Manifesto of the New Economy: Institutions and Business Models of the Digital Society

Front matter

Manifesto of the New Economy

Alexander Dolgin

Manifesto of the New Economy

Contents

1. Untroduction® ereak E iee e dia ieee ceca et ie ca AME AAR S 1 2.2 Consumption as Language or, Why Does Society Need Diversity?” voices Tories EEE EEEE E E AE S 10 24 . Personal Thoughts: soreer etek ek cae hi eat eee ees 15 2.6 The Economic Sense of Collaborative Filtering: Dik Li Meba air aa ucla A EE EAN SRS 25 2.8 The Gratuity Economy: Retrospective Payment 2.8.2 A New Business Model for the Electronic Media: 2.8.4 An Explanation of Demand and Unmediated Distribution ... 40 vi Contents

3 The Symbolic Economics Approach to the Humanities

3.1 Prospects for Humanities Research into Third-Generation INGLE W OLKS. iosia neea SiE NERE EE OR E ORES RARER

Chapter 1 Introduction

A spectre is haunting the globe — the spectre of the New Economy, a phenomenon for which a definitive name has yet to be found and which for now is hidden behind an uninformative signboard. We are going to take a look at it, to see which human practices, already established or still in the making, characterise it, and which of its tools and institutions hold out most promise.

Many have little enthusiasm for the lifestyle the New Economy has visited upon us. They see it in terms of the deficiencies of mass culture, as emphasising inequalities between people even as it levels down and eradicates the uniqueness of cultures all over the planet. This is difficult to counter. The New Economy brings much that is of value, but even if this is conceded the value it brings is considered shallow and trivial. There is general agreement that the pluses are far from compensating for the minuses. But before deciding whether to condone or condemn the changes it brings, let us take a closer look at its arrangements and give more thought to its ethical dimension.

Let us start by seeing what traditional economic science has to say about it. Much of life is linked to markets, which is why our everyday reality is more accessible to economists than to other social scientists. There is much to be learned from prices and the volume of goods being produced. With the assistance of money the sheer variety of life can be turned into numbers, to enter the jurisdiction of mathematics, and thence proceed to the planners to be administered. Where economic modelling proves successful we can derive a summary vector, the overall resultant of social forces, the thing that turns the millstones of history on the grand (and on a more intimate) scale.

Often, however, we are dealing with a complex, motile, incalculable system of forces which derive from the motivations of groups with differing interests. Although methodologies have been devised to deal with this, more often than not

A. Dolgin, Manifesto of the New Economy, 1 DOI 10.1007/978-3-642-21277-2_1, © The Author(s) 2012

2 1 Introduction it is anyone’s guess which vector is going to prevail and which direction the ship of state will move in. The result is that much reliance is placed on political intuition, and decisions are taken on the basis of guesswork and hoping for the best. With their schemes of classification, economists do sometimes predict correctly how things will develop, although since the financial crisis they have been looked at askance. There are complaints that they failed to sound the alarm and have yet to come up with a solution. Well, the current standing of economics is not our main concern but it does conveniently lead on to discussion of the New Economy (which could equally well have started from the adverse selection which bedevils cultural markets).

If the general public take the view that economists have dug themselves into a hole, at least that did not result from professional incompetence. Factors they don’t monitor rebelled, forces which they know about in the abstract but which current systems for measuring markets can’t take proper account of, which economic philosophy doesn’t fully understand and therefore leaves out of its calculations. These, for traditional economics, exogenous factors are linked to metamorphoses occurring in the soul of well-fed homo sapiens. Economists don’t do a bad job of modelling a hungry man, particularly if he is a European and not too hungry. They are doing much less well in trying to get the measure of homo sapiens when he is enjoying a high level of material satisfaction.

Economists are ignorant of anything outside the domain of the market so they classify it as being of no importance, which means they get their sums seriously wrong. They are often uneasily aware, or at least suspect, that these unknown quantities exist, but what can they do? When society suddenly becomes unpredictable, we know we have entered a danger zone. Much of what is missed by traditional economics — people’s motivations, desires and moods, their cognitive resources of memory and attention, the speed of their mental reactions, their cultural codes and values, their aesthetic tastes and so on, which have hitherto been seen as aspects of the psyche and hence the province of social psychology, now come within the purview of the New Economics. The aim of the present book is to show how we can uncover these unknowns and put them to work for the good of society. How are we best to access and process this under-researched knowledge about ourselves and the world around us, which we all have but which we keep to ourselves?

