The Information Age/Information Knowledge and the New Economy

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What is the information economy?[edit | edit source]

An information economy is where the productivity and competitiveness of units or agents in the economy (be they firms, regions or nations) depend mainly on their capacity to generate, process, and apply efficiently knowledge-based information. [21] It is also described as an economy where information is both the currency and the product.

While we have always relied on information exchange to do our jobs and run our lives, the information economy is different in that it can collect more relevant information at the appropriate time. Consequently, production in the information economy can be fine tuned in ways heretofore undreamed of. What makes information plentiful in this economy is the pervasive use of information and communications technology.

Box 4. Banking Without Boundaries

For the first time in 300 years, the very nature of banking has changed. We still handle money, but information, not money, is now the lifeblood of our industry. From what was essentially a transaction-based business, where customers came to you (or didn’t), banking has to make the leap into what is essentially a sale-and-marketing culture. In the new culture, a bank is defined almost solely by its ability to add value to the customer relationship, which breaks down into acquiring, analyzing, integrating, and leveraging of information about, from, and for the benefit of each individual customer.

The last (but obviously not the least) of our fundamental changes goes to the very heart of how banking is done. What used to happen only in branches (and only during ‘bankers hours’) can now happen not just anywhere in the world at any time of the day or night, but also through just about any delivery channel a customer cares to select—the automated banking machine, the telephone, the personal computer, even the television set.

Source: Lloyd Darlington “Banking Without Boundaries: How the banking industry is transforming itself for the digital age” in Don Tapscott, Alex Lowy and David Ticoll (eds.), Blueprint for the Digital Economy: Creating Wealth in the Era of e-Business (New York: McGraw Hill), 115.

What are the main features of the information economy?[edit | edit source]

The information economy is global. A historically new reality, the global economy has the capacity to work as a unit in real time on a planetary scale. [22] Corporations and firms now have a worldwide base for skilled labor to tap. Capital flows freely between countries, and countries can utilize this capital in real time.

However, some critics claim that a true global economy has yet to be achieved. Stephen Cohen observes that the mobility of labor is undermined by people’s xenophobia and stricter immigration laws. Multinational corporations still maintain their assets and strategic command centers in their home nations, and capital is still limited by banking and finance laws.

Castells, however, argues that even if globalization has not yet been fully realized, it will only be a matter of time before this happens. Globalization will be affected by government regulations and policies, which will affect international boundaries and the structure of the global economy. [23]

A second characteristic of the information economy is that it is highly productive. William Nordhaus of the US National Bureau of Economic Research states that:

Productivity growth in the new economy sectors has made a significant contribution to economy-wide productivity growth. In the business sector (between 1999 and 2001), labor-productivity growth excluding the new economy sectors was 2.24 percent per year as compared to 3.19 percent per year including the new economy. Of the 1.82 percentage point increase in labor-productivity growth in the last three years relative to the earlier period, 0.65 percentage point was due to the new economy sectors. The contribution of the new economy was slightly larger for well-measured output because that sector is smaller than the business economy. [24]

Some critics argue that there is no relationship between profitability and investment in ICT. Castells looks into the history of productivity growth in advanced market economies and observes a downward trend of productivity growth starting roughly around the time that the information technology revolution was taking shape in the early 1970s. According to him, this decline was particularly marked in all countries for serviced activities, where new information-processing devices could be thought to have increased productivity. However, manufacturing productivity presents a different picture. Manufacturing productivity in the US and Japan increased dramatically in 1988-1989 by an annual average of 3% and 4.1% respectively, and productivity increased at a faster pace than during the 1990s. [25] Castells concludes that economic statistics do not adequately capture the movements of the new information economy, precisely because of the broad scope of transformation under the impact of information technology and related organizational change. There may be a diffusion from information technology, manufacturing, telecommunications, and financial services into manufacturing services at large, and then into business services.

A third characteristic of the information economy is the change in the manner of obtaining profits. Robert Reich observes that profits in the old economy came from economies of scale—long runs of more or less identical products. Thus, we had factories, assembly lines, and industries. Now profits come from speed of innovation and the ability to attract and keep customers. Where before the winners were big corporations, now the winners are small, highly flexible groups that devise great ideas, develop trustworthy branding for themselves and their products, and market these effectively. [26] The winning competitors are those who are first at providing lower prices and higher value through intermediaries of trustworthy brands. But the winning is temporary, and the race is never over. Those in the lead cannot stop innovating lest they fall behind the competition. [27]

Is the information economy different from the “knowledge economy”, the “new economy”, or the “network economy”?[edit | edit source]

All these terms are used interchangeably, although the various concepts tend to emphasize different aspects of the phenomenon—like “knowledge” instead of “information” or “network” as opposed to “new”. Peter Drucker describes the information revolution as a knowledge revolution. The key, he says, is not electronics but cognitive science. [28] The software used for computers merely reorganizes traditional work, which had been based on experience. This is done through the application of knowledge, in particular systematic, logical analysis. Setting up an IT structure is not enough. To maintain leadership in the new economy, the social position of knowledge professionals and the social acceptance of their values should be guaranteed.

