08 September 2020

The pace of innovation in the data-driven economy

'Economic Rents and the Contours of Conflict in the Data-driven Economy' (CIGI Papers No. 245 — July 2020) by Dan Ciuriak at the Centre for International Governance Innovation comments 

 While history allows many narratives to be spun, the contours of conflict, both internal and between states, can be seen as aligned with the contest over control of the most valuable productive assets of an age — from the wars of territorial acquisition of the feudal era when land was the main source of economic rents, to the wars of mercantilist expansion when the economies of scale generated by the machinery of mass production became the main source of rent, to the resource-rent-fuelled oil wars of the modern era, and, in recent decades, the proliferating conflicts over intellectual property (IP). 

With the digital transformation we are seeing the emergence of a new type of economy — the data-driven economy, in which data is the essential factor of production. Data generates massive rents, fuels the rise of superstar firms and generates powerful incentives for strategic trade and investment policy. The emergence of this new economy signals a new era of conflict, on new battlegrounds and with new tools or weapons, between new coalitions within and between countries. This conflict is already upon us. The vast rents prospectively at play in the data-driven economy arguably constitute a major (perhaps the major) trigger for the open trade and technology war between the United States and China. They also are at the heart of the brewing conflicts over taxation of digital platform firms.  

This paper describes the contours of the conflicts that are to be expected with the digital transformation as it realigns interests; compares these expectations with actual developments; and comments on the strategies of the main protagonists and the implications for the rules- based system of international commerce. ... 

In the era of continuous and steadily accelerating technological change that started with the Industrial Revolution, economies and societies were repeatedly transformed in ways that can be traced to ownership of the essential and scarce factor of production of the day and command of the economic rents that flowed to that factor. The digital transformation is now ushering in a new economic era, in which the economy is again being reordered by new technologies based on a new essential capital asset — data. The emergent data-driven economy promises to be similar to, but distinct in a number of ways from, its knowledge-based economy predecessor. However, it is very different from the industrial era based on machinery of mass production, which the knowledge-based economy itself succeeded, and the land-based feudal era before it (Ciuriak 2018a). These differences can be related to the ways in which data is different from the productive assets that underpinned the economy of preceding eras. 

This paper briefly sets out this thesis and describes the contours of the conflicts that are to be expected with the digital transformation as it realigns the interests of social groups, companies and countries. It concludes with some inferences concerning the nature of these conflicts for policy makers tasked with navigating the coming period of turbulence.

Ciuriak concludes

a rules-based system is efficient for the regulation of trade when competitive market conditions apply — which was perhaps unusually and fortuitously the case in the postwar period when, briefly, economies were characterized by constant returns to scale and the labour share of income was constant. However, in the contest for international rents, geo-economic and geopolitical power runs roughshod over rules. That is the situation facing the international community in the coming years. The critical factor going forward is to de-escalate the rhetoric on national security and values, which are not negotiable and potentially put the parties onto a path to mutually ruinous conflict, and instead place the emphasis on the sharing of rents, which is a negotiable issue that can be addressed by an institutional framework already in place — the WTO.