Digital Phoenix: Why the Information Economy Collapsed and How It Will Rise Again.

• Author: Margolis, Stephen E.
• Position: Book review

Digital Phoenix: Why the Information Economy Collapsed and How It Will Rise Again By Bruce Abramson Cambridge, Mass.: MIT Press, 2005. Pp. xii, 366. $34.95 cloth.

In case you haven't heard, the information economy has collapsed. It came into being sometime in the mid-1990s, showed enormous promise, then collapsed in 2001. Fortunately, however, there is still hope. In Digital Phoenix, Bruce Abramson looks at the now moribund information economy, offers his diagnosis of the cause of its decline, and proposes a cure that will allow it to prosper anew.

According to Abramson, the United States suffered two important and mutually reinforcing public-policy failures in the 1990s: the executive and judicial branches' failure to bring Microsoft to heel, and the legislative and judicial branches' failure to give us intellectual property law that strikes the right balance between creative freedom and incentives to create. These failures allowed predictable self-interested behavior (sometimes abusive, sometimes not) to distort the operation of markets, causing them to fail, too. When these failures denied investors and entrepreneurs the benefits they had banked on, the result was the collapse of the information economy.

Readers might reasonably ask whether anything that might be called the information economy actually collapsed. Because Digital Phoenix is essentially data free, we have to look elsewhere for answers. The North American Industrial Classification System (NAICS) provides a standard for aggregating business data into industries. NAICS group 51, information industries, includes publishing (books, newspapers, databases, and software); motion picture and sound recordings; broadcasting; Internet publishing; telecommunications; and Internet service providers, search portals, and data processing. Bureau of Economic Analysis data for NAICS 51 show growth in nominal value added for every year from 1997 to 2004. Growth does slow from 9.7 percent in 1997 and 15 percent in 1998 to 4 percent in both 1999 and 2000, and then to 1.2 percent in 2002 and 1.6 percent in 2003, before recovering to 9.6 percent in 2004 (http://www.bea.gov/bea/industry/gpotables). These data indicate a slump, but hardly a collapse. Of course, Abramson might prefer a different designation of the information economy, but he doesn't tell us what it would be. His discussions include software, Internet services, telecommunications, movies, and sound recordings, so the NAICS group 81 designation looks pretty close.

Some things did collapse, of course. The...