The knowledge economy is also a networked economy. The concept stresses the important role of links among individuals, groups and corporations in the new economy. It has been argued that networks have always been an ideal organizing tool due to their inherent flexibility and adaptability. However, traditional networks were not designed to coordinate functions beyond a certain size and complexity. This early limitation has been overcome with the introduction of ICTs, particularly the Internet, where the flexibility and adaptability of networks are brought to the fore, and their evolutionary nature is asserted. [29]

What is Coase Law? And how is it related to the ICT revolution and the information economy?[edit | edit source]

Nobel Laureate for Economics Ronald Coase noted that a firm tends to expand until “the costs of organizing an extra transaction within the firm become equal to the costs of carrying out the same transaction on the open market.” [30] Coase also believed that the law of diminishing returns applies to firm size: Big firms are complicated and they find it hard to manage resources efficiently. Small companies often do things more cheaply than big ones. Therefore, if it’s cheaper to perform a transaction within a firm, it usually stays there. However, if it’s cheaper to go to the marketplace, then firms go to external suppliers. Thus, a car maker (like Toyota) will buy car batteries from a supplier rather than manufacture batteries in-house if it is easier to do so.

ICT reduces transaction costs significantly. Large and diverse groups of people can now more easily and more cheaply gain near real-time access to the information they need to make sound decisions and to coordinate complex activities. [31] Firms can now downsize to the point of producing their main competence and purchasing everything else they need from outside. Thus, instead of massive corporations, what are emerging are small highly focused corporations that farm out production to their allies. This is also known as network production.

Box 5. Furiously Fast Fashions (excerpts)

… Hong Kong is the center of the garment outsourcing industry. Most of the companies located there own and run factories across Asia that weave, cut and sew garments. But Li & Fung is a different kind of outsourcer… the 95-year-old trading house that once sold ceramics and fireworks overseas doesn’t own a stitch when it comes to making garments. No factories, no machines, no fabrics. Instead, Li & Fung deal only in information, relying on a far-flung network of more than 7,500 suppliers in 37 countries, from Madagascar to China to Guatemala. “There are no secrets in the actual manufacturing. I mean, a shirt is a shirt,” says William Fung, the managing director. “We would rather build on something proprietary, like what information it takes to make that shirt faster or more efficiently.”

As an order comes in … Li & Fung uses personalized Web sites and e-mail to fine-tune specifications with the customer. It then takes those instructions and feeds them into its intranet to find the right supplier of raw materials and the right factory for assembling the clothes.

… (Li & Fung’s) division manager Ada Liu explains how she juggled a pants order for a major American clothing brand. She had the fabric woven in China because the factories there could dye it the dark green indigo she needed, and she chose fastenings from factories in Hong Kong and Korea because they are the most durable. Then she sent the raw materials to Guatemala for sewing. “For simple things like pants with four seams, Guatemala is great.” says Liu. “They can do things quickly, and it’s close to the U.S. Delivery takes only a few days.” And if production problems arise in Guatemala, Li & Fung can tap into its worldwide network and send the order to another country to avoid delays.

As a garment moves through production, retailers can make last-minute changes to orders on the Web site, which tracks the entire production process. About five years ago, when the company was run by phone and fax, Li & Fung would get an order for 50,000 khaki cargo pants - and deliver the goods five months later. Now, until the material is woven, the customer can cancel the order online. Until the fabric is dyed, the retailer can change the color. Until it is cut, the client can change the design or size. “There are generally fewer mistakes and disputes now when we have to make changes because the communication is clearer. That makes [adjustments] easier to do,” explains Liu.

Source: Joanne Lee-Young and Megan Barnett, “ Furiously Fast Fashions,” in The Software and Information Industry Association Trends Report 2001 [home page on-line]; available from; accessed 28 August 2002.

