Saving money at a cost to the economy

WIRED:What effect will money saved by internet purchases have on this recession, asks Danny O'Brien

IS THE internet a luxury or a necessity? As this recession deepens, that’s a question that many of us will be asking.

When we cut back on monthly expenditures, will it be the home broadband internet? The 3G data plan? Or does the net have an even more important part to play in times of little money as it has had in times of plenty?

I don’t know about you, but they’re going to have to pry my internet from my cold, dead hands. I may cut down on my high-speed option, but when it comes to saving money, the net provides the modern equivalent of coupon-clipping and boot-sale dredging.

My only worry is exactly what effect all that “saved money” is going to have on how this recession (or depression) plays out. This will be our first truly networked downturn, where the internet is accepted as a part of many of our lives. In a time when economies need to increase demand, not contract, the net’s many cash-saving features may benefit the individual at the cost of our whole economy.

I’ve mentioned before writer Clay Shirky’s idea of the “Coasian Floor”, the idea that in accordance with economist Ronald Coase’s ideas on the costs and benefits of organisation, the net is making previously impossibly expensive organisations practicable.

These “organisations” can be so informal as to barely merit the term: a few dozen horse fans across the world deciding to share in the price of a thoroughbred online, perhaps; a “flash mob” of bored city dwellers co-ordinate via e-mail to play a practical joke by all turning up to a certain department store wearing its clerk’s distinctive uniforms.

These tiny, previously impossible organisational feats can easily grow to have a major political or economic impact.

Before the net, it would be insane to try and build a political campaign out of millions of $10 donations, because simply managing, requesting and processing all those donations would have cost more than the $10 itself.

You simply could not have a global 24/7 market for the rubbish in people’s cellars, as eBay effectively provides, without the net. But now the organising costs means that digging out those old vinyl albums makes sense: you can find a buyer online more easily than you could at a local boot sale.

What does that mean, though, in a time where many of us are considering the local boot sale as our main shopping centre? I’m not sure it’s all good for the economy.

We’ve been through a period of over-demand, bankrolled by a high level of consumer debt. Now consumers, worried about their future, are attempting to pay off that debt, even in the face of historically low interest rates.

After decades of worries about inflation, Western countries are now seriously concerned about deflation, where companies attempt to attract buyers by lowering prices, only to find that customers’ wages (deflated by lower companies revenues) are dropping too fast to buy even cheaper items.

Now the primary market for new consumer goods not only has to compete with others offering the same new product for a lower price; it also has to compete with an internet-empowered secondary market of used goods.

To give an example – I’ve just moved into an apartment and I’m in the market for a new vacuum cleaner. There’s a shop just down the hill that sells them new, but a quick look on Craig’s List reveals that I can buy a second-hand one for a fifth of the price, from a neighbour who lives closer to me than the retail shop.

I forgo the expensive new cleaner for a quicker second-hand deal closer by.

In a time of plenty, I’d probably pay the premium for a brand new item. Before the internet, I wouldn’t even know about the alternative. These days, though, I’m delighted to take the cheaper second-hand item, especially as it’s actually more convenient for me to obtain. That’s a good deal for me, but it’s also another bite out of the potential growth of the economy.

The sale of a new vacuum cleaner and those profits have been competed away by the vacuum cleaner company’s own past production. I’ve saved money at the cost of the present economy’s prospects.

I’m not saying that the internet, so long an engine of over- ambitious booms, will now penalise us in a prolonged downturn. I’m sure that it will continue to produce many of the business models that will lead us out of the economic wilderness that we find ourselves in.

However, as we look to government economists to number-crunch our way out of this mess, I do wonder if they are able to take the new effect of the net into account.

Many people are complaining that it was exposure to a raw, unregulated financial market that caused the problems we’re in today. They forget that there are millions of raw, unregulated micro-markets continuing on the internet: tiny transactions between consumers that go unmeasured in anyone’s idea of growth and uncontrollable by any regulator’s idea of how the economy should be steered.