New Metropoles

Jose G. Perez jgperez at SPAMfreepcmail.com
Tue Nov 9 12:03:41 MST 1999



Doyle,

    Let me start with the stock market. Yes, it is volatile, and my
impression is that it is moreso today than, say, 20 years ago, though I
haven't seen any studies to that effect. To my mind the kind of up-and-down
fluctuations you see in the market are "a tale told by an idiot, full of
sound and fury, signifying nothing." To a large extent, these fluctuations
are caused by changes in market "sentiment."  There's a whole industry
dedicated to manufacturing this sentiment and changing it like clockwork
three times a week. All of this talk and activity is entirely in the realm
of speculation. And I think experience shows that a 5-20% drop (the most
recent one was 20%, I believe, as measured by the S&P though not the Dow)
has little or no effect whatsoever on consumers and the economy.

    I'm not sure what point you are trying to make by comparing market cap
to GDP. A lot of this "market cap"  right now consists of illiquid dot-com
shares in the hands of insiders. Their putative value cannot be realized
today and I don't believe it will ever be realized. It is pure fiction, a
complete bubble, and there's not even an expectation that this fictitious
"capital" should provide a return. These shares are not at all comparable to
those of IBM or any other established, profit-producing company.
Stockholders of real companies with real assets and real profits would never
in a million years accept netscape or AOL or Amazon.com paper in exchange
for their own shares at anything like current valuations. The basic
mechanism, as I've explained, is to float a small tranche and let the
speculators bid up the value chasing the small amount of stock on the
market. On wild days you get things like volumes in a given stock that are
several times the number of shares on the market. That reflects the fevered
speculation that is going on -- not anything about the broader economy or
the broader stock market.

* * *

    On computers and productivity. I'm familiar with the book you cite as
well as the review in Doug Henwood's newsletter. That is precisely the view
I'm polemicizing against. My contention is that the service sector
productivity figures in particular are meaningless junk that could not
possibly be true. It seems that that has now also become the official
position of the major government statistical agencies. The BLS -- in charge
of getting together many of these stats -- goes over in great detail in the
February issue of Monthly Labor Review what is wrong with the figures they
have and how they put them together. Fed Chairman Alan Greenspan has also
criticized the unreal nature of these figures in congressional testimony.
I've reviewed and quoted that material in posts last summer, and won't
repeat it here.

    Manufacturing productivity presents a much different picture. However,
the government combines the "service sector" productivity figures, which are
bogus, with the manufacturing ones to give us a figure for the business
sector of the economy as a whole. These are the foundation for a lot of
these "contrarian" jeremiads about the non-results of computerization.

    What has happened is that computerization has collapsed the cost of
doing all sorts of paperwork. This is what government statistics showing
"less" productivity were capturing, that the cost of clearing bank
transactions or preparing a statistical analysis of sales kept getting lower
and lower. But, unlike in manufacturing, where real goods are produced which
have a value independent of the costs of production incurred by a particular
enterprise, things like clearing checks or credit card purchases, producing
company reports and memos, etc., have no value. Thus the government tries to
impute a value to them from their costs. In sector after sector of the
"service" side of the economy, you see the same problem, figuring out just
what the "output" is and how to value it.

    To get an appreciation for this, consider a very simplified example from
retail sales.  Say you come up with the following definition: the output is
the final (retail) sales minus the (wholesale) cost of goods. That's the
value "added" by the work of the people at the store (you could if you
wanted to include depreciation on the "costs" to get a more realistic
picture, but this would not affect the analysis below, so let's just pretend
it doesn't exist).

    Now consider that output for a moment. Included in it are inventory
costs, for example. Now, put in computerized sales terminals which
automatically track which items are being sold from stock, and link those to
your inventory computers. Now you have a day-by-day, hour-by-hour accounting
of your inventory. You no longer need to order so much at one time, if
delivery takes one week, there's no reason to order much more than a week's
supply at a time. Through such mechanisms you greatly reduce your cost of
carrying inventory, and since retail sales is a price-driven, cut-throat,
competitive business, you "pass on" much of the savings to consumers to
increase your volume. That volume increase takes the form of more stores,
and thus K-marts and Targets and Wall Marts soon blight the entire
landscape, and Sears gets taken off the stock market indexes, because they
weren't quite as nimble at playing this game.

    Let us now turn to our government statistician who is focused on one (or
100, it doesn't matter) retail stores to figure out productivity trends. The
cost of inventory declines, and so do prices. Final sales minus wholesale
cost of goods have shrunk. Yet that's the "output" of the store! Therefore,
the "output" declines and with it so does "output per hour of labor" or
productivity.

