John Quiggin
(Credit: John Quiggin)
commentary The global financial crisis that began early in 2008 has put many of the seemingly unstoppable processes of globalisation into reverse.
The volume of international trade has fallen sharply, and that of international financial transactions even more so. The banks and financial markets that seemed to define the global economy have retreated into the arms of national governments.
There is one striking exception to this pattern of retrenchment. According to the TeleGeography Global Internet Geography Research Service, international internet traffic has grown at an annual rate of 74 per cent in 2009, well above the 55 per cent growth measured in 2008.
In part this is a matter of momentum. The huge growth in capacity that was already committed before the crisis ensured that growth could continue. Although new investment in fibre-optic capacity has slowed as a result of the crisis, the system has proved capable of absorbing massively greater traffic.
But there are more fundamental forces at work here. Although the internet and its main manifestation, the World Wide Web, depend on physical communications networks and commercial service providers, they are not, in the end, about cables and modems.
The web is a set of protocols and social institutions for the expression and exchange of ideas of all kinds, whether expressed as text, audiovisual material or software. Ideas are public goods. They can be shared without losing value, and they cannot easily be restricted. The web is a prime example of a global good, one which benefits people everywhere in the world and depends for its value on contributions made all over the world.
The fact that the spectacular expansion of internet activity has continued, and even accelerated through the financial crisis shows that the global exchange of information does not depend, in any important way, on the global financial sector. Most internet innovations have been developed on a non-profit basis, and even for-profit companies like Google maintain strong independence from the short-term demands of financial markets.
The fact that the spectacular expansion of internet activity has continued, and even accelerated through the financial crisis shows that the global exchange of information does not depend, in any important way, on the global financial sector.
With a handful of exceptions the innovators who gave us the internet received little or nothing in the way of financial reward.
On the other hand, the productivity of the real economy — and therefore the financial sector — depends hugely on innovations that have arisen from the growth of the internet. The first-generation innovations of the web in the 1990's universally adopted by business and governments. Now they are shifting to "Web 2.0" technologies, including wikis, blogs and web-centric applications.
There has, then, been a huge shift in the location of innovation. Many of the innovations that have driven productivity growth over the past two decades depend on public goods mostly produced outside the market and government sectors.
When we compare the huge social and monetary cost of the global financial crisis with the huge and continuing benefits of the global exchange of information, almost all of it given away free of charge, a striking paradox emerges. With a handful of exceptions the innovators who gave us the internet received little or nothing in the way of financial reward.
Leading figures like Tim Berners-Lee, the initiator of the World Wide Web, have become famous, but not, at least by the standards of the global financial sector, wealthy as result. And the thousands of contributors whose efforts turned these innovative ideas into reality have received little more than a warm glow of satisfaction.
Meanwhile, the innovators who gave us such boons as the CDO-squared, the option-ARM mortgage and the stapled security have walked away, collectively, with billions in salaries, bonuses and share options, leaving the rest of us to clean up the mess they created when the whole edifice collapsed so spectacularly a year ago. Even during the dotcom boom, when financial markets were eager to finance internet-based innovation, their efforts were spectacularly misdirected.
Billions were hurled at ludicrous ventures like the online sale of pet food. Meanwhile, the innovations that were to produce the web 2.0 wave, such as the first blogs and wikis, were being developed without any significant input of credit or venture capital.
This contrast raises questions about the way we organise our economic system, the way we regulate financial markets, and the incomes derived from those markets. If monetary returns are weakly, or even negatively, correlated with the value of social production, there's no reason to expect financial markets to do a good job in allocating resources to supporting innovation.
As a result, it seems unlikely, that the massive incomes generated in the financial sector to reward financial innovation are beneficial to anyone except, of course, the recipients.
This commentary by John Quiggin first appeared in print and on his blog and is re-published here with his permission.
John Quiggin is a Federation Fellow in Economics and Political Science at the University of Queensland. He is prominent both as a research economist and as a commentator on Australian economic policy. He has produced over 1000 publications, including five books and over 300 journal articles and book chapters, in fields including environmental economics, risk analysis, production economics, and the theory of economic growth. He has also written on policy topics including climate change, micro-economic reform, privatisation, employment policy and the management of the Murray-Darling river system.
John Quiggin has been an active contributor to Australian public debate in a wide range of media. He is a regular columnist for The Australian Financial Review, to which he also contributes review and feature articles. He frequently comments on policy issues for radio and TV. He was one of the first Australian academics to present publications on a website. In 2002, he commenced publication of a blog providing daily comments on a wide range of topics.
You could say that the relatively small financial investments to setup Google, Facebook, even YouTube, etc have simply stimulated an inevitable organic growth of the internet. That was simply going to full-fill a strong intrinsic, even simple human desire both men and women share... a love of communication.
Thank goodness the flow of information is NOT tide to financial markets, or controlled in absolute by any government.
Thankyou Mr Quiggin for your insights.