Economics: Weightless economy packs a heavy punch

Long-term success is more likely to come from ideas and designs than physical products, says Danny Tyson Quah

There are only two avenues still open for the continual betterment of a society, once its resources have been allocated to maximise the economic welfare of its citizens. The first is expropriation: a society can plunder the economic achievements of other societies. The second is technical progress: a society can utilise continuing developments in the arts and sciences to improve the lives of its citizens.

The former option is neither clever nor subtle. More crucially, it is self-liquidating: it cannot result in sustained improvement.

Therefore, technical progress is the only feasible engine of growth in a modern economy. But it is naive to suppose there is not a price to pay for technical progress, and that to ensure continuing economic growth, societies can get by without making difficult sacrifices.

Those choices might turn on whether to channel resources into blue-sky research, exploring the boundaries of human knowledge and experience, but which might have no immediately visible pay-off. Or, they might hinge on smoothing the reallocation of people and resources from one line of work to another, as new productive options open and others close.

One example of these changes is what has come to be known as the "weightless economy". By this I mean an economy where creating value is associated increasingly with dematerialised products: computers, telecommunications, machine and biological software, mathematical algorithms, and related services.

Such an economy also includes designs and ideas - computer databases, new financial products, better entertainment and more efficient ways of transmitting information. These objects are dematerialised because their economic values reside not in a physical form, but in their organisation of zeroes and ones, binary bits of logic.

Dematerialised products are important for economic growth for a number of reasons. First, they are infinitely expandable: their use by one person takes nothing away from their contribution to another's welfare or productivity. For instance, when a piece of software - installed on a satellite server circling the Earth - is used by myself in my office, no physical limitations prevent the simultaneous and equally efficient use of that software by someone else in New Zealand. The same is not true of a chocolate biscuit - once I have eaten that biscuit, no one else can.

Not all hi-tech products are dematerialised. Over the course of the Industrial Revolution, spinning jennies and open-hearth furnaces were the hi-tech tools of their day. The conceptual breakthroughs resulting in them are dematerialised. The spinning jennies and open-hearth furnaces themselves are not.

With dematerialisation, there are interesting implications for social equity: when one segment of society "consumes" such commodities, nothing physical makes the enjoyment any less intense when other segments of society also tap in.

This is not true in the case of land, property, or physical machines: redistribution of those from rich to poor, or poor to rich for that matter, is about the most wrenching and profound change a society can inflict on its own citizens.

Skills and training are the key to success in a weightless economy. A large stake of inherited wealth gives one no special advantage over someone else who has acquired the training, discipline and imagination to see where opportunities arise.

In a weightless economy, success comes not from having built the largest factory, the biggest oil supertanker, or the longest assembly line. In a weightless economy, success comes from knowing how to locate and juxtapose critical pieces of information, how to organise understanding into forms that others will demand.

All of these are skills that modern education systems can and should provide. By contrast, no amount of schooling will give someone the bone structure of a Kate Moss, the acting skills of a Daniel Day Lewis or the footballing skills of an Eric Cantona.

The rate at which dematerialised products add value to economic life is high, growing, and seemingly infinite. Thirty years ago a single transatlantic telephone cable could manage, at best, 150 simultaneous conversations between North America and Europe. Now, fiber-optic cables carry thousands of times that traffic, without breaking into a sweat, and for a tiny fraction of the price. Fifty years ago, a city's street lights would dim whenever one of the handful of Earth's most powerful computers were turned on. Now, disposable musical books that "sing" tunes for my children carry more power than all those early machines combined.

These changes are profound. However, the theoretical possibilities and the attendant social implications are not just for the future.

Job growth in California since 1990 has been at almost 2.5 per cent annually, compared to the 1.5 per cent national rate. And California is not a small, nimble island city-state, like Hong Kong or Singapore. California's annual output exceeds all but a half dozen or so of the world's economies.

The biggest contributors to California's economic success are entertainment and advanced technology. In the US, computer scientists and engineers are not only among those occupations growing fastest in sheer quantities, they are also where salaries are rising most dramatically - particularly for women. Economic growth rates in the US have doubled during this decade while inflation has fallen and productivity has continued to rise - from reaping the benefits of computer networking and information technology.

Weightless-economy technology is not an exclusively American phenomenon. In GSM and mobile telephony, Europeans are giving Americans more than a run for their money. It was a French company that launched the smart- card technology industry, and which still owns more than a third of the billion-dollar worldwide market. The UK continues to supply close to half the world's video game entertainment software.

But national instincts may be misguided. Companies now design, analyse, manufacture and test semiconductors - the world's most valuable products - with the greatest disrespect for where these different activities take place. Indeed, why should anyone care when designs zip across space as just logical collections of zeroes and ones, and where laying down tracks in silicon involves shifting physical material too minuscule to weigh on a shopkeeper scales?

The weightless economy brings optimism and excitement. However, those making the greatest contributions in the weightless economy and achieving its highest rewards will be those with the skills to mesh with its realities. If market failure and social myopia hinder the development of those skills, it is up to governments to put in place the right kind of education system - one that fosters the training and creativity for working in the weightless economy.

q Danny Tyson Quah is director, National Economic Performance Programme, Centre for Economic Performance, and professor of economics at the London School of Economics.