http://theage.com.au/articles/2002/08/24/1030052995912.html Internet trading helps purge a blocked system By Charles Wright August 27 2002 Next No doubt it will take the Nobel Prize committee a decade or more to recognise the significance of the latest piece of research from The Edge laboratories, which has led us to the formulation of Wright's Theory of Economic Constipation. This theory assumes that the economy, like the human intestinal tract, can suffer from the equivalent of muscular dysfunction, which can result in irregular movement of material through the system, leading to unhealthy compaction and systemic failure. The Edge believes that we are going through precisely this painful interruption at the moment. The healthy movement of partially digested material through the system has been blocked, so that rather than being adequately, umm, processed, it has been backing up in the nation's attics, spare rooms and garages. Unfortunately, due to an inappropriate emphasis on intake and inadequate understanding of the importance of healthy digestion of previously ingested material - for the benefit of the lay person, we shall refer to this as "the second-hand market" - the system is placed under further strain by the ingestion of yet more new stuff. Although we have not yet identified all the causes of this painful disruption, we are pretty certain that the main irritant is advertising. Advertising produces an artificial need to consume new material but it does not stimulate the economic digestive processes that would move older material through the economic digestive tract. The situation has become much more critical, of course, because the nature of the modern economy has resulted in increased production without a corresponding increase in jobs. Jobs are the enzymes of the economic digestive tract and without them we risk total break-down of the financial system. No scientific breakthrough - not even those in the so-called dismal science - is made in a vacuum. And The Edge acknowledges a debt to eBay but we have concerns about some auction practices on the site. We first began to appreciate that eBay was not so much an online auction site as an economic, umm, bowel, when the owner of the local second-hand bookshop revealed that he was finding it increasingly difficult to find stock. "People have started selling them," he explained, "on eBay." "Good idea," we thought, and promptly logged on and bought some. What we discovered was that eBay has produced an entirely new industry, which is turning the contents of those attics, spare rooms and garages into gross domestic product and export earnings, providing income and employment for a growing number of people. Take, for instance, 13-year-old Aiden McIlduff. It would possibly be misleading to describe young Aiden as an Internet entrepreneur but, in a modest way, that's what he is. Better, perhaps, to call him an eBay entrepreneur. Aiden was introduced to eBay by one of his mother's friends who, like an increasing number of people, had developed a small, but healthy business selling second-hand clothing on eBay. Because his mother was able to source cheap books through her job as a sales representative for a publishing company, he started selling books. Then he bought some watches and auctioned them for a profit. He won a colouring competition. The prize went up on eBay. So did a digital camera. He did some wheeling and dealing on some Game Boy games, and sold them - and the Game Boy. These days, Aiden is saving to buy some shares and, later, real estate. He reads The Financial Review and the property section. Joshua Gans, professor of management and information economics at Melbourne Business School, sees eBay as an important breakthrough in the problems of transaction costs - the concept identified by a previous Nobel Prize winner, Ronald Coase - which inhibit social efficiency. Transaction costs are a key figure in the development of companies. According to Coase, firms are created because the additional cost of organising them is cheaper than the transaction costs involved when individuals conduct business with each other using the market. The development of eBay removes the firm's entrenched advantage over the individual, and Gans, who was astonished to be able to sell a Palm III on eBay for only slightly less than the value of a new unit, sees it as a promising step. "When you unlock all these things in people's closets, each one is real gross domestic product. It won't turn up in the GDP figures but it's really what it's all about. It's much better to unlock the value of an existing product than to manufacture a new one." The Edge sees it as the economic equivalent of eating fresh fruit and vegetables. We could end the global recession overnight. And if you have any second-hand mystery novels for sale, we'd be happy to buy them. cw@bleedingedge.com.au