The Information Sector
Welcome to the information sector! We’ve entered a world devoted to buying, selling, managing, and manipulating digital information; a world that began with software, gave birth to the Internet, and stands poised to conquer entertainment.
You’ve probably been here before. If you invested in a dotcom and watched your portfolio rise and fall, you were here. If you read about Microsoft and found yourself appalled at its monopolistic practices, or concluded that a vindictive government was out to punish corporate success, you were here. If you downloaded music using Napster, or smugly prided yourself on your refusal to do so, you were here. And if you ever wondered what all of these things had to do with the overall economy, you were here. So, welcome back to the information sector!This time, we’ve arrived with a purpose. We’re here to understand what happened and why. Now that we’ve had a chance to catch our breaths and to review some actual data, we’ve returned feeling that this time we can get it right—if only we could understand what went wrong the first time. How did the information sector suddenly descend upon us, seemingly from nowhere, in the middle of the 1990s? How did we integrate so many new technologies, toys, and productivity tools into our lives so quickly and so completely—and why did the flow of innovations suddenly seem to slow to a trickle? What was really going on with Microsoft, Napster, Linux, and all those other new products and companies? What role did the government have to play—and what role will it have in the future? How does any of this relate to the overall economic picture? What does it have to do with the apparent mismatch between job creation and productivity? And finally, how can we disentangle the threads of technology, economics, law, and public policy to understand why the information economy collapsed, how it will rise, and what it will look like when it does? These questions frame our inquiry and motivate our journey through the information sector.
The information sector is the part of the broader tech sector where people work entirely with information and products composed entirely of bit strings. Though we’ve had information businesses for at least as long as we’ve had a software industry, the information sector didn’t exist until the commercial Internet exploded into public consciousness. But the sector’s not done growing. Not by a long shot. As we move into the future, it will swallow increasing numbers of industries—often kicking and screaming. With each industry swallowed, we’ll find ourselves facing new opportunities, new challenges, and above all, new wealth. Or at least, most of us will... And therein lies the key to understanding the future economy of the information age.
The first industries swallowed—software, the Internet, entertainment, publishing—all share an important feature. They never have to leave the digital realm. Most of the rest of the tech sector is very much in the physical world. Microchips, computers, switches, routers, cables, optics, and telecommunication systems are all physical devices that allow us to manipulate information. These industries define information equipment sectors, and many of their fortunes will move in lockstep with those of the information sector. But the information sector itself remains a uniquely interesting place, well worth our time and attention.
Prior to the mid-1990s, the information sector had been an exclusive club open only to the priests of academe and a few chosen followers. When it finally escaped from their temples to land on our desks, massive confusion ensued. Investors intoxicated with arcane buzzwords powered a huge investment boom. Daily reports about the government’s antitrust suit against Microsoft added even more buzzwords to the mix, and a universal race to invest in “the next Microsoft” magnified our belief that The Internet Will Make US All Rich! We absorbed that belief with the zeal of new converts, and built a temple to Mammon atop our beloved NASDAQ.
Our index bubbled ever higher until, seemingly without warning, the bubble burst. The Internet, it seemed, might not make us all so rich, after all.The information sector’s story flows from the source of our faith through a rough encounter with reality to the sea of legacies that we are still trying to comprehend today. Ideas born in the temples of academe not only drove the sector’s development but also reveal the sector’s key message: The Internet, in fact, can make us all rich, as consumers and as producers, if not as investors. The best evidence of this message lay not in the front-page stories of the trial and the bubble, but rather in the less told tales of the Linux operating system popular among hackers and the Napster file sharing system beloved of music fans. These systems exploited newly enabled business models to make information sharing cheap and easy. But both systems also met strong opposition from entrenched interests intent on preserving their own profits. The tension between information-sector business models that bring consumers and producers closer together and the entrenched expectations (and in many cases, legal rights) of traditional distributors, promises to play itself out time and again as the information sector swallows industry after industry.
