Digital Economy, Society and Governance

Posted on by
Reply

I came across this interesting discussion in which governance of the digital economy is analyzed. I have tried to review and present my thoughts on this lecture by Prof. Rainer Kattel.

Rainer Kattel: Governing the digital economy | University College London (UCL) Institute for Innovation and Public Purpose (IIPP)

Prof. Kattel begins with some facts about the digital economy and its effects on privacy, productivity, employment, market concentration and global trade. He only uses these as a plane to discuss some more fundamental changes in our society brought about by digital technologies and its version of capitalism.

Features of the digital economy:

  • Not just automate but informate: Citing Zuboff, the lecture notes that today’s technologies learns not just about processes but also about users, their abilities and deficiencies such that it improve itself – a fundamental shift from earlier machines which performed routine, automated tasks. This presents questions for management of firms and organization behavior. Although this is a transformation, Zuboff’s work also notes the imperatives of what she calls ‘surveillance’ capitalism are different from managerial capitalism that the lecture focuses on.
  • Collective production of innovation: Citing Benkler, the lecture notes that production has always been a social process and in the digital age, this is more so as people willing give information into networks that becomes channels of innovation. For example, Open Source Software like Linux which has been amended and improved by myriad developers without profit motive. The question is, why have organized firms if innovation can be peer-produced? This process, according to Benkler, is varied in terms of granularity and modularity such that peer-production happens according to convenience and expertise of the developers.
  • Intangible Capital: Citing Haskel and Westlake, the lecture notes the increases relevance of brands, teamwork, social networks of employees, ability to source ideas from outside the firm etc. present challenges of measuring value of people as well as products and processes.

Digital Innovation and Competition

While classical economics argues for perfect competition, innovation happens via imperfect competition, as Schumpeter had proposed. The rapid expansion of market share which happens if technology itself learning to do things it is designed to do, can only be viewed as imperfect competition. This leads to reinvention of capitalism as technology changes every few decades, with an emergent new common sense, new products and new opportunity of profits – not of which have the ideal market of perfect competition.

For this, the lecture cites Prof. Carlota Perez’s work on the history of innovation, which shows that for every technological revolution, there is an installation period with bubbles and mania for initial investors, followed by turning point of collapse and recessions, which eventually leads to the general deployment of the technology for general prosperity with the intervention of the state.

Carlota Perez

While this may be the general trend of technological development and innovation deployment, the length of the frenzy, turning point and start of ensuing deployment period varies across societies and technologies. It is not inherent in the technology but a socio-political decision as to how and when the state responds to intervene such that the technology is used for general welfare. Similarly, the new common sense is also socially constructed.

Challenges:

The lecture also presents multiple interdependent challenges for economists, society and governments that digital technologies present:

Economics:

  • Why have firms when products and services can be crowdsourced or peer produced? Will their purpose only be rent extraction from this production? What would it mean for national accounting systems, if tasks that create economic value are so dis-aggregated?
  • What does this means for markets? Why do we need privately owned platforms when peer-production can be just as or more efficient?
  • If production of information is collective, why not have commons type ownership? What does it mean for the notion of property?

Society:                                                                                                                             

  • Welfare state vs personalized services – universality of government policies vs individual-focused customization
  • Statistical self vs automated self – following norms set by government vs going along with personalized feedback from devices
  • Countervailing institutions vs digital nomad – unionized labor vs gig workers

Governance:

  • Stability and predictability vs agility and experimentalism
  • From reaction to anticipation – predictive policing
  • Automation, platforms and inclusion – governments thinking like platforms e.g. payments systems, identity systems and automated services

Criticism:

While these comparisons and contrasts are important, the state and the firms seems to be understood here in the same fashion i.e. as centralizing institutions compared to the individual. Although they may have centralizing tendencies, there economic and political functions are fundamentally different – something we should never lose sight of. Even if the government provides some services or acts like platforms in a digital economy, its political identity has to be understood as separate from firms.

Similarly, the juxtaposition of universality and personalization may be less antagonistic and more about balance,as against what is presented in the lecture. While the automated self with personalized services becomes more prominent, it might not be wise for the state to lose sight of some universality and statistical averages in terms of policy making even as it focuses on the calibrating itself to individual citizens. Moreover, governance that has agility, is experimental, is automated or anticipates policy issues has to be always looked through the lens of inclusive democratic norms before institutionalizing these changes, which may not themselves yield inclusive or constitutionally sound results.

Notwithstanding these concerns, the lecture is an insightful analysis of the challenges and opportunities of the coming digital economy, what we need to think about, where to intervene and how to understand and shape the changes taking place around us.

The Financial Crisis: “Too big, interconnected or Chinese to fail”?

Posted on by
Reply

“Too big to fail” is a phrase used to describe an institution that has grown, or rather been allowed to grow, to such a scale and scope that its failure will mean a systemic collapse. The banks had morphed from the regular Jimmy Stewart banks to market-based Wall Street megabanks, a financial overgrowth that had spread its tentacles into the houses of regular persons, their businesses, their education, their healthcare – all across the world, from the US to UK and Europe.

Their failure was deemed so destabilizing that they had to be saved at all odds. Institutionally, this revealed a peculiar logic: the national interest was in saving purveyors of high finance that had caused the crash. As Tooze writes, Geithner’s “commitment was to upholding the stability of “the financial system,” because without that, the entire economy was bound to fail. That was his key article of faith. The interests of America and the financial system were aligned.”

“Too interconnected to fail” describes the interconnected nature of banks such that failure of one of them precipitates a panic of failure of the entire banking system such that the policymakers find it imperative to save them. For example, globalized finance was deeply interconnected with the American mortgage boom through the shadow banking system. When the Lehman was allowed to fail, the costs in wholesale funding markets rose steeply due to risk of contagion in the interconnected banking system.

As Tooze writes, “The Fed and the Treasury misjudged the scale of the fallout from the bankruptcy of Lehman on September 15. Never before, not even in the 1930s, had such a large and interconnected system come so close to total implosion. But once the scale of the risk became evident, the US authorities scrambled.”

“Too Chinese to fail” refers to the fact that a large portion of the debt issued GSEs, Fannie Mae and Freddie Mac, were held by Chinese investors and Paulson “didn’t want them to dump the securities on the market and precipitate a bigger crisis…”, one that would jeopardize the ‘system’. As Tooze writes in the end, “what worried observers was the possibility of a mass sell-off of dollar-denominated assets by China’s reserve managers.

As the storm clouds gathered, holding China in place was the first priority of Paulson’s Treasury. And Paulson was willing to pay a high political price for doing so…. Nationalizing them helped to prevent a simultaneous Atlantic and Chinese crisis with consequences too awful to contemplate.” However, America was a big market for Chinese goods and “balance of financial terror held”. There was no Chinese dollar sell-off and “the crisis that followed was not an American sovereign debt crisis driven by a Chinese sell-off but a crisis fully native to Western capitalism”.

While the three phrases represent three different features of globalized finance, there also are big overlaps between them. These are not stand-alone characteristics.

References:

  1. Tooze, A. (2018). Crashed: How a decade of financial crises changed the world. Penguin.
  2. Kapadia, A. (2019). Capitalism: Theories, Histories and Varieties, HS 449 (Class Slides). IIT Bombay, delivered Jan – Apr 2019