So there's at least one problem with this, I think (though in principle, I suppose I agree). This line bothers me:

Even if Internet-related applications only become a tenth of the world's economy

A tenth? Internet applications? A tenth of the world's economy could be Internet applications? I'm a bit flabbergasted by the thought. I mean, I guess...if entertainment spending comes to be merged into the Internet applications category, and media, and toys and games, and travel, and education, etc. I guess the argument can be made that a tenth of the investment an average business makes (regardless of what the business actually does) in the future will be on Internet-related technology.

But, I think we're still a long way from that, aren't we? And it doesn't alter the basic realities of the economy, and where people spend most of their money.

How much do grocery stores and food producers spend on Internet applications? Certainly not 10%. Real estate and other big ticket item sellers like cars and boats? Is it 10%? Seems very unlikely, though maybe with advertising becoming more Internet focused one could say that their advertising budget will eventually be going to the Internet. Food and houses and other necessities are where 1/3 to 2/3 of the average person spends their money, worldwide. So, what else is there? Energy. I suspect energy companies spend maybe a tenth of one percent of their annual budget on Internet-related expenses, if that much (though they spend a lot on technology, in general).

Unless we imagine that the percentage of money people spend on these things will drop significantly in the near future relative to entertainment, toys, sports, and knowledge-related activities (and all of those things become dramatically more Internet focused--which is the believable aspect of this scenario), a 10% Internet application economy future is hard for me to visualize.

Of course pg is theorizing that the wealth being created is independent of existing systems of wealth generation. Being a libertarian, I'm sympathetic to that notion. But, there needs to be a productivity boost created by new technologies for it to literally create wealth. It needs to save people time or make some sort of production or transit more efficient. Entertainment doesn't produce wealth, IMHO, it merely redirects it...and some percentage of modern Internet applications are entertainment. I'm not saying that's a bad thing...just that I believe when the wealth being "created" isn't actually in response to production or increased efficiency, I suspect it's squeezing a balloon rather than blowing more air into it.

And, the natural fallout of that is that if the brightest young lads and lasses are going into Internet applications, instead of taking part in the physical world, we might end up slowing the growth of wealth generation in the world rather than accelerating it. Particularly if they're mostly doing pure entertainment applications.

Luckily, as long as we have a free market, it will correct for those kinds of mistakes, even if it takes a while for us to recognize the corrections (and even if the mistakes get subsidized across several years because investors are slow to react to shifts in the landscape).