The significance of information effects
Phuah Eng Chye (15 July 2017)
I have adopted a simple approach to evolving paradigms for the information society. I start by examining how improvements in information production and use alter economic behaviour. In this regard, societal evolution has been driven by innovations such as languages, books, the telegraph, telephone, radio, television and computers. When these innovations reach a tipping point in terms of capabilities, deployment and integration, they trigger momentous changes that spawn new industries and lifestyles with consequential upheavals in social structures.
Recent advances in social media and the Internet of Things (IOT) is significant because it positions individuals as the mobile centrifugal force around whom social and business interactions revolve on a real-time basis. These innovations assist in overcoming time and space constraints and redraw the boundaries for economic activities. Arising from this, the information effects have dramatically altered economic incentives, costs and behaviours.
There have been numerous management studies of information effects – not surprisingly as an understanding of landscape changes are a matter of business success and survival. Examples include Clayton M. Christensen’s concept of innovative disruption which describes how innovations disrupt vertical production chains and displace established competitors. Chris Anderson’s long tail theory explains how low information costs shift demand from a small number of hits in favour of a vast quantity of niches in the tail. These theories highlight that differences in information capabilities can overturn the established rules of economic behaviour.
In attempting to analyse the information effects, I start by reviewing the prominent features associated with information – namely its intangible nature, the speed of communication, its compounding size and the impact of transparency. These effects feature prominently in an information environment and lead to other secondary effects which pose significant policy challenges.
- Intangibility
This is the most prominent of the information effects. Charles Goldfinger was among the earliest to study the phenomenon of intangibility which he characterised as the fall in weight and value of physical material in economic output. Intangibility has far-reaching economic effects. It reduces the need for physical resources, labour and capital. The trend towards zero marginal costs[1] reflects the commodisation of value from production and promotes abundance. In such an environment, economies transform from being supply-driven to being demand-driven with consumption replacing output as the main constraint on growth. The main constraints on consumption are time, income and (international and domestic) tolerance of debt levels. Intangibility has a critical impact on the organisation of capital, work and social relations. Intangibility transforms capital from an ownership to a process or use concept while industry is transformed from distinct segments with vertical production chains into collaborative networks which simultaneously facilitates convergence and unbundling. This leads to a decoupling of traditional economic relationships. Intangibility can aggravate inequalities through the Winner-Take-All effects[2] with the bulk of rewards captured by a few people or companies.
- Speed
Speed is the next most critical aspect of the transition to an information society. Its achievement is facilitated the adoption of standards and broadening of network connectivity. Speed shortens the time frame between learning, production and exchange. This means demand can be fulfilled more quickly but this reduces the value of inventory or the need for capital. Speed alters the relationship between maintenance (support) and production costs; leading to strategies that focus on replacement rather than maintenance which increase wastage. Speed accentuates transience. Shorter product and corporate life cycles induces short-termism, free-riding and opportunistic behaviour. It reinforces autonomy by depersonalising relationships and reduces the benefits of organisational hierarchies and continuity. Speed removes time buffers – reducing reaction and resting time between crises. This accelerates dislocation and poses time synchronisation challenges.
- Size
Faster growth leads to more frequent occurrences of parabolic growth which gives rise to size effects. Parabolic growth aggravates imbalances and inequalities arising from the concentration of income, ownership, resources, talent, liquidity and risks. Emphasis on scale leads to reliance on financial transactions to meet performance targets, increases “too big to fail” risks. The “widening inequality distance”[3] contributes to the neglect of small and socially valuable economic activities. Size, combined with speed, transparency and mobility, leads to crowding (of income, capital and people) which can undermine social, economic and financial stability.
- Transparency
Transparency is the quintessential source of contradictions and tension in the information society. The features of transparency are the production, disclosure of and access to information. The use of information in the form of signals, discussion and collaboration is essential for societal exchange, discipline and cooperation. The value and quality of information is improved by expanding access and the number of users. But transparency is a double-edge sword. Transparency incentivises free-riding and arbitrage and leads to crowding and contagion. Increased visibility and audit trails removes buffers such as obfuscation and relationships which increases society’s vulnerability to polarisation. Transparency can lead to discrimination, superficiality and confrontation. In particular, transparency can combine with size and speed to give rise to simultaneous concentration and fragmentation. Examples include the concentration of market intermediation and wealth among big participants while the “long tail” reflects fragmentation among small participants. Hence, transparency heightens the tensions between contradictory forces such as concentration-fragmentation, autonomy-relationships, networks-markets and freedom-surveillance.
Intangibility, speed, size and transparency are the four primary information effects. In the transition to an information society, the share of intangible activities rises while the information effects would get bigger, faster and more visible. The primary information effects can combine to give rise to secondary consequences such as transience, polarisation, concentration-fragmentation and crowding. For example, transience increases the levels of uncertainty and is deflationary. Polarisation and concentration manifests through reducing the ranks of the middle class and aggravating inequalities. Crowding is the source of problems related to housing affordability, financial contagion and pollution.
In this regard, the information effects are pervasive and cause disruption across a broad front. Increased speed, visibility and convergence will intensify competition. Products and markets will fragment but intermediation will concentrate. Business enterprises will become more transient in terms of ownership, employment and products. Scale and the speed of obsolescence will increase the impact of business decisions, success and failures to communities and nations.
Greater production and use of information therefore has broad consequences in shaping societal organisation and economic activities. In this context, the information effects will cause the traditional relationships between output, income, labour and capital to break down irrevocably. It will also change the patterns for risk-sharing, employment and income distribution. Governments will increasingly find the challenges from economic and social dislocation becoming more severe as the percentage of physical output over the total value of economic activities decline substantially.
References
Charles Goldfinger (2000) “Intangible economy and financial markets”. Communication & Strategies. http://www.idate.fr/fic/revue_telech/68/goldfing.pdf
Chris Anderson (2009) Free: The future of a radical price. Hyperion.
Clayton M. Christensen (1997) The innovator’s dilemma: When new technologies cause great firms to fail. Harvard Business School Press.
Jeremy Rifkin (2014) The zero marginal cost society: The internet of things, the collaborative commons, and the eclipse of capitalism. Palgrave Macmillan.
Phuah Eng Chye (2015) Policy paradigms for the anorexic and financialised economy: Managing the transition to an information society. http://www.amazon.com/dp/B01AWRAKJG
Robert H. Frank, Philip J. Cook (January-June 2012) “Winner-Take-All markets”. Journal of Microeconomics Vol. 1 No. 1. Mind Reader Publications. http://journalshub.com/mrp-admin/journal/pdf/10.%20Robert%20H.%20Frank%20and%20Philip%20J.%20Cook.pdf
[1]Jeremy Rifkin
[2] Robert H. Frank, Philip J. Cook
[3] The gap between the largest and the smallest unit. Phuah Eng Chye