Digital Economics

The Digital Transformation of Global Business

Jens Christensen

• Publisher: Books on Demand
• Year: 2016
• ISBN:
  9788771887235
• Edition: 1
• Topic: Storia
• Subtopic: Storia antica

In the 2010s, new technological and business trends threaten, or promise, to disrupt multiple industries to such a degree that we might be moving into a new and fourth industrial revolution. The background and content of these new developments are laid out in the book from a holistic perspective. Based on an outline of the nature and developments of the market economy, business, global business industries and IT, the new technological and business trends are thoroughly dealt with, including issues such as internet, mobile, cloud, big data, internet of things, 3D-printing, the sharing economy, social media, gamification, and the way they transform industries and businesses

Chapter 1

Introduction

 

During the 1990s and 2000s, a third industrial revolution transformed business, technology and society into the kind of world we virtually live in today in the 2010s. The business world and companies globalized and information technology moved from back office to front office and began its ubiquitous spreading. By way of the PC, mobiles and the Internet, a new digital and connected age began to emerge. Despite its growing importance, however, by 2010 IT continued to be regarded as one function along with the other business functions. This state of affairs began to change rather quickly as we entered the 2010s.

What had been more or less peripheral activities in the previous decade moved in some cases to the top of the business agenda. New technologies, especially digital, and empowered consumers threatened to disrupt established industries. As the changes became more visible around the mid-2010s, the transformation began to look like an emerging new industrial revolution, the fourth industrial revolution. It is just the beginning of transformations. A wider breakthrough of new business and technological trends are not likely to happen until the next decade, however. Nevertheless, things are moving pretty fast, as leading corporations and multiple start-ups are investing heavily in a line of new technologies and adapting their business models to a rapidly changing world. Governments are beginning to support the transformation process, too.

No matter how much things are changing, what does not change is the fact that the market economy and business continue to rule the world, in combination with governments. Furthermore, the radical changes of the 1990s and 2000s form the basis from which the transformation process is taking place. We shall therefore start by outlining the nature of market economy as well as that of business (chapter 2 and 3). In addition, the business structure of global industries and applied information technology will be dealt with (chapter 4 and 5). From this starting point, the emerging transformation of business and technology will be treated more thoroughly (chapter 6). These new developments are documented as best as possible from multiple current sources, often institutions and companies analyzing business and technology trends.

Unlike some previous attempts to treat the idea of ‘digital economics’ as a field of its own, isolated from the rest of the economy,¹ we shall take a holistic and integrated approach to the subject. We look for the disruptive business potentials of digital technologies, contrary to some specific economic method.

 

¹    Carl Shapiro and Hal R. Varian (1999): Information Rules. A Strategic Guide to the Network Economy; Martin Peitz and Joel Waldfogel, Ed. (2012): The Oxford Handbook of the Digital Economy. Oxford, UK: Oxford University Press.

Chapter 2

Market Economy

What is economics?

According to mainstream neo-classical economics theory, ‘economics is the study of the use of scarce resources which have alternative uses’.² Scarce means that what everybody wants add up to more than there is. It is not a matter of missing basic needs. It is reality that constrains people. ‘There has never been enough to satisfy everyone completely. That is the real constraint. That is what scarcity means’. Unmet needs are inherent in all societies at all times. Different economies are just different ways of dealing with scarcity. At least that is what neo-classical economics want us to believe. There is much truth in this statement, although this is not the whole truth.

Economics is partly about consumers’ consumption of the output of goods and services, partly about producing that output from scarce resources in the first place. In production, inputs from the use of land, labor, capital and other resources are turned into output. The consequences of these decisions determine a country’s standard of living. Those decisions and their consequences can be more important than the resources themselves, for there are poor countries with rich natural resources, such as Venezuela, Nigeria and other African countries as well as semi-developed countries such as Russia, whereas rich countries such as Japan and Switzerland include very few natural resources.

Economics is also about ‘alternative uses’, because each resource may be used in different ways. Iron ores can be used to produce many different steel products ranging from small tools to automobiles and factory constructions and petroleum may be turned into gasoline or plastics. How much of each resource should be allocated to each of its many uses in an efficient way that is what economics is about. Different countries have different ways of making decisions about the allocation of scare resources. Those decisions and consequently the efficiency of production affect directly the standard of living of societies. Economics is not about money. Money is simply a tool for getting real things done. The government cannot make us all rich by simply printing more money. It is the produced volume of goods and services which determines whether a country is poor or rich.

Economics is not a matter of opinion or emotions. It is a systematic study of cause and effect, ‘showing what happens when you do specific things in specific ways’. Basic economic principles do not follow lines of ideology and political convictions. They remain the same, no matter what. Controversies in economics are not simply a matter of opinion. Reality shows the consequences of decisions taken on the basis of economic analysis. ‘Economics is a body of tested knowledge and principles derived from that knowledge’. Without understanding how an economy works, good intentions can lead to counterproductive, or even disastrous, consequences for whole nations, which are seen in countries such as Zimbabwe and Venezuela. Conversely, fundamental changes in Indian and Chinese economic policies since the late twentieth century have led to economic growth, including a relative decline in poverty and the rise of a large middle class. Economics is about rational choices leading to efficient use of resources. In this sense, it may be used in all business and organizational contexts.

A certain group of economists think the economic approach may be extended to include all spheres of life. Accordingly, they define economy as the study of rational choice in any situation of life.³ That life is full of rational choices, such as should I study this subject or something different, what is best for my future carrier, should I buy this house, should I marry this person or not, shall we have children, and any other questions of life. According to these economists, economics is not defined by its subject but by its theoretical approach. We shall not subscribe to this approach but define economics as the study of the economy.

