Saturday, September 25, 2010

Traditional vs. Digital Economies

One of the most profound changes in digital civilization is the emergence of economies that do not play by the traditional capitalistic rules that the West had taken for granted since the time of Adam Smith and the Industrial Revolution. I will briefly introduce and contrast chief principles of the market economy (drawing on Adam Smith) and those of the emerging economies in the digital world (by referring to several key concepts and their proponents).
Adam Smith and the Wealth of Nations

On the eve of the Industrial Revolution, Scottish thinker Adam Smith published his landmark treatise in 1776. For centuries we (in the West, and in contrast to Marxist and Socialist ideas...) have bought into Smith's major premises. Read this selection of excerpts from the original text to see the following ideas set forth:


Division of Labor - The efficiencies of specialization vastly improve individual and overall productivity. This made a lot of sense within the Industrial Revolution where human and machine efficiency were compared.

Self Interest - People produce and exchange goods and services out of a desire for personal profit. According to Smith, this is the best we can expect from one another (morally and economically).

Laissez-faire / Free Markets - When governments allow and promote a free market ("laissez-faire" means "leave alone" and refers to minimal government intervention in trade), it results in a general economic benefit resulting from individuals pursuing their self interests. This comes about through what Smith calls the "invisible hand" -- a sort of divine providence applied to large, free economies. Here is the relevant paragraph from Wealth of Nations explaining the invisible hand idea:



Competition and Scarcity -- Smith describes the dynamics of price fluctuation and wage rates in terms of price rising due to scarcity, and falling due to competition and supply.

Smith covers other aspects of classical economics, including money and labor value, but these are the main tenets of capital-driven, market economies that emerged from the time of the Industrial Revolution. Now, how do these compare to the kind of economy emerging from the Digital Revolution?

Economic Principles of the Digital Age

Abundance over Scarcity - Quoting David Hornik summarizing Chris Anderson:
The basic idea is that incredible advances in technology have driven the cost of things like transistors, storage, bandwidth, to zero. And when the elements that make up a business are sufficiently abundant as to approach free, companies appropriately should view their businesses differently than when resources were scarce (the Economy of Scarcity). They should use those resources with abandon, without concern for waste. That is the overriding attitude of the Economy of Abundance -- don't do one thing, do it all; don't sell one piece of content, sell it all; don't store one piece of data, store it all. The Economy of Abundance is about doing everything and throwing away the stuff that doesn't work. In the Economy of Abundance you can have it all 

Social Motives over Self Interest - It turns out that billions of connected human beings are not motivated as much by money as by reputation, by a genuine desire to share, by a sense of contributing to larger efforts, and by feeling part of a community. This is why we see reference to "Reputation Economy" the "Sharing Economy" or the "Gift Economy." When the dominant basis for exchange is not monetary, it rewrites business models (or perhaps removes them or relegates them to secondary status).

Free and Freemium Business Models - One of the consequences of the Abundance Economy is a shifting of business models away from scarcity. Chris Anderson argues that free is a necessary and optimum business strategy in the digital age. (The original blog post; the book based on this, Free: The Future of a Radical Price by Chris Anderson; the free audiobook version of Free)

Architecture of Participation - As Tim O'Reilly puts it, "any system designed around communications protocols is intrinsically designed for participation." The low barriers to entry for creating media and posting information online play to those non-monetary, social motives listed above. Suddenly we have the rise of the amateur, the fan, and the user who makes all that user-generated content (mostly for free). This results in a greater diversity among those both creating and consuming online.

The Long Tail - As Chris Anderson has articulated, the power curve distribution for cultural products has traditionally favored the very small percentage of "hits" that make big money for corporations. However, the Internet is rapidly bringing attention and value to the other part of that power curve -- the Long Tail of less popular items trailing far off to the right on the graph. Nowadays, there is almost unlimited life to those many minor products that don't get the big hype and big bucks. Amazon can afford to keep for sale the most obscure books, and profitably so, since each year more and more consumers are making their way down the Long Tail, finding niche and specialty products that would never have had sales volumes high enough to justify staying in print before the digital age. (The book: The Long Tail by Chris Anderson [2006]; the original article from Wired magazine).


The Commons - In direct contrast to the enclosure movement mentality (in which public lands were turned into private property), on the Internet "information wants to be free" (as Stewart Brand famously put it). People want to provide and use media and information without restriction. This is why intellectual property has been such a nightmare for digital goods. Copyright is being challenged by Creative Commons licensing. (Recommended reading: The Public Domain: Enclosing the Commons of the Mind by James Boyle (2008)

Remix Culture - As people freely supply and re-purpose web content (by using public domain works, by ignoring copyright, or by employing Creative Commons licensing), they create "remix" culture. Rather than being seen as an appropriation of intellectual property, this is seen as productive creativity that feeds into the reputation and sharing economies of the digital age. (See Lawrence Lessig, Remix: Making Art and Commerce Thrive in the Hybrid Economy)

Crowdsourcing - All those users generating content don't mind being marshaled into worthy projects, offering for free their abilities to perform tedious tasks or provide data that would normally be very costly to organize. This ties into the amateur culture and the architecture of participation inherent in the digital economies. Distributed computing becomes a social activity, tapping the volunteer labor of thousands. (Recommended reading: Crowdsourcing by Jeff Howe [2008])

24 comments:

meggster said...

I am hanging on to the edge of my seat!
Seriously, I am very interested in how this "gift economy" coming out of the Digital Revolution can even function as an economy. It seems counterintuitive; however, logic is just a language game anyway.

bricolorful said...

It seems like this is most people's argument against the "gift economy" of the Digital Revolution.

Kevin said...

What I don't understand is how people would be able to eat in an economy like that? Would farmers make their food available to order online for free? Just wondering...

