We’re witnessing an extraordinary series of digital revolutions in our economy, which pose practical challenges for investors, policy-makers and innovators all trying to understand the changes.
We’ve just had the first conference of Readie, which is shaping up to be a very exciting network of researchers and policymakers interested in the digital economy, with great backers including Google and RKW. Here is a summary of the talk I gave to help kick things off.
We’re witnessing an extraordinary series of digital revolutions in our economy, which are simultaneously exciting, scary and surprising. They range from the mushrooming scale of new platforms like Uber and Airbnb, to new applications of machine learning, waves of investment going into AR, VR, new social media platforms and data analytics, to rapid change in the labour market.
These changes pose practical challenges for investors, policymakers and innovators themselves, and intellectual challenges for anyone wanting to make sense of what is going on.
One is how to map and measure. The team at Nesta has done some really path-breaking work. The Tech Nation report combined open and survey data, commercial data, web-scraping and machine learning to adapt the categories, providing a much richer, more comprehensive and up-to-date picture of the UK’s digital industries, which is suggestive of where statistics could be heading in the future with much more use of digital tools to map emergent economic patterns.
A very different challenge is how to make sense of the impact of automation on jobs. For 50 years many futurists forecast that millions of jobs would be destroyed by automation, that we would all become self-employed, or work from home, and for most of that time the facts went in the opposite direction. But it’s possible that ‘this time is different’. Many books have warned of a coming jobs disaster, and we now have plenty of forecasts of which jobs will be most at risk. Researchers will need to track carefully who is right, and to help education systems better prepare young people for likely scenarios.
Then there are all the multiple questions around the sharing economy – how to tax, regulate, measure or support it. The UK just gave generous relief to homeowners wanting to rent out on Airbnb while Barcelona has done the opposite. One of the many interesting side-effects of the sharing economy is that it shows up major deficiencies in economics. For example, we lack any good ways of measuring capacity utilisation in things like cars and houses – let alone the productivity of consumption (something I covered in my book The Locust and the Bee). Yet this is probably the greatest contribution of the sharing economy tools. Another challenge is that when the sharing economy is successful it may reduce GDP even as it raises living standards.
In almost every sector big strategic issues are coming to the fore for which current theories are inadequate: should Europe’s universities be much more aggressive in developing MOOCs or MOOC-like services? How should the arts make the most of digital tools, having seen the music industry lose half of its revenue in a decade thanks to innovations like iTunes?
I have a strong personal interest in these questions. A quarter of a century ago I did my PhD at MIT on the economics of networked economies, published in this book. I found myself grappling with the intellectual achievements of people like Fritz Machlup, Chris Freeman, Joseph Stiglitz and Paul Romer, but also concluded that there still wasn’t all that much useable theory. For example, then, as now, economic theory couldn’t easily cope with zero marginal cost industries (my PhD focused on fibre broadband); it had few tools available to understand not only the positive network effects of services like Facebook and Instagram but also the negative network effects that can be seen in comments pages. It lacks any very good theories for explaining the new digital commons, a topic I covered in this recent piece; what to believe about ‘long tail’ effects; or how scared to be of new monopolies and quasi-monopolies.
"We don’t yet have a Keynes or Smith for the 21st century"
These are all issues that Readie will engage with, linking the best and most profound research on the cutting edge of theory, with the needs of decision-makers who want pithy analysis and clear conclusions. We don’t yet have a Keynes or Smith for the 21st century. But it’s highly likely they will be working in this field, with the courage to overturn old theories and rethink economics from the ground up, with data, information and knowledge at the core.
Hopefully Readie can give them a useful community within which to sharpen up the arguments, while also linking them into the real world. Smith and Keynes were, after all, heavily involved in the policy discussions of their times. Their counterparts today will be as well.