But if we take a closer look than just the neo-classical definition of economy as the allocation of scare resources, then what is economy?⁴ At first, you might say that the economy is anything dealing with money - earning, spending, and borrowing money, and so on. This is part of the story. When we talk of money, we do not mean physical money, such as a banknote and a coin. This is shown every day when we pay by way of electronic cards. Money is really just a symbol of what resources you can get with a certain amount of money. It represents some value, because everybody else accepts this relationship between symbol and reality, which in the end is guaranteed by your national central bank. Money and other financial claims such as shares, bonds and other financial products are dealt with by the financial sector. Does the financial industry equate economics then? No, it is only a small part of the economy (some 5%).

Money and claims to resources may be generated in many ways. This is another part of the story of economics. The most common way to get money is to have a job or be your own boss. So a lot of economics is about jobs. From the point of view of the individual worker, a job is about getting a job and how much you are paid. This depends on your skills and the demands for your skills, which again is heavily influenced by the changing nature of competition as a result of developments in technology, international markets and so on.

Working conditions are also affected by political regulations and decisions concerning the labor market, such as restrictions or lack of restrictions on international movements of labor, prohibition of child labor, environmental rules, etc.

You can also get money through transfers, i.e., by simply given you money. This may be either in the form of cash or kind, for example from your parents, charity, and from the government.

Once you get access to money, you use it to buy consumer goods, such as food, clothes, energy, housing, and other goods to fulfil your basic needs. Next, we spend money for higher ‘mental’ wants such as books and computers as well as services including a haircut, visiting bars and restaurants, and going on a holiday abroad. So a lot of economics deals with the study of consumption.

In order to be consumed, these goods and services have to be produced in the first place – goods in farms and factories and services in offices and shops; this is the field of production – an area of economics that has been rather neglected since recent times, because the mainstream Neo-classical school stresses the importance of exchange and consumption rather than production. In standard economics textbooks, production appears as a ‘black box’, in which somehow labor (human work) and capital (machines) are combined to produce goods and services. There is little recognition that production is a lot more than combining abstract labor and capital. Actually, how efficient this black-box is organized and developed through technologies, skills and procedures in accordance with the changing nature of competition in the surrounding world is the foundation of wealth creation. Most economists leave the study of these things to ‘other people’, who are dealing with engineering and business. That is why you cannot just study the economy along the line of mainstream economics alone, if you truly want to understand and explain the economic phenomena of modern societies. One limitation on the neo-classical approach is its individual perspective of economics.

The individuals as heroes

The dominant Neo-classical view is that economics is the ‘science of rational choice’.⁵ According to this view, choices are made by individuals, who are assumed to be selfish and only interested in maximizing their own or at their family’s welfare. All individuals are seen to choose the most costefficient way to achieve their goal. ‘As a consumer, each individual has a self-generated preference system’ that specifies what he likes. Looking at market prices of different things, he chooses the goods and services that maximize his utility. Through the market system, the choices of individual consumers tell the producers what the demands are for their products at different prices (the demand curve). ‘The quantity that the producers are willing to supply at each price (the supply curve) is determined by their own rational choices, made with a view to maximizing their profits. In making these choices, producers evaluate costs of production’, based on the prices of different and potential inputs. ‘The market equilibrium is attained when the demand curve and the supply curve meet’.

For decades, this individualist vision of the economy has become the dominant one. One reason for that is that it corresponds with the idea of individual freedom. Here is no higher authority than the market to tell individuals what they should consume and produce. An alternative system would have to be based on bureaucracies deciding what to be produced and distributed for consumption. But why, then, are there societies that combine free markets with dictatorship, such as in China? And why do governments in democratic countries regulate so much of the economy? Well, some would say that they shouldn’t and that they really harm the economy by reducing productivity and the rational use of resources. In this case, strong political influence of the economy is not based on rational economic considerations, but the resulting clash of different group interests.

When it comes to individuals, they do not just have selfish interests. Sometimes we are just generous, curious, fair, honest, and feel a sense of duty, friendship, and love. At other times, we take a long-term perspective. Because people have multiple roles in their lives, they may act differently in different roles. In addition, our knowledge of the world is sometimes vague or twisted. As a result, we are often not that rational in our choices. It is better to say that we are acting according to bounded rationality.

And where do individual preferences come from? Preferences are strongly formed by our social environment. Coming from different backgrounds, you don’t just consume different things but you also get to want different things. People are embedded in societies. They are socialized and not individuals separated completely from each other. Individuals are products of their societies and particular social background. People are also manipulated by other people. All aspects of life involve such manipulation, such as political propaganda, education, religion, mass media, and advertising.

On the other hand, mainstream economics is not just useless. It points to the fundamental relationships of supply and demand and it is also right in saying that prices are the coordinating factor of the market economy.

The Role of Prices

Let’s follow the reasoning of the importance of prices in allocating resources.⁶ In a market economy, activities are coordinated by way of prices. Prices make sure that people get food, clothes, and housing, no matter whether they are produced in your own country or they stem from other countries. The alternative to prices is bureaucracy. Imagine what a monumental bureaucracy it would take to feed large cities such as London, Paris, New York, Tokyo, Beijing or Shanghai. Instead, the simple mechanism of prices does the same job faster, cheaper and better.

But does the lack of economi...