The Economics of Enough_ How to Run the Economy as if the Future Matters - Diane Coyle [121]
Clearly, there are also likely to be interactions between “market failures” and “government failures.” We have seen this all too clearly recently in the heavily regulated financial sector where both market and regulatory failures ultimately led to many banks in many countries forcibly crossing the private-public border to become state-owned or state-controlled. Some problems of coordination are just hard, and any approach to them will be flawed.
That does not mean there are no economic principles to guide us in drawing the boundary. The long experiment in planned economies behind the Iron Curtain demonstrated comprehensively that the public sector is very bad at very many kinds of economic activity—such as producing the right number of pairs of shoes in the right sizes and colours, innovating in consumer electronics or creativity in popular culture, for example. On the other hand, the government can do well in providing public transport, education and health care, basic scientific research, and encouraging sophisticated arts like ballet and opera.
Democratic government is obviously the overarching mechanism for resolving social priorities in the face of market failures. But how to implement collective choices is a challenge given the reality of government failure too. What’s more, new technologies are making the challenge even harder.
THE IMPACT OF NEW TECHNOLOGIES
Technological change alters the nature and scope of market failures, as discussed in the last chapter. For example, mobile telephones ended the natural monopoly in the fixed telephony network. This paved the way for the successful privatization of many former state-owned, fixed-line monopolies in many countries, as competition was available from new mobile operators. Similarly faxes and then e-mail have created new forms of competition with the old postal monopolies. Smart cards and electronic monitoring have made it feasible to exclude some drivers from the roads at certain times. In all of these examples, the role of government—the type of intervention needed—has changed.
The new information and communications technologies have had a more profound effect on market economies, however. They form what economists refer to as a “general purpose technology” because they affect the organization of the economy in a wide-ranging way, like steam or electricity or rail in the past.20
One widespread effect has been to increase the scope of economies of scale, as there are many industries in which it is now possible to reach a much larger number of consumers at very little additional cost, thanks to the possibilities of online marketing and distribution. Network effects have amplified this dynamic. So in many industries, the structure has evolved into a small number of very large firms competing across all products and services, and often globally, and a large number of small businesses supplying particular niches. Software is a clear example: it costs Microsoft almost nothing to supply one additional copy of its software, as almost all the cost is upfront development. And once enough people are using Word, or Windows, many other people will find it attractive to use the same software. The structure of the software industry is exactly that pattern of a few very large businesses indeed and a proliferation of small ones either selling compatible add-ons or serving niche markets.
That’s not the only effect of the new technologies. A larger share of the richest economies is accounted for by “experience goods”—education, health, entertainment, leisure activities—as described earlier. As people grow richer they spend a growing share of their incomes on services of this