Professors Eli Noam and Richard Epstein present their views on the economic problems inherent in the new economy.
Noam is concerned about the structural stability of new economy industries: "we need to recognize that the entire information sector - from music to newspapers to telecoms to internet to semiconductors and anything in-between - has become subject to a gigantic market failure in slow motion." The problem stems from the high fixed costs - low marginal cost structure that characterizes these industries. Economists have worried about the stability of such industries for over 100 years. Noam extends the argument to macro-instability, given the increasing share of information goods in the economy.
Epstein offers a sober rebuttal. He focuses on the implications of these cost structures on pricing practices, rather than stability. He suggests that Noam's case for subsidizing old industries for the purposes of diversification and stabilization may be worse than the disease.
My take? Epstein wins by TKO. But Noam does us a favor by making us consider the economy-wide implications of the new economy. Perhaps Fed policy has been motivated by this concern in recent years.
Note: this cost structure characterizes professional sports as well as information goods.
Via the angry economist, who has no donut for Noam.