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Arguing in My Spare Time, March 1999 - August 1999

Title DateStarts WithEnds With
Keynes Then and Now03-11Many economists, including Shapiro and Varian in "Information Rules," have pointed out that there are parallels between the current wave of innovation and the wave of innovation that occurred about one hundred years ago, with the advent of electricity, the telephone, and the automobile.The question that I have is whether the contemporary information economy is likely to be more or less fragile than the capitalist economy that recently preceded it. My plan is to start with the Keynesian ideas as articulated by Skidelsky, and then to assess whether they continue to apply.
Future uncertainty and present indeterminacy04-07When I was studying economics, a fad called "rational expectations" was sweeping through the profession. It was an interesting concept, worthy of study, but I am afraid that it threw us off track.Instead, one must acknowledge that a variety of states of expectations are possible today, and different states of expectations will lead to different paths and scenarios going forward.
The Internet Boom as a System04-12When I studied economics at MIT, we were next door to the "systems group," for whom economists had only contempt. The systems theorists were known for making pessimistic long-term forecasts, particularly about energy and the environment.In short, the Internet stock boom can be viewed as a system with very strong reinforcing mechanisms. Having gathered momentum, it may be propelled forward very powerfully. However, it is quite possible that some day those same powerful forces will be aligned in the opposite direction.
Cosby's Gas Station Attendant04-18In 1965, when records were still vinyl, I obtained a copy of "200 MPH," a Bill Cosby disc. Cosby’s theme was his love of sports cars combined with his mechanical might be tempted to recommend that policymakers try to pop the bubble sooner rather than later. But for Keynes, breaking the hearts of the entrepeneurs serves no useful purpose. He probably would recommend that we enjoy it while it lasts.
The User Disenfranchisement Movement04-27Recently, some software development consultants with whom I work brought up the subject of "open source" software. What is rather implausible is a scenario in which the dominant process in software development turns out to be the one which disenfranchises the user.
Airplay05-12When I was about 12 years old, my parents bought me a guitar. Within a few weeks, I could play a passable version of the then-current hit song, "Snoopy vs. the Red Baron." The portal strategy and other current fads will be forgotten. I cannot remember the name of the group that recorded "Snoopy vs. the Red Baron."
The Software Production Function06-04A test question I recall from undergraduate economics asked:

"What law is illustrated by the fact that not all of the world’s wheat can be grown in a single flower pot?"

Robert Solow, a Nobel laureate from MIT, famously warned his economics colleagues about the temptations of practicing "amateur sociology" when problems lie outside the economic paradigm. The explanation for the fact that the Law of Diminishing Returns applies to software development seems to require us to take that step.
Diminishing Returns in Software Development06-14The June-July issue of "FastCompany" magazine contains an interview with Michael Cassidy, co-founder of an innovative Web search engine. He says that if you divide the estimated market value of his company by the hours spent by developers, the resulting figure is $10,000 of value created per developer per day.In conclusion, the mysterious problem of diminishing returns may be one of the most important things for a manager to understand when allocating staff for software projects. Michael Cassidy’s policy illustrates just one possible adaptation.
Arithmetic in a Bubble07-08My favorite Internet IPO went off this week.

The concept of is one to which I can relate instantly.

For example,, which in terms of traffic probably is not even in the top 5000 web sites, has a market cap of over $900 million.
The Economics of Franchise Value07-25In response to my previous essay, "Arithmetic in a Bubble," one reader commented on the relative merits of different franchises on the Internet, such as Yahoo, eBay, and Amazon. To the extent that learning is what is important, the best indicator that a company will be a valuable franchise in the future would be if it were earning high returns today.
The Case for Formal Models08-14I was re-reading Francis Fukuyama’s "The Great Disruption" on the airplane the other day, when the pilot came on to the speaker to announce that we were headed into "turbulence" near our Denver destination.If equations [1] and [2’] represent Fukuyama’s thesis, then had he started out by presenting this simple formal model, it would have been much easier for me to follow the rest of the book. If not, then I still do not understand "The Great Disruption," and the case for using formal models may be even stronger.
The Last Inch and Metcalfe's Law 08-22Metcalfe’s Law states that the value of a network increases with the square of the number of people connected to it. Because Metcalfe’s law (due to Robert Metcalfe, inventor of Ethernet and now a journalist/pundit) implies increasing returns, it often is invoked to argue that traditional economics does not apply to the Internet.What I have tried to do is inject a little bit of reality by pointing out that eyeballs bring diminishing marginal returns and increasing marginal costs. This means that conventional economics may be much more applicable in the Internet environment than is commonly assumed.