Wednesday, July 15, 2009

Close but no cigar

Senator Conroy launched his Digital Economy Future Directions report last night. It has already received some positive coverage including from DE blogger Verity Pravda.

Even before its release Mr Negative Nick Minchin decided to have a go at the report over an apparent contradicition of the report referring to the development of the DE as a "market-led phenomenon" while the Government proposes to intercede in the space by building the "transport" infrastructure. However, one could note that agriculture has always been a market-led activity whhile Government has invested in road and rail infrastructure to enable it.

My own concern is that a paper on the "Digital Economy" is still scant on questions of hard economics. I worry that not enough attention is paid to the ways that production economics change, and the speed of transmittal of information change. These fundamentally change assumptions about markets - firstly more industries will be dominated by one or a few firms, and systemic risk can be communicated through the system like a pandemic.

I also think more space could be devoted to understanding "growth" and what is known as "new growth theory" or "endogenous growth theory". This is because the underlying assumption is that the private investment of firms in new capabilities continues to have diminishing returns, but has constant returns across the economy due to "spill-over" efects. This becomes of particular concern because of the modern Australian obsession with "commercialising" R&D outcomes. This desire runs counter to some of the themes of open systems and , in the IP space, the Creative Commons licences.

We need instead to focus more on the concept of "leveraging" R&D outcomes than one model of leverage which is direct "commercialisation". (I may return to this another day).

These things matter because ultimately much of the report still hinges on a simplistic neo-classical model of an economy. Let me site one examle, that I've now started to overuse. The report asserts that resistance by business to taking up some digital solutions (transacting with customers) is a concern with security and reliability and not with whether customers have the technology.

I heard similar objections when we tried to sell call centre solutions to corporates in the late 1980s. However, the practical reality was they could forecast no real saving from alternative channels until they could actually close channels down. That couldn't happen till ALL customers would transact in the new mode.

Whether customers will transact is itself a kind of network effect. It has two elements - the first is needing to have a big enough mass actually with the technology. The second is that people promote it to each other. One way of generating the classical S-curve of technology adoption is to model a population on the assumption that person X will buy the service once enough of his friends do. The shape of that S-curve depends on a parameter that effectively measures "how reliant on others" are you. Australia's oft claimed rapid technology adoption is actually one with slow leadups then very sudden escalation. It is reflective of a society that places a higher value on the assessment of my peers (New Zealand is even more so - they are more like sheep than us).

In the reports discussion of regulatory structures it is a pity to see that the focus remains on classical "content" like media content, and not on the regulatory environment to support transactions. The Reserve Bank of Australia report on the weaknesses of our e-commerce transaction processes doesn't get a mention.

The book The Origins of Wealth distinguishes between Physical Technology (making stuff) and Social Technology (rules), and talks about how each develops (favouring an evolutionary description). Social Technology in this sense includes the capacity to co-operate across the economy. The regulatory structures section could have explored further the ways Government can "regulate" to encourage co-operative behaviour. It somewhere got lost in the mist of "self-regulation".

Finally the section on measurement missed two important points. The first is that we should not be frightened of counting things rather than generating data by sample. My example is we should be able to report a lot better on actual internet speeds and price performance than we do - if only Government was prepared to manipulate twenty million service records. The fact is that data is neither a large transmission task noer a large processing task. The second is that we really culd build our own version of a digital economy index that tried to bring together a number of disparate elements. Instead we get the report talking approvingly of the unbelievably shoddy survey report that AIG put together.

Finally, though there was a great deal of effort to talk of other industries, the report, the presentations and the showcase were all incredibly ICT focussed. We have a long way to go to get everybody to understand that the Digital Economy is more than fast broadband, video downloads, e-health and e-government.

The report should get some good reviews for bringing some structure to the discussion. It should be marked down for being an uneconomic discussion of the Digital Economy.

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