Commentary

Internet Is Not Making a New Economy

By Dwight R. Lee
July 6, 2001
The Internet is clearly a marvelous technological advance, allowing hundreds of millions of people from all over the globe to exchange information almost instantly. But the claims that it is creating a new economy based on information and communication are pure hype. Long before the Internet we were benefiting from an amazing network of global communication and information in the old free-market economy. There is nothing new about an “information economy.”

Market economies have always been information economies. The Internet can improve the information transmitted through markets, but that information has always been the reason for the amazing success of free-market economies. Let’s admire the Internet for the marginal improvements it makes to our market economy. But while admiring the shine lets not ignore the shoe.

Every day each of us simultaneously exchanges messages with millions upon millions of people through the market network. The information we transmit is picked up quickly by those who can best use it, informs them on the appropriate action to take, and provides them the means and motivation to take that action.

The result is a pattern of global cooperation that finds each of us serving the interests of millions of others by using our time and talents to provide what they value most, while benefiting from their reciprocal consideration. This market network has been enriching the lives of those people lucky enough to live in free economies long before the advent of the Internet.

Communication in the market network takes place through prices based on private property and voluntary exchange. Private property is essential for people to engage in voluntary exchange, and when exchange is voluntary it typically takes place at a price that reflects the highest value of what is being exchanged (people generally sell to those willing to pay the most).

So market prices communicate the value others place on the things we own, and motivate us to relinquish those things to others when they are worth more to them than to us. Similarly, market prices for goods and services also reflect the costs of making them available. People will not consistently sell a product at a price less than the value sacrificed to make it available.

So market prices communicate how much value is given up elsewhere in the economy to provide products, and motivates us to buy products only when the additional unit is worth more to us than the sacrifice our purchases impose on others.

Firms are constantly listening to the market messages of consumers that are sent in the form of profits and losses. Consumers inform firms with profits when those firms are using resources to produce more value than those resources are producing in other activities, And they respond by expanding their production. On the other hand, consumers inform other firms with losses that they are not providing enough value to cover their cost, and those firms respond by producing less.

I’m not arguing that market prices are the best form of communication for all occasions. How do you say “I Love You” with a market price? Very clumsily. But market prices are far and away the most persuasive way to communicate your desire for chocolates and roses, which will increase the impact of — and payoff from — saying “I Love You.”

Of course, the Internet has made it easier to order those chocolates and roses, but it’s the incentives provided by market prices that insure the cooperation of the literally thousands of people who have to coordinate their efforts to get them to you when and where you need them.

Let’s give the Internet credit. It is making important changes in our lives and the way we do business. Certainly the Internet is improving market communication in important ways. But without the market network we would all be impoverished by our inability to communicate and cooperate with the millions of people we depend on everyday, no matter how much access we had to the Internet.

A longer version of this article was published in the Cato Journal, Vol. 20, No. 3.

Dwight R. Lee is Ramsey Professor of Economics and Private Enterprise Economics in the Terry College of Business, University of Georgia.