Tehran(Bazaar): Seth C. Oranburg, Associate Professor (with Tenure), Duquesne University School of Law in interview with Bazaar News Agency said: The digital economy impacts business by increasing competition and this improves various industries by incentivizing business to cut costs and add value.
Following is the full text of the interview:
Bazaar: As the first question, what is digital economy?
Oranburg : As a preliminary point, we should define the digital economy. The digital economy generally refers to economic activity that occurs online. That definition includes online shopping (Amazon, Alibaba), online media (Facebook, Parler), and even online education (edX, K12). A more specific definition refers to good and services that are digital in nature, such as cryptocurrencies( e.g,. Bitcoin), non-fungible token (NTFs), initial coin offerings (ICOs), and an emerging market in digital property.
Bazaar: What are important factors in the digital economy?
Oranburg : The very short version is that the digital economy reduces costs and therefore it can create value. There are three main cost problems in transactions that the digital solves: triangulation cost, trust cost, and transfer cost. The ability to reduce cost is the most important aspect of the digital economy and is the reason why it is so popular today.
The most important factor in digital economy is that the internet makes it cheaper and easier for people to find information. The digital economy can reduce the risks inherent in buying or selling goods or services by making it easier to find information about prices, reputation, and quality. For example, you can look at Yelp reviews to get some information about whether a local roof-repair business does a good or bad job. Or you can look on Glassdoor to learn what people are usually paid for a certain job at work. It used to be really hard to learn this sort of information, but now a quick Google search tells us a lot about a potential transaction partner. For this reason, the digital economy is an extension of the information economy to a commercial aspect. This aspect of the digital economy has existed since about 1993, when the World Wide Wide gained widespread popularity through a universal Hypertext Markup Language (HTML). To put this in technical terms, the digital economy reduces search and information transaction costs. Some economists call this triangulation cost instead of search and information cost, but really it means the same thing.
The second factor driving the digital economy is the proliferation of platforms. Platforms are web site and apps on which people can meet and do business. These platforms are digital marketplaces. Just like traditional marketplaces, like the Grand Bazaar in Istanbul, Turkey, these platforms are places where buyers and sellers congregate to exchange goods and services. It is efficient for such transactions to be offered in one place, because this is easier (and therefore cheaper) than promotion one’s sales and looking to buy one’s goods in various places. For example, on Uber, you can be a rider or a driver. Uber doesn’t sell car rides; rather, Uber connects people who want rides with people who want to give rides. What is really interesting about platforms is they have incentives to create fair and efficient marketplaces because that will help the platform’s reputation. If a lot of Uber drivers bring riders to the wrong destination, or drive in circles to boost fares, Uber itself will lose trust from riders and therefore lose customers. For this reason, platforms have financial incentives to create safe, fair, and fun experiences for both the supply and the demand side of the market. In technical terms, the digital economy centralizes trust in platforms, which lowers the trust cost of doing business.
The third factor and emerging factor is the digital economy makes it safer and more reliable to transact with strangers. For example, you can write a smart contract on the Ethereum blockchain that will automatically make a payment when certain conditions are met. I could write a simple computer program that pays you one Ether when a product’s radio-frequency identification (RFID) tag enters a specified location such as a warehouse or a customer’s front porch. It does not matter if we trust each other or even if we trust the governments under which we live. This program will execute the transaction regardless of politics so long as its program conditions are met. This might in the future allow people who live in different regions to agree on a common basis for trade. Until now, international governments have failed to instate a common commercial law among nations. The rule of code, so to speak, might provide a common commercial law where the rule of law has failed to do so. When the transaction is performed, payment automatically moves from the buyer the to seller. By making sure that people are paid when transactions are completed, the digital economy reduces transfer costs. This also means we have less need to asks courts of law to enforce broken promises, which reduces litigation costs.
