How information alters economic concepts
Phuah Eng Chye (25 May 2019)
Information always had a key role in societal advancement. However, its role was overshadowed by the visible pre-eminence of machines and technical knowledge in expanding physical infrastructure and production. The status of information has changed recently. The advent of technologies such as the internet, the smartphone, AI and IOT has pushed information to the forefront. Information capabilities, that used to be the preserve of governments and large corporations, are now widely accessible to the public. The relationship between data and activities is becoming dynamic; with data increasingly driving events. Data is perceived to be replacing labour, capital and even oil as the most valuable resource in an economy.
In this context, I would define the information society as representing a notional point where the economic logic shifts from linear to non-linear, from hierarchy to peer-to-peer, from stock (accumulation) to flows (circulation), and from production to communication. The ability to respond real-time and to rebundle activities and risks disrupts traditional processes and organisational structures. The change process alters the context and meanings of economic concepts.
- Abundance vs scarcity. Information increases abundance by minimising the need for raw material and physical requirements, by increasing substitutability and by increasing the level of intangible activities relative to production. For example, the physical output of dictionaries has fallen substantially. But the virtual supply of dictionaries has increased. Many people have access to a dictionary (as an app). Consumption has probably increased as dictionaries are embedded as editing tools in writing applications. Hence, it is possible for physical output to fall and virtual consumption to rise as a physical product is digitised. Expanding abundance thus undermines the validity of scarcity-based theories. When abundance overwhelms scarcity, scarcity (physical) will become the exception and abundance (information) will become the general case. Abundance will decouple the traditional links between income, production and consumption and cause value to migrate. This affects the conventional theories on labour and capital. The state of abundance can, of course, be reversed. Scarcity (shortages) are reimposed[1] when governments or firms choose to reduce information or choice (e.g. through regulation, hoarding) or result from an event shock. These reversals represent regression rather than progress and reduces the level of monetisation and exchange.
- Clarity of economic concepts. The information effects that result in convergence, modularity, complexity and transience diminishes the clarity of economic concepts. For example, the distinction between consumption and production is blurred by sharing and other information-driven modes of participation (e.g. co-creation). Work is increasingly dictated by information and social activities rather than by production needs while traditional employment is eroded by fragmentation and transience. Like financial products, activities are now decomposed into temporary bundles or components which are then rebundled into synthetic products. Convergence increases overlap – such as between labour activism, politics, trade disputes, intellectual protection and national security. Policies and regulations based on segmentation will thus face greater tests from overlaps and gaps caused by disruption. Information will give rise to more laws and legal disputes will increase exponentially as the clarity of legal definitions diminishes. An information society is a society of laws and disputes.
- Financialisation and savings. Monetary values are no longer anchored to physical assets but are a function of information. This is consistent with the value shift from tangible to intangible assets (disclosures, brands, skills, intellectual property) and increasing monetisation of activities. Financialisation[2] can thus be viewed as an information process to monetise the value of activities and assets. The continuous expansion of the sphere of monetised activities can crowd out social (non-monetised) value with adverse effects on social relationships; and make inequalities more obvious. A theory on financialisation (based on information) would likely produce a different interpretation of monetary events and policies relative to theories based on credit. Traditional theories define savings as a decision to defer consumption. In a financialisation paradigm, there is no need to defer consumption due to abundance. Instead, savings act as the feedstock underpinning financial intermediation and stability. Higher savings lead to higher demand for investible assets. This increases consumption directly if the asset is based on consumer loans and indirectly through the wealth effect from rising asset prices. Financialisation can thus be viewed as the organisation of capital (domestic and foreign) to overcome budget constraints to finance large undertakings, promote economic growth and to improve liquidity. Interventions are needed to maintain price (consumer and asset) stability, ensure access to liquidity and to strengthen financial resilience. Financialisation strengthens the relationships (connectivity) between income, balance sheets, asset returns and prices.
- Market efficiency and externalities. In the industrial society, the removal of frictions increase efficiency. In the information society, markets are generally frictionless. However, the absence of frictions may ironically pose fairness, efficiency, profitability and stability risks. These risks can be mitigated by interventions to rebalance or by adding frictions. For example, restrictions can be imposed on transaction speed to reduce contagion risks or to improve trade fairness in markets. Externalities may also arise from information overload and misinformation, the abuse of information to exploit or discriminate against other parties or to obfuscate risks or costs. Regulatory intervention is usually needed to promote information transparency, governance and fairness.
