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The Jedi Master Speaks

Principle Number 2

The Net is Deflationary

em PortuguÍs nell'Italiano

The Net is deflationary. This is certainly one of the most interesting aspects of the Internet. Part of it is due to good old fashioned competition. If programmers in India will work for $5/hour, why would anyone want to hire me for $50/hour? Or, if General Motors can hire a stable of accountants in China for $2/hour to do the grunge accounting work, why retain an expensive American accounting firm?

Of course, there are some obvious difficulties concerning language or experience or simple familiarity with customs. But the same problems don't arise over the sale of finished goods. As bookstores are finding our the hard way, many people would rather, for roughly the same price, browse a web site and have the books they order delivered to their doorstep. Indeed, each day more and more goods are appearing on Web sites at prices that are equivalent to stores which maintain inventory. Some, such as grocery delivery, suffer from glitches in the ordering and delivery process, but who doesn't expect these problems to be worked out in time...and in very short time.

But, there are other more subtle processes at work that are deflationary. The "competition for eyeballs" on the myriad of existing Web sites...which is increasing at an exponential rate...is forcing more and more sites to give away free goods and services. Why, for example, are YOU visiting THIS site? It may be simple curiosity, lured here by a man who claims to be a Jedi Master...a mythical character invented by movie makers...concerning the Internet. Or, having sampled some of the wares, you returned because you thought you could obtain valuable insights into the working of the most important medium to arise since the printing press. But, in any case, you expect that this information will be FREE OF CHARGE. And it is.

This same impulse is guiding those with considerable more capital with which to experiment, to give away much more valuable things at their sites. One company is now giving away whole computer systems in return for which you have to accept advertisements "pushed" to you...that is, delivered to your screen without your conscious permission. Another requires you to sign up with them as an Internet Service Provider in return for your free system.

Where will this end? Some radical economists do not believe that it WILL end. They think that the Internet eventually will force all prices...on ALL goods and services...to ZERO! But, how can this be? Adam Smith long ago established, by both theoretical and observational work, that, in a free market, the costs of goods will sooner or later approach...but never quite reach, due to the necessity for profit...the cost of manufacture. He never asserted, however, that the price could ever fall BELOW the cost of manufacture.

I personally remain sceptical and do not quite understand how this cost/price/profit barrier can ever be breached. No one has yet to come up with a theory to explain how this might happen. Of course, if the entire theory of value were to change, perhaps in the manner envisioned by the famous Star Trek series, then something truly revolutionary could be afoot. In that science-fiction vision of the future, it has become so easy to manufacture goods, that they have lost all value whatsoever. Lacking a "hard" basis for a monetary system, services too are performed on a truly voluntary basis, without recompense, at least in monetary terms. Only the intangibles of existence...honor, duty, adventure, curiosity, pleasure...retain value. It certainly is a pleasant dream, but surely not attainable.

Or is it? Could it be that the amazing explosion of free enterprise enabled by the Internet is simply going to accelerate at an ever increasing rate, eventually making the stupendous change brought about by the industrial revolution look trivial?

What is observably true is that the Net is deflationary. I believe that this is largely behind the fact that during one of the greatest economic expansions in history, prices remain stable or are falling. Where will it end? Stay tuned...

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