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])