- Private ownership vs public value. The concept of ownership in an information environment raises many important issues in relation to the effects of partitioning and enclosing ownership rights – particularly for data, images, algorithms, knowledge, human capital and infrastructure. In this context, there has also been a shift in the battle for control from ownership of production and physical assets to ownership rights to access and information assets[3]. The ownership of physical assets (which are scarce) can be contrasted with the ownership of information assets (which are abundant). Ownership restricts usage and increases private value at the expense of public value. However, the value of information increases exponentially with greater usage, sharing and cooperation[4]. Hence, expanding private ownership of information can have a detrimental effect on economic growth. Mariana Mazzucato notes the internet business models “are built on the commodification of personal data, transforming our friendships, interests, beliefs, and preferences into sellable propositions”. She points out the “way we have of ascribing value to what the internet giants produce is completely confusing, and it’s generating a paradoxical result: their advertising activities are counted as a net contribution to national income, while the more valuable services they provide to users are not”. Mariana Mazzucato argues that “a large part of the technology and necessary data was created by all of us, and should thus belong to all of us. The underlying infrastructure that all these companies rely on was created collectively (via the tax dollars that built the internet), and it also feeds off network effects that are produced collectively. There is indeed no reason why the public’s data should not be owned by a public repository that sells the data to the tech giants, rather than vice versa. But the key issue here is not just sending a portion of the profits from data back to citizens but also allowing them to shape the digital economy in a way that satisfies public needs. Using big data and AI to improve the services provided by the welfare state – from health care to social housing – is just one example…Only by thinking about digital platforms as collective creations can we construct a new model that offers something of real value, driven by public purpose…The digital economy must be subject to the needs of all sides; it’s a partnership of equals where regulators should have the confidence to be market shapers and value creators”. Hence, it is questionable “how democratic a network of everyone owned by a few large companies can become. It is a question of whether the platform empowers or restrict the sharing of information and freedom of choice…the readiness of governments, corporations and households to participate in a sharing economy – in terms of their organisational structures, roles, processes and expectations”[5].
- Relationships and values vs autonomous transactions. Societal progress was built on shared beliefs and relationships. Advancing information capabilities reduced the need for shared beliefs and relationships to support progress. In this regard, the high levels of exchange and coordination among strangers is a marvel of the information society. It illustrates how information and autonomous transactions can replace relationships in fostering trust. But the autonomous features result in a society that functions on price, expediency, crowds and superficiality. In its place, it leaves a moral vacuum in relation to the purpose of social interactions. It is still an open question as to whether society can progress in the absence of long-term relationships, ideals and civic consciousness to achieve the greater good. The importance of social relations and long-term commitments will be tested in the data-driven world that is emerging.
The changing complexion of economic concepts reflects a society in transition. The end of a phase implies the expiration of the ethos that underpinned its ascendancy. Old meanings are replaced by new meanings and old values by new values; a change that is eventually solidified by generational change. In this context, the Protestant Ethic of hard work and frugality are out of place in the information society where production is overshadowed by conspicuous consumption, hard work by the rise in the value of intangible assets (e.g. brands) and social activities, and frugality by monetisation and rising costs.
The new meanings reflect that technological advances have moved information from the periphery to the centre of our lives. The production and exchange of unlimited quantities of information already have a significant economic, social and cultural impact on a global basis. But we still rely on legacy policy and regulatory frameworks to achieve objectives more suited to an industrial economy. We need to discover new paradigms that better explain the changes in the economic landscape and that can guide us as to how we can organise economic activities for a brighter future.
References
Charles I. Jones (20 February 2019) “Paul Romer: Ideas, nonrivalry, and endogenous growth”. https://web.stanford.edu/~chadj/RomerNobel.pdf
Mariana Mazzucato (27 June 2018) “Let’s make private data into a public good”. MIT Technology Review. https://www.technologyreview.com/s/611489/lets-make-private-data-into-a-public-good/amp/
Phuah Eng Chye (2015) Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society.
Phuah Eng Chye (1 July 2017) “Introduction to the information society”. http://economicsofinformationsociety.com/introduction-to-the-information-society/
Phuah Eng Chye (15 July 2017) “The significance of information effects”.
Phuah Eng Chye (10 February 2018) “The sharing economy: Sharing infrastructure and beyond”. http://economicsofinformationsociety.com/the-sharing-economy-sharing-infrastructure-and-beyond/
Phuah Eng Chye (5 January 2019) “Future of work: Redefining work (Part 6: Monetising participation)”.
Phuah Eng Chye (2 March 2019) Future of work: Transition to the information society.
Phuah Eng Chye (27 April 2019) “Defining the information society”.
Phuah Eng Chye (11 May 2019) “Critique of information”.
[1] E.g. online dictionaries and its applications can be banned.
[2] See Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society.
[3] See “Critique of Information”.
[4] Paul Romer’s theory of endogenous technological change espoused the nonrivalry of ideas is responsible for the rise in living standards over time. Since ideas are not depleted by use, nonrivalry gives rise to increasing returns to scale which underpins the growth process. See Charles I. Jones.
[5] Phuah Eng Chye “The sharing economy: Sharing infrastructure and beyond”.