Web 2.0 Blog – Discovering Innovation Opportunities using Social Media

Posts Tagged ‘economy

Economics, according to wikipedia, is the social science that studies the production, distribution, and consumption of goods and services.

Notice money is not mentioned. But the current theories of economics socio-economic (Kondratieff (Kondratiev), Schumpeter, Kuznets) , fiscal-economic (Keynesian / Monetarist) and political-economic (Libertarian/Austrian) theories are all based on monetary markets.

Well that makes sense because MOST of the production, distribution and consumption of goods and services in society has used money as a means to relate them to another for at least 200 hundred years.  Money was a great leap forward in human history because it allows independent  transactions of goods and services. You can sell to one person and buy from any other, instead of having to set up a complex barter network with multiple prosumers or grow/hunt/forage everything on your own.
In modern times, you can also manipulate the market by artificially altering the money supply like a throttle on an engine.

Even so non-monetary based transactions have always been with us and seem to take 3 forms:

1. Bartering. Exchange between 2 people or a chain of prosumers.

2. Reputation. People will do things so that others think of them differently (usually in a more positive light).

3. Common good.  Sometimes hard to distinguish from reputation.  A good example are for-profit companies which contribute to common open source code based so they all share an updated platform to build their products on.

These have not been considered when discussing economics this century, because these types of economies were usually limited to family and local neighborhoods for most people.   A couple of examples:

1. Entering a local pie contest. (production driven by reputation)

2. Helping family members to do home improvements. (service driven by reputation)

3. Taking of your lawn so it looks as good as the neighbors’ and keeps the value of the neighborhood high.  (service driven by common good).

These are not significant to a modern economic structure.  And while wealthier people have donated to causes driven by reputation,  it is usually lumped into the other economic theories because it involved money instead of services.

Most people have been limited in terms of the amount of goods and services they can produce for these non-monetary motivations because raw materials  bought with money were usually required and then it essentially becomes a donation with a small value add. (Purchase the ingredients for brownies and donate them to the bake sale.)

Services can more easily be offered for non-monetary motivations, but their significance has also  been limited in modern times.  Usually these involve some basic labor such as fixing the neighbor’s flat tire. When they get more complicated they start to compete with opportunities to earn income which tend to limit the amount of skilled service people are willing to donate.

The impact of services offered for non-monetary motivations have in the past have also been limited in there impact to the larger economy for three major reasons:

1. Monetary costs of distribution and replication.

2. Limited distribution limits the potential impact and thus motivation for common good, reputation driven services and good.

3. Modern demands for complex goods and services limits the impact of the individual.

Social media removes these all barriers in the case of information products and services. (see more detailed explanation below)

In social media, two types of phenomena have started to change the impact of non-monetary activity to the larger economy:

1. Crowdsourcing/Collaboration (distributed production/ distributed problem solving). The best example is in software: linux, drupal, and other significant software programs which other companies charge license fees for.

2. Information distribution and analysis. Blogging in short.  Reporting on events, spreading the reports of others and analysis of news events.

3. Social Networks.  These have made it possible to impact large numbers of people if you create or collect highly relevant services or information.

Social media is technology amplified social interaction and allows for broad free distribution of information products and services.  Linux now is starting to threaten Microsoft’s dominance in the server and device markets.  Blogging has now replaced a significant amount of the magazine and newspaper industry.  (Actually newspapers seem to be hanging on by getting story leads from the blogosphere.  Don’t believe this? Check the thickness of your favorite magazine and compare it with what it was 5 years ago.)

So the big question… What does  is the impact on people of a non-monetary social gain? How do you compare it against monetary based gains?

Do we need to now combine non-monetary and monetary economics into a more comprehensive understanding of the well being of society?

Broadcast media. Monetary loss?

Broadcast media is irrevocably changing now that anyone has the power of mass information distribution.   And it is being replaced in part by largely non compensated product. The more organized the blogosphere gets, the more crowdsource news sites will popup and probably dominate.  The power of news analysis will be with in the hands of the most trusted analysts (bloggers)  rather than media distributors which many would view as a more just world.

The most significant loss related to media would seem to be the loss of an advertising based which we have relied on to drive consumer demand in the western world for the past 50 years.  If people listened to their friends, they might buy what they need, rather than be convinced to buy what they should want.  Will sidebar advertising on facebook, google and the like replace this as a consumption driver.

The power of social networks to set behavior standards and norms should not be underestimated. The July 07 New England Journal of Medicine had a 30 year longitudinal study which showed that obesity can be spread through social networks.  The messages sent through social networks are powerful.  Broadcast media for the last 50 years has supplemented social messaging with profound effects on society.  From the newness of the car you drive to the size of the house you ‘need’ to live in and has greatly affected consumer demand and is largely responsible for the ‘need’ now to have 2 earner households in the US. (IMHO.. havent had time to do the research yet).

Software and the long tail. Monetary gain?

Linux is growing rapidly as both a server and desktop operating system (though desktop adoption is still small).  IBM one of its biggest supporters though sees an advantage in linux as well as a significant number of its own patents being freely available for anyone to use and innovate on.

