THE PLACE OF INNOVATION IN THE DIGITAL ECONOMY
By Rishi Shah
The digital economy thrives on innovation, which is essentially these incremental, gradual and inevitable processes of producing new products through combining current technology. We cannot predict the direction of innovation, and this explains the volatile and unpredictable nature of the digital economy. All ideas are variations and combinations of other ideas, and as knowledge is limitless, the potential for innovation is also limitless.
The benefits are plentiful: Innovation spurs on economic growth. This is because economic growth is essentially the reduction in the time taken to satisfy a need. Thus, through cost and rime reducing innovation there is rapid economic growth. The boom of Silicon Valley, and the technological growth in China is ample evidence for this. Moreover, there is a direct link between higher innovation and falling poverty, seen in Kenya (MPesa Mobile Payment technology), or bio crops to feed the world’s hungry. This knowledge dispersed between all members of society, instead of centralised bodies, is why society can function, according to Hayekian beliefs. Moreover, innovation creates synergy demand, such that as the demand for one industry grows, industries of compliment goods also increases. Finally, we see that a lot of process innovation is about reducing unit costs, by improving the production capacity of the business and increasing the exploitation of economies of scale. As a rule of thumb; innovation that doesn’t cut time or cost fails.
However, we must also recognise that this growth of the digital economy has created ‘gales of creative destruction’. A term first coined by Austrian economist Joseph Schumpeter, it explores how innovation in one industry (in this case the digital economy), displaces jobs in other industries (manufacturing jobs). For example; as UBER grows, established taxi firms decline, or as Air BNB firms populate the market there is a decline in employment for hotel chains. More to the point, we must also establish the human psychology behind innovation. Very commonly, it is a money motive and a profit motive that drive entrepreneurs to innovate. There is frequent cutting of corners, and manipulation prevalent. This could even create false bubbles (arguably Bitcoin is an example), where people are lulled into a false pretence that the asset price will continue sky rocketing. Moreover, as Keynes believed, the entrepreneur’s greed should be seen with a sense of morbidity. There is nothing to celebrate in the callous nature of innovation, which harms many in the process.
On the contrary, Thomas Edison or James Watt are examples of innovation entrepreneurs who worked for the betterment of society. The profit motive wasn’t the driving force of innovation, and the intentions were correct. Perhaps, the digital economy isn’t based on unethical entrepreneurs and it is working to ameliorate the standards in society.
The digital Economy, which can be perceived as conducting business through markets based on the World Wide Web, has seen a revolution in the 21st Century. The intangible economy has gained strength, and technology giants are dominating the ownership of market share, consumer data and profits in general. Here we find a microeconomic dilemma, whereby currently people don’t know the value of their data and hence they cannot allocate resources accordingly. People have no property rights over their data.
Some argue that Tech giants need to be broken up, as that their size is a threat to consumer and societal welfare. They are new and more dangerous forms of monopoly, and are commonly able to hide behind the fact that seemingly offer 'free' services. The digital services tax is a step in the right direction, but a lot more needs to be done to ensure that beneficial innovation can thrive, but the vices of the digital economy are ironed out.