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Roger Clarke's 'Alternative Economics'

Alternative Economics for the Information Age

Roger Clarke

Principal, Xamax Consultancy Pty Ltd, Canberra

Visiting Fellow, Department of Computer Science, Australian National University

Preliminary Draft of 12 December 1999

© Xamax Consultancy Pty Ltd, 1999

This document is at


Everyone seems to agree that the information age is different. Everyone also seems to agree that conventional economics fails to provide an appropriate basis for understanding it. There are alternative approaches to the creation of a new body of economic theory. This paper provides an overview of the battle between the hard-headed version of information economics, which focuses on the information economy, and another school of thought that perceives economic behaviour to be a means to an end rather an end in itself.


1. Introduction

insert description of the setting - the information age has arrived, and we're stuck with outdated intellectual tools that are a very poor fit to the circumstances

insert motivation - new theories are emerging, and we need to understand them

The paper commences by identifying key assumptions underlying conventional economics, whose current form tends to be described as 'neo-classical'. It then describes key features of the technologies, social behaviour and economic behaviour that have emerged during the last decade of the twentieth century as the long-heralded information age matured. The poor fit of neo-classical economic theory to the current context is underlined.

Economists strongly aligned with the corporate sector have been hard at work, describing a new economics for the network economy. The tenets on which the new theory is being built are outlined, and some key features are identified of what is characterised in this paper as 'hard-headed information economics'.

In parallel, another approach has been emergent, elucidated by people whose commitments are to human rather than business values. This 'communitarian information economics' is described, and differentiated from its competitor. Three scenarios are drawn, and some implications are drawn for the theory and practice of electronic society and electronic commerce.

2. Neo-Classical Economics

insert an outline of the world that conventional economics sets out to describe, including quotes from and citations of the high priests:

Various branches of the theory relax particular among those assumptions, e.g. by investigating the implications of information asymmetry for the fit between theory and reality.

3. Key Features of the Information Age

insert an outline of the world ushered in during the last decade of the twentieth century:

* Information Centrality

For at least thirty years, the feeling has been in the air that a major shift in civilisation was occurring or about to occur. In the search for a suitable descriptor for this new age, a variety of terms have been coined and catalysts nominated. Boulding used 'post-civilisation', and McLuhan 'the global village'. Toffler coined 'the super-industrial society' to mean "a complex, fast-paced society dependent upon extremely advanced technology and a post-materialist value system" (1970, p.444), but the term had shorter currency than did 'future shock', and he now prefers 'third wave society' (1980, 1972-85).

Perhaps the most influential was Bell's 'post-industrial society' (Bell, 1973), originally coined to refer to the growth of services in general. Such terms have, however, been progressively replaced by 'the information society'. In 1968, Drucker asserted that "knowledge, during the last few decades, has become the central capital, the cost centre and the crucial resource of the economy" (1968, p.9).

Masuda (1981), Jones (1982) and Stonier (1983) popularised the term 'information society' (see also Cawkwell 1987). Naisbitt (1982) committed his first chapter to "the megashift from an industrial to an information society ... it is no longer an idea - it is a reality ... an economic reality, not an intellectual abstraction" (pp. 11, 20). Naisbitt traces the commencement of the information society to 1956-57, when white-collar workers for the first time overtook blue-collar employment in the U.S., and Sputnik foreshadowed the era of global satellite communications.

Central among the tenets of post-industrial and information society futurism were greatly increased decentralisation of power and fluidity of organisation.

* The Explosion of Digital Technologies

The sudden conversion from an analogue to a digital world (or 'from atoms to bits', as Negroponte (1995) described it) has occurred in every aspect of the information handling process:

* Social Origins of Cyberculture

On the original Internet, the users were members of research communities, whose pattern of behaviour was to share effort. No thought was given to the idea that data and services might be worth charging for. Similarly, the bulletin-board and newsgroups users who migrated onto the Internet had concepts of community-service and sharing, but no developed notion of an economy. The newcomers during the early period of growth, roughly 1990-94, cheerfully adopted this ethos. The psychology of individual behaviour within electronic communities is considered in Hauben & Hauben (1997).

The 'virtual community' was originally thought of as a social construct, for social purposes, both in the pioneer research communities (Clarke 1994a) and in communities more generally (Rheingold 1994).

Electronic communities are considered in various papers indexed at Clarke (1995-). Key aspects of the culture are egalitarianism and openness [CHECK THAT AGAINST THE UNIMELB SLIDES]. In many fora, this manifests itself as direct speech, 'sounding off', and flaming. Some communities have, however, harnessed the opportunity to conduct more polite and constructive interactions.

Physical communities are based primarily on physical proximity. Within a geographical area, whose size is determined by the available transport and communications technologies, sub-communities arise whose members share a common interest or belief-system. Virtual communities, on the other hand, are seldom based on physical proximity alone, but almost always on some kind of common interest. They extend over unlimited physical space, and enable people to 'meet' and communicate who would not otherwise even be likely to know of one another's existence. Rheingold has speculated that their attraction has partly been as a result of the breakdown of older forms of neighbourhood, community and culture.