As primarily an information economics, the New Economics is well suited to the job of looking directly at the individual human being. Particular attention is going to be paid, then, to interpersonal communications, primarily on the internet, an environment where many novelties are born. We are going to look at a new way for people to interact, and specifically at a new way for them to cooperate, through collaborative filtering. This is something currently familiar mainly to professionals and advanced internet users, but it is extremely important for the New Economy and the information society as a whole.

Collaborative filtering, which is essentially group filtering, is a system for exchanging subjective experience. It makes it possible to choose objects and information which can be expected to appeal to the tastes and preferences of each individual member of a group. The idea behind it is that groups of like-minded

1 Introduction 3 individuals can be built up on the basis of judgements by a large number of people of the quality of whatever interests them. Their judgements can be registered, for example, by means of rating. Within their group information will be exchanged which will make it possible to use the judgements of certain group members to predict how other group members will respond to goods they have yet to experience. The principle is similar to word of mouth, except that it has been automated and purged of “noise.” Confidence in the value of new recommendations is based on the experience of past success. If one of the group members is the first to find out about something interesting, he can assess it, inform the others, and save them the trouble of each individually repeating the assessment. They in turn may discover something of general interest and reciprocate. Collaborative filtering is really just a universal mechanism for consumer testing the quality of all manner of things: goods, texts, works, — even people. It is indispensable for a society which is being overwhelmed by superabundance. Collaborative filtering, for all its novelty, is only replicating the way anybody acts when faced with the need to make a choice: find someone sensible who has been in the same situation and ask them what they think. Computerising this kind of action was a really major achievement of the turn of the millennium, and the scope of the discovery and the areas to which collaborative filtering can be applied has yet to be appreciated.

People are in constant contact with other people in many connections, and with which people and in which connections underlie the quality of their life. Collaborative filtering is a universal method which enables them to optimise the way they make these links. It facilitates access to knowledge dispersed in society, including our knowledge about each other, and out of this a whole spectrum of institutions, rules and standards can grow to reorganise the way people relate to each other and bring about an overall improvement in the life of society. The quality of our contacts depends on how society divides into groups and on which of them we are capable of belonging to. Much, perhaps everything, in today’s society depends on overt or covert stratification, and that is something to which collaborative filtering is ideally suited.

We shall discuss these issues in three sections: (1) analysis of the fundamental problems and logical options for developing the information society; (2) practical institutional planning to find ways of solving the problems that raises; (3) analysis of examples, including a website which provides a platform for networking and collaboration. Thus we will cover the topic from its basic premises to its implementation in practice. Metaphorically speaking, our task is not merely to describe the laws of aerodynamics, but to show how an aircraft can fly, and then show one, created in accordance with the laws of aerodynamics, rising from the runway to demonstrate convincingly the reality of flight.

Open Access. This chapter is distributed under the terms of the Creative Commons Attribution Noncommercial License which permits any noncommercial use, distribution, and reproduction in any medium, provided the original author(s) and source are credited.

Chapter 2 The Second Invisible Hand of the Market 2.1 What is the New Economy?

Both the New Economy itself and the lifestyle to which it gives rise are inextricably linked with texts (in the broadest sense of the word): with their production, distribution and consumption. On this basis it is defined as an information economy. A detailed analysis of the New Economy would call for a separate extensive treatise which would only distract us from our topic, so we will restrict ourselves to trying to establish its main distinguishing features.

One of the obvious features of the New Economy has been the preceding growth of costs associated with information processing (so-called transaction costs) as against expenditure on the physical manufacture of goods (transformation costs). Institutional economics has long been familiar with the concept of transaction costs (Ronald Coase). They occur all over the place and relate to all manner of agreements, coordination and interpretation, but like friction they are inconspicuous and difficult to register even when great efforts are made to do so. In the few attempts made to measure them (one was undertaken by Douglass North) about 40% of all expenditure in the business environment was found to be of this kind. Today the figure is probably even higher since the proportion of costs spent creating and processing information is constantly rising. Oddly enough, no one has ever tried to calculate the retail end user’s costs. This is not to say that the lawsuits resulting from transaction costs have finally become more significant than the extraction of hydrocarbons or the crop yields of wheat, but, bearing in mind their importance, we can safely say they have been under-researched and underestimated.

The next key characteristic of the New Economy is the sharp increase in the proportion of non-material, non-utilitarian goods in the structure of consumption. These include not only media consumption, not only the realm of culture (cinema,

A. Dolgin, Manifesto of the New Economy, 5 DOI 10.1007/978-3-642-21277-2_2, © The Author(s) 2012 literature, music), which is natural, but also, without exception, every aspect of everyday life which until not long ago was considered to be, and was, utilitarian.

