Free Lunches Served on the Internet

March 23, 2009

An editorial discussing the proliferation of Internet companies without ample income in the latest issue of The Economist concludes that “the demise of a popular but unsustainable business model now seems inevitable.”  Survival through the cash cow of advertising worked for Google, but that strategy has not been reproduced as successfully as hoped elsewhere.  With world recession spreading and deepening, even Google is experiencing growing pains.

One of the most repeated expressions from the field of economics is “there’s no such thing a free lunch,” and it is applied to many quite varied situations.  The totally free offerings on the Internet, including this site, illustrate one example of what economists mean.  Think of President Lincoln’s famous observation that you can fool some of the people all of the time, all of the people some of the time but not all of the people all of the time.  Nothing is free for everybody and forever.  For limited periods, however, some people are indeed able to feast on a free lunch.  The Internet makes such occurrences more common because it reduces barriers to entry, but free competition also cuts the appeal of competing firms that carry a price.  When some inevitably succumb, new free lunches on the Internet appear, and the cannibalizing of remaining firms selling their lunch goes on and on.  What’s unique about the Internet age is the very easy path to entry.  The scope for competition is much fiercer in many more fields than was ever possible ten, five, or a couple of years ago.

From a macro sense in capitalist societies, one thinks of competition as being always healthy.  Along the spectrum from perfect competition to monopoly, the further one goes, the greater one finds scope for distorted price levels that fail to allocate products and labor in an optimal way.  But what happens when a quantum leap in the nature of competition is thrust suddenly upon the existing business landscape — and not just on a few but rather on a wide cross-section of industries?  And what if this shock piggy-backs on the equally huge changes wrought by globalization? Both of these forces were possible because of inventions in information and communication technologies, and the result has been creative destruction on a scale rarely, if ever, experienced before.

Banking excesses and inadequate regulation are generally blamed for the global recession.  Other developments far removed from that one industry put the world economy on a course that seems likely to have jumped the tracks early in the 21st century even if not pushed by the breakdown of the financial system.  The road back to sustained economic expansion was never going to be smooth.  I suspect it will prove more complicated than generally realized even now.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.


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