Chase said...

Just last night my reading for American Heritage was on America's transfer from England's mercantilism to Adam Smith's capitalism, and right when I had convinced myself that capitalism was the best alternative, I read this article. There are still aspects of the free market within the gift market but we still have yet to see the long-term effects of the "digital economy".

Danny said...

I think in regards to books and literature, information should be free. Something would need to change within our current system of publishing because it would greatly affect authors/writers, who have very high expenses due to costs associated with editing, copywriting, and liscensing...

Sarah Wills said...

I learned in my personal finance class last semester that people who frequently give to charities end up better off than their counterparts who don't. Isn't that awesome?! It seems that giving freely really can progress humankind.

Jake C said...

I am an economics major. i am really excited for this topic. i hope we can spend a good deal of class just discussing and comparing/contrasting the two ideas.

Clint said...

Danny, interesting thought. If "information" were free though, how would writers then make their money? With information no longer being scarce, according to Adam Smith won't they not be able to profit from distributing it? And won't the quality of information suffer?

Daniel Zappala said...

Clint, I'm charging you $5 for each blog post of mine that you read. :-)

Mike Lemon said...

Kevin, I'm posting on that topic right now!

James Wilcox said...

That is a very interesting concept to think that we have shifted from an environment of scarcity of goods to an overabundance in certain areas.

However, I feel the applications of an overabundance of goods are still very stratified and selective in certain areas (mostly around digital goods.) However, there still seems to be a sense of scarcity and free market of hard goods.

Erin Hamson said...

Chase, I was thinking the same thing! After attending Dr. P's lecture, I could see all the benefits of letting people bicker among themselves about prices, because they will find the best price. But I think that the shift from self-interest to direct community benefit is a parallel to shifting from gold and silver to self-interest.

Andrew said...

@Sarah This Talk from more than a year ago is super good at explaining exactly how it is that you will make more money if you give more. The idea is that the more you give, the richer you will become. This refutes the idea that you have to get rich first in order to give.

**I recommend that everybody listen/read this BYU Forum talk from a year plus ago!**

Dave Potter said...

Erin, I feel like the "shift from self-interest to direct community benefit" deals primarily with incentives.

In my blog post, I talk about more about incentives and economics.

Katherine Chipman said...

Andrew-Thanks for adding the link to the forum. That is what came to my mind as I was reading everyone's comments.

It seems that there is definitely a fine balance between what should be free and what should have a price. It is also interesting to look at goods and information and the challenges that each create when they are free or have a price.

I'm excited for this discussion in class!

jakydigiciv said...

I think it's interesting too that our economy (Amazon was mentioned) is better able to support obscure projects and options. Some big debates back in the day were (and are to this day) over monopolies, monopolies which often formed because one person or company would make a very viable product and so other smaller companies couldn't make a small profit on their less popular product. (I'm thinking specifically of the OS2 v. Windows wars in the '90s.) But these days, there are enough options that obscure products don't have to feel that way. We don't have to buy only mainstream because if a company has only one thing that sells mainstream, it can afford to support less lucrative (yet still cool) projects on the side. It's interesting to see.

Trevor said...

The rewriting of business models has evolved the way we think about basic needs. Online consumer reports and e-stores allow no human interaction, but also allows smaller products a chance. I doubt Adam Smith could have dreamed of the markets that exist today, but he would accept them as the best, because they have been guided by the invisible hand.

Parker Woody said...

I am also excited for the discussion in class. I am a little confused because it seems to me that this system is still based in capitalism but has only had a change in currency.

Shaun Frenza said...

Most of us have grown up in an age that we don't really know how to barter. We forget that money isn't the only thing that buys food. Just imaging a world that has the possibility of trading social networking and digital information for ANYTHING. Let the IRS guys figure out how that all works out, but we don't have to be stuck to money or standard capitalism.

Furthermore, don't we all believe that we will eventually live in a society that is eternally wealthy and ONLY shares everything freely - I think it's called something like, the Millennium Falcon...

Alex Gunnarson said...

After reading a bit of the Wired article and dealing with a bit of counterintuitive concepts, I can see now how certain things would be able to be given away for free. If the product is cheap enough to manufacture (i.e. at virtually no cost), it's actually *more* profitable to utilize the product as a form of advertisement for a different product, even if only a small profit is made on the product actually being sold for money.

Alex Gunnarson said...

As for the free flow of information—perhaps even the idea of "owning" ideas is outdated. Maybe the answer is that information ought to be inherently patent- and copyright-free, but in order to protect the continued progression of humanity as a whole, those who frequently come up with good ideas, music, artistry, and so on should be subsidized by the government and/or voluntarily donated to by the public at large. Then authors and musicians and such would have their daily bread (or maybe caviar) and the rest of the world would benefit by the free flow of information. In order to ensure that the money would go to the right people, that they would have incentive to continue their information production, and that general confusion wouldn't ensue, a virtually unchangeable digital signature could be embedded in every work.

kristina said...

If people produce and exchange goods and services out of a desire for personal profit then I think they should get their personal profit whatever that is...money, food, clothing, etc. I like Shaun's comment about bartering. I thought a lot about this in class how a community could exchange services and objects for other services and objects. I wonder if money will ever lose its value and place in our market? Will we create some kind of tangible object to exchange that represents trust or a good reputation?

bricolorful said...

@Daniel Zappala, what is the link to the site we saw in class that showed different business models (like the "freemium" model)?

Chase said...

I just made a post on selfishness and altruism in the economy. It's a little lengthy, mostly because I'm still trying to sort out my thoughts, but feel free to add your own opinion.

http://chasing-knowledge.blogspot.com/2010/09/selfish-economy_30.html

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