Information: definition, economic roles and economic properties
DEFINITION OF ‘INFORMATION’
The economics of information will be considered within the following definition:
Informationis that property of data that repre- sents and measures effects of processing of them.
Processing includes data transfer, selection, structuring, reduction and conceptualization. For data transfer there is an accepted measure of the amount of information (the shannon or ‘en- tropy’ measure), but it is inappropriate for more complex processing in which value, economic or otherwise, is important (Arrow 1984: 138).
Hayes (1993) has proposed measures for some of the other levels of processing.
In that definition, ‘data’ is taken as equivalent to physical ‘recorded symbols’, exemplified by printed characters; by binary characters in 158 ECONOMICS OF INFORMATION
magnetic, punched or optical form; by spoken words; or by images. Whatever the physical form may be, it becomes a recorded symbol when it is interpreted as representing something.
It is therefore necessary to recognize both physical and symbolic aspects of both entities and processes. The following matrix (Table 2) illustrates with examples of economic con- texts:
Table 2 Matrix of entity and process
This matrix will be used to summarize the macroeconomic structure of national economies in distributions of the workforce among types of industries and types of processes. It will also be used to summarize the micro-economic distribu- tion of costs within industries.
Each of the two dimensions, though shown as a dichotomy, is a spectrum reflecting the relative importance of the two polar positions. For example, ‘consumption’ is a mix of physical and symbolic: one needs food to live, so it is a physical entity and consumption is a physical process, but one uses food to represent a lifestyle and both entity and process become symbolic – what Veblen (1899) called ‘conspicuous con- sumption’. As one moves in economic develop- ment from subsistence through capital formation, to capital control, to social control, the role of capital shifts from physical to symbolic.
For the processing dimension, the spectrum is exemplified by the types of data processes. Data transfer is essentially physical, involving the movement of signals. Selection is a mixture of physical and conceptual, decisions being sym- bolic but selection itself being physical. Analysis
is symbolic and can remain so, though it is likely to be translated into physical realizations in display formats. Data reduction is almost purely symbolic, levels such as conceptualization even more so.
There can be transition from quadrant to quadrant in the matrix. An example is the transition of persons from manual labour into sports, and the conversion of what may have been simply physical effort into a game. As another example, concepts may be made real through artistic performance, and physical pro- ducts may be derived from artistic performances.
ECONOMIC ROLES OF INFORMATION
The writings of the economists concerning in- formation almost universally focus on its role in decision-making. (Some relevant references in- clude Von Neumann and Morgenstern 1952;
Arrow 1984; Laffont 1989; Philips 1988). But information clearly is important in operational management beyond use in decision-making.
This role is supported by management informa- tion systems. Furthermore, information is a result of environmental scan to ensure that there is knowledge of external reality in decision-making.
Information can serve as a substitute for physical entities. ‘telecommuting’ replaces the movement of people with the transmission of data. Exploration through imaging replaces ex- ploration through surgery.
Information is used to influence and persuade.
Advertising serves buyers wanting to learn about products and vendors wanting to sell them. It subsidizes a wide range of information media.
Information is essential in education, serving the process of learning, supplementing interac- tion with teachers and providing (in books, media anddatabases) much of the substance. It may be an educational objective in itself, since among things to be learned are the tools for access to and use of information.
Information is the substance of cultural en- richment, entertainment and amusement. People are willing to pay for it, which is the basis for the entertainment industries. In the matrix of Table 2, these are represented by ‘writing and compos- ing’, ‘sports’ and ‘performing arts’.
Information can be a product, a commodity – something produced as a package. And informa- tion can be a service. Indeed, the majority of
‘business services’ (the national economic ac- count that includes consulting) are information
Entities Processes
Physical Symbolic
Agriculture Data input Physical Manual labour Data storage
Personal services Data output (e.g. reports)
Sports Intellectual
games Symbolic Performance arts Writing and
composing Classroom lecturing Programming
and mathematics
ECONOMICS OF INFORMATION 159
based. Information can be a capital resource, especially for companies that produce informa- tion products and services. For them, databases are the means for producing copies for distribu- tion, the source for derivative products and services, and the basis for developing new pro- ducts and services. They are likely to be the major capital investment, more important than equipment or buildings.
