1. The Context of a "Modern Economy"
This section provides some key background assumptions about the developing "modern economy" that will underpin the subsequent analysis. It is based primarily upon material contained in Towards a "Modern Economy" E-Commerce Strategy for New Zealand, prepared by the ISCR for the Ministry of Economic Development in September 2000.
Electronic Commerce
Many definitions of electronic commerce prevail in the literature, ranging from a tight description relating solely to "commercialisation of the Internet" to broad, inclusive definitions embracing all private, internal and external networks which form a part of any inter-organisational electronic information system (O'Daniel, 1999)8.
Consistent with previous work undertaken by the ISCR for the Ministry of Economic Development9, we favour a wide view of the definition of Electronic Commerce. This enables measures of exchange facilitated by specific technologies to be incorporated into a wider social and economic performance framework. This framework recognises that electronic commerce, while utilising specific technologies and opening up opportunities for new methods of production and exchange, also supports and enhances a set of well-established exchange mechanisms between individuals and firms who have historically, and will continue into the future, to exchange goods and services via a variety of trading mechanisms. Such a framework enables integration of analysis across different exchange mechanisms, and recognises that value is exchanged in places other than commercial exchange markets (for example, the non-profit public good research exchange market).
Using the Organisation for Economic Co-operation and Development (OECD) typology of Economic Commerce Definitions (Figure 1) we take as our definition for this paper:
"Electronic commerce refers generally to all forms of transactions relating to commercial activities10, including both organisations and individuals, that are based upon the processing and transmission of digitised data, including text, sound and visual images."11
Figure 1. Typology of Electronic Commerce Definitions
Source: OECD Measuring Electronic Commerce p 19.
We include in our analysis all transmission of digitised data, irrespective of the technology involved or the mechanism of transmission. This scope enables us to consider all use of computerisation in firms and households, Electronic Data Interchange (EDI) between transactors, the Internet and specialized consumer applications such as Electronic Funds Transfer at Point of Sale (EFTPOS) and digitised credit card transactions.
This base also includes transmission of voice and data over digital telephone networks. We believe this broad approach is necessary to capture not only the extent to which electronic commerce technologies are being adopted individually, but also to capture the extent and flow-on effects of substitution between them as new ways of transacting are developed. This approach facilitates the subsequent identification of causal links between changes at the individual and firm level and trends emerging in higher-level social and economic system indicators.
Information
Information is an asset, just as capital is an asset. It is the fundamental component (basic "good") of a modern economy. Changes brought about by Electronic Commerce are underpinned by changes in the ways in which information is procured, processed, transmitted, stored, utilized and enhanced. Changes to the ways in which information influences commerce are not new:
"The real information revolution is not that information is suddenly becoming important. Information has always been important. The revolutionary aspect of the information age is the treatment of information in ways that would have been unimaginable only a few decades ago." Perelman (1998).
However, it is the special properties of information12 which are driving the development of the modern economy13:
(a) Information Has Many Public Good Properties
Information has non-rival and non-excludable properties. Having incurred the fixed cost of producing information, the marginal cost of duplicating and distributing it in digital form to other users is close to zero (hence, non-rival properties). Further, making information available to another user does not reduce the ability of the first user to make use of the information. Indeed, preventing duplication and use of information once it is produced is comparatively expensive (hence, its non-excludable properties). Copyright and patents, private networks, password protection etc. represent costly ways of endeavouring to exclude people who would otherwise have "free" access from using highly valuable information.
(b) It Is an "Experience Good"
The value of information to its consumer can only be determined after it has been consumed (that is, experienced). It is unlike physical objects (e.g. a car) in that it is extremely difficult to assess its value in advance, and having been "exchanged" it generally has negligible return value. In this respect, it resembles services.
(c) It Exhibits Increasing Returns to Scale
Use by one person does not preclude use of information by another. Hence, one piece of information can be used many times to create new economic value. It is not consumed in the manner of physical resources such as land, labour and capital, where use for one purpose precludes use for another.
(d) It Is a Network Good
Generally, the more people who have access to information, the more value can be created from it. This effect is the same as the network externality effects of communications networks, which become more valuable the more people there are connected and participating in its use.
(e) Information Has Multiple Functions
Information can be a factor of production, a component in the process of monitoring production processes utilising other factors, and an output product in its own right. Thus, it is both a value-adding product and a transaction cost generator.
Technology
Developments in information processing and communication technologies are both lowering the costs of, and speeding up the:
- transmission of
- storage of, and
- access to
information.
This is lowering the transaction costs associated with practically all business and social activities. Transaction cost reductions from technological developments are particularly evident in:
- lowering the costs of matching transactors, by
- reducing search costs
- broadening the scope of potential sources of information
- reducing the time taken for negotiation, resulting in
- more informed transactors
- less asymmetric information
- mass-transaction mechanisms (e.g. auctions)
- facilitating the development of more cost-effective transaction, contract and production monitoring processes.
It is also opening up new production possibilities using information as a factor of production with:
- products and services supporting reduced transaction costs
- new ways of using existing information
- the collection of previously disregarded information for the production of new goods and services and the organisation of economic and social activity.
[Note that "technological developments" are not limited to what we colloquially define as "technology" in the form of computers and equipment. Re-engineered human processes that utilize information are also a vital component - indeed, it is becoming increasingly evident that investment of capital in many physical machines requires complementary investment in human systems and processes to yield productivity improvements14.]