The advantage lies in the power of the long tail when it comes to technological innovation.  It turns out inviting people who should know very little about the core of a complex project, often know something very significant about an aspect of the project which is critical or at least important to its overall success.  The one guy who contributes one thing which turns out to be a critical patch against a hacker attack adds tremendous value to the project.  The more complex technology becomes, the more important the long tail is.   And on the opposite end, the less successful closed door efforts are in creating complex solutions.

Skeptics will say that Linux was paid for with money, that it is just a service based model. And for the most frequent contributors that was true to some extent. But the majority of the long tail contributions do not seem to have been paid for and while some programmers may have done the work on company time, it seems clear others worked on their own time. In either case a contribution to something accumulative and distributable to people who were not their clients is clearly a non-monetary contribution, even if services were paid for one time. The net result is a paid short term service plus a freely distributable enhanced product.

Overall win or loose?

The death of mass media while significant in the short term, means that people will more in touch with the reality of others in the world, rather than having vision created for the purpose of selling product.  I argue that mass media is in some ways a result of technological limitations because natural human communication is 2 way with all parties having the ability to choose to broadcast or  listen.  Hopefully this more tightly knit online world community can help prevent the potential damage which could occur as we go through the current deflationary cycle.

According to socio-economics, we need a significant technological innovation in order to bring about the next economic boom. While some have assumed this would come from nanotechnology or robotics, I think it may come from the development of a knowledge or semantic web. A semantic web could be brought about more quickly by using crowdsourced techniques to create the necessary underlying ontologies or definitions in a ‘Linked Open Data’ model.

So if social media can be utilized to bring out the next economic boom based upon a crowdsourced knowledge web platform, it would definitely result in an overall economic gain.

Look for more soon on why a knowledge web would lead to the next economic boom.

Why social media removes barriers to impact of non-monetary goods and services.

In business when you offer a skill, you create mechanisms to make it repeatable or widely distributed to multiply it’s economic effect.  Repeatability and distribution mechanisms have normally been costly in time, labor or infrastructure,  so were not used normally utilized in non-monetarian economic transactions.  And because they have lacked these features,  non-monetarian economic productivity contributions have normally been considered insignificant.  Also the limitation of distribution and replication have also limited the motivation to produce these goods and services.  Social media has removed the cost of distribution and replication for information based products and services.

The need to complex services for greater impact has also limited the economic impact of these non-monetary distributions.  Traditionally it has been difficult to collaborate on voluntary efforts because the small amount of time people have had to put into non-monetary efforts.


I am not an economist, but sometimes I play one on this blog. Why? Turns out understanding economics is important. Feel free to correct or argue the points I make.

Socioeconomic (Kondratieff (Kondratiev), Schumpeter, Kuznets) theory seems to be driving the current deflationary cycle more so than fiscal economic (Keynesian / Monetarist) or political economic (Libertarian/Austrian) theories offer the opportunity to reverse it. Socioeconomic theory basically says in order to get out of a deflationary cycle, it is an sociological problem as much as a fiscal one. The solution is the appearance of revolutionary technology promising large profits for investment in order to start the next boom cycle, and snapping the society out of the blue funk created by an economic downturn.

OK, so you expect me to say to get on the bandwagon and say, social media that will be the key to the next economic boom right? I don’t think so but I do think social media could help mitigate the damage caused the deflationary and cycle and may be instrumental in constructing the next opportunity for technological innovation.

But first I want to start a discussion to try to understand what the objective economic potential is of the social media revolution.

Social media uses technology to enhance the ability of people to interact with others.  Technology powered interaction, connection, trust and relationship building. In the business world this means establishing trust and communication channels that support and enable collaboration, and build engaged teams by removing barriers and frustration created by traditional structures.

Social media especially in the form of collaboration has the promise of unlocking hidden knowledge in organizations when needed, lowering the cost of software through open source collaborations, finding relevant information more quickly, and making organizations more agile and responsive. But these are mostly cultural changes which usually occur slowly.

So the promise for change is there, even though will take longer right?  Yes, but the technology needed to invest in to bring these changes about is relatively cheap.

Social media will bring change, though.  It has the promise of creating more efficient companies through collaboration, a greater variety of information services at low cost through mashups and open source, and a lower cost to product and service messaging, when the product or service has great appeal.

But, at the same time social media is having a destructive effect on major existing industries. Traditional advertising media is becoming less and less effective as the more audience becomes more networked and attentive to one another. Friend of a friend referrals, rating sites or consumer oriented websites will become the norm and rely on their objectivity to maintain trust with their followers, therefore are not as subject to trying to manipulate their audience based on the promise of big advertising revenue. Make no mistake, manipulation is clearly part of the social media landscape, but the ability for anyone to broadcast and be heard by large audience networks means it is more difficult and will in the end be the exception rather than the norm.

