Capitalistic Musings | Page 5

"new
economy". The marginal costs of producing and distributing intangible
goods, such as intellectual property, are negligible. Returns increase -
rather than decrease - with each additional copy. An original software
retains its quality even if copied numerous times. The very distinction
between "original" and "copy" becomes obsolete and meaningless.
Knowledge products are "non-rival goods" (i.e., can be used by
everyone simultaneously).
Such ease of replication gives rise to network effects and awards first
movers with a monopolistic or oligopolistic position. Oligopolies are
better placed to invest excess profits in expensive research and
development in order to achieve product differentiation. Indeed, such

firms justify charging money for their "new economy" products with
the huge sunken costs they incur - the initial expenditures and
investments in research and development, machine tools, plant, and
branding.
To sum, though financial and human resources as well as content may
have remained scarce - the quantity of intellectual property goods is
potentially infinite because they are essentially cost-free to reproduce.
Plummeting production costs also translate to enhanced productivity
and wealth formation. It looked like a virtuous cycle.
But the abolition of scarcity implied the abolition of value. Value and
scarcity are two sides of the same coin. Prices reflect scarcity.
Abundant products are cheap. Infinitely abundant products - however
useful - are complimentary. Consider money. Abundant money - an
intangible commodity - leads to depreciation against other currencies
and inflation at home. This is why central banks intentionally foster
money scarcity.
But if intellectual property goods are so abundant and cost-free - why
were distributors of intellectual property so valued, not least by
investors in the stock exchange? Was it gullibility or ignorance of basic
economic rules?
Not so. Even "new economists" admitted to temporary shortages and
"bottlenecks" on the way to their utopian paradise of cost-free
abundance. Demand always initially exceeds supply. Internet backbone
capacity, software programmers, servers are all scarce to start with - in
the old economy sense.
This scarcity accounts for the stratospheric erstwhile valuations of
dotcoms and telecoms. Stock prices were driven by projected
ever-growing demand and not by projected ever-growing supply of
asymptotically-free goods and services. "The Economist" describes
how WorldCom executives flaunted the cornucopian doubling of
Internet traffic every 100 days. Telecoms predicted a tsunami of clients
clamoring for G3 wireless Internet services. Electronic publishers
gleefully foresaw the replacement of the print book with the much
heralded e-book.
The irony is that the new economy self-destructed because most of its
assumptions were spot on. The bottlenecks were, indeed, temporary.
Technology, indeed, delivered near-cost-free products in endless

quantities. Scarcity was, indeed, vanquished.
Per the same cost, the amount of information one can transfer through a
single fiber optic swelled 100 times. Computer storage catapulted
80,000 times. Broadband and cable modems let computers
communicate at 300 times their speed only 5 years ago. Scarcity turned
to glut. Demand failed to catch up with supply. In the absence of clear
price signals - the outcomes of scarcity - the match between the two
went awry.
One innovation the "new economy" has wrought is "inverse scarcity" -
unlimited resources (or products) vs. limited wants. Asset exchanges
the world over are now adjusting to this harrowing realization - that
cost free goods are worth little in terms of revenues and that people are
badly disposed to react to zero marginal costs.
The new economy caused a massive disorientation and dislocation of
the market and the price mechanism. Hence the asset bubble. Reverting
to an economy of scarcity is our only hope. If we don't do so
deliberately - the markets will do it for us, mercilessly.
The Roller Coaster Market
On Volatility and Risk
By: Dr. Sam Vaknin
Also published by United Press International (UPI)
Volatility is considered the most accurate measure of risk and, by
extension, of return, its flip side. The higher the volatility, the higher
the risk - and the reward. That volatility increases in the transition from
bull to bear markets seems to support this pet theory. But how to
account for surging volatility in plummeting bourses? At the depths of
the bear phase, volatility and risk increase while returns evaporate -
even taking short-selling into account.
"The Economist" has recently proposed yet another dimension of risk:
"The Chicago Board Options Exchange's VIX index, a measure of
traders' expectations of share price gyrations, in July reached levels not
seen since the 1987 crash, and shot up again (two weeks ago) ... Over
the past five years, volatility spikes have become ever more frequent,
from the Asian crisis in 1997 right up to the World Trade Centre
attacks. Moreover, it is not just price gyrations that have increased, but
the volatility of volatility itself. The markets, it seems, now have an
added dimension of risk."

Call-writing has soared as punters, fund managers, and