E-BUSINESS: VALUE CREATION IN THE NEW ECONOMY
Luc Soete,
University of Maastricht
Director of Maastricht Economic Research Institute on Innovation and Technology (MERIT)
Computing and the information and communication technologies (ICTs) have fostered a new analysis of the economy.
I would like to concentrate on three key aspects of this phenomenon.
First, in Europe, we consistently refer to “information and communication technologies,” whereas in the United States
the standard phrase is simply “information technology” (IT). In the U.S., the tendency is also to focus on the computer
as an exemplar of IT and of the technological changes encompassed by the term. On this point, I totally disagree with
Robert J. Gordon, who compares the computer to the major inventions of the nineteenth century such as the automobile
or electricity. Confining the network of ICTs to the computer1 or to the effects of the computer is a highly reductionist
approach. It neglects the dissemination of the various technologies and their interaction—two factors that give us a
broader vision of the impact of technology.
Second, communication technologies are essential in economic terms. Today, for the first time, we can transmit
electronic signals with practically no loss. Admittedly, the signals are boosted by routers, but the digital network
operates without loss, unlike electrical power grids, where losses can reach 10% or even 15%. The possibility of sending
signals over a digital communication network without loss justifies the expression “abolishing distances.”
Third, the new technologies offer mobile communication. Information is now “in the air.” It has no geographic or
physical limits due to the material infrastructure. The 500 billion pages on the Web can be accessed anywhere, at any
time, and without physical contact. The economic impact of such a technological change has yet to be defined.
My talk begins with a historical overview of a major source of the growth recorded in our economies: the gradual
integration of what were initially public goods into the sphere of economic exchange and valuation. Throughout the
history of most economies, we can identify comparable phases of economic expansion in which significant domains
were colonized, and an economic value and an exchange value were assigned to activities previously outside the
economic system.
Information and communication: a new phase in the continuous expansion of
the economy
The new technologies must be analyzed in a broader economic framework. Under the influence of U.S. economists, we
tend to observe the changes induced by the new economy solely in terms of the impact on productivity. This is
consistent with the tradition of the economics of technological change. We study how the new technologies can put an
end to the Solow paradox, for example. However, by adopting such an approach, we tend to overlook a fundamental
issue, which is to examine how the new technologies enlarge the economic field. They add value to the economic
system, in keeping with a trend that characterizes the entire human experience since we were “expelled from Paradise.”
Assigning value to public goods, or the expansion of the economy in space
Let us return to the origin of the world, and assume that in Paradise all goods were public. Utility was thus maximized
effortlessly. But what would have happened if the population of Paradise had increased? Would the supply of public
goods have been sufficient? Most likely not. One of the major lessons of economics is that, in the spatial sphere, we
have never stopped generating value from the Earth that has been at our disposal since the days we were chased out of
the primal paradise. Value has been created by assigning exclusive rights, operating rights, and property rights over
1. (Editor’s note) Robert J. Gordon, “Does the ‘New Economy’ Measure up to the Great Inventions of the Past?,” Journal of Economic Perspectives,
vol. 4, no. 14 (fall 2000), pp. 49-74.
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goods that were—in essence—public. I’m thinking in particular of natural public goods. Let’s take the example of a
pond. If we had not introduced operating rights or property rights over a natural space such as a pond, it would soon
have run out of fish owing to overfishing.
The establishment of operating and property rights makes the economic interest of an individual comparable to the
environmental interest, under the terms of a balance (of sorts) between growth, economic exploitation, and preservation
of environmental capital. In the developing countries, the pressure exercised by poverty and underdevelopment is such
that it can quickly lead to the overworking of natural goods—for example, the sea and the Amazon forest.
Granting property rights over public goods adds enormous value to goods that already existed but did not belong to the
economic sphere. The Earth has not grown bigger, but we have substantially enhanced its value in the economic sense of
the word by assigning value and introducing that value into the economic system. True, the physical space occupied by
humankind has not increased, but we have conferred additional value on natural goods by introducing the concept of
economic value. On the other hand, the allocation of operating and property rights, while informed by an equality
principle, can lead to inequalities. In 1842, one of the first articles written by Karl Marx as a young journalist for the
Rheinische Zeitung was a pamphlet against the poverty created by granting private firms operating and exclusion rights
in German woodlands, thereby preventing the poor from gathering wood for their own use.
Payroll employment enlarges the time sphere
The second expansion of the economy took place in the time sphere. Before the industrial revolution, the population
hired out only a small portion of its labor outside the family. Most work-related activities were not voluntary. They took
place within the family. The transactions they generated were not commercialized. With industrialization, time has been
“outsourced” in the form of wage or salary income.