Electronic technologies are a facilitator to the process of creating additional value in the economy. They are transforming the speed and nature of communication (particularly communication of information), but this is just one subset of the changes brought about by the information revolution. Electronic technologies are an enabler rather than a cause of the information revolution, as they enable changes to be wrought to the core element: information.
Firms
Our definition of the firm encompasses the organisation of any investing activity for productive gain. Thus includes:
- individuals as producers and consumers
- networks of individuals operating jointly
- corporate entities (regardless of size, format, ownership or legal status)
- governments where they act as producers and consumers.
We note that governments also undertake a legislative and regulatory role in the economy that can influence the behaviour of all participants. However, we believe it is important to separate out the activities of governments as producers and consumers from their regulatory and legislative activities, as government's role as a consumer or purchaser is functionally very little different from that of any other producer or consumer. The distinction comes only in the ownership of the transacting entity.
While we recognise that the patterns of usage will vary between firm types, we draw attention to the fact that the fundamental unit of economic activity is the transaction. Firms are the vehicles by which we gather transactions together into an organised framework (nexus of contracts). These may be small in scope (individuals) or large (multinational companies). Firms provide a medium through which information can be channelled.
But we note that firms may take many forms, and the forms are changing as a result of changes in the costs of transmitting, processing, storing and utilizing information (transaction costs). Lowered transaction costs are driving two concurrent and diametrically opposite processes:
- globalisation and
- individualisation
Globalisation
Globalisation is:
- increasing the number of sources and destinations of information (inputs)
- increasing the size of available markets for products/services (outputs)
- capitalising upon reducing transaction costs of wide-scale coordination and cooperation and thus increasing the "span of control" of economies by making it more feasible to coordinate activities over a wider number of participants (e.g. global policies)
- increasing the potential to capitalise on economies of scale for some products/services
Individualism
But individualism is:
- placing firms (which are a nexus of contracts) under stress as the reducing cost of information lowers the transaction costs associated with contracts (market contracts become increasingly preferable over vertically integrated firms)
- capitalising upon the increased availability of cheap information and technological advancement to free individuals from the need to be physically present and monitored by employers/contract partners etc.
- redefining the unit of productive analysis away from the country/firm towards individuals/individual processes:
- enabling valuations to be built from the "bottom up" rather than the "top down"
- even to the extent that individual functions/processes can be broken down and separately evaluated
- reducing specialisation and eliminating the concept of "one person, one job"
- developing a new concept of interaction between individuals and other social constructs:
- individuals perform many different tasks
- tasks are combined into projects
- projects may be carried out in teams
- different teams carry out different projects
- different personnel on different teams
- many projects undertaken concurrently, for many different clients, potentially in many different locations/jurisdictions
- blurring the distinction between tasks undertaken as a "producer" and tasks undertaken as a "consumer"
- leading to the development of a multi-faceted transacting entity - the individual mobile transactor - whose many transacting activities cross traditional boundary definitions and are difficult to apportion to specific activities (for example, is an Internet connection maintained at home accountable purely as a consumption activity if the registered user also uses that connection to transfer work-related files on which he/she works on at home and retransmits back to a work location - an activity which if conducted at work would be accounted as a production activity? How should this resource be divided? Is it even reasonable that it should be separately accounted for?).
Consequences
These forces have significant consequences for:
Firms
- transferral of allegiance/loyalties from traditional social foci (firm, community of residence, country) towards new locus of attention (individual, profession, team, network, community of interest)
- alliances built up surrounding these communities of interest
- questioning of the role of a nation state in these processes
- diminishing importance on the location of activity
- considerable overlap in the requirements of any policies (firm, local, national, regional, global) to cover all of:
- government strategy (e-Government, in New Zealand parlance)
- business development strategy (e-Commerce or e-Business)
- individual development strategy (e-Person)
(raises the question of whether these strategies can be developed separately)
Markets
- increasing contestability in markets from goods and services providers who are equally able to "move in" to a territory where previously a presence was impossible
- returns on innovation can (must) be captured quickly across geographic markets rather than over time in few markets as has historically been the case.
Individuals
- freeing up of individuals from specific physical locations (including country/community of residence) in order to perform tasks
- increasing mobility of people, information activities, across regions and countries
Citizens in a Modern Economy
Most tasks require the utilisation of knowledge/information to:
- carry out the task (where individuals with specific knowledge, skills, information and interpretative ability both perform the task and self-manage) or to
- coordinate the various activities required to undertake the task
- obtain the commitment of those performing the task
- monitor its performance (when undertaken by a "worker" with the requisite knowledge/skills/information within a "firm").
(Effective task performance is dependent upon communication/transmission of this information.)
These applications apply equally to business and consumer activities: utilisation of information for consumption as well as production, for basic living as well as business (e.g. shopping, household management, etc.)
Thus:
- multi-tasking will become the norm
- everybody must both manage and perform the task
- everybody in a modern economy is a "knowledge worker" in at least some of their activities
- everybody will need a basic level of skills to participate
- everybody will require access to a base set of information to participate
- information literacy' is a vital component for all participants
Hence, access to both:
- education and
- information-accessing infrastructure
is critical. Absence of one invalidates the applicability of the other.
People in a "modern economy" thus become both:
- a stock of information required and thus an input to the performance of "knowledge worker"15 tasks
- a market for information products that result from such tasks.
Increasing mobility and globalisation means that there are few barriers preventing individuals from pursuing personal activities wherever those opportunities present themselves. Individuals may no longer identify themselves with communities, firms, countries or global alliances.
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