Technology, Web and Startups

Recently, there was a talk at the Singularity University by John Mauldin that discussed some of the debt problems in the US and world economy. While I’m happy to see the Singularity community continue the debate across multiple disciplines, I still think there is a lot that needs to be addressed regarding the economics around informationization.

For this article I prefer using the term informationization which is slightly detached from the concepts used in the Singularity community and Ray Kurzweil’s ‘law of accelerating returns’. By informationization I want to refer to the world-changing phenomenon in which physical processes get replaced by informational processes. While abstract and detached from the Singularity, I think most technologists and non-technologists will agree that this informationization is something that is happening right now.

So far, typical discussion about the economic consequences around informationization have been about the falling price of physical goods, the cost of computing power per dollar and some have ventured into the areas of post-scarcity economics and human-level AI labour economics. In this article however, I am much more interested in how informationization affects us now and in the near future. What will be the new drivers of wealth? What industries will be born and which ones will perish? What government policies will work? What strategies will not work?

Extremistan

In a world where more and more activities are becoming informational, there is far greater variety in extremes. Our society has been very bad at dealing with this. Nassim Nicholas Taleb has described some of these fundamental issues in his book, the Black Swan (TBS). In TBS, two worlds are described: Mediocrestan, the physical world in which there is only limited variety; and Extremistan, the informational world in which there is a much greater variety. TBS doesn’t elaborate these concepts much, but as described in the book, they play key roles in the predictability of certain systems. Today the world is much more of an Extremistan in which it is hard to predict anything because of the sheer complexity. For the past years, among many things, mr Taleb has been very skeptical of the trust people have been putting in predicting systems that are not really predictable at all. Consequently, he has been betting against the status-quo and has reaped great returns from his investment portfolio.

Informationization could bring an increase of bubbles in the economy.

So what’s so different in Extremistan?

• There is a huge difference between the smallest and the biggest
• Things are a lot more complex and harder to predict
• Change happens fast, things that were tiny can become big in an instant
• There is a lot more volatility which could result in less stability and sustainability

Macroeconomics

Over time more symbols get added onto the symbol stack, an example would be a stock option which is very far removed from something tangible. The ever increasing complexity of this symbol stack is making it very hard to accurately measure value creation by traditional means. With the growth of the symbol stack more currencies will be born and more transactions will happen beyond simple monetary transactions. Since this activity falls beyond the monetary radar thats used by governments and economists, a lot of the macroeconomic numbers are not just missing resolution, they are missing entire dimensions.

Having a single currency to exchange goods has given us tremendous benefits to deal with the administration of who owes who what. However, now that communication lines are exploding between businesses and people and now that most administration is done digitally, there is no longer a need for only a few currencies. In fact, there is a very strong need for more currencies! A lot of value thats done on ‘good faith’ by ‘amateurs’ for example is becoming digital, like for example the work done by some passionate Wikipedia contributors. These ‘volunteers’ are producing real value and can for example be paid by an increase in social capital, which in turn can be monetized by for example sponsorship and advertising. Alvin Toffler explains a lot more about these prosumers and the hidden economy behind it in his book Revolutionary Wealth.

To summarize this:

• A lot of value-creation is done without the transaction of money. This in consequence means that huge assets are being build up which are only waiting to be monetized. Example: the social capital of influential bloggers.
• Since digital value-creation is highly measurable, you can expect new currencies to arise. Example: the number of Twitter followers for a person that pay x amount of attention to that person.
• A lot of the macroeconomic reports that are used by policy makers lack data-sources to paint an accurate picture of where value is created.
• A perhaps dangerous consequence of this is that policy is created and predictions are made without an acknowledgement of the lack of data.

I’m not saying that its impossible to measure the gross of economic throughput, I’m just saying it is very challenging and we cannot count on simple measurable monetary transactions. I think it is very important that we figure out whether or not we can keep up with the explosion of transactions, currencies and value-creation ecosystems, as this could affect entire countries. For example, all government spending is based on taking tax on a percentage of a measurable transaction. What if governments can no longer keep up with the complexity of todays world? The tax agency of my home country, the Netherlands, for example, is neglecting revenue tax on all ‘digital services’ performed outside of Europe. (lucky me! :] )

Source: OECD

When looking at some of the data thats used by macro-economists through an informationization lens, there are some very interesting observations we can make. Take for example the Trade in Service (TIS) by the OECD. These numbers (see above) reveal that some countries have a huge deficit when it comes to the trade of these more intangible items. For example, while the United States’ trade deficit is often contrasted against Germany’s healthy export, it turns out that post-industrially speaking, the US is far ahead of the other countries. Of course, there is a lot going on beneath these numbers and only by looking at the sub-service sector stocks we can really tell which countries have healthy knowledge economies.

The New Scarcities

Things that are abundant will become a commodity, which will greatly reduce the price and its value. These are core economic principles that are unlikely to change. Thanks to informationization many things are becoming more abundant, but where abundance is created, new scarcities are formed as well. Understanding these new scarcities will give us insights into where new economic value is created.

Thanks to the great copy machine called the internet, traditional ways of charging for a medium are failing. Many industries now have to deal with the reality that their content was always free and that they can no longer charge for the medium. The reality is that everything that can be copied is as abundant as air. Would you be able to charge money for the air you breathe?

So what is not copyable by the ‘great copy machine’? Kevin Kelly, in his ingenious essay, Beyond Free, lists out seven of these new scarcities that will rise in value and which people will pay for:

• Immediacy
• Personalization
• Interpretation
• Authenticity
• Accessibility
• Embodiment
• Patronage

Even though these concepts are still very abstract, they hold the key to where new markets and businesses are created. Some of these, e.g. authenticity and patronage, can perhaps never be made abundant. Billions will flow however, to those that can commoditize these scarcities.

A list of potentially endangered industries.