Some time ago, I warned regulators about the pitfalls of attempting to regulate what they don't understand (Clarke 1997c). As an antidote, I proposed that they first develop a deep appreciation of Internet aphorisms and epigrams, such as:

Cyberspace as 'shared hallucination' There's no 'there' there The street finds its own uses for things On the net, nobody knows you're a dog National borders are just roadbumps on the information superhighway National borders are not even roadbumps on the information superhighway Information wants to be free (Clarke 1999b) The catch-cry that 'information wants to be free' is ambiguous. It was originally an assertion that the natural state is for information to be available, not protected. "The word 'free' in 'free software' refers to freedom, not to price" (Stallman 1992). But it is capable of being bastardised into an assertion that 'information wants to be gratis'.

* Business Applications of the Internet

insert key points from the early sections of WillPay.html

or should that come a bit later, to show that the info economics of Varian et al. relates to the behaviour of marketer-as-predator?

4. Hard-Headed Information Economics

Neo-classical economic theory is a very poor fit to the information age. Resources are not scarce, and are easily and cheaply replicable. Much of the behaviour of people in the Internet context is ill-described by 'self-interested rationality'. A 'new economics' is emerging, which relaxes the key set of assumptions underlying neo-classical economics, viz. non-replicability and hence scarcity of resources.

use as the driving reference Shapiro & Varian (1999), and provide a polite rensition of the key features and processes

weave in the following:

what about:

The form of 'new economics' described in this section is based on somewhat more relevant assumptions than neo-classical economic theory. In particular, it does not assume:

There remain a number of ways in which it is is a bad fit to the realities of the information age, that were described in the preceding section. In particular:

The following section considers a further alternative.

5. Communitarian Information Economics

describe the alternative 'new economics':

The following is an earlier attempt at this argument:

* Direct Consideration, or Indirect Reward?

A great deal of the behaviour in network communities is social in nature. On the other hand, a lot of valuable information is exchanged. It is easy to dismiss the behaviour of participants as merely altruistic, and therefore beyond the reach of economics. It is easy, but wrong; because the notion of reciprocity does exist. The difference is that exchange in virtual communities takes place for indirect or abstract reward, rather than for direct consideration. Drawing a distinction rooted in rural communities, Rheingold (1992, p.425) argued that "the community's conceptual model of itself is more like [communal] barn-raising than [zero-sum game] horse-trading". An alternative metaphor, which explains the processes of electronic community in a manner more akin to conventional economics, is the 'cooking pot', which "keeps boiling because people keep putting in things as they themselves, and others, take things out" (Ghosh 1998).

* Emergence of a Body of Theory

In his analysis of the business models underlying Internet commerce, Bambury (1998) classified the approaches into those transplanted from real-world business and those native to the Internet. But in both cases, he concluded that "corporations are engaged in the colonisation of the Internet": their mind-set is just as out of tune with the contemporary scene as the East India Company and the Hudson Bay Company are historical relics.

For some time now, there have been warnings that the long-standing notions of both 'market' and 'consumer' would change. Toffler (1980) wrote about 'prosumers', as active participants rather than mere acceptors of what was thrust at them; and of the end of 'marketization', and its replacement by what we would now call 'the marketspace' (Rayport & Sviokla 1994).

Alternative economics have been advanced, especially in the context of software, by such authors as Richard Stallman, of gnu and Free Software Foundation fame, Goldhaber ( 1997a, 1997b), Raymond (1998). These are derivative from the now well-established underlying theory of information economics (Lamberton 1971, 1994, 1996).

* Processes of Innovation

Dempsey (1999)

use Unix, emacs, GNU licences, Linux, open source arguments

* Community ?

Central to all of these are the presumption that economic growth is critically dependent on the velocity and richness of idea-communication within communities. It isn't necessary to go so far as to assert, as Kelly (1998) does, that information economics will in due course displace the old economics of scarcity, as network behaviour becomes the entire economy. But it is vital to appreciate that electronic community has primacy.

If that proposition is correct, and electronic community and cyberculture are fundamental, then electronic commerce will continue to falter, while-ever corporates seek to dominate, acquire, and exploit the Internet. To achieve the breakthrough, businesses have to discover what cyberculture is. Only by building on that understanding will they be able to appreciate the behaviour of net-consumers, and hence devise principles and practices that match consumers' expectations and needs, and thereby fulfil the marketer's own objectives.

* The Feasibility of Co-Existence ?

insert references to ../DV/DirectMkting.html, ../DV/InfoBase99.html#ArgMa, relationship-based marketing, and permission-based (opt-in) marketing

Some theories of web marketing are beginning to appear that reflect awareness of what the social web is, such as Hoffman & Novak (1997). A recent study of 'eCommerce Trust' leads to the conclusions that consumer confidence is greatest where the other party is known, there is a positive record of experience in dealings with that party, the terms of dealing are clear, and some form of credible assurance exists that the other party will perform in accordance with those terms (Cheskin 1999. See also Clarke 1999).