    That's where the service sector declining productivity figures come
from. From a decline in "output" which in reality is a decline in costs,
i.e., an INCREASE in efficiency!

    For Marxists, such a statistical perversion should come as no surprise,
since we know the value of the commodities being sold comes solely from the
socially necessary abstract labor time necessary to produce them.
In manufacturing, where both the output and labor input are easily and
transparently measured independently of each other, it makes sense to talk
about "productivity." But not so in "services."

    Consider banking, where the "services" rendered --safekeeping of money,
clearing transactions, and so on-- are presumably the "output" but there's
no specific charge or payment associated with them. The whole thing is such
a muddle that bourgeois experts don't even know what to make of deposits:
some say they are part of inputs, others that they are  part of output,
others that they are both, others that they are neither.

    It is on the basis of such "rigorous" scientific understanding that the
official statistics succeed in coming up with a decline in productivity in
banking and financial services on the order of 1% a year for a quarter
century!

    To a Marxist, all these sorts of costs are paid, so to speak, out of
surplus value. Retailing, banking and all sorts of other "services" are not
value-adding operations, they are value "sinks," they drain part of the
surplus value generated by the economy as a whole. Hence the meaning of a
decline in the "output" of such sectors is precisely the opposite of what it
is for the bourgeois economists. For the bourgeois economist, it is a
decrease in society's wealth. For us it is recovered surplus value, value
which is no longer wasted on, for example, keeping banking records by hand.

    For society as a whole, these sorts of activities represent the same
thing as "overhead" for an individual enterprise. A company that reduces its
overhead costs isn't poorer as a result, it is richer.

    So, where and how do we see the "savings"? Well, consider this: where do
new cable channels come from? Where do the resources for the thousands of
web sites that have sprung up over the past few years come from? Overall,
these things are possible because society has been able to free up the
resources necessary to put them together, including the necessary labor.

* * *

    Finally, let me get to your argument about how can I say there's a boom
now, computers have been around for 50 years and PC's for close to 20. That
is true. But I do not believe the extraordinary labor savings (or efficiency
or productivity increases) we are seeing are due solely to computers, but to
the *combined* effect of several different technology advances, including in
telecommunications and networking.

    It is clear, at least to me, that where I work computerization of
specific individual areas was one advance, but networking all the computers
in a standardized way and connecting them all to the Internet as well as to
a private company "intranet" has been a real leap.

    The benefits to be gained are far from over, as yet the computerization
of video is in the early stages. Ideally at some point, all current footage
would be online and available from any work station; and archival material
would be in near off-line digital storage (like a DVD) that could be
accessed in a matter of at most a minute or two without human intervention.
There's probably a couple of generations of technology before we get close
to something  like that. Right now at big TV news organizations when you're
sending a report by satellite or fiber, you have to have an operator at each
end, one to "roll the tape" (or press play on the video server), the other
to press record on tape, video server or both. There's also a whole
department of people who plug different incoming signals into your in-house
"router" (essentially a very-high-quality cable system) and tell you that
such-and-such a report will be on receiver 52 or whatever. Soon, one hopes,
standards and format will be in place so that all the person at the sending
end has to do is to click "send" and computers will schedule the
transmission, select the routers at each end, activate the recording
devices, automatically enter into databases the appropriate information, and
alert the people who are going to use the material at the receiving end in a
program that it has arrived.

    One characteristic of the way these technologies combine is that they
are worth much more together than separately. Take, for example, "bandwidth"
over fiber lines or satellite circuits. You can, in principle, send a TV
signal in either digital or analog form. As it turns out, to do so in
analogue form with top quality takes a large amount of bandwidth, which is
why you traditional analog cable system signal looks a little muddy, less
sharp and brilliant than a good signal from a local broadcaster over the
air. The "fringe" of the signal, what gives you that little bit of extra
sharpness, is sacrificed for a big savings in bandwidth. But if you take
that signal and digitize it, you can get a signal that is sharper than over
the air in the bandwidth of one cable channel. But even better, you can
compress the digital signal to one fourth or one sixth the original amount
of data, and in most cases the output will be just as sharp and detailed as
the original uncompressed digital signal. The reason for that is that video
images typically are highly repetitive; very little changes from one frame
to the next.