GENERAL ECONOMIC PROPERTIES OF INFORMATION
Given its definition and roles, information is an economic entity with both costs and values, and people differ in their perceptions of the balance between the two. Beyond that, though, informa- tion has more specific properties of economic importance.
. While information is represented in physical form, that form can be changed without changing its content.
. In contrast to physical goods, intellectual goods can be created with limited physical resources, and frequently as a by-product of other operations. Information is easily and cheaply transported. The first copy represents most of the costs in creation, and reproduction costs are relatively small. As a result, it can be produced and distributed with minimal deple- tion of physical resources.
. There is an evident and direct relationship between physical goods and the materials used in producing them. One knows exactly how much steel is needed to produce a car. But there is no comparably direct relationship between any kind of good – physical or symbolic – and the information used in its production. The value of research, market information or advertising is uncertain, at best probabilistic, and much of the value is poten- tial rather than actual.
. There is a complex relationship between the time of acquiring information and the value of it. For some, the value lies in immediacy – yesterday’s stock information may be worthless tomorrow. For others, the value is likely to be received in the future rather than the present.
. Persons differ greatly in perceptions of the value of information, in kinds of use, in ability and willingness to use, in assessments of costs and in ability to pay. Typically the distribution of use of information is highly skewed, with small percentages of users frequent in their use
and the great majority infrequent.
. Use of information is affected by the distance users must travel to get access to it. The theory states that the use of any facility decays as the distance increases, as a function of the cost of travel; if the cost is linear, the decay is exponential and if the cost is logarithmic, it is quadratic. This theory applies to information resources (Hayes and Palmer 1983).
. An accumulation of information has more value than the sum of the individual values because it increases the combinations that can be made. The information and communication technologies (see information and commu- nication technology) have greatly in- creased the ability to make combinations. The number of databases, their size, the means for processing and relating them, the ability to use them – all are growing exponentially.
. There are immense economies of scale. Com- bined with the value in accumulation, this provides strong incentives for sharing informa- tion, especially since, once available, it can be distributed cheaply, which makes sharing easy.
. Information is not consumed by being used or transmitted to others. It can be resold or given away with no diminution of its content. Many persons may possess and use the same infor- mation, even at the same time, without dimin- ishing its value to others. All these imply that information is a public good.
. However, there is the need to invest in the creation, production and distribution of infor- mation and that implies a wish to recover the investment. Furthermore, there may be value associated with exclusivity in knowledge, so there must be an incentive to make it available to others. This implies that information is a private good.
. Most information products and services lie somewhere between pure private goods and pure public goods, and the same information may alternate as a public and private good at different stages of information processing and distribution.
. Given that mixture of public and private good, private rights must be balanced with the rights to use the information. copyright is one means of doing so, and the copyright clause of the Constitution of the USA embodies this balance: ‘The Congress shall have the power. . .to promote the progress of science and the useful arts by securing for limited 160 ECONOMICS OF INFORMATION
times to authors and inventors the exclusive rights to their respective writings and discov- eries’ – progress implying use and rights implying protection.
The macroeconomics of information
BACKGROUND
In The Information Economy (1977), porat added an ‘information’ sector to the usual three sectors of national economies – agriculture, in- dustry and services. As a basis for economic assessment, Table 3 provides a comparison of the distribution of workforce among sectors (the
‘information sector’ and the other three combined as ‘non-information sectors’) and functions for economies at three levels of development (Hayes 1992).
In 1998, the percentage of the US workforce employed in the information industries was about 32 per cent, much greater than 22 per cent in 1990 and the 20 per cent shown in Table 3 for 1980, so there has been a substantial increase in information even in the economy of the USA.
