• The Internet allows the growth of information economies
  • The Internet: a new information economy?

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    Fair competition and the powerless States

    It might be thought surprising that free markets, if they are so efficient, have not come forth everywhere and very rapidly. A reason for this could be that they require a state structure, strong enough to impose the rules of the liberal game and thwart attacks on competition. Firms try to avoid fair competition and, to maximize their profit, try to establish a strong position or even a monopoly in some niche. It is precisely efforts such as these which create the market’s dynamic, for example efforts towards product differentiation. Insofar as the state is sufficiently strong to impose such antitrust rules on powerful players, it is strong enough to rectify any consequences of the market operation which might be criticized, particularly short-term fluctuations or certain intolerable inequalities.

    Liberal states have therefore always fluctuated between controlling the market with a view to ensuring it functions properly on the one hand and on the other hand intervening in order to offset the consequences, even if efficiency is then lost. Often, the roles are partially divided between a local state structure, responsible for social balance, and a federal state structure, above local level, supervising its actions with a view to limiting them and guaranteeing that markets remain sufficiently free. This is how the United States functions, and this is also the system that has been adopted in Europe. It should be a cause for concern that such a system is inherently potentially unstable in the event of a crisis insofar as the federal authorities alone would attract the wrath of economic players.

    In the cases referred to above, the size of markets was smaller than that of the federal states responsible for overseeing their operation. Currently, markets extend beyond states, without there being, at this level, any authority responsible for imposing the rules of competition. Consequently, there is a risk of moving on from liberalism with strong states control, which is always close to some sort of flexible planning, to liberalism with weak states control, a situation of which no country really has any genuine experience.

    A liberalism with weak states control could become unstable and inefficient for a number of reasons:

    • the impossibility of properly applying anti-trust laws might enable long-term monopolies to be established, a hypothesis which is all the more likely as production is governed by increasingly marked economies of scale;

    • if the specific functions of the State (police, justice,...) are weakened, the rules of the game are easily transgressed and contracts are less often complied with, resulting in very high transaction costs;

    • many of the rules of the liberal game are not imposed directly. Economic agents apply them, even if they do not correspond to their short-term personal optimum, because they have a vague idea that such rules lead to efficient situations from which they will ultimately benefit in the long run. If there is an element of doubt regarding the value of these rules or whether they are effectively applied by everyone, the implicit social contract risks being broken - corruption is a symptom of this.

    Such a consideration is central in terms of the Internet economy because the development of a network of this type will depend greatly on the responses given to the issues just addressed. These responses fall into three main groups:

    • either it is assumed that markets will be self-regulating, i.e. that it will be possible to define the rules of the competitive game also in a competitive manner. Under such conditions, the enforcement of the rules can also be left to the logic of a free market. This is the attitude which corresponds to the ideology of the early Internet users;

    • or it is assumed that the State monitoring will benefit from the same technical progress as that which allows the expansion of markets and makes them fluid. States will, in this case, have to be encouraged to act jointly on regulating networks14;

    • or it is hoped that a world authority will be set up with a view to returning to "liberalism with strong states” types of regulation. This latter scenario is rather unlikely in the short term.

    The Internet allows the growth of information economies

    The contradictions of information economies have been increasing for a number of years. The development of the Internet sharpens such contradictions and, in the same time, triggers the invention of new solutions that will alleviate these contradictions and permit the incorporation of information products into the market economy. Today’s haphazard development of the Internet can be explained in part by the creativity of the “network of networks” in solving the problems which it has actually turned into pressing issues.

    First of all, the Internet should be accurately defined: it is a phenomenon which is much more than the adoption of the TCP/IP protocol. It would be futile to try and foresee its evolution on the basis of the qualities or defects of IP protocol in data transfer. (2.1)

    Next, there is the role played by IP networks in setting up perfect markets, so perfect that they might, over time, lead to instability and, paradoxically, thwart actual competition. (2.2) This is to be feared all the more as the Internet extends markets beyond State jurisdiction and offers a model of self-regulation of questionable effectiveness. (2.3)

    Nevertheless, the Internet allows what has previously been referred to as the generation of demand and thereby solves the principal problem facing information economies: the marketing of information and the regulation, by competitive markets, of products and services whose production is subject to marked economies of scale. Its economic model is neither that of the mass media nor that of e-commerce - it is an autonomous model based on the generation and exploitation of communities of clients. (2.4)

    Finally, one should mention business organization: if transaction costs are profoundly modified, firms will have to adopt a new type of coordination of their activities and develop new relationships with their employees. (2.5)

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    The Internet: a new information economy?

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