    But look what's happened. You used to have one satellite or fiber
circuit with one signal. Now you've got one circuit with four or six
signals. The effective cost of getting the signals from point a to point b
has just been cut by three-fourths or five-sixths. Or, viewed another way,
once you get your first signal up on a satellite transponder, your next
three or five signals are free. But this reduction in cost means that now,
providing a given cable service has become cheaper. The niche channel that a
decade ago was impossible, like, say, Court TV or the sci-fi channel,
becomes possible.

    So far a lot of these communications are taking place over individual
pipes, or circuits. The best example is POTS, or Plain Old Telephone
Service. From your handset all the way to your aunt in Los Angeles, a
certain amount of bandwidth is specifically set aside for that one
particular phone call. And mostly that bandwidth is wasted. The same thing,
a digitized version of your voice, could easily be sent over the Internet.
It isn't done much right now for a couple of technical reasons, the main one
being that you'd want those real time voice packets to get to L.A. very
quickly. You need, in effect, a way of labeling those data packets for
express handling, something that hasn't yet been built into the Internet
protocols but will be. Once that is done, telephony as we know it is likely
to disappear. All the little individual bits of bandwidth up until now
reserved for each connection could simply be thrown into the overall
bandwidth pool, where they will be used much more efficiently than now. One
likely result is that long distance charges will simply disappear, just as
on the Internet now you don't get charged for accessing an out-of-area web
site or sending a long-distance e-mail.

    But that same technology that would allow for rapid transmission of
voice would also allow for the rapid, real-time transmission of pictures.
There you are probably going to need special on and off ramps to the
Internet, for the volume is very great, but the efficiencies of it are also
likely to be great. It's just a fact that MOST "backhaul" and occasional
video circuits are unused much or most of the time. XYZ news network, say,
has a transatlantic transponder constantly open from London, which it has
multiplexed into 6 digital channels. At those moments of big world events,
all six channels might be used, but mostly, they're on bars. The "normal"
daily peak traffic is three channels, and the average daily use is less than
one channel. If you can send all that stuff through the Internet (or through
a special high-volume network that uses the same principles), all of a
sudden you can add, not ONLY XYZ news's transponder to the overall
trans-Atlantic capacity, but ALSO those of all its rivals, those leased by
corporations, etc. etc. etc. You would free up tremendous amounts of
bandwidth capacity at virtually no cost, because the really expensive part
is putting up the satellites or laying in the ground fiber lines. And all of
a sudden you might have, for example, scores of VHS-quality classes by TV
available on the Internet, or if-and-when available penny a minute
transatlantic phone calls.

    Technically, these things are at most a few years out, a lot of the
technology already exists, no new breakthroughs are needed, although there
would be a great deal of engineering and integration required to make it all
work. If/when they get implemented is really more a question of politics,
corporate infighting, standards-setting and so on.

    I'm focusing a lot on how this might affect broadcasting, that's what I
know best. But this has tremendous applicability across all types of
industries. You can come up with a new car or airplane, and have
computerized tools "cut" a model to be tested in a wind tunnel half way
around the world that same day, for example. Anything involving modeling,
designing, prototyping, projecting or communicating in general is likely to
be greatly impacted.

    This is the basis for my saying that my guess is we will continue to
reap above-average gains in productivity and economic growth for something
on the order of five or ten years, because of the things that are already
possible but have not yet been deployed or have had only limited application
so far due to cost.

José

-----Original Message-----
From: Doyle Saylor <djsaylor at primenet.com>
To: Marxism List <marxism at lists.panix.com>
Date: Tuesday, November 09, 1999 12:53 AM
Subject: Re: New Metropoles


Greetings Comades,
A little bit more about the digitization boom between me and Jose.

Jose
The most important of these, without doubt, is what is going on in the
real economy. On that you have little to say, apart from referring to a
couple of studies debunking  the "myth" that computers are a good investment
for business.

Doyle
I am sure that investing in computers is a necessity for business.  That
isn¹t to say though that computing performs the sort of boom you imply.
Computing doesn¹t perform that well.  In many cases digitization is inferior
to previous production regimes.  For example while records were not durable
in some ways like CD¹s the sound is really better than CD¹s.  That
digitization was forced not by performance but by market dynamics.  The same
thing can be said about the sterilizing effect of digital images as compared
to more hand made images.

Jose
Thus we are left with the conclusion that for close to two decades
American businesses have been on an irrational binge of investing in wave
after wave of computer technology that does not even pay for itself; as a
result, government and private statistics show that businesses have suffered
significant drops in output and productivity.