Objects are increasingly used not merely as possessions with useful properties, but as signs, symbols, cultural codes — in brief, as signals and messages. Consuming goods, a person enters into relations with other people: people communicate through their possessions. This process of a large-scale move from utility to symbolism accelerated about half a century ago and was identified by such theoreticians of consumer society as Georges Bataille, Jean Baudrillard, Pierre Bourdieu and Roland Barthes. At that time the new lifestyle was only beginning to appear and their works were prophetic. Now these processes have become so evident that they show up in statistics. That is why now we can and must move from political economics to applied economics, with laws and formulae which enable us to anticipate the course of events. This, indeed, is one of this book’s tasks: to identify data which the economics of the New Economy can operate with, and to indicate how they can be collected.

But let us return to the differences between the New Economy and the old. In parallel to changes in the structure of consumption, which is becoming increasingly diverse, individual, and sophisticated, there is a change in the correlation between production and commerce. It is becoming cheaper to manufacture than to sell. The proportion of factory costs in the retail price of goods is decreasing. In several industries the retail price is five or even ten times more than the production cost, and a two to three times markup is almost standard. The markup is determined by costs associated with delivering goods to the retail customer, and a substantial part of these relate to information. Commerce earns its cut legitimately by creating information about demand. A large increase in the retail price over the factory gate cost is a reliable indicator that a particular industry is in the camp of the New Economy. It also indicates unambiguously that the new “information” economy is not confined to the media and entertainment, or to the cultural industries (which include the internet). It also includes such traditional segments of the market as clothing, furniture, electronic household appliances and cars which, despite their thoroughly material appearance, nowadays belong to the information industries and are functioning in accordance with the rules of the New Economy.

We can also list signs of the New Economy which are in strict accordance with traditional economic logic. For example, goods cease to be used long before they have actually worn out. Moral depreciation has overtaken physical depreciation. Possessions are not fully used and could carry on in service for a long time, but are written off because they are out of fashion. They become not just unusable but positively damaging since they discredit their owner in the eyes of those around him. Another sign of the times is that in the past the value of most goods could be assessed fairly accurately by such attributes as weight, size and power. Now products are migrating en masse to the category of “experience goods” which have to be used before you can tell whether they are what you are looking for. Take the mobile telephone. All its features and specifications are described in the bulky instruction booklet, but they vary so much that it is simpler just to buy the telephone and work them out through use. We need not go into this too deeply, but merely note

2.1 What is the New Economy? 7 that a key peculiarity of the New Economy is a lack of transparency, a lack of clarity as to the quality of goods, and this result from their sheer numbers and complexity. This leads to “information asymmetry” between what manufacturers know and what consumers can tell, and to distortions of the market when the purchaser is misled. In theory a customer could work out the reality of the situation in each individual case, but he simply hasn’t the time to do that for everything. George Akerlof has shown that if the consumer cannot accurately assess the quality of a product, a tendency to “adverse selection” results in inferior goods and services crowding out those which are better. This has brought about a change in how firms compete in the market. They do their utmost to differentiate their wares, to become monopolists in a specific sub-species of a product. In the process the difference is sometimes no more than using a different label and charging a different price. Differentiating everything from everything else makes it possible to avoid having to compete in one large market championship and instead to rule supreme in some cosy niche, thus moving towards the “monopolistic competition” described by Edward Chamberlin.

The next feature of the New Economy is that the price of goods increasingly reflects a personal, situational value refracted through the perception of other people rather than some universal value. This is a consequence of the fact that consumption increasingly resembles collecting. We are talking here not about the collecting of old-fashioned knick-knacks, but a practice embraced by everybody who seeks to position themselves in society by visually presenting facets of their personality. In this game a particular purchase, in the context of a lifestyle, is of interest mainly as the culmination of a series of declaratory purchases which aim to project a desired image.

Without this last purchase, everything previously acquired might be of little value, but it acts rather like that particular condiment which transforms just food into a signature dish. This is why when we are looking at consumption characteristic of the middle and upper storeys of Abraham Maslow’s pyramid of needs (where someone’s greatest need is for recognition, self-assertion and revelation of their personality), Heinrich Gossen’s law of diminishing marginal utility, which is a fundamental of economics, no longer operates. This law points out that each successive portion of a good is less valuable than the one preceding it. It is valid for homogeneous goods in short supply, the need for which is dictated by biological necessity, but it holds no sway in the New Economy because there goods are neither homogeneous nor in short supply. Economists of the past, in particular Wiener, knew of exceptions to Gossen’s law and pointed out that goods with network or group effects, like telephones or fashion clothing, had paradoxically increasing utility because their value is tied to the number of users. In the past these really were exceptions, but today network and group effects predominate. Neither does Gossen’s law hold for consumption linked to such personal investments as listening to music or creative growth generally, as Gary Becker has pointed out. It might seem that, taking the unit of consumption as being not a single purchase but the collection in its entirety, the law of diminishing marginal utility would again operate, but this view too is untenable because collections are never definitive and there is an endless variety of communities in which they can be displayed.