What is e-commerce?[edit | edit source]

The ICT revolution has transformed not only how (and where) goods are produced but also how commodities are exchanged. E-commerce is buying and selling over the Internet or any transaction concluded through an information network involving the transfer of ownership or rights to use goods or services. More precisely, it includes all business transactions that use electronic communications and digital information processing technology to create, transform and redefine relationships for value creation between organizations, and between organizations and individuals.

The different types of e-commerce are: business-to-business (B2B); business-to-consumer (B2C); business-to-government (B2G); consumer-to-consumer (C2C); and mobile commerce (m-commerce).

What will happen to agriculture in the information economy?[edit | edit source]

Like the production and exchange of commodities, agriculture will also be transformed by ICT. ICTs will allow farmers to have more accurate information on the factors that are needed to increase crop yield. “Precision farming” or farm management using ICTs will become the norm rather than the exception.

We can also expect better crops and livestock as a result of agricultural biotechnology. The term “biotechnology” broadly includes “any technique that uses living organisms, or parts of such organisms, to make or modify products, to improve plants or animals, or to develop microorganisms for specific use.” [32]

The potential applications of modern biotechnology in agriculture are varied and promising. These include:

(a) improved yield from crops;
(b) reduced vulnerability of crops to environmental stresses;
(c) increased nutritional qualities of food crops;
(d) improved taste, texture or appearance of food;
(e) reduced dependence on fertilizers, pesticides and other agrochemicals;
(f) production of novel substances in crop plants.

Box 6. Farming Goes Into Space

For most of the twentieth century, farming has been somewhat of an inexact science, more a matter of a farmer developing an innate understanding of the nuances of his land and thereby planting and harvesting his fields accordingly. Now, at the beginning of the twenty-first century, sophisticated technological advancements offer today’s farmers a variety of methods to increase crop yields, selectively apply pesticides, and lower associated costs. The technology that is enabling this revolution in farming processes is on the ground, in the tractors, but it is also up in the sky, circling the globe in a geo-synchronous orbit 12,000 miles above the planet’s surface.

Twenty-four satellites orbit the Earth, making up the Global Positioning System (GPS) System. These satellites have the ability to pinpoint the location of an object on the ground within a few centimeters. Developed by the Department of Defense for military purposes, GPS has now been opened up for civilian use. In fact, civilian applications have come to outnumber military one almost 10 to 1. Among the former, precision farming seems poised to become the next great application area for GPS.

How, specifically, are these new technologies helping farmers to improve farming efficiencies? At this point, precision farming can be broken down into three major areas: crop, soil, and positioning sensors — including remote and vehicle-mounted, on-the-go tools that detect moisture levels, protein, water stress, and disease or weed infestations; machine controls that guide field equipment and can vary the rate, mix, and location of water, seeds, nutrients, or chemical sprays; and computerized GIS maps and databases that process the data produced by the first category of tools and generates the “prescriptions” that drive the second category.

Although improvements can and are being made in the first and second categories, their capabilities are well developed, well defined, increasingly integrated, user-friendly, and ever more affordable. The critical component, and the one that can realize the greatest benefits for farmers, is found in the final category: GIS-based, decision-support software that can guide management practices. It is in this third area where more work remains to be done: building the databases, refining the analytical tools, and increasing the site-specific agronomic knowledge and expertise of the community.

Source: Craig Sutton and John Deere, “Farming Goes Into Space,” in The Software and Information Industry Association Trends Report 2001 [home page on-line]; available from; accessed 28 August 2002.

Did the information economy end with the dot-com crash?[edit | edit source]

Not at all. If we look at the history of technology and development, we will see that the dot-com bust is part of the normal pattern of events in any technological revolution.

The economist Joseph Schumpeter suggests that a technology revolution starts with the introduction of one or more technologies that enables the new cluster.

The new technology cluster, at first little noticed, achieves successes in early demonstrations. Technical people start small companies based on the new ideas. These new companies compete intensely in this early turbulent phase, when government regulation is largely absent, and as successes mount in a technical free-for-all environment. The promise of extraordinary profit looms. The public begins to speculate.

The middle phase sees a sustained build out or golden age of the technology, during which the technology becomes the engine of growth for the economy. Large companies and oligopolies reign, and the period is one of confidence and prosperity.

In the last phase, the technology matures. Technological possibilities are saturated, production moves to places on the periphery, and complacency sets in. Profits at home are low, and entrepreneurs start scouting for new opportunities. The economy becomes ripe for the next revolution. [33]

It was not the information economy that died with the dot-com crash. Only the hype died. The downturn in ICTs and the dot-com crash simply ended the first phase. We are now just entering the middle phase, the “sustained build out or golden age of the technology”.