Doyle
Computing, or digitization has been around since the fifties.  Personal
computers were booming in the 80¹s.  The growth of the economy was anemic up
until the mid decade point of the nineties.  Even now we are supposed to
accept "full" employment as 4.1%.  There is a lot of money being made in a
wealth polarized society.  For them it is a boom.  But there are an awful
lot of homeless people on the streets, and a huge prison population in a
boom.

Jose
Every day I go to work I see the tremendous labor savings
effected through the use of Internetworked computers. Your guess that this
infrastructure is as expensive to keep up as it cost to do things the
old-fashioned way is wildly off the mark. The half dozen extra people it
used to take to fully staff a control room 10 years ago have mostly been
realized as net savings to the company. Yes, there are programming, hardware
and maintenance costs associated with all these computerized systems, but
they are much lower than the costs of the previous setup.

Doyle
Are you talking about TV production?  Radio production?

Jose
On the financial markets in general, I would say that the relatively
high valuations we see today do not seem to me to be totally irrational,
give or take 10 or 20%, and especially if you have the perspective that the
next five or ten years in the U.S. economy will be like the last 5 or 10
years. This kind of economic boom justifies, in my opinion, a significant
premium over the historic average valuations of, say, a price/earnings ratio
of 15 or 17.

Doyle
I guess you mean some segment of the Stock Market rather than the Œfinancial
markets in general¹.  Otherwise if you consider your view that the valuation
of the Stock Market is skewed from 10% to 20% and the market is 1.5 times
the GDP or in the range of 10 trillion dollars, then your view is off by
either one to two trillion dollars.  So I would infer using your margin of
error is two trillion dollars, and that would be 28% of the whole economy of
the U.S.

I¹ll put that in the context of the bubble like condition of this Stock
Market.  Over the recent past, and I¹ve stopped counting we have had several
market falls of the general range of 10% and one that reached 17% of the
market value.  None of these drops caused an economic slow down, much less a
recession.  In other words massive swings in value on the market don¹t have
a real world effect.  I would guess this means that these swings indicate
that there is nothing underlying these market swings.  The most egregious
example on the markets is of course the internet stocks.

While nosing around in stuff I copied into my computer here and there I came
across a book blurb  from the Brookings Institute web page on this subject.

The Computer Revolution
An Economic Perspective
152 pp. / 1997

cloth 0-8157-7896-1 $38.95
paper 0-8157-7897-x $16.95

Economics / Technology
Brookings Institution Press

By Daniel E. Sichel

During the 1980s and into this decade, U.S. businesses poured billions of
dollars into computers and other information technology. Yet the
productivity performance of the U.S. economy in the 1980s remained
lackluster--especially in the service sector--leading many observers to
suspect that companies were not getting their money's worth from these
high-tech investments. At the same time, academic research found little
evidence of a productivity payoff. But have the tables now turned? With an
apparent improvement in
productivity in recent years, much academic and popular opinion now suggests
that the payback is at hand or just around the corner.

"For more than a decade, American corporations have been shoveling billions
of dollars in
computers down a black hole, with no reponse at all from the sluggish growth
rate of American productivity. Dan Sichel's pathbreaking book helps us to
explain the computer paradox by showing that computer hardware is too small
a share of the capital stock to matter much, and that there are reasons to
doubt a future surge in the contribution of computer hardware and software
growth." Robert J. Gordon, Professor of Economics, Northwestern University

"The great productivity puzzle of the last two decades is why the much
touted computer
revolution has not produced faster economic growth. Dan Sichel's
dispassionate analysis
articulately confronts hype with facts and provides deep insights into the
nature of the
relationship between computer hardware and software, productivity, and
economic growth. It is a major contribution to our understanding of this
critical area." Richard E. Quandt, Professor Emeritus, Princeton University
and Senior Adviser, Andrew W. Mellon Foundation

And there is a review in the Left Business Observor #97, October 1997 of
this book

Here is an extract:
Š
"That BW quote is marshalled by Daniel Sichel, along with quite a few others
from the business press over the last 40 years, to show that the payoff
lurking just around the corner - or finally arriving - is an ancient theme
in popular commentary on the economic possibilities of computers. Yet
despite the latest BLS revision of the productivity figures, the long-term
payoff still seems deferred; the spring 1997 burst looks like a blip if you
inspect any time period longer than three months. The present business cycle
expansion, now over six years old, has the lowest rate of productivity
growth of any since modern numbers begin in 1947, and the 1990s are the
weakest decade of the five shown in the
nearby chart."Š

Cheers,
Doyle Saylor



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