The Internet is an innovative infrastructure improvement of immense public value. Like all such public assets, the Internet confers an immediate benefit upon anyone who uses it—it reduces the cost of exchanging information. The value of this benefit is already enormous. It will grow as we digitize more products, as more industries enter the information sector, and as more users join the network. All existing users will share in its increased value, but not necessarily evenly. Most users will emerge as small, incremental winners. But the big winners and the actual losers can both threaten our ability to enjoy those benefits. The biggest winners will be those who figure out how to collect tolls from a locked- in customer base, thereby privatizing our glorious savings.
Powerful losers may bend laws and regulations to preserve the profitability of their own inefficient profit streams. These groups threaten the information sector’s development. Toll collection and misregulation can slow technological development and reduce the Internet’s value to us as consumers, to innovative producers, and to society as a whole.The key to the entire information economy lies in the ways that we approach intellectual property and network economics. The centrality of these concepts is not surprising. Every society is shaped, in large part, by the way that it approaches property rights and the exchanges of those rights. Information products tend to define network industries. Network economics will necessarily govern the ways that we build and exchange products in the information sector. But we have some choice about the ways that we conceive of ownership and property rights inherent in those products. Our current approach to intellectual property has already caused a number of visible problems. It promises to create even more challenges as the information sector grows.
All told, a vibrant information sector must rest upon two pillars: public infrastructure and private entrepreneurship. The notion of an information infrastructure is expansive; it requires much more than wires, routers, and communication protocols. It includes a full range of government policies necessary to promote economic development in the information age. Education and employment policies that promote lifelong learning, retraining, skill acquisition, and labor mobility are critical; an inability to move people fast enough to keep up with the flow of information and goods can strangle any society, including ours. Tax policies that maximize incentives, trade policies that eliminate barriers, and immigration policies that encourage people to locate where they can be most productive are equally critical. Security policies and social welfare systems that encourage calculated risk-taking enable entrepreneurship and small-business growth.
And only foreign and defense policies that promote market expansion, freedom of choice, human dignity, individual responsibility, and the other values of liberalism can promote global integration and growth. Policy choices in each of these areas will guide American and global economic development as we continue our transition to the information age.But the single most important infrastructure investment—and the one most directly relevant to the economy of the information age—lies in our conception of intellectual property and idea markets. Information products are, at heart, ideas. We need people to devise innovative ideas if we are to have any valuable information products at all. But ideas have a tendency to circulate freely. Once an inventor exposes an idea to public view, it tends to take on a life of its own. Numerous replicators share it broadly, often without the inventor’s knowledge or consent. That characteristic of ideas complicates our goal of creating idea markets. Why pay an inventor for a freely available idea? Yet, without some hope of compensation, inventors are likely to innovate only to solve their own problems, and they will have no particular reason to share their solutions with others. Perhaps the critical infrastructure question of the information age is how to best motivate the creation and dissemination of ideas.
This policy environment, along with our ever-improving physical infrastructure, will define the platform atop which our private sector entrepreneurs will innovate, teach, and commercialize new information products. The first significant wave of their work powered the bubble. Though we lost many of their products in the ensuing undertow, we can expect further waves to follow. The lessons of both that first wave and first undertow are critical to shaping future products. And though we will spend some time exploring both those lessons and their implications to future entrepreneurs, our focus on this journey will be elsewhere.
Our primary goal is to understand the relationship among digital information products, intellectual property rights, and network markets—technology, law, and economics. We need to understand the infrastructure that our current system implies, to see how it has played itself out in the Microsoft trial, the Linux bazaar, and the Napster song, and to explore where it appears to be heading. We also need to consider whether or not we could do better. This focus will shape most of our journey, as we attempt to comprehend the public infrastructure that will make private entrepreneurship possible. In short, we have returned to the information sector to learn what happened and why—so that we can leverage that knowledge into a better, brighter, richer future.