Tag Archives: technology

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.

Digital Technologies and Property Rights

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Digital technologies are calling into question assumptions about the “nature” of many older economic processes in industries that are more likely to see the digitization of their content [publishing, entertainment, software, tele-communications among others]. In particular such technologies appear to be raising questions about the very conceptions of property rights [how is it organized, who controls it and how is it distributed, among others] that potentially could have serious implications for the division of power in the global political economy.

Question: How can the changes being brought about through the digital infrastructure [economics of the network + digital devices] contribute to significantly different outcomes about conceptions of property rights ? How could these rights affect the balance of power in the global economy?

With cheap availability of medium grained digital communication and storage devices (i.e. devices that cost low enough to justify personal purchase yet have excess capacity e.g. router, hard disk) along with internet, network effects increase manifold. The output generated is difficult to be appropriated (i.e. converted to private property) by any one player as the production depends on the collaboration among multiple nodes. For example, use of peer-to-peer networks. These networks can be used for data computation (Fightaids@home), storage (DC++) and communications (Skype). However, it does not mean that it cannot be appropriated.

Networked information economy complicates the notion of property rights that were conceptualized for rivalrous physical goods, and based on assumptions of scarcity, efficiency and anticipated benefits from trade of well-defined properties. Information goods are abundant and in fact, have to be artificially made scarce by exclusion (patent/copyright). Since marginal cost of these goods is zero, any price attached to it only reduces its economic efficiency. While property rights grant static efficiency to these goods, dynamic efficiency falls due to increased cost of future innovation dependent on easy availability of information goods in the present.  This dynamic efficiency figured less in old proprietary regimes because innovation was only possible in-house due to huge costs associated with physical infrastructure – which is no longer the case.

At the same time, the amorphous nature of activities on a network make it difficult to assign well-defined property rights for trade. This does not mean that exchange or value creation does not happen. For example, Linux operating system and open source software have become a success outside the paradigm of markets and firms. Projects were sufficiently modularized and varyingly granulated to suit the distributed contributions of developers and subsequent improvements. These outputs are licensed under General Public License (GPL), which prevents appropriation of the product by any one person. It becomes a ‘common’ good which can be used and modified by anyone under the same GPL.  In the old property rights system, this would have led to ‘tragedy of the commons’ with negative externalities for the collective. However, there is no such externality in this case as the good produced, software here, is non-rivalrous. In fact, the more it is used and tinkered with, the better and more robust it becomes (for example, Wikipedia). This is quite opposite to what one expects in property rights regime.

This creates a friction between the incumbent imperatives of property regime and the increasing salience of non-proprietary networked processes and outputs. For example, spectrum auction- based property rights system creates an artificial scarcity in wireless communication. Spectrum-based business models, which depend on preventing non-subscribers from accessing the communications, will gradually become obsolete as increasing adoption of wireless connectivity (e.g. WiFi) devices with excess capacity makes it possible for need-based peer to peer connectivity to take place. This reduced the power of telecommunication companies.

As the fuzzier boundaries become difficult to enforce, the balance of power will shift in the global economy to mark the increased salience of non-proprietary production processes. For example, the maintenance of Linux is done by a group of companies including IBM which pool in resources. This acts as a counteracting force to the polarizing influence of Microsoft while creating a potent non-proprietary resource which can be used for free. This has even more importance in the current context of global economy because of the increasing cost of technological development and shortened shelf-life of products that come out of these highly capital intensive investments.

However, this does not necessarily mean that economics of the network and the cheap availability of devices will lead to a more diffused form of property, moving towards a commons regime. The potency of distributed computing, storage and communications from dispersed capacities can be no match for the consolidated and highly organized computational and data storage capacities of giants like Google, Facebook, Amazon etc. They not only use their wide reaching networks to capture as much data as possible for monetization, they also appropriate the monetary benefits that emanate from the non-monetary, non-proprietary activities of users of their services.

This further problematizes the conception of property rights by delinking the ownership of the physical device from the ownership of intellectual property that it collects. For example, hardcopy of books could be resold in the market but a digital copy of a book on Kindle cannot be sold. In fact, Amazon learns from the reading patterns of Kindle users and monetizes those insights – something which was not possible. The user, while owning the physical device (Kindle), has no ownership of their own data being gleaned so seamlessly round the clock while. In fact, Amazon can remotely delete content from Kindle without permission of the ‘owner’, as it did in 2009.

The conception of property rights is also complicated in the area of agricultural technology with increasing digitization. For example, John Deere traditionally sold agricultural tools whose ownership would transfer to the farmers on sale. They could be easily repaired by self or by trained mechanics without paying the company repeatedly. With digitization and remote transmission of data to and from the company database, there is a separation of ownership of equipment (say, tractor) from ownership of data. Moreover, software debugging, device repair and remote update create new problems for the farmers as it increases their dependency on the company, reducing the supposedly exclusive control that a ‘property’ is supposed to offer to an ‘owner’.

Therefore, we see that the same network effects and availability of cheap devices, that tilt the regime of property rights towards a more diffused ownership or commons, can also be exploited by firms to render the property right claim of the user effectively useless as the value no longer lies with the device or the equipment owned but in the intangible data gleaned through them. In this new paradigm of networked devices, the former has the potential to reduce the agglomeration of power in the global economy, the latter can lead to further consolidation in the hands of a few companies and a few or even just one country. Nonetheless, old property rights become difficult to enforce and even be undesirable.