in fact, if you had taken my mesas academy course last year You could have gotten many lectures on the economics of the internet and hopefully dug french will offer that course again so the students can Get a chance to hear this Hear this stuff in more detail. Um, I've actually written a couple of articles on this too that The internet makes for a fascinating sort of case study On the one hand, you know, there is vast decentralization on the internet Right uh Millions of people can you know can link in and and can create software and different products and even the hardware and so on And you know, the internet's relatively unregulated Compared to other parts of the commercial world And it's you know, the and it's thrived and a lot of people Sort of free market proponents have said the rise of the internet demonstrates How a decentralized You know free market sort of order can function It shows the superiority of free markets over central planning and so on now I don't disagree with those claims, but I'm a little bit more circumspect than some of my colleagues In in you know pointing out In using the internet as a shining example of decentralized bottom-up market-based Spontaneous order to use high-exterm But certainly the modern internet does It is a kind of spontaneous order But remember that the underlying technologies Of the internet the basic communications protocol and what they call ip You guys you know, you everybody You know the idea of having an ip address Well ip stands for internet protocol That's you know, the system that assigns the the numeric addresses to different devices that are connected to the internet There's also a protocol for exchanging the little pieces of information The little packets that go back and forth, which is called transmission control protocol or tcp So this uh the internet is based on the so-called tcp ip standard A set of rules for how different devices across the internet will connect Communicate with each other and so on how bits of information will be passed along From one server to another server or from one router to another router and so on Those technical standards did not come from the market Right they came from the state Remember that the internet has its origins in a defense department project in the 1960s The so-called arpa net That came out of the u.s. Governments advanced research projects agency Or defense advanced research projects agency DARPA that makes all the super, you know secret spook spook stuff And it was originally designed to provide a secure communications infrastructure in the event in the event of a nuclear war The reason that the designers adopted this kind of decentralized web-like structure Where there's no one central point No central node that could be taken out by the enemy is precisely to allow different military bases to communicate with each other Even in the event that the russians were to take out washington dc or something like that So the internet is not a hub and spoke network like federal express Right where all the packages go through memphis. There's no central node With the internet it's a it's a loosely structured web And that was a deliberate design by its designers to facilitate robust secure military communications There were also academic users research computing users Who wanted the ability to log in remotely to server computers located at other Sites and so on but it was the point is it was government It was the defense department And it was university researchers on government grants People with the rand corporation and so on who designed all these early protocols And the structure of the current internet the way the internet operates today is still in a sense Builds on the legacy of these early designers who were not market actors You know making choices in anticipation of satisfying consumer wants I there's a quote that I really like from a document so-called net book That's sort of an informal open source history of the net history of the internet And this one passage I think is particularly insightful according to the author The current global computer network has been developed by scientists and researchers who were free from market forces Who were free of market forces Because of the government oversight and subsidy of network development in the 60s and 70s These network pioneers were not under the time pressures or bottom line restraints that dominate commercial ventures Heaven forbid right therefore they could contribute the time and labor needed to make sure the problems were solved In other words according to this historian, you know What's good about the internet is that its designers were free from the constraint that what they designed had to satisfy consumer wants Right they could play They could do what they thought was neat and cool and what they as engineers thought was most effective and so on Thank goodness according to this Uh these kinds of uh This line of thought thank goodness that capitalism didn't rear you know stick its ugly nose Into the early development of the internet now. Does that mean that there's something We shouldn't use it or that you know something wrong with the internet. Of course not Markets are very good at taking what is given to them and making it work the best way that it can But we should not be naive In forgetting that the underlying technologies which may not be as good for us as the technologies we wish had been chosen Uh were the result of you know state actors so to conclude You know the information technology does have some interesting and oftentimes unusual characteristics that are worth studying information goods Network effects and so on are important But they're not fundamentally new Nor do we need you know new a new kind of economics To explain them we we need not replace the downward sloping demand curve I copied this from man economy and state with an upward sloping demand curve or something else that uh You know a new kind of austrian economics that replaces the old no good old Conventional causal realist austrian economics is as good as ever. So thank you