Introduction
In the late 1990s, many business leaders, investors, journalists and politicians became firmly convinced about the fact that the world economy is undergoing a fundamental structural change driven by both globalization and the revolution in information and communication technology (ICT). ICT can play a central and powerful role in increasing productivity and growth - insights that have influenced a wide range of government officials, development agencies and businesses. ICT’s ability to impact growth operates via a number of mechanisms. First, as a capital good, investment in ICT contributes to overall capital deepening and therefore helps raise labor productivity. Second, greater use of ICT helps firms increase their overall efficiency, and therefore their multifactor productivity (MFP). Finally—and perhaps most far-reaching - increased use of ICT contributes to network effects, such as lower transaction costs and more rapid innovation, which in turn improve the overall efficiency of an economy.
Most of the large economies in the world are already dominated by services. Developed countries are also close to becoming information economies. The confluence of these trends means that information services are the largest part of developed economies, with others close behind. This evolution is being accompanied by a revolution: the rapid industrialization of information services.
These developments have manifold consequences for the economy as a whole, as well as for productivity, trade, jobs, globalization and competition. At the sector level, many industries are undergoing massive changes in structure. There are also significant implications for management strategies and internal organizational structure for all firms.
Chapter 1. What is the Information economy?
Historical Overview
For over forty years, information and communication technologies have been everywhere in the literature, explaining changes in society, and giving rise to many terms and buzzwords like the information economy. Echoing early works, the OECD (Organization for Economic Co-Operation and Development), in an influential study conducted in the 1960s, concluded that ‘the computer can be considered as the key to the second industrial revolution, just as the steam engine was the center of the first industrial revolution.’ This conception of information was followed by a second one: information as commodity or economic activity. Such a conception was developed by American economists F. Machlup and M.U. Porat, and became very popular in the late 1970s and early 1980s. What preoccupied policy-makers was structural change in the economy, namely the transition from a manufacturing economy to a service or information economy, and ‘information gaps’ between countries.
Information came to be defined very broadly. It included just about anything that was intangible. The statistics developed for measuring information relied on the national accounts: aggregating expenditures for specific industrial activities into an information field. More recently, a third conception of information emerged: information as technology. Many analysts came to view information technologies, because of their widespread effects on the economy, as bringing forth a new techno-economic paradigm or technological revolution. The key issue was no longer identifying the sector producing the technologies, but rather mapping the applications of information technologies and their uses. Information was thereafter restricted, at least in official circles, to what came to be called ‘information and communication technologies,’ and the measurement emphasized the diffusion and use of the technologies.
The story of the economics of information is the history of struggles over how to understand the increasing information intensity of our social and economic lives. Neoclassical economic thought originally avoided informational problems; however, the resulting inconsistencies, paradoxes, and failures led to a new stage of theoretical development.
The transformation in economics once it began to deal directly with informational issues has been dramatic. The topic began the 20th century “in a slum dwelling in the town of economics” (Stigler, 1961, p. 171), but by the beginning of the 21st it had been the subject of research awarded a number of Nobel prizes: Of the 34 Nobels given to economists since a prize in that discipline was inaugurated in 1969, seven have been awarded to individuals whose work focused on problems in the economics of information and another three to thinkers whose work has been key to this.
There was a period during which the history of economic thought largely disappeared from university curricula (Blaug, 1978), but the role of information in the economy is, of course, ancient. Indeed, the very earliest written records document economic activity (Nissen, Damerow, & Englund, 1994). Historians of economic thought typically place the origins of modern economic ideas in the 18th century, with Adam Smith (Blaug, 1996; Landreth & Colander, 1994). Basic ideas about the nature of the economy developed during this period, establishing the framework within which information has come to be understood. By the 19th century, many thinkers identified problems we now understand as information-based even though other language was used to describe those issues and the implications of their insights were not always recognized. Over the course of the 20th century, economists operating from a neoclassical perspective began to acknowledge that differences in the kinds and amounts of information available, and in who has access to that information, are so important that they could not be ignored. This change in attitude, however, was slow. As Babe (1996) notes, despite the appearance of key publications on the topic as early as the 1920s by thinkers such as Coase, Knight, and others whose work is discussed later, full attention was not accorded to the economics of information until the 1960s. Not coincidentally, this was the period during which we also began to use the phrase “the information society” to describe the ways in which society was being transformed as a result of new information technologies (Braman, 1993).