Within the information sector, information functions can be classified into four groups:
management functions, support functions (pri- marily clerical in nature), equipment functions (hardware and software), and substantive func- tions (involved in the production and distribu- tion of information). Information industries can be classified into four categories (see Table 4):
NATIONAL POLICY PLANNING
Nations and corporations can gain economic
Full-scale development, representing economies like that in the USA in the 1980s Category of function
Category of industry Non-information functions
Information functions
Organization total
Non-information sectors 50% 30% 80%
Information sector 6% 14% 20%
Substantial development, representing most other industrialized economies Category of function
Category of industry Non-information functions
Information functions
Organization total
Non-information sectors 60% 25% 85%
Information sector 6% 9% 15%
Limited development, representing most peasant-based economies Category of function Category of industry Non-information
functions
Information functions
Organization total
Non-information sectors 80% 14% 94%
Information sector 3% 3% 6%
Table 3 Illustrative levels of development for information economies
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values from an information-based economy, but balancing them are barriers (see below):
Values from use of information
. Better workforce, better trained and more capable of dealing with problems.
. Better product planning and marketing, based on more knowledge about consumer needs.
. Better engineering, based on availability and use of scientific and technical information.
. Better economic data, leading to improved investment decisions and allocation of re- sources.
. Better management from improved communi- cation and decision-making.
Barriers to use of information
. Costs are incurred in acquiring information.
. It is likely that the return is over the long term, while the expenditure is made immediately.
. Except for the information industries them- selves, information is not directly productive.
. Rarely are results clearly attributable to the information on which they were based.
. Accounting practice treats information as an
‘overhead’ expense, subject to cost-cutting.
The barriers can deter companies from making investments in information resources. That does create opportunities for information entrepre- neurs, but there will be risks for them.
On balance, the benefits would seem to outweigh the barriers, so macroeconomic policies should try to alleviate the barriers to information development, encourage information entrepre- neurs, assure that information resources are
available when needed and prepare managers to use information. The implications for national policy planning are shown below.
National policy implications General economic policies . Encourage entrepreneurship.
. Shift from low technology to high technology.
. Shift from production of physical goods to information goods.
Develop the ‘information economy’
. Encourage effective use of information in business.
. Provide incentives for information industries.
. Develop information skills.
Management of information enterprises . Establish technical information skills . Develop information support staff skills The micro-economics of information
INCOME TO THE PROVIDERS OF INFORMATION PRODUCTS AND SERVICES
The revenues for the information industries in the USA in 1990 and 1998, as percentages of gross national product and absolute dollars, are shown in Tables 5 and 6 (Statistical Abstract of the United States1993, 2000):
Of special importance is the steady year by year increase, for the past decade, in expendi- tures for ‘Business Services’, reflecting growing use of information in the economy.
THE COSTS OF INFORMATION
Costs occur in the following stages of informa- tion production and distribution:
1 Information must be created, by generation and processing of data; these are authoring functions.
2 It must be assessed for publishability; these are editorial functions.
3 It must be processed for the generation of a master; these are composition functions.
4 Products and/or services will be produced.
5 The products and services will be marketed.
6 They will be distributed. The stages exemplify the schematic used in the definition of infor- mation (see Table 7)
Categories Examples Information
production
Research and development Authoring and composing Information
distribution
Publishing and libraries Television and movies Information
transactions
Telecommunication Banking and brokerage Information
equipment
Computer hardware and software Telecommunications
Table 4 Categories of organizations in the information sector of the economy 162 ECONOMICS OF INFORMATION
The costs for authoring, editorial and compo- sition will be treated as capital investments; those for production, marketing and distribution as delivery costs. In practice, the costs of authoring usually are borne by authors, compensated for by royalties and thus part of the costs of sales for the publishers
Today, three forms of distribution need to be recognized: (1) printed and film, (2) magnetic tapes (VHS-VCR) andoptical disks (CD-ROM and DVD), and (3) electronic. For the first two, distribution is by a combination of wholesale distributors, retail outlets and libraries. For electronic, by television (broadcast, cable and satellite) and the Internet.
Table 8 provides a qualitative summary of the relative importance of each form of distribution for several types of information. In that sum- mary, ‘primary’ means that the form is the initial means for distribution, the major source of income and the basis for recovering most if not all of the capital investment; ‘secondary’ means the form is a significant alternative means for distribution; ‘tertiary’ means that the form is speculative, with income still too small to be significant; blank means the form is of no substantial significance. The assessment for books with respect to non-print distribution and for scholarly journals with respect to CD-ROM distribution may be too pessimistic, but the facts are that the current income from them is minus- cule.
