The digital revolution
The digital revolution has transformed daily life in the last thirty years or more. By itself, that doesn’t necessarily make it interesting, but the transformation often involves quite different ways of doing things done in the past. It is interesting to think about why those changes have occurred and what is likely to happen. The effects on financial markets and banking are fascinating.
Returns to Stockholders in New Industries
Even before the demise of the so-called dot-com bubble, Cora Barnart and I started working on a paper to answer the question: “Are Stocks in New Industries Like Lottery Tickets?” The short answer is “No.”
“Returns to Investors in Stock in New Industries” is a rewritten version of that paper with additional historical data. We find that investors received positive returns, sometimes spectacular ones. All that said, on average an investor generally would be better off with a diversified portfolio of stocks in the overall market given the risk. Furthermore, a portfolio of stocks in a new market does not compensate for the riskiness of the portfolio. So much for sector funds, at least in new industries. (And I do not doubt for other industries.)
Electronic Commerce and Electronic Money
The digital revolution also is related to my interest in banking and money, especially private money.
Electronic commerce will become increasingly important as time goes on. Some changes will affect the economy a lot, and all changes will affect some people a lot.
Electronic payments are crucial for the development of electronic commerce. While credit cards work today, it is unlikely that credit cards will be sufficient by themselves over time. If nothing else, not everyone who has access to a computer can get a credit card.
While it is hard to be as sure about the importance of anything other than credit cards, I think that electronic money will be an important part of the development of electronic commerce.
This electronic money may well be private money, not government money. Debit cards seem to have become the version of electronic money adopted so far. While not as radical as many versions of electronic money, debit cards have made a lot of inroads into cash transactions.
Banks issued private currency from 1838 to 1863 -- in what was called free banking -- in the United States. This episode is informative about what can make electronic money successful and how electronic money might work. I have been doing research on this episode for some time. A summary of this episode and a brief discussion of the connection to electronic money is included in “Wildcat Banking, Banking Panics and Free Banking in the United States” published in the Federal Reserve Bank of Atlanta Economic Review 81 (December 1996), 1-20.
The following are short non-technical pieces on electronic commerce and electronic money.
“Personalized Pricing on the Net”
analyzes Amazon.com’s attempt to charge different prices to different customers without warning in September 2000. This did not go over well (to put it mildly) and it should have been obvious to them why it would not.
“Is There a Future for Electronic Currency on the World Wide Web?”
published in E*Journal, the journal of The Society for Electronic Commerce and Rights Management, Winter 1999.
“Is E-commerce a Revolution?”
published in E*Journal, Fall 1999.
“Is There a Future for Electronic Cash in the United States?”
published in The Journal of Internet Banking and Commerce, November, 1998. A copy also is available here.