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By Michael Roberts
March 2000
It all started in October 1969. Scientists at the University of California, Los Angeles, were ready for a critical experiment. Theyhad a computer and communications node, while colleagues installedsimilar equipment up the coast in Menlo Park. They planned to testwhether they could link the two computers over telephone lines tooperate as one system. The researchers began to tap in the message:'log in' to make the link. The system crashed.
Thus was the beginning of internet revolution. By the end of themonth they achieved the link. Of course, the purpose in those dayswas to ensure that nuclear missile systems could be kept operativeeven if part of the network was put out of action in a war.
The commercial importance of this breakthrough was not fulfilled for another 25 years - just as the invention of the steam engine by James Watt in the 1780s did not become really useful and developeduntil the launch of the rail engine two decades later. Similarly thepetrol combustion engine did not lead to cars and trucks for abouttwo decades.
The significance of the Internet is that it takes the computer and'information technology' onto a new stage: computers now communicatewith each other. That is producing a dramatic exponential increase inthe speed of transmitting information. Computers and the microchipwere for the era of the 1970s and 1980s. The 1990s and the firstdecade of the new Christian-based millennium are for telecommunications and the Internet. The Internet will expand acrossthe globe just as the railroad did in the latter half of the 19thcentury and the motor car and airplane did in the latter half of the20th century. The economic result will be a huge reduction in thetime taken to transmit information and, with it, a fall in the costsof producing goods and services.
It's an old law that the doubling of microchip performance, or ahalving of its cost, takes place every 12-18 months. Similarly,between 1650 and 1950, the cost of physical force to make one averageunit of production things fell from thousands of man-hours (dollars)to just a few minutes (cents). In the last 30 years, the cost of atransistor or memory chip has fallen from $7 to a few millionths of acent. The Internet revolution will have a similar impact.
Internet commerce
By 2003 there will be 500m people connected to the Internet, or about 10% of the world's population. By 2003, over 65% of UShouseholds will be connected. In the same way that the railroad,motor car, electricity connections and the airplane developed hugenew industries and capitalist conglomerates, new Internet companiesare springing up as fast as you can say .com. By 2004, it isestimated that worldwide business-to-business Internet commerce willreach over $7trn. Internet commerce in the US will reach $2.5trn, orabout 25% of the annual output of the US in that year. Already theInternet companies have grown bigger in size than the formertechnology giants (airlines, publishing and healthcare) and arecatching up to the automobile industry quickly.
The impact of the Internet revolution has already been felt oneconomic growth. The information technology sectors as a whole(computers, telecomm, Internet, software etc) in the US are growingat double the rate of the rest of the US economy. They now contributeover 8% of US annual output on their own. Indeed, since 1993, withoutthe IT sectors, US economic growth would have been 1% of GDP lowereach year. In 1999, nearly 80% of all investment by capitalistcompanies in the US went into information technology sectors! Overone million jobs have been created by the US high-tech sector since1993 and there are now 8m people working there at generally 50%higher than average wages.
All this has convinced most capitalist commentators that the ITrevolution has given the US and other major capitalist economies anew lease of life - even the magic elixir of immortality. In this'new paradigm', economic growth will continue at breakneck pace (bythat they mean about 3-4% a year) and inflation will stay low (about2% a year). And there will be the achievement of 'full employment',something not achieved in the 200 years history of industrialcapitalism, except for very brief periods. Once again, but this timewith much hugely bullish confidence, the capitalist gurus areclaiming that their system has now achieved perfection and will neverenter a major crisis of falling output, collapsing investment and mass unemployment again.
But in their euphoria, they have forgotten the words of their own history. This is what the editors of the US journal, Business Week,said back in the summer of 1929: "there has been a breakthrough intechnology and industrial management, a firmly implanted socialoptimism, widespread public participation in the stock market,greater access to personal credit, better statistics, better railroadtransport and stabilised prosperity".
Yet look what happened over the next three years in the US to thatboundless optimism about the new technology! Just six months later,Business Week said this: "Every new era in history has been basedupon the exaggerated enthusiasm set in motion by some single new industry. At one time it was a gold rush or real estate boom. In ourera it has been the automobile".
Salvation from the crisis?
Now in the decade of the 2000s it will be the Internet. Thetechnological marvel of the Internet will not save capitalism from crisis, just as the railroad did not in 1880s and the automobile didnot in the 1930s. Indeed, for some very good reasons, it will exacerbate the inevitable slump in capitalist prosperity. The firstreason is that, just as the railroad and automobile before, theInternet is drastically lowering costs. But this is a hugedeflationary force on capitalist companies' ability to keep upprices. Intense competition and huge investment of capital isboosting economic growth now, but it is doing so at the expense ofcapitalist profitability.
