Question

Speed of Self-Correction 3A) Would the increasing size and importance of online shopping in our economy make self-correction become faster or slower? Clearly explain your answer. 3B) If the government increased the generosity of our social services (ex: health care, employment insurance, welfare, etc.), would this make self-correction become faster or slower? Clearly explain your answer. Hint for #3: Think of the 2 issues that tend to make self-correction slower in the first place.

Answer 1

3(a). The facts are clear. In most major markets, physical retail continues to grow, albeit at a far slower rate than online shopping. Lots of stores continue to be opened, including by quite a few brands that are hardly new or “digital-first” (think Dollar General or Aldi). And it is true that physical stores account for roughly 90% of all retail sales (at least in North America). Five years from now, by most estimates, that number is still likely to be well over 80%.

First of all, that percentage is an industry-wide average, an amalgamation of many different categories. The percentage of e-commerce sales varies markedly by product segment, from around 2% for grocery to more than 20% for apparel to the overwhelming majority of sales in categories where products can be digitally delivered, like music, books and games. So perhaps folks in the supermarket business might justly not be completely freaked out by the growth and relative market share of e-commerce today, but I doubt you’d get the same reception from the executives at Borders and Blockbuster who failed to see the wave of digital disruption a decade ago and were given the gift of “spending more time with their families.”

3(b). The real costs of publicly produced private goods may be above minimal levels because government imposes bureaucratic rules and red tape (in part as a substitute for the profit motive) and often lacks competitive pressures for internal efficiency (perhaps because politicians reap a surplus from monopolistic provision). Heads of bureaucratic agencies who wish to maximize their prestige and perks, and have greater information than the politicians and citizens they supposedly serve, are often able to argue successfully for larger budgets than are needed for least-cost production.