As you might imagine, these three factors mean the digital economy threatens traditional corporations and governments. If we replace brokers (who traditionally held information), physical markets (who traditionally hosted commerce), and governments (who traditionally regulate commerce and resolve commercial disputes in courts of law) with digital substitutes, that weakens the power of these traditional authorities. The authorities must therefore innovate and become digital, stifle others’ digital innovation, or become obsolete. Unfortunately, traditional agencies do not always respond to these existential threats with innovation. Rather, the more typical response is that large firms will spend money lobbying government officials or even supporting regime change so that their profits are protected from digital innovation.
different from the traditional economy is that virtual goods
Bazaar: How does the digital economy impact business and improve various industries?
Oranburg : The digital economy impacts business by increasing competition and this improves various industries by incentivizing business to cut costs and add value. The digital economy creates a new way to do business more cheaply, and this this threatens business and industries that earn accounting profits from maintaining control. But the inevitable pressure is for the digital economy to eventually force business and industries to innovate and create more value for customers; otherwise, new firms will capture market share from old ones. For example, Amazon makes it easy for consumers to find whatever they want and get it quickly. Walmart, a traditional brick-and-mortar retailer, responded by lowering prices, cleaning up stores, providing food and entertainment, allowing people to order ahead of time, and, eventually, maintaining their own web presence. In America, we see this value through new highs in the stock market. American corporations are more valuable than even because competitive pressure from the digital economy required business to work harder to make more value.
Although the impact of the digital economy overall improves net social welfare, not everyone is a winner in this system. According to the theory of Creative Destruction, new innovations replace old ones. This causes some business to fail and some works to lose jobs. For example, in the late 1800s, there was a thriving market for horse-drawn carriages. But when Henry Ford introduced the Model T in 1908, the horse-drawn carriage industry lost out because cars were preferred over horse-drawn carriages. The owners and workers in the carriage industry argued that cars were unsafe in an effort to cause government to save them from Creative Destruction. These efforts are technically called rent-seeking, where businesses spend money to get favors from government bureaucrats instead of spending money on creating valuable innovations. So there are loses in the digital economy, and they complain loudly about this, but in the long run the digital economy will force businesses to give consumers better quality goods and services and lower prices.
Bazaar: What are the challenges in accelerating the digital economy?
Oranburg : The biggest challenge in accelerating the Digital Economy is regulation. Large, influential corporations tend to be older and more traditional. These traditional corporations see the digital economy as a threat and want governments to stop that threat through regulation that benefits traditional economies. Their arguments are couched in many ways; for example, some might argue they are protecting manufacturing jobs; others might argue that corporations should do more social things and not make so much money. Perhaps think about it this way: If you spent the last 30 years on an assembly line manufacturing gasoline engines, and that is all you know how to do, you are likely to oppose the movement toward electric engines, simply because that will result in you losing your job unless you retrain and gain new skills. Likewise, traditional economy corporations do not want the digital economy to succeed because it is a treat to conventional business models, and they will use all their power to prevent accelerating the digital economy. In short, the challenge the the digital economy is mainly that those who succeeded in the traditional economy and are unwilling or unable to transition to a digital economy are going to use wealth and power to influence governments to stop the digital economy.
Bazaar: What are emerging technologies for improving the digital economy?
Oranburg : Right now, the most interesting emerging technology, in my opinion, is blockchain. Unlike Bitcoin, which is a currently popular cryptocurrency that runs on on a type of blockchain network, blockchain technology is a more broader idea. The idea behind blockchain is to decentralize information: information about transactions, news, trust, etc. Blockchain technology allows the same information to exist in many places at once while validating that information to be true according to a majority of users. This represents a new sort of democracy where everything is public and can be scrutinized. Right now, blockchain technology is mainly employed in the financial industry. But in the future, blockchain technology could support innumerable digital economy industries. Virtually any business that relies on information can leverage blockchain technology to distribute and authenticate that information quickly and reliably.
The blockchain is also a foundation for entirely new innovations. For example, there is an emerging market in digital property, which did not exist before. By establishing some digital environment on a reliable blockchain, creators of this environment can reliably claim that property in this environment is scarce, and ownership rights and permanent. This creates a new market for ownership of digital environments, known as the metaverse. It is too early to say whether the metaverse will become the next critical location for the digital economy in general, but it is clear that blockchain technology has enabled and will enable other technologies that improve the digital economy for the foreseeable future.
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