Retail product distribution may also take a hit because of social media, since e-commerce services are being enhanced with a layer of crowdsourced social intelligence ‘people who bought X also bought Y’. Also large companies can offer lower prices but still, through social media, have a personal touch, previously the advantage of the small business. Essentially this is pushing toward the commodization of all mass produced products and the markets of the future which have opportunity for larger profits will be niche markets requiring subject matter expertise and customization.  Essentially all growth markets in the future will be niche markets.

So in the short term, social media’s gains in economic investment may be offset by the disruptive role it has in traditional industries.  In the past technology changes lead to obvious and simple routes to large scale increases in productivity and demand. A path for social media methods to lead to an increase in productivity and demand in a short amount of time is less obvious since it requires a cultural change as much as a technological one.   In the longer term, as the culture adopts it to the full potential of social media, there may be large scale increases in productivity but in the near term social media is not providing a clear path for investment to lead to gains efficiency and productivity and even that ROI for social media applied throughout the economy is still anecdotal rather than proven.

Another question to ask is whether social media can help mitigate the damage done during this deflationary cycle.

Tightly knit communities survive economic stress better and social media allows more of the world to get and feel connected.  Also it actually gives people something to do if there is a lack of economic activity.

The motivation for this seems to be a sort of reputation economics which motivates people to do things like create open source software, do reporting on events, and a lot of other information services which before the internet, people would absolutely be expected to be paid to do. This is allowing rich content, development of useful products etc to be done without investment but with returns, such as any business which hosts their websites on linux servers or uses open office to create and manage documents.

In addition, these longer term efficiencies such as the ability to create complex systems such as an operating system (think Linux) at a very low cost and rather quickly, could help bring out a new technological innovation which present a clear path to increase productivity and demand. If we could determine what that innovation is and how to bring it about more quickly, then we might be able to shorten the deflationary cycle which the socio-economic theories predict.

Watch for future posts on why that technological innovation we need, may be the knowledge web promised by the Linked Data concept.

Note: I have no education in economics but economics is beginning to trump all other concerns primarily due to a lack of trust in financial markets, so I am trying to pay attention.  Since one use of social media is to engender trust, can social media play a role in mitigating the damage from the current deflationary cycle we are in?

PS I am certain the educated economic people will tear me apart on my simplifications/misunderstandings of economic theory…but here goes..

Some background from Wikipedia:

Joeseph Schumpeter was “an economist and tried instead to integrate sociological understanding into his economic theories.”  He has some interesting predictions which seem to be playing out in the current news.

Creative Destruction:

“In Capitalism, Socialism and Democracy, the Austrian economist Joseph Schumpeter popularized and used the term  to describe the process of transformation that accompanies radical innovation.[2]  “

“In Schumpeter’s vision of capitalism, innovative entry by entrepreneurs was the force that sustained long-term economic growth, even as it destroyed the value of established companies that enjoyed some degree of monopoly power.”

Sounds familiar? Social media as disruptive/transformative? Linux vs. microsoft?  It seems there are 2 social media issues which intersect with the economy.

1. Social media as a both a social and technology innovation which has the potential for significant creative destruction. (I will deal with the creative destruction power of social media in another post because I already have a headache thinking about economics and social media at the same time.)

2. Social media as a tool which is able to spread sphere’s of trust faster and wider than they could normally be spread.

But how about this on the trust issue.. According to Schumpeter as interpreted by Roger Arnold, former radio talk show host and macro economist, the reason a recession becomes a depression is due to irrational decisions which start to occur when leaders frantically try to find a quick fix to stop the downward trend.  They listen to the economic models which promise the faster fix rather than the ones which have most predictive.  They also tend to turn inward as they make the decisions.

The depth and length of the deflationary cycle will be determined by whether cooler heads prevail and on rebuilding confidence of INFLUENCERS in markets, NOT the confidence of markets. (Social media axiom:  people trust people not organizations. Therefore markets cannot trust. People in markets trust and are trusted.  Also financial markets are notorious for being led by their influencers, so an influencer map is incredibly important.)

So the real risk we run, is that irrational decisions further corrode trust among financial influencers with the administration.  That leaders will loose the market’s confidence even further by thinking they will pander to constituencies with a quick fix and ignore the concerns of the financial influencers who are expected to come back to the market.  The fact is the rescue will be slow and will need the help of those same finance guys who got us into the mess in the first place. People don’t like that but there it is.

So how do we prevent further loss in confidence?  We need to address economic issues which matter to financial influencers and convert them to evangelists for the administration’s economic policies.  Yes, talk with the a…holes who got us here in the first place.   Also we need to make sure Treas/Fed have a broad economic theory outlook rather than a narrow set of Friedman economic assumptions taken as fact even though they don’t seem to be good predictors any longer.

Is this happening now? It seems the opposite is the case.  There seems to be a trust gap between Fed/Treasury and market leaders right now.   Neither trusting the other to act to work towards a mutually beneficial outcome.

If  ever we needed collaboration where all parties are trusted to act to achieve the best outcome and make sure diverse opinions are heard, the time is NOW and the place is the financial  sector.