The growing pains of the digital economy (6-4-2020)

Written by: Jan Luiten van Zanden

This week ESB (a Dutch journal for economists and policy makers) will publish a paper by Onno Schellekens, Ellen Croes, Arthur van Riel and me about the ongoing transition to a digital economy. This is the result of the cooperation that we have established with the Joep Lange Institute in recent years. After a long experimental phase, we have now finally found a formula for our working together – on a theme, the transition to a digital economy that is new to them, and to us. Most of the intellectual input is supplied by Onno Schellekens, who has visionary ideas about how the digital economy is developing, or perhaps should be developing. However, he finds it difficult to put this in writing, so I find myself in the position of ‘ghost writer’, discussing his intuitions and speculations, and trying, together with the other members of the team, to ground this in theory and relevant literature. For me this project meant that I had to dig into the debates about the ‘platform society’ (José van Dijck who is doing a lot of interesting work on this, is another source of inspiration).

The problem we focus on is the transition to a digital economy: data and the ability to process them into information will form the basis of the future economy – perhaps in the same way as in which coal was the basis for the Industrial Revolution. Data will be the main source of power and wealth in the economy of the 21th century. This leads to a number of questions (which give the project an economic historical twist): can we identify similar transitions in the past and what can be learned from them?  How can the role of data and information in the past and present be conceptualized, and perhaps even measured? Given the dominance of companies of the US and China in this field, is it possible to develop a European/Dutch strategy for this? Big questions, that we cannot answer fully of course, but all academic work starts with asking relevant questions…

I am not going to summarize the article, but just pick two issues: the role of information and of trust (and perhaps later return to the question of a European strategy). We all know that all economic activity is based on data, on information – this is similar for the hunter-gatherer who collects berries in the woods and the multinational entreprise drilling for oil near the coast of Surinam. Yet, this aspect is only rarely studied (we think), and there are almost no theories about the interaction between structures of information gathering and distribution and development. Certain societies are based on centralized forms of information gathering (ancient temple societies such as the Incas or the Sumerians, 20^th century planned economies), others have decentralized systems (famously defended and theoretically explained by Hayek). We also have no idea about magnitudes: how much data were available and how were they processed, in the past and in the present, etc. All these questions have not systematically been posed in the past, are now becoming relevant – or acute – as we are moving to a society which is ‘entirely’ based on data.

The second issue, about trust, is inspired by North. We argue that in the data economy that is emerging new forms of exchange have become important, which are based on the value of data themselves. Many platform services are free, because the user supplies his/her data in return, and the business model of companies such as Google, Facebook and Amazon is to exploit the information that can be derived from it for other purposes (nudging your buying behaviour, selling commercials etc.). But this only works in a smooth, stable way if we can trust these tech companies, but since they are driven by commercial interests, that is probably not the case. The alternative, Chinese model also does not work for a European population. The problem is a bit similar to – we think – the issues concerning trust that were behind the slow growth of the market economy in the Middle Ages and Early Modern Period, when, if we are to believe Douglass North, people lacked the trust in market-related institutions, because they did not trust the king. Constraining the power of the king is seen by North as the key to creating the right institutions for a flowering of the market economy. Protected property rights was one of the key institutions in the change. Similarly, we argue that we need clear property rights concerning data and protection against the powers of state and big tech companies to create the right conditions for an efficient use of the new possibilities of the digital economy.

Let me give an example. It may well be that – until a vaccine has been found and distributed – forms of social distancing will be with us for quite some time. This must in some way or another be regulated and monitored. Social contacts have suddenly become a ‘scarce commodity’, and we have to think of ways to allocate them in an optimal way. The ideal tool for this might be some kind of   tracer app, which will not only trace your social contacts because that it the most efficient way to follow the possible spread of the virus, but also to limit the number of social contacts people are having. But would we trust a Facebook tracer app? Or prefer one introduced by the Dutch government? How can we set up such a system in a way that we can really trust this new technology?

Until a few weeks ago, I thought that the crucial weakness of the current organization of the world economy was its growing dependence on the internet. We have, without really considering the long-term consequences and dangers, for almost all the things we do – individually and collectively -become really dependent on a smooth functioning of this new technology. However, ironically, it is not a computer virus that is causing the current Armageddon, but a real virus. The effect has been that we have become even more strongly dependent on the internet – the switch towards a digital economy has accelerated dramatically.

Continue reading: Joop Goudsblom and the rewildering of society (7-4-2020)

Source:

Onno Schellekens, Jan Luiten van Zanden, Arthur van Riel, Ellen Croes, Groei mogelijk door nieuwe omgavng met data-economie. ESB, 4786, juni 2020.