Today, the average household receives a dual income by taking part in payroll employment, and it outsources activities
previously performed in the family, such as housekeeping and child care. By outsourcing time and no longer relying on
family labor, we have enlarged the economic sphere. However, a basic inequality persists, which is chiefly an income
inequality between (1) the dual income of households who have no time to enjoy it—the ultimate paradox of a rich
consumer society, and (2) poverty often concentrated in single-income households, most notably single women with
children. These households have neither the time nor the money to engage in other activities, whether domestic tasks or
activities that would boost their income to the point where they could outsource some of those domestic tasks.
NICTs herald a new phase: “digital” expansion
Today, the new information and communication technologies (NICTs) set the stage for a fresh wave of economic
expansion by allowing the coding of exchanges. True, information and communication have always existed. But, thanks
to the new technologies, they can now be coded and traded. We can sell them in digital form anywhere and at any time.
Online transactions are executed instantly and without distance constraints.
The new technologies thus enhance the “tradability” of many activities hitherto limited in space and time. These
innovations also solve the asymmetry between information supply and demand. Moreover, supply is personalized for the
individual user. Highly detailed information products can be offered to satisfy extremely specific information requests.
This trend also raises the issue of rising inequality, as the socialization of information due to the Internet is not a
socialization of knowledge.
Three microeconomic aspects of the new economy
How can the new economy generate value? At the microeconomic level, we can distinguish three factors: information
goods, information on goods and services, and the information infrastructure.
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The issue of digital-goods ownership
We now have at our disposal what are called information goods or digital goods, which comprise all tradable online
goods such as MP3 files. The issue is to find ways of introducing exclusive rights over them. What procedure(s) will
prevent them from being copied? How can the information society create an exclusive claim on goods that are
essentially public? Can one introduce copyright, property rights, or patent rights for them? Information clearly plays a
social role and contributes to social cohesion. The introduction of rights in this sector is a timely issue. For example,
should patent rights be granted for software, management processes, and so on? We are still exploring the limits to
information ownership.
Information on goods and services can reduce transaction costs
The new economy creates “goods and services information,” which is essential in solving information asymmetry in
these markets. The information supplied concerns prices, quality, and procedures for acquiring the products. In this
respect, the Internet has revolutionized distribution. Transaction costs may be reduced—sometimes phenomenally—in
areas where information on, say, subcontractors or product quality often lacks clarity.
The Internet can also play a part in B2B by bringing transparency, promoting new forms of organization, and facilitating
disintermediation.
It is also making substantial contributions in the business-to-administration (B2A) sector. We are currently performing a
study for the Port of Rotterdam. According to our findings, new technologies can help reduce the Port’s “pure”
transaction costs—which we estimate at USD2 billion—by 25%.
As regards goods and services information, we must examine not only the transparency provided by the Internet, but
also information-search costs. New technologies are emerging, such as search engines. For the moment, our knowledge
of individual behavior is too fragmentary. Empirical studies are needed to determine how to define more sophisticated
search methods. Anthropology may give us some useful leads here.
Network effects enhance network value
The information infrastructure is evolving—and this raises all the issues of networks and standards. Economic theory
has looked at positive spillover effects and other typical aspects of networks. For example, the network’s value increases
in proportion to the number of network users, as Metcalfe’s law2 states.
There are also the issues raised by information infrastructure and open standards. One of our studies has shown that
open standards are essential to achieving network economies. Such network effects do not seem attainable with closed
systems such as electronic data interchange (EDI): they engender only productivity-related effects. When you open up a
system, you may get a steady stream of network effects. If so, they will be much more significant and long-lasting at an
overall economic level.
The emergence of “e-business”
Since early 2000, hacking episodes and the Microsoft case have forced us to examine how the new-economy businesses
can create and preserve a customer network. The number of clicks-and-mortar partnerships is increasing. New alliances,
known as e-liances, are forming. They may involve one of the following combinations:
•
a start-up and an existing firm: for example, the merger between AOL.com and Time Warner, which has given birth
to the first global multimedia communications conglomerate; the joint venture between Shell and Commerce One, to
develop an electronic exchange in the energy sector; and the agreement announced by Unilever and iVillage.com for
the joint opening of a “beauty and body care” site.
2. (Editor’s note) Named after Robert Metcalfe, inventor of the Ethernet network protocol and founder of the 3Com corporation. Metcalfe’s law
holds that a network’s value grows by the square of its networked units.
