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McGill Univ.'s Reuven Brenner On The New Digital Economy By Doug Tsuruoka | |
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Business cycles are less volatile if mistakes are fixed quickly -and
that's just what a digital economy helps you do, says economist Reuven
Brenner. Brenner teaches economics at McGill University in Montreal. He has authored six books on financial and business subjects, and writes regularly for Forbes magazine. He has received numerous awards and recently shared the podium with ex- Federal Reserve Chairman Paul Volcker at a forum in Monterrey, Mexico, on currency matters. Brenner recently spoke with IBD about how the digital economy will differ from the old economy. IBD: How is the digital economy impacting business cycles?Brenner : It's dampening volatility because quick flow of information allows you to correct mistakes faster and more efficiently. A digital economy also allows you to leverage strengths more quickly. IBD: How, exactly?Brenner : To understand this, you have to ask, Why do we have business cycles? We have them because asset prices vary. They vary because we make a wide variety of highly specialized investments.As time passes, we realize some of these investments were good, some mistaken. We make these realizations because we absorb information and change our expectations. Every mistake is a cost, and one way or another, people pay for these mistakes because shifting resources reduces capital. That's why absorbing information and correcting mistakes quickly is everything in a digital economy. IBD: You talk about making ''matches'' in a digital economy. What do you mean?Brenner : It has to do with what's called the ''economics of better matches.'' We're looking at questions like what happens in a world where innovations significantly lower the cost of matching up things like buyers with sellers, or capital with technical and organizational talent. Other implications to consider in a digital economy are what new markets and industries become viable, how do business models change and what types of companies are most likely to succeed. It's like a marriage. You're married, but you don't know if it's the right match or not. If you continue to live with a bad match, the mistakes only accumulate and it ends in a divorce. You also lose a lot of capital you invested. But if you react to every signal, mistakes are corrected faster and the marriage can turn out to be a good and lasting one.Va au début de colonne |
IBD: How does the Internet fit into this?Brenner : The quicker flow of information through the Internet allows for a closer match between suppliers and buyers. This allows better pricing information to be formed. So-called ''bit'' technology helps process old news quickly. As a result, mistakes are corrected quickly or have shorter duration. Bit technology also lowers the cost of creating new markets and diminishes price disparities. Since fewer mistakes are made, volatility in business cycles is diminished. IBD: Can you give an example? Brenner : Take hotels and airlines. Not long ago, my flight was canceled
while I was waiting at the airport in Philadelphia. The airline immediately
linked up with hotels on the Internet, who all bid against each other to
place the stranded passengers.
IBD: How does a digital economy affect relations between businesses and their customers?Brenner : The Internet allows you to look at customers differently. Quick feedback from customers is a quick way to correct mistakes. Mistakes in Linux (open-source operating software), for example, were corrected much faster than Microsoft, which keeps its software secret and doesn't allow feedback from a lot of people. IBD: How does the Internet affect things like inventory?Brenner : The technology that allows you to have higher capacity allows you to keep fewer inventories. Take Dell Computer. They don't keep inventory. They put the machines together only when customers order them. All this is based on new technology. Not holding inventory dampens business cycles. IBD: Is the digital economy responsible for the superior performance of the U.S. economy?Brenner : It's not just because of the ''economics of bits.'' It's also because of the deregulation of financial markets. The key role of financial markets is to lessen the persistence of bad decisions. For, as mistakes accumulate, financial markets advance credit on harsher terms or not at all. IBD: Does digital technology dampen all sources of volatility?Brenner : There's one exception. The argument doesn't take into account fiscal or monetary mismanagement. By this, I mean political mismanagement at places like the Federal Reserve. That's a source of volatility that technology can't stop. //////////////////////////////////////////////////////////// Copyright (c) 1999 Investors Business Daily, All rights reserved. Investor's Business Daily - The Economy (07/07/99) |
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Updated on 1999 août 04 at 18:35:12 
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