The Information Age/Information Knowledge and the New Economy

What is the information economy?
An information economy is where the productivity and competitiveness of units or agents in the economy (be they firms, regions or nations) depend mainly on their capacity to generate, process, and apply efficiently knowledge-based information. It is also described as an economy where information is both the currency and the product.

While we have always relied on information exchange to do our jobs and run our lives, the information economy is different in that it can collect more relevant information at the appropriate time. Consequently, production in the information economy can be fine tuned in ways heretofore undreamed of. What makes information plentiful in this economy is the pervasive use of information and communications technology.


 * Box 4. Banking Without Boundaries 


 * Source: Lloyd Darlington “Banking Without Boundaries: How the banking industry is transforming itself for the digital age” in Don Tapscott, Alex Lowy and David Ticoll (eds.), Blueprint for the Digital Economy: Creating Wealth in the Era of e-Business (New York: McGraw Hill), 115.

What are the main features of the information economy?
The information economy is global. A historically new reality, the global economy has the capacity to work as a unit in real time on a planetary scale. Corporations and firms now have a worldwide base for skilled labor to tap. Capital flows freely between countries, and countries can utilize this capital in real time.

However, some critics claim that a true global economy has yet to be achieved. Stephen Cohen observes that the mobility of labor is undermined by people’s xenophobia and stricter immigration laws. Multinational corporations still maintain their assets and strategic command centers in their home nations, and capital is still limited by banking and finance laws.

Castells, however, argues that even if globalization has not yet been fully realized, it will only be a matter of time before this happens. Globalization will be affected by government regulations and policies, which will affect international boundaries and the structure of the global economy.

A second characteristic of the information economy is that it is highly productive. William Nordhaus of the US National Bureau of Economic Research states that:


 * Productivity growth in the new economy sectors has made a significant contribution to economy-wide productivity growth. In the business sector (between 1999 and 2001), labor-productivity growth excluding the new economy sectors was 2.24 percent per year as compared to 3.19 percent per year including the new economy. Of the 1.82 percentage point increase in labor-productivity growth in the last three years relative to the earlier period, 0.65 percentage point was due to the new economy sectors. The contribution of the new economy was slightly larger for well-measured output because that sector is smaller than the business economy.

Some critics argue that there is no relationship between profitability and investment in ICT. Castells looks into the history of productivity growth in advanced market economies and observes a downward trend of productivity growth starting roughly around the time that the information technology revolution was taking shape in the early 1970s. According to him, this decline was particularly marked in all countries for serviced activities, where new information-processing devices could be thought to have increased productivity. However, manufacturing productivity presents a different picture. Manufacturing productivity in the US and Japan increased dramatically in 1988-1989 by an annual average of 3% and 4.1% respectively, and productivity increased at a faster pace than during the 1990s. Castells concludes that economic statistics do not adequately capture the movements of the new information economy, precisely because of the broad scope of transformation under the impact of information technology and related organizational change. There may be a diffusion from information technology, manufacturing, telecommunications, and financial services into manufacturing services at large, and then into business services.

A third characteristic of the information economy is the change in the manner of obtaining profits. Robert Reich observes that profits in the old economy came from economies of scale—long runs of more or less identical products. Thus, we had factories, assembly lines, and industries. Now profits come from speed of innovation and the ability to attract and keep customers. Where before the winners were big corporations, now the winners are small, highly flexible groups that devise great ideas, develop trustworthy branding for themselves and their products, and market these effectively. The winning competitors are those who are first at providing lower prices and higher value through intermediaries of trustworthy brands. But the winning is temporary, and the race is never over. Those in the lead cannot stop innovating lest they fall behind the competition.

Is the information economy different from the “knowledge economy”, the “new economy”, or the “network economy”?
All these terms are used interchangeably, although the various concepts tend to emphasize different aspects of the phenomenon—like “knowledge” instead of “information” or “network” as opposed to “new”. Peter Drucker describes the information revolution as a knowledge revolution. The key, he says, is not electronics but cognitive science. The software used for computers merely reorganizes traditional work, which had been based on experience. This is done through the application of knowledge, in particular systematic, logical analysis. Setting up an IT structure is not enough. To maintain leadership in the new economy, the social position of knowledge professionals and the social acceptance of their values should be guaranteed.

The knowledge economy is also a networked economy. The concept stresses the important role of links among individuals, groups and corporations in the new economy. It has been argued that networks have always been an ideal organizing tool due to their inherent flexibility and adaptability. However, traditional networks were not designed to coordinate functions beyond a certain size and complexity. This early limitation has been overcome with the introduction of ICTs, particularly the Internet, where the flexibility and adaptability of networks are brought to the fore, and their evolutionary nature is asserted.

