The Supply-side Internet Jude Wanniski January 14, 1999

We do not pick stocks at Polyconomics, but we do know the supply-side effects of an invention that will increase the efficiency of the world economy in ways we now can begin to imagine. When we think of Amazon, Broadcast.com, Yahoo and the other companies that swoop up and swoop down as the market attempts to price their long-term uncertainties in a world of short-term uncertainties, it is well to remember there are no suitable comparisons in modern experience. Floyd Norris of The New York Times, who now writes the economic editorials, on Wednesday sketched out some interesting thoughts on how the world of commerce will develop with the Internet. Yes, we will do more and more shopping via the Internet, which suggests fewer retail shops and shopping malls, less auto traffic due to shoppers, more business for UPS and FedEx. It takes a while to change habits, though, so this will happen at a glacial pace, with plenty of time for adjustment. When I was a boy growing up in Brooklyn of the 1940s, Borden’s still maintained stables for horses that delivered milk in bad weather, and old men came down 50th Street in horse-drawn vegetable wagons on regular schedules. Because the supermarkets were few and far between, housewives only went once a week, because they had to walk several blocks each way. By 1950, my father earned enough money to buy a new Plymouth for $900 cash, which meant the supermarket got more business and the horse-drawn carriages and myriad mom-and-pop stores with high mark-ups soon disappeared. 

In his commentary, Norris points out that in the Wall Street boom of the 1920s, RCA stock climbed rapidly, but not nearly as rapidly as Amazon and Yahoo have climbed, and that when the 1929 crash hit, investors in RCA were wiped out. Actually, if they held their stock, they recovered in the next generation, after WWII, but Norris is right in observing that the high fliers are more vulnerable to global economic storms than are the tried-and-true blue chips. It is inherently risky to trade in the Internet stocks, because their value is being assessed far into the future, and while those values promise to be much greater than RCA’s potential in the 1920s, they are extremely sensitive to near-term developments. Individual investors who buy a small selection of Internet stocks and put them in a time capsule should do extremely well. The “invention” of the web can be compared to the electric light, automobile or telephone, but its potential is far greater -- as fundamental as the invention of the wheel eons ago. By bringing about the ability of everyone on the planet to communicate with each other in real time, mankind can solve problems in a fraction of the time that it has taken to this point. 

 It took as long to travel from Rome to London in 1800 as it did for Julius Caesar in his time. We think of the time savings in terms of wear-and-tear on the human body, but the more important contribution of railroads and steamships was the ability of people to exchange information more rapidly. I began my “Supply-Side University” on our website in 1997, and without a word of free publicity in the public press, we now have 1000 registered students around the world. This is a raindrop in the ocean to the potential of Internet education, the development of human capital, which in combination with financial capital can dramatically increase living standards everywhere on earth. The thought struck me the other night that in the not-too-distant future each home will have only three or four “books,” of different sizes. You will be able to sit in your easy chair, turn on the reading light, cross your legs, and open a “book.” With a few keystrokes you will have the latest mystery novel in your lap or any book available in the Library of Congress, at a cost so small that you need not bother “copying the book” so you can pass it on to a friend. A slightly larger “book” will display your favorite newspaper or magazine, which will no longer exist in hard copy. In either case, senior citizens will have the book or paper they wish displayed in large type. If you don’t know English, the book or newspaper is automatically translated into your language and available in your “book.” If you like music while you read, you can order anything in the catalogue, including the 1936 recording of Lily Pons singing the “Bell Song” from Lakme, or Toscanini rendering a Beethoven symphony in 1946. Successful artists, poets, and writers will draw enormous royalties from a world-wide audience. 

The general stock market advance also represents a discounting further into the future because of the Internet. Internet commerce will take market share away from regular commerce, just as automobiles took market share away from horse-drawn carriages and the buggy-whip industry. That is a zero-sum game that is unavoidable. The Schwabs will make Merrill Lynch’s distribution network obsolete, and as long as Merrill knows how to compete in this world, it will adjust and compete. The same is true of the insurance industry and banking industries. When you have so many people working so many hours to process information, their elimination frees them to do things that cannot be done by information processing. The prices of things we buy will not decline in nominal terms, but they will in real terms. An ounce of gold cost $20 in 1790 and the same in 1930, and a loaf of bread cost 10 cents in 1790 and the same in 1930. But gold miners and bakers could produce the ounce and the loaf in one-tenth the time, because of the enormous additions to the capital stock that had taken place.

This is a primary reason why it is silly to worry about a Social Security or Medicare deficit in 30 or 50 or 75 years. As long as our political leaders do not do anything as destructive as they did in 1929-30 -- erecting tariff walls to protect themselves from competition, when all they did was put up a wall between producers -- the work force simply will shift from processing information to work that requires human hands. People who now sell stocks and bonds at street corner brokerage shops will have children who will be doctors, nurses, and well-paid service-industry workers at resort hotels. Children who want to be poets, novelists, composers, and entertainers will find an enormous increase in demand from a population that still wants to gather in crowds for such social activity. 

As I’ve pointed out before, this is America’s industry. The Internet belongs to the world’s only superpower and here it will remain. Europeans and Asians and people throughout the world will not be able to replicate our Internet because we already are too far ahead. This is why the invention is so much more important than the light bulb or auto or telephone, which could be produced anywhere in the world as soon as their particular features were understood. Foreigners can use the world-wide web for their own commercial purposes, but they will have to pay for the privilege of coming into that marketplace. And just as U.S. cyber-citizens today are able to air-out information that is “bad” for the United States but is not making it through regular channels, so there will be a Matt Drudge in every country to police the people who would do damage to the world. The Internet is a very populist place, in the best sense of the term.

I’m not an Internet expert, but I have profited by being on the board of directors of the Amerindo technology fund, Alberto Vilar’s high-performance, high-tech mutual fund. This enables me to talk to people who truly are experts, in that their lives have been devoted to this never-never land for more than 20 years. For years, Alberto had been telling me the Internet still was in batting practice for the nine-inning game. Today, he says the game has started, and we are in the top of the first. Trees don’t grow to the sky and neither does Wall Street, but with the Internet the sky is the only limit. Those who worry about earnings and P-E ratios when they mull these prices instead should worry about the only events that can blow them up, temporarily, which would be the destructive acts or policies of our political leaders.