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•
two existing firms: for example, Whirpool and Nokia have signed a cooperation agreement for the design of
innovative solutions in networked electrical domestic appliances.
Typically, these firms are connected by increasingly sophisticated networks. The strength of the alliance will depend on
the magnitude of the change linked to the role of information in the industry itself, and on whether the change involves
commerce, distribution, or an outright reorganization.
Some macroeconomic trends
In macroeconomic terms, we can assert that a portion of previously non-economic activities has now joined the
economic sphere. The economic sphere is expanding continuously—as is the tradability of information goods and
services. Trade in the latter generates additional growth. Products are increasingly personalized. These innovations
require active participation by consumers, who are thus more closely involved in the commercialization of such goods
and services.
A new cycle of productivity gains?
In the 1990s, new growth conditions prevailed in the U.S., predicated on the integration of information and
communication into the economy. Of course the ICT sector had its own presence in the economy, encompassing
hardware and content. The market was deregulated and produced very high income. And the financial sector was highly
developed.
The current debate centers on the issue of whether we are experiencing a productivity-growth cycle similar to the
previous ones. In particular, the search is on to determine if the U.S. is enjoying macroeconomic-cycle effects analogous
to the effects of the 1961-69 cycle. But the 1991-2000 cycle—if it is indeed a cycle—bears little resemblance to the
1961-1969 cycle. In a typical cycle, total economic growth and productivity growth are very brisk in the first two years,
then gradually decline to far lower levels at the end of the cycle. In the present cycle, the figures are moving in the
opposite direction (chart 1).
Cha rt 1
Productivity grow th in pe riods of e conomic ex pa nsion
5
5
First 2 years
3rd and 4th years
5th and 6th years
7th year and beyond
4
4
3
3
2
2
1
1
0
1961-69
1982-90
1991-99
0
Periods of economic expansion
Of this we can be sure: if we are in the midst of an economic cycle, is it not of the conventional sort. Today, the U.S.
holds an outstanding position in productivity terms. In Europe, some countries have yet to join this productivity uptrend.
In the U.S., the largest productivity gains are concentrated in the ICT-producing sector. The same is true in France,
which has a large ICT sector. By contrast, no such trend is visible in the Netherlands or in Denmark (chart 2).
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Chart 2: Labor-productivity growth in ICT-producing sector
20.0
17.1
16.2
1990-95
1995-98
15.0
9.7
10.0
9.6
8.6
7.3
6.2
5.0
4.3
5.0
3.9
3.3
0.0
0.0
Netherlands
Denmark
France
Germany
Italy
United States
Source: ICT database, OECD
Behind these observations, a sizable measurement problem persists. We have carried out a study on the subject for the
Royal Netherlands Economic Association. If we use the U.S. hedonic deflator for each country confined to the ICT
sector, we obtain a new assessment of productivity gains: nearly unchanged for France, but almost double for Germany
(chart 3). If we look at ICT-user sectors instead, we also find a fairly substantial productivity-growth effect for Germany.
In other words, two measurement effects are at work: the first concerns hedonic prices; the second pertains to the service
sector, which tends to be poorly measured.
Chart 3
Labor-productivity growth in ICT-producing sector, 1990-98, by deflator
national deflator
U.S deflator
14
12.3
12
Annual growth, 1990-98 (%)
12.3 12.3
11.4
10.8
9.9
9.7
10
8.3
8
6.5
6
5.8
5.5
4
2.4
2
0
Netherlands
Denmark
France
Germany
Italy
United States
Source: ICT database, OECD
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Infonomics: an interdisciplinary science to understand the new economy
In conclusion, we are facing the paradox of Paradise and Hell. In Paradise, goods prices are supposed to be low thanks
to network effects, utility satisfaction, and the abundance of public goods available for free. As a result, the gross
domestic product is small. In Hell, prices are affected by the scarcity and lack of goods. The gross domestic product is
probably very high. The effects of outsourcing consumption can be negative or positive. I do not wish to go into further
detail on this point, which would deserve a paper all to itself.
Many tools in economics, particularly in microeconomics, enable us to analyze how the new-economy markets function.
However, as we move further into this type of market, we must draw on other sciences such as anthropology,
psychology, and semiotics. The reason is that the new-economy markets are shaped by the behavior of individuals, who
do not respond in the way they would in the conventional material economy. This observation enables me to introduce
the concept of infonomics. Infonomics is an attempt to develop a new, interdisciplinary science, needed today to explore
all aspects of the new economy. That is the goal of the Institute for Infonomics created at the University of Maastricht
(http://www.infonomics.nl/).
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