Today's Economist quotes the conventional
Today’s Economist quotes the conventional wisdom on telecommunications from a year ago, noting:
TODAY, there is no economy but the global economy, no Internet but the global Internet, and no network but the global network,” wrote George Gilder, a technology guru, in February 2001. He predicted that two telecoms firms, Global Crossing and 360networks, “will battle for worldwide supremacy, but in a trillion-dollar market, there will be no loser.
At exactly the same time, I was writing
“The last few months have not been a good time for economic miracles. As late as November last year, we were still being told how the miraculous ‘New Economy’ had put an end to the business cycle in the United States. By Christmas, however, the Internet shakeout had turned into a full-scale collapse, with dozens of failures and downsizings every weak. Moreover, the downturn has spread from the flashy but economically inconsequential dotcoms to the large, and massively indebted, telecom sector”
Why was I right, and Gilder, along with most other commentators, wrong. Because I paid attention to the reality of natural monopoly
Throughout the last decade, wishful thinking about the benefits of competition has led to bad economic analysis. The costs have mounted from the billions to the trillions. Both the potential growth of the telecom sector and the strength of the US economy have been massively overestimated, because of the belief that competition is some sort of magic elixir.
There are real benefits from increasing competition where artificial barriers to entry have monopolised naturally competitive industries. But there are equally large costs in failing to take account of natural monopoly, externalities and all the other reasons why not all aspects of life are organised through competitive markets.