This is the essential nature and the driver of present-day consumerism. A bought item supplements an existing collection but never finally completes it. In itself it may not be expensive, but the increase in value which it brings to the set is disproportionately large. Anticipating that future gain, the consumer is more tractable, a fact of which the seller is well aware, allowing the price to walk on a long leash. A designer accessory whose factory price is little more than $10 may be put on the shelf with a three-digit price tag. This “scissors effect,” where the cost of manufacture diverges wildly from the retail price, is exposed when the price can be slashed during sales. That is the norm in the New Economy.

The distinctive features of the New Economy are a response to fundamental changes in the traditional economy and, of course, in technology. The time structure of our lives is changing, as are the things we do and the length of time we do them for. The number of hours you have to work to satisfy life’s basic requirements is decreasing, so one would expect leisure time to increase. This does not always occur, of course, because people may prefer to work more in order to clamber up the social ladder. Nevertheless, the increase in leisure time is very large, not a matter of mere percentage points. In the second place, the quality of work time is changing, perhaps for the better, perhaps not. From a burdensome chore, work may be transformed into personal self-assertion and inspired creativity. On the other hand, it may remain monotonous and tedious and blunt the acuity of the person doing it. Liberation from the rigours of the workplace does not automatically ensure a happy life for the peoples of the world, and even if matters do improve, there is no guarantee that this will be perceived. Finally, the quality of leisure changes, and here too there is no guarantee that it changes for the better when we are less busy. The industrialisation and standardisation of recreation lower its value and attractiveness. For all that, these changes have in common a tendency for the quality of an individual’s personal time to rise.

High-quality personal time is time which people themselves rate as having been well spent. A prerequisite is for the individual to have freedom to choose and to use all his abilities to the full. The mission of the New Economy is to bring humanity closer to that ideal.

The concept of quality time is central to this book and it is worth now considering ideas of progress. The ideal of progress has so often led to disappointment, has become so encrusted with connotations of war and global tragedy, that people seem to have quite given up on it. Nevertheless, progress never went away, it was still there, only doubts were ever-increasing as to whether it was actually a blessing. I believe progress can be rehabilitated if we understand it to mean increasing people’s quality time. We shall discuss this in Chap. 3.

Economists are in a difficult, even a ticklish situation. The realities of the New Economy are suffused with the symbolic, yet traditional economists continue to operate with material, earthbound bean counting, paying scant attention to the “semiosphere,” the changes in people’s motivations and the structure of their values. Yet the trends in these areas are so powerful that before you know it they will demolish traditional notions of society, and perhaps society itself. Culture

2.1 What is the New Economy? 9 influences the economy, but in the process is increasingly subject to the laws of economics. One might imagine that languages, symbols and signs are born and live in accordance with rules which have little in common with the material economy, and at one time that was true. But even as we watch they are going the same way as air and water, which are beginning to be scarce. They have moved from the category of free goods to the category of economic goods in short supply.

What is it in this subtle, incorporeal matter that has become a resource? On the one hand, it is the signs, works, linguistic and other symbolic constructions themselves. It is increasingly difficult to find a title for something, for example a website, without discovering to your dismay that the combination of letters you fancy has already been appropriated by somebody else. Words and names have become commodities in the most literal sense. They have to be bought for cash from cyber-squatters. That might seem an insignificant symptom, but far more telling is the fact that Google’s search system really took off only when they found a way of selling, believe it or not, words. A business pays Google for a word or combination of words, and is thereby enabled to advertise through the search system. In response to users’ enquiries containing the relevant words, the business’s advertisement appears on the pages of search results.

Far more conspicuously than the accumulation of signs, another problem is becoming evident: the limited nature of such human resources as leisure, attention, memory, emotions and taste. The media and entertainment industries ramp up their offerings but encounter a shortage of eyes and ears. Advertising markets calculate the monetary equivalent of attention, how much a unit of time of a particular social stratum is worth at a particular hour of the day on a particular advertising platform. Production of the symbolic has always been an economic process, if with special features, but now consumption of the symbolic has also become an economic process. Not only people and businesses, but states compete for cultural territory. Take, for example, the battle over which language should be used for encoding the contents of national libraries. Google favours English, while France champions French.

