Economic Impacts of Information and

Communication Technologies

Univ.-Prof.Dr. Hardy HanappiInstitute of Economics

University of Technology of Viennahttp://www.vwl.tuwien.ac.at/hanappi/

Overview• 1 Basic Theory:

From economic processes to technological progress, and back

• 2 More Theory:

The role of technology in dynamic economic models • 3 From Theory to Policy:

A consistent framework for analysis applied in Austria

• 4 More Empirical Findings: Selected recent results of economic ICT impacts in Europe

Basic Theory

• Economic Processes• Information & Communication Processes• Economics ICT• ICT Economics• History: Economics ICT

Basic Theory – Economic Processes 1

Economics:

Primary metabolism of society

society

primary distributionprocess

production

secondary distributionprocess

consumption

time time

Classical view ofreproduction andgrowth

Basic Theory – Economic Processes 2

Distribution 1

Distribution 2production

consumption

production unitsmarkets

households

organisationcommodities

labourcommodities

revenues

wagesexpenses

expenseshouseholds

reproductiongrowth

Commodity producing societies

Basic Theory – I & C Processes 1

What is Information? Periodicity: years, days

Living systems: adaption to periodicity, copy in structure, memory is impicit in evolved structure

Animals & Humans: memory explicit in individuals, used as model for anticipating behaviour

memory models individual society

language

Commodity production:

Stable reproduction stable money flows

Regulation of behaviour by powercoercive

ideologicalinstitutions

Capitalism

Market mechanisms, money, price systems (information technology)

Production of new information becomes necessary for the survival of production units

new production processes, new products, new utilities, new institutions

Basic Theory – I & C Processes 2Basic Theory – I & C Processes 2

Basic Theory – Economics ICT 1

Maintenance of profitrate new technology

Level of profits: = revenue - cost

revenue = price x quantitycost = wagerate x labourtime + interestrate x capital

Volatility of profits: (profitrate) = f (stable relations)

Stable relations

within firms

between firms

between states

Basic Theory – Economics ICT 2

New technology must drive:price : market power, quality (actual or perceived), price ratchets

quantity : new products (versions), new needs (discovered or produced), quantity ratchets, expanding geographical markets

wagerate : against unions, lower reproduction cost, globalisation

labourtime : technology, cheaper regulation (lower taxes)

interestrate : finance versus industrial capital

capital : technology, cheaper regulation (lower taxes)

infrastructure cost : public institutions (education, health, transport, ...)

cost of social peace : law, social identity, power systems, ...

Basic Theory – ICT Economics 1

Information technology provides information commodities Large amounts, very low variable cost Bottleneck: opportunity cost of consumers (getting attention) Bottleneck: selection of relevant information (names, „brands“)

Bottleneck: Decreasing information processing capacities

Changing firm structure, changing institutional structure

Global shake-up of profitrates

Basic Theory – ICT Economics 2

Communication processes (subset of information processes)Defining characteristic: temporal aspect

knowledge(T) = knowledge(T-1) + information(t) – obsolete information(t)

Utility Ui(communication) of entity i builds up in time, is satisfied by communication and vanishes again. E.g. phone calls, music ...

Information usually is accumulated in knowledge:

But:

Echo effects: not receiving communication signals is interpreted as signal!

filling in attention gaps, economy of time, substitution strategies

Basic Theory – Economics ICT 1

Prevailing direction of causality: From economics to ICT

INVENTIONS SOCIAL INSTITUTIONS

PRODUCTION UNITS

12

3 4

5

6

Innovations in anarrow sense

innovations in a broad sense

Basic Theory – Economics ICT 2

Swarming:

Past

Presence

TIM

E

BREAK

fastchanges BREAK

very slow changes

slowchanges

MODIFICATIONS

More Theory

• Money as information technology• Technology in search models• Production of public good information• Production of finite knowledge set information• Production of models

Selected model types describing technolgy in an economic context:

More Theory – Money as information technology 1

General Equilibrium Theory: ( , )q f p q ( , )p g p q

(( 0) ( 0)) (( ) ( ))S Sp q f F g G

Sf Ftypical ( )S Dq q q

typical Sg G( )S Dp q q

Observed quantities and coins carry information:

Strong welfare implications !

