Shrinking costs mean that anyone can be a star

ECONOMIC VIEW

It is conventional wisdom to say that computers and new communications technologies are revolutionising the industrial economies. But beyond the observation that we therefore need a more highly skilled workforce, detailed analysis of the economic implications is pretty scarce. What does it mean to say we are becoming a knowledge-based economy?

There are some welcome attempts to close this knowledge gap. The key to understanding the transformation is the "dematerialisation" of the economy, according to new research. This means the trend towards the value produced in our economies being embedded in computer memory or perhaps even biological memory rather than material things.

The important change in the big industrial countries is not best characterised by a switch from manufacturing to services or even from low to high technology. It is the switch from producing machine tools or even computers to creating software and gene sequences.

Dematerialised economies are significantly different, argues Danny Quah, a researcher at the London School of Economics.* The difference is not just that ideas are more important or can be communicated more easily, for a great deal of technical change in the past has taken the form of a good idea that can be copied everywhere without becoming less useful to its originator.

Mr Quah calls this property "infinite expansibility" and cites Thomas Jefferson's definition: "If nature has made any one thing less susceptible than all others of exclusive property, it is the action of the thinking power called an idea, which an individual may exclusively possess as long as he keeps it to himself; but the moment it is divulged, it forces itself into the possession of everyone and the receiver can not dispossess himself of it. Its peculiar character too is that no one possesses the less because every other possesses the whole of it. He who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me."

The difference in a dematerialised economy is that the products of the economy are infinitely expansible too. My use of a word-processing programme in the production of this newspaper does nothing to stop other people around the globe using the same software.

The same is true of a huge variety of products in the modern world - the content of an Oasis CD, the broadcast content of television signals, the information on the Bloomberg or Reuters system, any software, a Disney movie, and so on. Evidence suggests that in the US the dematerialised industries are already bigger than the defence and auto industries.

One conclusion is that, contrary to a recently fashionable view, the globalisation we see at the end of this century is profoundly different in character from the growth of trade and overseas investment 100 years ago. Trade is increasingly not the exchange of goods and services but their reproduction.

The notion that a dematerialised economy is infinitely expansible has other fascinating implications. Clearly, markets are not local or national but universal: as we know well, there are no obvious boundaries to the market for Microsoft software or the Disney concept.

Secondly, in the dematerialised industries there are no significant initial capital costs of the sort it took to create General Motors. One person and a computer is enough to start.

Thirdly, using dematerialised products often involves what economists call "network externalities". This means that if enough people use one product - say Windows95 on their PC - it will grow in popularity simply because everyone uses it, even if experts think another product - such as the Apple system - is better.

However, one of Mr Quah's most interesting results concerns the implication that the new-style economy will lead to both greater income inequality and greater mobility. Economists have already analysed the "superstar" phenomenon. People are paid hugely more than others doing almost indistinguishable work when they corner a significant market share. It is Placido Domingo's success that makes fans want to listen to him even in preference to more talented singers. The music business is a "winner-takes-all" market.

Dematerialisation makes this phenomenon more widespread. For one thing, costs of entry into many of its industries are low so anyone can make a bid for stardom. For another, network externalities make it easier to corner the market. These explain how Bill Gates could progress from his computer in a garage to become a billionaire whose software is used on a majority of the world's PCs.

A second new paper also explores how information technology can explain the phenomenon of growing income inequality, which the chart shows to be widespread in the industrial world. A paper by Assar Lindbeck and Dennis Snower for the Centre for Economic Policy Research** looks at the economic implications of a subject widely studied in management texts: the demise of corporate hierarchies in favour of delayered and empowered companies.

Just as the technology of mass production led to the assembly line and its management hierarchy, information technology has led to a characteristic organisation the authors call the "holistic" company.

It has come about because there are increasing synergies between tasks thanks to computers. It is easier for one person to take an order, arrange delivery and send out a bill than to have separate departments - and much better for the customer. Or for a factory worker running computerised machinery to improve the design of the product.

Holistic companies therefore need workers who are well-educated and versatile rather than ones who have been trained to do specific tasks. These broadly skilled people are in high demand and their wages have risen relative to those with outdated single skills. Indeed, the authors argue that there is a segment of unemployable people stuck at the bottom of the labour market.

Their analysis suggests that part of the trend to greater inequality could be reversed by effective education and training. We could try to produce a well-educated and versatile workforce of people who would be well-suited to switching from one task to another.

This corresponds to the call for "security of employability" put forward by Joseph Stiglitz, chairman of President Clinton's Council of Economic Advisers, at the jobs summit in Lille. It has been pounced on by politicians of all shades as a path out of the forest of job insecurity.

It does point, however, to the need for an updated liberal education that will produce well-rounded young workers. Giving preference to vocational training which tries to pick specific skills that might be needed in the economy in 10 years and could become swiftly outdated would be a mistake.

There is one final point to emerge from these new analyses. They confirm that the consensus in the economics profession is settling on technology as the cause of greater income inequality in the industrial economies - and not trade with cheap labour third world countries.

For the global market for labour is functioning as a market should, and bidding up wages in developing countries.

Wages for those famous cheap software programmers in Bangalore have soared thanks to the huge jump in demand from Western employers.

* The Invisible Hand and the Weightless Economy, Danny Quah, Centre for Economic Performance March 1996.

** Reorganization of Firms and Labour Market Inequality, Assar Lindbeck and Dennis Snower, CEPR Discussion Paper no. 1375, March 1996.

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