A practical approach has been adopted by the information technology providers that fund the World Wide Web Consortium (W3C). Rather than mere window-dressing, they have produced a standard which lays the foundation for privacy-sensitive technology, and hence consumer trust in electronic commerce. The emergent Platform for Privacy Preferences (P3P) standard reflects their realisation that consumer Internet commerce is dependent on a much more balanced relationship between seller and buyer than has been the case using many of the conventional marketing channels (Clarke 1998b, 1998c). Even Bayers (1998) acknowledges the scope for P3P, quoting Novak et al. (1997)'s evidence that "consumers want full disclosure, full consent, opt-in", and that consumers 'lie through their teeth' when asked for personal information on commercial web-sites. See also Hoffman et al. (1999), and Cranor et al. (1999).

Recommendations for effective direct marketing are provided in Clarke (1998a). More specific guidance is provided in relation to spam in Clarke (1997a), and in relation to cookies in Clarke (1997b).

6. Prospects

This section addresses the question of what might happen next. It does so through the sketching of three scenarios.

* Scenario 1 - Corporations Rampant

This possible future sees corporations dominating consumers. Consumers remain passive, despite the opportunities presented by interactive channels and media. This might be because the public really are apathetic, or because corporations, perhaps assisted by governments, succeed in restricting media, channels, or the architecture of the information infrastructure itself.

In this case, the 'hard-headed' information economics described above may prove to be the appropriate theory for the times, and the 'communitarian' economics may prove to have been idealistic and illusory.

Maybe this bit belongs in here?

It is possible that the two worlds of community-service and business may be fundamentally at odds. It may be that they will remain that way, and that either business will conquer the Internet, impose its vision, and convert netizens into net-consumers; or business will abandon the Internet, and invest its efforts instead in some parallel information infrastructure, such as a resuscitated cable-TV world, in which its rules will dominate. Among other effects, this would be likely to lead to a significant reduction in sponsorship of Internet infrastructure.

* Scenario 2 - Consumer Revolution

An alternative future is that there will be very substantial change in the balance of power between corporations and consumers. This would see the proportion of economic activity that is performed by co-operative or mutual organisations recovering to be quite substantial. It might also force statistical measurement to at last recognise and take account of activities that are not undertaken in direct exchange for cash (Jones 1982).

In this case, the emergent communitarian theory of information economics would be the more appropriate of the alternatives. The hard-headed approach would presumably live on among die-hard economic rationalists, just as neo-classical notions do in the physical goods economy.

* Scenario 3 - Adaptation of the Hard-Headed Theory

An intermediate scenario sees both of the competing theories offering some relevance to analysts. Communitarianism would be unlikely to win through as a dominant theory; but hard-headed information economics would be forced to adapt, by recognising some degree of power in the hands of consumers, and the existence of information resource exchange in which benefits accrue to participants in a manner less direct than occurs in market-based transactions.

Do these bits belong anywhere??

A hallmark of the change is its impact on intermediaries. In a process referred to as 'disintermediation', existing middleman roles are changed, dramatically reduced, or even cease to be needed. This is because the functions they have performed cease to be of importance, or can be readily performed by the originator or the customer. In particular, publishers can use networks to reach directly out to readers, disintermediating retailers and libraries. Indeed, originators can disintermediate publishers. An example in relation to textual materials is that this article is gaining greater exposure on the authors' web-site than in the (hard-copy and CD-ROM) conference proceedings. The position is even more fluid in the case of music. The CD-quality MP3 compression standard is directly threatening the bloated music industry value-chain (Robertson 1997). In some cases, direct relationships between originator and re-user, or originator and consumer, may be the outcome. In many circumstances, however, there is scope for a process of 're-intermediation', with existing or new kinds of middlemen performing new functions. Search-engines play such a role; and successive attempts have been made (and, given their failure to date, more attempts will be made in the near future) to exploit these roles. A recent attempt, due to fade shortly, was 'portals'. Considerable tension therefore exists between the traditional and alternative economics of electronic publishing. In time-honoured tradition, powerful interests that are well-served by rejection of the alternative have been winning the initial political battles.

7. Implications

insert implications for:

Some thoughts are:

The analysis presented in this paper makes clear that neo-classical economics is entirely irrelevant to the information age. Moreover, the application of terms and models that derive from that body of theory should be regarded with the greatest suspicion.

The depiction of cyberculture and Internet consumer behaviour at the turn of the millenium suggests that there are serious inadequacies in the 'hard-headed' information economics that is touted in business schools as the replacement for neo-classical economics. This implies that inferences drawn from that theory will frequently transpire to bear only limited relationship to the outcomes that arise. Investors should remain wary of these theories, and reflect on the insights offered by the alternative, communitarian perspective.

8. Conclusions

We need new theory. A competition exists between a conservative and a more liberal alternative. Analysis and empirical researh are needed.


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