Danny T. Quah, London School of Economics
Source: http://www.unesco.org/courier/1998_12/uk/dossier/txt11.htm
Information and communications technology is transforming the world and producing ‘knowledge products’ to which traditional economic principles do not apply
The importance of the weightless economy can be assessed at three levels. We can look at individuals, firms and entire economies.
First people. In 1997, three of the world’s twenty wealthiest individuals were Americans who made their money almost entirely from software. Their total wealth was almost ten times as much that of the three wealthiest Britons involved in more tangible production (real estate, steel, and food). In October 1998, the world’s wealthiest individual (in software) was more than twice as wealthy as the runner-up, who was not in software.
Next turn to firms. As the historical volatility of stock markets powerfully shows, gauging the economic success or failure of individual firms is difficult in general. However, averaging stock market performance over longer time periods and across individual firms in sectors of interest can give a more reliable picture. The five major information and communications technology (ICT) firms that an interested observer would be likely to name are Microsoft, Intel, Compaq, Dell, and Cisco. Between them, these firms had market capitalization of $12 billion in 1987. By 1997, their combined capitalization amounted to $600 billion—a fifty-fold increase over less than ten years or annual growth of 45 per cent. Such rapid growth, sustained for such a long stretch of time, is remarkable by comparison with any other economic quantity.
Finally, consider countries. In the United States, the information technology (IT) share of nominal gross domestic product (GDP) has grown from 4.9 per cent in 1985 to 8.2 per cent in 1997. At the same time, IT prices have fallen dramatically: the real price of computing has, by some measures, been declining by 30 per cent a year for the last two decades. The real price of communications has, similarly, been decreasing at 8 per cent a year for the last seventy years, a halving every eight to nine years. And disk storage capacity has been increasing at 60 per cent a year since 1991, while its nominal price has fallen a hundred-fold. Thus, without even taking into account the potential spillover effects from its increasing the productivity of other industries, the IT sector’s direct contribution to real value produced has been substantial for the world’s leading economy.It may not be surprising that this is happening in the technologically advanced world. However, IT contributes greatly to growth in some of the world’s least developed economies as well. In India, per capita annual income in 1995 was $340: the majority of the population of 900 million lived on less than one dollar a day. At the same time, India hosts a major offshore software centre for the rest of the world. Software production in 1997 was a $2 billion industry, employing 260,000 people. The industry’s revenues have been growing by 50 per cent a year for the last five years, with over 60 per cent generated as export earnings.
The Internet is an important part of the weightless economy. Narrowly, it might be regarded as nothing more than one specific concrete manifestation of progress in information and communications technology. One might then simply say that it is the result of rapid and dramatic technical progress. But Internet technology could well have emerged without a specific application developed for it. Historical examples abound where one side of a market—supply—comes on strong while the other—demand—languishes, with the result that no ongoing development occurs. The fact that an Industrial Revolution did not occur in fourteenth-century China, despite its technological advances—superior to those in the West—attests tragically to that.
A dramatic reduction in transaction costs
But the Internet is not such an example. Radio, a relatively simple, undemanding technology, took forty years to achieve fifty million regular users. The Internet took four. This happened partly because the Internet makes it easier to deliver what participants in the economy have always needed: cheaper and easier exchange, faster dissemination of information, reduced inventories, greater outreach in both supply chain and distribution channels.
But perhaps more telling, this extraordinary growth arises from the fact that the Internet makes possible what previously was impossible. While tangible goods can be sold over the Internet, their actual delivery to the consumer will always be slow and will always eat up transportation costs. By contrast, the Internet can deliver directly weightless-economy goods and services. Health care counseling and education (two large expensive sectors in most advanced economies, where historically productivity growth has been famously low), news, software, music, advertising, video entertainment, securities, banking and other financial services, database access and consulting services can all be provided over the Internet—unlike haircuts and janitorial services. The result will be a dramatic reduction in transaction costs. Productivity will rise in precisely those areas that, traditionally, have seen poor productivity performance.