There is another problem, with which possibly we should start since it presents a major challenge to the whole of the theory and practice of economics. Traditionally economics has busied itself with scarcity, distributing resources in short supply in accordance with certain criteria. When dealing with material production, the focus on scarcity makes sense, but to a large extent the New Economy is dealing with non-material products, and thanks to digital technologies the cost of producing them falls virtually to zero. Under these circumstances it is difficult to give scarcity such a central role. What scarcity is there in an electronic file? The carpet is pulled from under the feet of classical economics, although in fact scarcity has not gone away. It has decamped from the phase of production to the phase of consumption, and is ultimately bound up with the receptive capacity of man. If we are to engage seriously with the New Economy, economics has no option but to create a counting system for anthropological resources. An institutional innovation described in this book helps us to find the solution.

2.2 Consumption as Language or, Why Does Society Need Diversity?

The New Economy is an economy of groups whose purpose is to satisfy a person’s need for quality communication. This understanding of the current situation is fundamental to all the ideas and thoughts put forward in the present volume. A particular individual’s quality of life depends on the kind of people he has around him and on the nature of his interaction with them. It is good to have access to circles in which you (a) acquire necessary contacts, (b) enjoy good standing, and (c) find common interests and a suitable field for activity. This is the area in which the New Economy operates, organising and providing content for groups, communities, and communication clubs. The group is the key unit of consumer society, its end and its means. The entire system of signs, texts and signals is, on the one hand, a means of gaining admission to groups in which a certain kind of person is welcome and another is not; and, on the other hand, it is an information menu for consumption there.

The quality of a group is related to the size and balance of its membership. The group should have neither too many nor too few members. An optimal size will emerge which can be sustained. The information economy and its industries works to produce signs and texts which make possible the successful formation of groups. Dress code at social events is a simple and effective means of regulating who comes in. Something similar, in a more or less sophisticated and veiled way, applies to all groups. Anybody who has not made the effort to learn the conventions or who does not know the passwords (which may be knowledge of particular texts and coded terms) is excluded. The need for visual signals, which can be read instantly and make it possible to stratify society, is what drives the fashion industries. Accessories perform the same function: mobile phones, gadgets, cars and other possessions.

These categories are very eloquent and announce the status and style of consumption you have achieved: how you dress, where your children go to school, what kind of car you drive, what kind of house you live in, how many languages you speak, and the like. All the components of the collection are balanced in terms of price and, more subtly, taste. If one link in the chain is altered, for example, if you take a step up the ladder, all the other links need to follow if a person is not to create an unfavourable impression. If you move up to a more prestigious car, you need to change the kind of clothes you wear.

What sort of nonsense is this, you may ask. Why should a serious person care what kind of superficial impression he creates. If he is a model, fair enough, but otherwise why give a damn about people who judge him by the clothes he wears? It will hardly affect the opinion of people who matter. We will not dwell on this error but confine ourselves to suggesting that the strategy of jackets with holes in the elbows is an alternative form of demonstrative consumption, only with a negative sign. It works to some extent for a very small group of people (for example, eccentric professors) who, as luck would have it, are the people who articulate the principle for everybody else.

2.2 Consumption as Language or, Why Does Society Need Diversity? 11

The habitus we show the outside world is a public photograph of our social status which, to some degree, also characterises our inner world. Like a bird’s plumage it allows a rapid initial filtering of individuals on whom it is not worth wasting time. It makes sense to subject those remaining to closer scrutiny, to listen to what they have to say, what they think, what they have read, how they live their lives. Accordingly, sophisticated consumption is not a whim or a sign of moral depravity, but a rational means of stratifying and dividing to create communities. Every time a person selects and purchases an item, he decides where and in what respects he wants to resemble people who interest him, and in what respects he wishes to differentiate himself from them in order to demonstrate his individuality. He needs to integrate in order to be accepted as an equal, but also to differentiate himself in order to be recognised as an interesting person and to occupy a condign position in the group. Integrating and differentiating oneself are the principal axes of the coordinates of social life, enabling people to position themselves through consumer choice. By demonstrating his taste and talents, each person in society minimises personal costs of time, attention and emotion to establish quality links. Cognitive markers help to minimise communication with unsuitable, “wrong” people. The industries of the New Economy thus produce not mere goods with utilitarian qualities, but primarily a system of signs and signals essential for the ordering of personal life, acquisition of professional contacts, and discovering proximate and less closely related groups. A person needs to belong not just to one group but to several, and on different levels, depending on the diversity of his interests and the facets of his personality. If we reduce the variety of goods, there will be fewer differentiated groups and their membership will be less compatible. People will get on each other’s nerves.