Information Haves and Have-Nots

"Arguing in My Spare Time," No. 24

by Arnold Kling

May not be redistributed commercially without the author's permission.

Index

In the fall of 1994, I went to my daughter's middle school for a meeting of a parents' advisory group to help the school make use of technology. The school had just received $1 million dollars of computers, networking equipment, and assorted gadgets as part of a Federal grant. The principal asked us for ideas for taking advantage of this windfall, which I guess we earned by having abysmal test scores.

"Teach literacy," I said, when it was my turn.

"You mean computer literacy?"

"No. I mean literacy. Reading and writing. 10 years from now, my daughter will not be using any of the software that you would give her today. She may not need to know how to use a keyboard and a mouse. However, she definitely will have to know how to read and write."

The parental advisory group never was asked to meet again. I did not get a chance to mouth off to the principal that school teachers are the only information workers in America who are given quotas that restrict their use of copy machines.

This incident reminded me of a speech I had heard a year earlier on "information haves and have-nots," given by a Clinton administration official who, in my opinion, belonged in the latter category. His theme had been that the government needs to launch initiatives and issue regulations in order to keep disadvantaged kids from becoming information have-nots.

The term "information have-not" is meant to suggest that there is some deficiency of physical capital that needs to be made up to remedy the situation. But what is the deficiency? Is it having a modem that only connects at 14.4 baud? Is it having a 386 processor when Pentium is state of the art? Would our family qualify for assistance because we do not subscribe to cable television?

After a little reflection, it would seem that the term "information have-not" is a useless expression. A better term to capture the phenomenon we are trying to describe would be "information unskilled." The potential for class divisions to emerge between the information skilled and the information unskilled is the issue to which the remainder of this essay will be devoted.

By "information skilled" I mean to include more people than simply computer programmers. The term includes people who are able to use the Internet, or even just the good old public library, to obtain knowledge in order to make decisions. Reading "Consumer Reports" qualifies one as information skilled at least as much as being able to spout computer buzzwords.

My sense is that the fracturing of our society between the information skilled and information unskilled already is underway. For example, political polls in the last few years now show that the second-strongest demographic separator is education (the strongest factor is race). Grouping people by amount of education produces greater differences in opinions on political issues than grouping by income, gender, age, or region of the country.

As an economist, I am more interested in economic fragmentation than political fragmentation. How might the class divisions between information skilled and unskilled compare with the division between capitalists and labor?

Physical capital has an inherent property of accumulation: people who already own capital are in a position to accumulate more capital. This characteristic has led various economists, most notably Karl Marx, to predict that the ownership of capital would be concentrated in the hands of the few, leading to differences in wealth large enough to threaten social stability.

In contrast, as information skills become a critical source of wealth, there is a potential for wealth to be distributed more democratically. There are no barriers to the diffusion of information skills.

Physical capital requires labor, not highly skilled or highly paid, in the production process. Often, the most efficient scale for physical capital is large, which means that massive amounts of labor are required. Thus, the emergence of mass labor markets, and, arguably, the reason for the surge in world population in the last 350 years, can be traced to the industrial revolution and its concomitant appetite for workers.

An information skill-based economy does not have the same inherent requirement for mass labor. It is interesting that in the 1960's, at the height of the industrial economy, the War on Poverty consisted of programs to improve the welfare, nutrition, and basic education of children born into poor circumstances. In the 1990's, the war consists of reducing the incentives to have children for women who are poor and unwed. In the 1960's, the sense was that with the right government assistance any child could be raised to participate productively in the labor force. Today, social policy does not make that assumption.

The ability to reach mass consumer markets without employing massive amounts of labor does give firms the potential to capture large wealth. In essence, the success of Microsoft reflects this.

In the long run, I suspect that there will be few, if any, repetitions of the Microsoft phenomenon. They had the luck to be in a market where other people were late to see its potential and shape, and they had the skill to make better decisions than other companies for a long time about reaching this market.

My guess is that the information economy will evolve toward becoming an efficient market, in which excess profits are competed away. In the stock market, very smart people are unable to beat the market, because the overall market is efficient. I expect that the Internet will turn out the same way. The low profits of Internet companies, rather than being a temporary phase, represents a foretaste of the future. Obviously, they cannot continue to lose money, or they will not survive. But I am not expecting them to achieve fantastic rates of profitability.

In the short run, however, there are a number of factors affecting the distribution of wealth that may raise concern.

1. There may be some social dislocation as the momentum in population growth that has built up in the past 200 years collides with the economic adjustment to a reduced need for masses of unskilled labor. The price of unskilled labor could fall further, leading to greater disparities in income and wealth, particularly from a global perspective.

2. Even if there is no inherent reason for wealth to become highly concentrated, the stock market is creating concentrations of wealth among small numbers of the information skilled. The information-age billionaires are, in my view, a fleeting historical accident. What is going on for the most part is a large and temporary pricing disequilibrium. Information skills are underpriced in the labor market and overpriced in the stock market. People who sell their information skills in the stock market are earning huge premiums, leading to concentration of wealth. This will not be true in the long run, as the disparity between the way information skills are priced in the stock market and the way they are priced in the labor market goes away.

3. Some of the value of information is exploitative. Investments in physical capital serve to enlarge the economic pie. Information skills can be used to enlarge the pie, but they also can be used to take a larger share of the pie without making it larger. For example, credit card companies can use databases to market to people who are likely to run up huge interest bills. More generally, many of the tactics described in Varian and Shapiro’s "Information Rules" can be used to increase revenues from consumers without increasing value delivered to them. Well-informed consumers will protect themselves, but poorly-informed consumers can be exploited more easily by firms that make better use of information.