Internet companies do not make any profit. They remain a huge costto the rest of the economy. But investment in the new technology hasbecome a necessity to compete. This necessity has leapt well beyondthe ability to garner surplus value from the investment. Just the topnine Internet companies are worth $100bn on the US stock market. Butthey make sales of just $1bn, or 1%. And that is just sales. Theymake no profit. Compare that even to the ten leading technology companies like Microsoft. They are worth only $50bn, but they make$100bn in annual revenues (and some of these make a profit too!). Overinvestment and overcapacity will be the outcome of the Internetboom.
The Internet and IT revolution is a huge deflationary force on thecapitalist economy. That is the result of system that developstechnology through competition and private capitalist investment.Intense competition means that very quickly the profitable advantagesgained by the first company to use the new technology quicklydisappear. The eventual outcome is that everybody uses the newtechnology and nobody gains extra profit as a result. Investmenteventually shoots up much faster than the extra productivity oflabour created. In other words, the rate of profit in relation toeach unit of capital stock begins to fall. The faster the technologyis adopted, the quicker prices fall, and the speedier profitableadvantages disappear. Eventually, the large swathes of the newindustry will go belly up from over optimistic investment.
In the 1850s there were hundreds of railroad companies formed,asking investors for money. How many were left by 1880? Similarly inthe 1920s and 1930s, there were hundreds of automobile companiesformed. Ask a Rover worker how many were left by the end of the 1970sand how many there are now.
And second, the hangover from the Internet investment bubble willbe worse this time. The result of previous overinvestment binges wasdeep slump in the capitalist economy. The response was forgovernments to intervene: to nationalise bankrupt utilities likewater, electricity, railways etc and to direct wage earners moneyinto renewing these industrial sectors. At the same time, the welfarestate was formed to provide some safety net for irate unemployed masses. Above all, work was eventually found for them in the biggest state sector of them all: the armed forces. The collapse of therailroad age in the 1880s set the stage for imperialist rivalry inEurope and eventually World War 1. The Great Depression in the 1930safter the overinvestment of the automobile/electricity boom led toWorld War 2.
Now many capitalist commentators reject the view that the Internetrevolution means another bout of deflation and slump. They argue thatthe Internet revolution is not some huge stock market bubble. Sure,prices will fall with the new technology, but so will costs. As aresult, profits will be created and that will mean new jobs for thosein the new sectors, and also as these new workers spend, that willcreate new jobs for the displaced workers of old industries likeRover car workers. The eventual outcome, as long as government doesnot muck it up by intervening, will be a lower cost, lower price,more profitable, faster growth economy - in short, the new paradigmor nirvana.
But the reality of the Internet boom is that while stock marketprices rocket to unbelievable heights, profits of the Internetcompanies are nowhere to be seen. Elsewhere in the economies of themain capitalist nations, growth is pitched at about 3% a year,productivity of labour at about 2% a year and prices remain low. Sothere is little profitability in these new investments. Just as the Asian boom of the early 1990s came crashing to an end in 1997 after abinge of overinvestment not matched by sufficient profit, so will theworldwide Internet boom.
Just a matter of time
It is only a matter of time before the US Internet bubble isburst, investments collapse and consumption of the masses falls backbecause of a loss of confidence in the 'new economy'. The Internetrevolution is a great technical leap forward. But under capitalism,it is being exploited by more and more precious investment capitalbeing thrown into this tiny sector of the economy at the expense ofall the rest. That happens under capitalism because there is no planning and no direction of resources. 'Market forces' meanspeculative investment, intense competition between capitalistinvestors, and above all, huge over-investment in relation toprofitability.
The canal share boom of 1835-36 was followed by slump and fallingprices. The railway stock mania of 1869-73 was followed by the biggest depression then seen under capitalism. The same was seen inthe aftermath of the share boom of the 1920s. Japan's stock marketbubble of the 1980s has been followed by ten years of stagnation andrecession. The optimists of capitalism believe that the Internetrevolution is really a low-price low-cost boom that will lastdecades. The reality is that it is just another speculative financialmarket bubble that will turn into a deflationary bust. As I writejust about everybody in the capitalist world, including formersceptics of Internet stocks, now believe that Internet companies willcontinue to drive upwards for the foreseeable future. When everybodyagrees, you know it won't last much longer.