Sunday, 22 September 2019 02:03 GMT

Why Economics Must Go Digital

(MENAFN - Daily Outlook Afghanistan) one of the biggest concerns about today's tech giants istheir market power. At least outside China, Google, Facebook, and Amazondominate online search, social media, and online retail, respectively. And yeteconomists have largely failed to address these concerns in a coherent way. Tohelp governments and regulators as they struggle to address this marketconcentration, we must make economics itself more relevant to the digital age.
Digital marketsoften become highly concentrated, with one dominant firm, because largerplayers enjoy significant returns to scale. For example, digital platformsincur large upfront development costs, but benefit from low marginal costs oncethe software is written. They gain from network effects, whereby the more usersa platform has, the more all users benefit. And data generation plays aself-reinforcing role: more data improves the service, which brings in moreusers, which generates more data. To put it bluntly, a digital platform iseither large or dead.
As several recent reports(including one to which I contributed) have pointed out, the digital economyposes a problem for competition policy. Competition is vital for boostingproductivity and long-term growth, because it drives out inefficient producersand stimulates innovation. Yet how can this happen when there are such dominantplayers?
Today's digitalbehemoths provide services that people want: one recent study estimated thatconsumers value online search alone at a level equivalent to about half of USmedian income. Economists therefore need to update their toolkit. Rather thanassessing likely short-term trends in specific digital markets, they need to beable to estimate the potential long-term costs implied by the inability of anew rival with a better technology or service to unseat the incumbent platform.
This is no easytask, because there is no standard methodology for estimating uncertain,non-linear futures. Economists even disagree on how to measure static consumervaluations of free digital goods such as online search and social media. Andalthough the idea that competition operates dynamically through firms enteringand exiting the market dates back at least to Joseph Schumpeter, the standardapproach is still to look at competition among similar companies producingsimilar goods at a point in time.
The characteristicsof digital technology pose a fundamental challenge to the entire discipline. AsI pointed out more than 20 years ago, the digital economy is 'weightless.Moreover, many digital goods are non-rival 'public goods: you can use softwarecode without stopping others from doing so, whereas only one person can wearthe same pair of shoes. And they require a substantial degree of trust to haveany value: we need to experience them to know whether they work, and socialinfluence is often crucial to their diffusion.
Yet standardeconomics generally assumes none of these things. Economists will bridle atthis statement, rightly pointing to models that accommodate some features ofthe digital economy. But economists' benchmark mental world – particularlytheir instinctive framework for thinking about public policy questions – is onewhere competition is static, preferences are fixed and individual, rival goodsare the norm, and so on.
Starting from thereleads inexorably to presuming the 'free market paradigm. As any appliedeconomist knows, this paradigm is named for a mythical entity. But thisknowledge somehow does not give rise to an alternative presumption, say, thatgovernments should supply certain products.
This instinct may bechanging. One straw in the wind is the call by Jim O'Neill, a former GoldmanSachs economist who now heads the Royal Institute of International Affairs(Chatham House), for public research and production of new antibiotics. Havingled a review of the spread of anti-microbial resistance – which will killmillions of people if new drugs are not discovered – O'Neill is dismayed by thelack of progress made by private pharmaceutical companies.
Drug discovery is aninformation industry, and information is a non-rival public good which theprivate sector, not surprisingly, is under-supplying. That conclusion is notremotely outlandish in terms of economic analysis. And yet the idea ofnationalizing part of the pharmaceutical industry is outlandish from theperspective of the prevailing economic-policy paradigm.
Or consider theissue of data, which has lately greatly exercised policymakers. Should datacollection by digital firms be further regulated? Should individuals be paidfor providing personal data? And if a sensor in a smart-city environmentrecords that I walk past it, is that my data, too? The standard economicframework of individual choices made independently of one another, with noexternalities, and monetary exchange for the transfer of private property,offers no help in answering these questions.
Economic researchersare not blameless when it comes to inadequate policy decisions. We teacheconomics to people who go out into the world of policy and business, and ourresearch shapes the broader intellectual climate. The onus now is on academicsto establish a benchmark approach to the digital economy, and to create a setof applied methods and tools that legislators, competition authorities, andother regulators can use.
Mainstream economicshas largely failed to keep up with the rapid pace of digital transformation,and it is struggling to find practical ways to address the growing power ofdominant tech companies. If the discipline wants to remain relevant, then itmust rethink some of its basic assumptions.


Why Economics Must Go Digital

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