Thursday, July 2, 2009

The Economic Reset Button

[Update: This accidentally became a series of posts on a theme.

Does Intellectual Property Law Foster Innovation? Where I question the efficacy of patent and copyright in a socially networked world.

Intellectual Property and the Deflation of the Knowledge Economy - Where I toy with the idea that the Knowledge Economy may not turn out to be much of an economy, especially when it comes to Intellectual Property

The Economic Reset Button - (this post) Where Jeff Jarvis asks Eric Schmidt whether or not this is a fundamental shift in the economic base

Innovative Deflation - Where I ask, "Is the knowledge economy ripe for growth, or is it the means by which traditional economies are shrunk?" ]

Below is an exchange between Jeff Jarvis and Eric Schmidt at the Aspen Ideas Festival. This is a very important 5 minutes to watch. Is our economy fundamentally shifting away from mass production/mass markets towards a knowledge economy?

Moreover, if my previous assertions are anywhere near correct, is this desirable from an economic standpoint for the U.S., given our current policies? I asked if there any real money to made in a "knowledge economy" in the long run:
Because as businesses whose product is reliant on intellectual property shrink due to Internet-based efficiencies, consumers are reaping the rewards of these efficiencies. Fewer people are employed by this sector, but fewer consumers are having to pay for products previously only produced by this sector.

To quote Jeff Jarvis from a different post:
Craigslist is blamed for destroying (that’s from the publishers’ perspective) $100 billion in classified ad value, replacing it with its reported $100 million revenue.

If we outsource mass production--the parts of our economy that are actually governed by the laws of supply and demand (scarcity)--and shift it towards a knowledge economy headed for deflation (abundance), what's left?

Don't get me wrong, I'm not at all proposing trade barriers, tariffs, or other forms of ineffective protectionism. I have no illusions that the bubble of a manual labor middle class has long burst in the U.S. However, we shouldn't be clinging to it until it sinks the whole ship. Isn't there some way to decouple the costs of production labor from the product? Robotics and automation? Lower wages? Less attractive benefits? I'd rather have GM making competitive cars in America and paying out lower wages to fewer people, than having no GM at all when we realize that the knowledge economy is really becoming a knowledge commune.

Is production an all-or-nothing game in America? It seems the only option we're given is to pay for it at traditional levels and wait until U.S. production collapses in on itself or exits the country, because we're unwilling to let wages and benefits fall to meet actual demand. In short, does GM exist to make affordable and desirable cars, or does it exist to employ people?

Given the amount of current consumption of intellectual property (copyrighted material like music, software, and newsprint; patented goods like just about everything else), couldn't we take advantage of this deflation to help cushion the blow of falling wages? How much of our income is dedicated to intellectual property, and its derived products? If wages decrease at the same time as cost-of-living decreases, are we really that bad off? Deflation moves in both directions, as it were.

That isn't to say that we're not in for a rough ride no matter what. As private citizens, we're reeling in our outstanding credit and tightening our belts, as we should be. One would hope that the government would learn from our good example. Instead, it's trying to reinflate a bubble that can't hold air: The housing market; General Motors; Chrysler; "Green Technology" as a fictional oasis for labor; The whole damn finance industry that was only sustained by, and lived to sustain, our now corrected bad spending habits.

Every bit of economic policy coming out of Washington is based on trying to maintain a status quo that can not be maintained in a global marketplace. This can temporarily inflate some sectors of our economy, but ultimately will leave us with nothing but companies that make the wrong things, and people who perform the wrong jobs. You know what they say: "As GM goes, so goes the country."

Retraining for a knowledge economy is fine in the short run, but it is no panacea. Craigslist doesn't employ the number of people it displaced in the newspaper business, and we can use this as a model for many of the effects of a knowledge economy. We should let supply and demand govern costs where it can, in the land of atoms, and preserve production at some level in this country, even if it's not the level we're comfortable with. These falling wages will provide incentive (for those who are able) to move slowly into more productive areas of our economy over time, to cushion their transition with the decreasing costs of living brought on by the information age, and not find themselves jarringly displaced at the collapsing of the next bursting economic bubble.