Tag Archives: digital

Digital Economy, Society and Governance

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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.

Digital Economy: Some themes

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Evaluating the Importance of the Digital Economy | Columbia University (2015)

I came across this interesting discussion in which digital economy is analyzed. I have tried to review and present my thoughts on four broad themes of the discussion.

Theme 1: Scope of Digital Economy

Martin Wolf, in his opening remarks, dismisses the term ‘digital economy’ as a useless name as he says that knowledge and information processing is an input into all economic and social processes and it’s not a separate part of economy. Be that as it may, I think this view of the utility of the ‘digital’ is limited and perhaps negligent. The assumption embedded therein is that, unto itself information has negligible or no value i.e. all it does it to transform the existing sectors of the economy albeit in profound and uneven ways. However, as we have seen with cloud computing, targeted advertising, social media etc., information is an intangible raw ‘material’ with multitude of utilities both in traditional sectors and in new areas of the economy.

Although as Joseph Stiglitz mentions that production of information is not a separate part of the economy and is intertwined with the entirety of it, I would argue that processing, aggregation and monetization of information is a separate part of the economy and is happening despite what conventional economics would call sub-optimal economic outcomes in terms of profits. For example, companies like Uber and Amazon have expanded with long periods of unprofitability with huge reserves of data on their servers. The expectation is that this data will be used for profits in the future in ways that we do not sufficiently understand right now. To be provocative, one can say that this ‘digital economy’ is being actively shaped to make it the backbone on which the rest of the economy is tethered. Of course, the digital is not standalone in any way. In fact, it is being configured such that the rest of the economy stands on it.

Theme 2: Effects on Developing Countries:

Both Mr. Wolf and Prof. Stiglitz offer interesting analysis of the effect of these changes on developing countries. For example, the competitive advantage to countries like India, China, and Bangladesh etc. in terms of lower labor costs can shift back to the developed countries as the routine processes that were earlier outsourced are automated. This, according to them, can reverse the growth in these developing countries. Although this is a trend that can materialize, it does not have to be this way. Their view assumes that most skills developed in these countries are those that can be easily automated and that the lack of large domestic markets for goods and services currently being exported will continue. If skills developed are diversified and a big domestic market gradually comes to the picture, it may not be the case that the changes in competitive advantage will hurt the developing countries.

However, this still leaves the question of distribution and inequality that digital economy may further exacerbate. In this shift from labor intensive to highly capital intensive technology, even if developing countries manage to create a big domestic demand despite reduction in competitive advantage, the producers of goods and services as well as source of well-paying jobs may be only a few powerful entities. This may lead to transformational shift in the asymmetries of labor-capital dynamics within both developing and developed countries. For example, the digital economy has brought large number of part-time workers that were otherwise not in labor market, eliminated the fixed costs of social security, with a few monopolists running these platforms. This changes the bargaining power of the earlier permanent workers like taxi drivers who now have to compete with part time cab drivers without any collective organization for bargaining for either.

This has both a political and distributional effect as ‘Uberization’ makes employment more and more precarious. While the challenges this poses to the social fabric of nations is unprecedented and spectacular, the difference in effects of this on developing and advanced economies will depend on the regulatory and governance response to these change rather than inadvertent gloom for developing and poor countries and relative normality of the rest.

Theme 3: Productivity in Digital Economy

Mr. Wolf argues that the impact of digital technologies on the economy is trivial compared to post-industrial revolution improvements in energy, transport, health etc. On a similar note, Prof. Stiglitz notes that the value of a better advertising agency (like Google or Facebook) is fundamentally is incomparable with the value of electricity or a car or an airplane. While this seems very convincing, it does not consider the fundamental changes that information and digital tools is bringing to the accessibility of health, energy and transport. It assumes that the facilities of energy, health, transport etc., although quite old, have become ubiquitous. That is definitely not the case and digital technology can provide tools to extend these essential services to the remotest corners worldwide.

Even if we make the tenuous assumption that productivity does not increase much in terms of outputs from digital technology, it cannot dismiss the fact that it has made possible the availability of services like education and finance in places where they hadn’t reached. There is definitely an argument to be made against the wasteful and destructive applications of digital technologies, for example, fake news, tax avoidance etc. However, this does not mean that digital technologies are themselves less productive or unproductive. What should not be forgotten is that post-Industrial revolution provision of electricity and transport was configured not just for the profits of industries but also for the welfare of the people. If there is to be a ‘digital revolution’ that realizes its productive potential, the public value needs to be re-imbedded in the policy frameworks that guide its development.

Theme 4: Stuck in ‘Industrial Capitalism’ Framework

While Prof. Stiglitz notes that the law of diminishing returns does not apply to information, he still evaluates the digital economy from the framework of firm competition that defined ‘industrial capitalism’. This will change both how the market economy functions, in terms of concentration, efficiency etc., and how government functions, in terms of taxation, regulation etc. That much is evident. What I think is missing from this discussion is the timeless surpluses that information storage, as an activity distinct from the production process, bestows onto the aggregator – a raw ‘material’ that does not need to be re-extracted if compared to the industrial inputs which vanished on use and whose supply had to be renewed constantly. While in this new networked capitalism, informational databases also have be updated and expanded constantly, they do not vanish on use. In fact, they become more valuable to the platform, the more they are used.

While the old frameworks still explain some parts of the new digital economy, they are fundamentally unsuitable as analytical tools to understand how, why and for whom the economy is changing. This is not just because of the built-in assumptions of neo-classical economics but also the political configurations that nurtured that view of managing social progress. The challenges posed by uninterrupted private surveillance, uberization, cross-sector monopolization, precarious employment and the like render the old economic theories, our individualistic political morality and our notions of social progress manifestly inadequate in the realm of the digital world.