More Theory – Money as information technology 2

Disequilibrium theories:

•Prices signal needs of households•Markets transmit need signals to production units•Production units signal their technological possibilities to markets•Markets transmit technology signals to households•Exchange takes place in market disequilibrium•Adaption takes place in expectations disequilibrium•Evolution of needs due to disequilibrium•Evolution of technology due to disequilibrium

More Theory – Technology in search models

PP PH N*

2

Example: Searching for a low price shop

No information acquired

P P CS N I* Information bought

P PS* *Use information if

that isP P

CH NI

2

More Theory – Production of public good information

    Firm 2  

    no R&D R&D

Firm 1 no R&D

  R&D

0, 0 10, -10

-10, 10 5, 5

The R&D game:

Not enough R&D in basic research!

Cheaper and more advanced ICT cannot help.

Public funding

Patent system

More Theory – Production of finite knowledge set information

Tragedy of the Commons model

Several firms produce information in the same finite knowledge area.

Since for every single firm additional R&D still is profitable, theystill carry on, even if (from an aggregate point of view) it would be wiseto move to a new area of research.

To much R&D is carried out! Clear property rights

Promote cooperation

Advanced ICT might even worsen the problem!

More Theory – Production of Models

World (Model MW) z0 = w0 + 0 u1 + ß0 u2

Entity 1 (Model M1) z1 = 1 u1 + ß1 u2 Entity 2

Original Model M2: z2 = ß2 u2

Modified Model MM2: z2=(1-)ß2 u2+(1M u1+ß1M u2)

Ideological Model MM: z1M = 1M u1 + ß1M u2

The cheaper ideological influence (advanced ICT) the less direct coercivepower is needed!

Ideological Power

From Theory to Policy

• A model for Austria• How information technology enters• Some quantitative results

From Theory to Policy – A model for Austria

aij

  

 

sectors

sectors

wages

profits

cons. inv. gov.exp.

GDP

distributionFinal demand components

Input OutputAnalysis

From Theory to Policy – How information technology enters

1. As a sector in IO-analysis

2. Modified by R&D policy

Public R&D expenditure (socioeconomic structure)

General University Fund

Regulations

Human CapitalModel

InnovationModel

AUSTRIA 3

Macroeconom

ic Rsults

From Theory to Policy – Some selected results 1

Four policies: Demand side, supply side, deregulation, education initiativeVergleich Wachstum

-0.0600-0.0400-0.02000.00000.02000.04000.06000.08000.10000.12000.1400

1998

1999

2000

2001

2002

2003

2004

2005

Jahr

Proz

ent Nachfrageorientierte Politik

Angebotsorientierte Politik

Vergleich Wachstum

-2.5000

-2.0000

-1.5000

-1.0000

-0.5000

0.0000

0.5000

1.0000

1998

1999

2000

2001

2002

2003

2004

2005

Jahr

Proz

ent

OrdnungspolitikBildungsoffensive

Basislauf

-15

-10

-5

0

5

10

15

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Jahr

Proz

ent

Wachstumsrate, real

Arbeitslosenrate

Inflationsrate

Nettodefizit (in % desBIP)

Nettoexporte (in % desBIP)

From Theory to Policy – Some selected results 2

More Empirical Findings

• Recent Eurostat statistics• Results from the S.T.A.R. project• The productivity paradoxon

PCs per 100 persons

0

10

20

30

40

50

60

70

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

year

EL

A

S

USA

More empirical findings – Eurostat 1

More empirical findings – Eurostat 2

Internet Users per 100 persons

0

10

20

30

40

50

60

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

year

EL

A

S

USA

More empirical findings – Eurostat 3

Mobile Phone subscribers per 100 persons

0

10

20

30

40

50

60

70

80

90

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

year

EL

A

S

USA

More empirical findings – Eurostat 4

More empirical findings – S.T.A.R. 1www.databank.it/star.

STAR Website

More empirical findings – S.T.A.R. 2

Ambivalent influence of ICT on employment

Peacemeal engineering succeses in e-commerce

Slow recovery from the stock exchange bubble

The productivity paradoxon starts to be solved !