In the US, the fastest growth in jobs is found precisely in sectors associated with the weightless economy. From 1996 through 2006, the industry with top employment growth is projected to be computer and data-processing services, at 108 per cent. The next fastest-growing industry is expected to be health services, at 68 per cent. The Bureau of Labor Statistics forecasts that the occupations with fastest employment growth will be database administration, computer services, and computer scientists (118 per cent); computer engineers (109 per cent); systems engineers (103 per cent); and then personal and home care aides (85 per cent). Wages earned in these industries and occupations are also high. In 1997, the average worker in the IT industry earned twice the national average across the private sector.
New rules and logic
All components of the weightless economy can be represented, without loss, as “bitstrings”—sequences of 1s and 0s. (This doesn’t mean they are digital in the sense used in relation to computers. An advertising image is a bitstring, but it is not insightfully viewed as part of computers and computer networks.) Since ideas and knowledge can also be represented in this manner, it is an easy step to identify them with the rest of the weightless economy. To minimize confusion I will call the bitstring pieces of the weightless economy knowledge-products. This emphasizes their symbolic similarity to knowledge but, at the same time, maintains their distinctness. There are three points to bear in mind. First, like knowledge, knowledge-products show infinite expansibility (a term due originally to Thomas Jefferson). They do not get used up, physically. The usefulness of computer software is not reduced the more users run it. Advertising imagery does not diminish in impact the more people view it; indeed, the opposite holds.The same terminology is apt for how a knowledge-product—unlike, say, a typical durable good—disrespects geographical distance. A knowledge-product behaves as if it expands to fill all available space. I can, in London, use a piece of software located on some satellite server encircling the earth while someone else in Stanford, California, does exactly the same, with the identical piece of software. This holds true for any intellectual property or libraries and databases. It does not apply for, say, a chocolate-chip cookie. When someone eats a cookie, it is no more.Second, like knowledge, knowledge-products show superstar dynamics. To understand this, consider first the wheel. Society does not reward reinvention of the wheel, but multiple implementations of (the idea of) a wheel do get properly compensated. However, those multiple instances are fashioned out of hard physical material which the buyer pays for.
Knowledge-products, by contrast, are the idea and implementation rolled in one—multiple implementations require no physical material. For example, the fastest way to appreciate an idea in computer software is to see that software running; the only way to value the contents of a computer database is to access the database itself; the only way to understand a gene sequence is to see it expressed in a lifeform. In short, we cannot distinguish between the product and the idea behind it.
In this context, reproductions of an original knowledge-product should fetch zero price in a well-functioning market. Superstar dynamics refers to this first-(or winner)-takes all characteristic shared by both knowledge and knowledge-products.However, this zero-price property does not say that knowledge-products are valueless: water is essential to human welfare, but its price in modern societies is, for all practical purposes, zero. Bundling water with something else—adding carbonation to water, extracting it from certain distinguished springs, associating it with a powerful advertising image—can, of course, be a rewarding enterprise. Businesses can and do add value, similarly to many knowledge-products in the weightless economy. For example, the value that the Nike shoe company generates is not the raw material in its shoes, but the culture associated with them. The value that the consultancy firm JP Morgan generates by giving away its raw data is not in the data itself but in the bundling of that information with a particular financial perspective—and who better to continue to develop that perspective than JP Morgan itself. For many software companies, rewards don’t lie in the software itself, but the services provided and the organizing of a community of users.
Labs for producing intellectual property
Third, like knowledge, knowledge-products have a chain of production that is irrecoverably intricate and uncertain. Applying more factor inputs in an effort to increase output can be self-defeating. Just as making nine men pregnant for a month fails to produce a new-born baby, throwing more programmers at a software project does not typically make a complete piece of software faster, better, or more reliable. Similarly, financial consulting, a musical composition, or devising the central image in an advertising campaign calls not for many hands, but few. The same dynamic applies with scientific discoveries; many researchers work on the same problem to reach the same discovery simultaneously. These three properties imply that the way businesses operate should change and that appropriate government policies will need to acknowledge those changes. As a first step, one might think of economies comprised entirely of knowledge-products—weightless economies—as being like large laboratories for producing intellectual property broadly defined. The problem is that the systems of intellectual property for organizing patents and copyrights are based on principles and conceptions which no longer apply in the weightless economy. The question is not whether a new set of market rules has emerged, but the ways in which people, governments and firms can respond to them.
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