For distributors and retail outlets, capital investments are primarily in physical plant, though there will be some in inventory. Those for libraries are in physical buildings and equip- ment, but most significantly in their collections and associated technical processing. Delivery costs for distributors, retail outlets and libraries are largely for staff. (For all retail establishments in 1997, capital expenditures represented about 20 per cent of total costs, and staff 80 per cent.)
Information industries US data for 1990 US data for 1998
Transaction industries 4.9% $274 billion 7.1% $629 billion
Hardware and software industries 3.4% 190 billion 7.6% 665 billion Production and distribution industries 14.0% 783 billion 17.7% 1,545 billion Total for information industries 22.3% 1,147 billion 32.4% 2,839 billion Gross National Product 100.0% $5,600 billion 100.0% $8,750 billion Table 5 US distribution of revenues in percentages of GNP and absolute dollars I
Details of production and distribution 1990 1998
Book publishing 0.3% $15 billion 0.3% $29 billion
Journal publishing 0.3% 15 billion 0.3% 30 billion
Entertainment 3.2% 180 billion 3.8% 330 billion
Formal education 7.0% 392 billion 6.9% 601 billion
University research and development 0.4% 21 billion 0.3% 27 billion
Business services 2.9% 160 billion 6.0% 528 billion
Total 14.1% $783 billion 17.6% $1,545 billion
Table 6 US distribution of revenues in percentages of GNP and absolute dollars II
Entities Processes
Physical Symbolic Physical Production Marketing
Distribution
Symbolic Composition Creation Editorial Table 7 Information production and distribution processes
ECONOMICS OF INFORMATION 163
For the Internet, capital investments are in hardware and software for processing and com- munication. Delivery costs are for staff and communication access charges. Unfortunately, any estimates for Internet costs are uncertain.
First, costs occur at several points – commu- nication services, network backbones, domain servers, internet service providers and user facilities. The costs for network access are largely independent of actual use, being connec- tion charges related to bandwidth and reflecting anticipated demand. Second, the rate of growth of the Internet is so rapid that data on one component of operations, reported at one point in time, cannot be compared with data for another component, reported at another point in time. Third, there are mixtures of funding – public, institutional, advertising and individual users – and many of the costs are subsidized, buried in other accounting categories.
Complicating the assessment of Internet costs is the fact that many of them are borne by the users instead of by the producers and/or distribu- tors. The costs of local storage and printing are borne by the user, and they are not negligible.
Users spend time in accessing, downloading and managing the digital files.
Despite those difficulties, one analysis (Hayes 1999) estimated that the yearly delivery costs for access to a digital library on the Internet would be distributed 25 per cent for communica- tion, 50 per cent for staff and 25 per cent for amortization of equipment.
THE MICRO-ECONOMICS OF BOOK PUBLISHING
The text of a book is usually the creation of an author. The return on that investment is usually derived from royalties, typically 10 per cent of the list price of the book. For scholarly and
professional books, there usually is no royalty.
Less than 1 per cent of authors actually get published and only half of those are really successful (Hartwick 1984).
Estimates can be made of the costs for print- form distribution. Table 9 simplifies and gener- alizes from data reported by Dessauer (1981), Bingley (1966) and Machlup (1962), showing costs of print-form distribution as percentages of list price. Data are not available to make com- parable estimates for CD-ROM or Internet dis- tribution, and sales of ‘electronic books’ are still minuscule (Streitfeld 2001).
Editorial functions include locating and encoura- ging authors, working with them in creating suitable manuscripts and assessing the value, marketability and suitability for production. The functions in production management include copy-editing, formatting and organizing the con- tent, and managing composition or transition to the production master. To these must be added overhead and general administrative costs cover- ing the wide range of corporate costs–benefits, space, supplies, etc.
Forms of distribution
Types of information Printed/film Magnetic/optical Television/Internet
Books Primary Tertiary Tertiary
Scholarly journals Primary Tertiary Secondary
Software Primary Secondary
Databases Secondary Primary
Motion pictures Primary Secondary Secondary
Television Secondary Primary
Table 8 Importance of forms of distribution
Royalties 10%
Capital costs 30%
Editorial 5%
Composition 25%
Delivery costs 30%
Production 14%
Distribution 16%
Discount 30%
Table 9 Costs of print-form distribution as percentages
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