What is Coase Law? And how is it related to the ICT revolution and the information economy?
Nobel Laureate for Economics Ronald Coase noted that a firm tends to expand until “the costs of organizing an extra transaction within the firm become equal to the costs of carrying out the same transaction on the open market.” Coase also believed that the law of diminishing returns applies to firm size: Big firms are complicated and they find it hard to manage resources efficiently. Small companies often do things more cheaply than big ones. Therefore, if it’s cheaper to perform a transaction within a firm, it usually stays there. However, if it’s cheaper to go to the marketplace, then firms go to external suppliers. Thus, a car maker (like Toyota) will buy car batteries from a supplier rather than manufacture batteries in-house if it is easier to do so.

ICT reduces transaction costs significantly. Large and diverse groups of people can now more easily and more cheaply gain near real-time access to the information they need to make sound decisions and to coordinate complex activities. Firms can now downsize to the point of producing their main competence and purchasing everything else they need from outside. Thus, instead of massive corporations, what are emerging are small highly focused corporations that farm out production to their allies. This is also known as network production.


 * Box 5. Furiously Fast Fashions (excerpts) 


 * Source: Joanne Lee-Young and Megan Barnett, “ Furiously Fast Fashions,” in The Software and Information Industry Association Trends Report 2001 [home page on-line]; available from http://www.trendsreport.net/software/young.html; accessed 28 August 2002.

What is e-commerce?
The ICT revolution has transformed not only how (and where) goods are produced but also how commodities are exchanged. E-commerce is buying and selling over the Internet or any transaction concluded through an information network involving the transfer of ownership or rights to use goods or services. More precisely, it includes all business transactions that use electronic communications and digital information processing technology to create, transform and redefine relationships for value creation between organizations, and between organizations and individuals.

The different types of e-commerce are: business-to-business (B2B); business-to-consumer (B2C); business-to-government (B2G); consumer-to-consumer (C2C); and mobile commerce (m-commerce).

What will happen to agriculture in the information economy?
Like the production and exchange of commodities, agriculture will also be transformed by ICT. ICTs will allow farmers to have more accurate information on the factors that are needed to increase crop yield. “Precision farming” or farm management using ICTs will become the norm rather than the exception.

We can also expect better crops and livestock as a result of agricultural biotechnology. The term “biotechnology” broadly includes “any technique that uses living organisms, or parts of such organisms, to make or modify products, to improve plants or animals, or to develop microorganisms for specific use.”

The potential applications of modern biotechnology in agriculture are varied and promising. These include:
 * (a) improved yield from crops;
 * (b) reduced vulnerability of crops to environmental stresses;
 * (c) increased nutritional qualities of food crops;
 * (d) improved taste, texture or appearance of food;
 * (e) reduced dependence on fertilizers, pesticides and other agrochemicals;
 * (f) production of novel substances in crop plants.


 * Box 6. Farming Goes Into Space 


 * Source: Craig Sutton and John Deere, “Farming Goes Into Space,” in The Software and Information Industry Association Trends Report 2001 [home page on-line]; available from http://www.trendsreport.net/software/deere.html; accessed 28 August 2002.

Did the information economy end with the dot-com crash?
Not at all. If we look at the history of technology and development, we will see that the dot-com bust is part of the normal pattern of events in any technological revolution.

The economist Joseph Schumpeter suggests that a technology revolution starts with the introduction of one or more technologies that enables the new cluster.

The new technology cluster, at first little noticed, achieves successes in early demonstrations. Technical people start small companies based on the new ideas. These new companies compete intensely in this early turbulent phase, when government regulation is largely absent, and as successes mount in a technical free-for-all environment. The promise of extraordinary profit looms. The public begins to speculate.

The middle phase sees a sustained build out or golden age of the technology, during which the technology becomes the engine of growth for the economy. Large companies and oligopolies reign, and the period is one of confidence and prosperity.

In the last phase, the technology matures. Technological possibilities are saturated, production moves to places on the periphery, and complacency sets in. Profits at home are low, and entrepreneurs start scouting for new opportunities. The economy becomes ripe for the next revolution.

It was not the information economy that died with the dot-com crash. Only the hype died. The downturn in ICTs and the dot-com crash simply ended the first phase. We are now just entering the middle phase, the “sustained build out or golden age of the technology”.