Understanding the Digital Economy:
Understanding the Digital Economy:

Data, Tools, and Research
Wednesday, May 26
Department of Commerce
Remarks by Dr. Neal Lane
Assistant to the President for Science and Technology

Good morning! I'm delighted to be here at this first public conference examining how we can measure the economic and social effects of the digital economy. I'm going to give a "placeholder" definition here – since, to some extent, we're treading in unfamiliar, though inviting, waters. When I say "digital economy," I mean to emphasize the convergence of computing and communications technologies in the Internet and the resulting flow of information and technology thatis stimulating all of electronic commerce and vast organizational change. I can't think of any current public policy issue that is more timely or has the potential to affect more people.

One of the inescapable aspects of life in the new digital economy is the flood of unwanted messages that arrive every day in our e-mail – jokes, "top ten" lists, dictionaries of Southern slang, phony virus warnings, internet hoaxes, etc., many that are sent to us by friends. I came across a list the other day that I think is appropriate for the audience of this particular conference: It's a list of warning signs that you may be living too deep in the digital age.

For example, one warning sign is that you have a list of 15 phone numbers to reach your family of 3. Or maybe you e-mail your son and daughter in their rooms to tell them that dinner is ready, and they e-mail you back to ask, "What's for dinner?" Or you realize that you'rechatting several times a day with a stranger from South Africa, but you haven't spoken to your next door neighbor yet this year. And you're probably beyond all hope if you realize that you're getting most of your jokes via e-mail instead of in person.

These are slight exaggerations, but only slight. The Internet, the World Wide Web, e-commerce – these are still very new phenomena in our lives, and they are affecting our lives in ways that we're perhaps not sufficiently prepared for. It's imperative that we begin now to systematically analyze the ways these phenomena have changed – and will continue to change – our world.

I want to talk today about how we are seeking to address some of the long-range implications of the digital economy. I'm going to set some context and then briefly describe the Administration's Information Technology for the 21st Century Initiative (IT2), which includes research on the social and economic implications of information technology. Finally, I will identify some of the key areas of research within the scope of that initiative.

Twenty-two years ago, when the Commerce Department published a study on "The Information Economy," digital information was found principally in the back offices of large companies – in payroll records, typing pools, mailing databases, and the like. Today, it is everywhere, in everyday content and communications,and as the logical infrastructure that drives the digital economy. Not everyone agrees on just how large a role the digital economy plays within the economy as a whole, but it is clearly a prominent driver of economic and social change at present – attracting investment, reducing inflation,and increasing productivity. Twenty years ago, the typical job was that of an assembly-line worker. Today, it is in an office with a computer.

But how different is the digital economy, really? What should we expect of it? We don't want the transformations underway in technology and the marketplace to outpace our ability to make sense of them. That's why, with this conference, we're trying to engage some very intelligent and knowledgeable people (you) in trying to help us understand these phenomena.

Among all the wealth of paper you've received at this conference is this handout. You don't need to pull it out right now, but it helps to make a point. The digital economy is driven by a convergence of information, computing, and communications,which we have come to call the Internet. This convergence is responsible for the widespread growth of electronic commerce, new competitive strategies,and changes in business processes and organizational structure. It is enabling new networked forms of activity that are neither markets nor hierarchies but are based on relationships.

We see examples all around us of how this new technology is used in scientific research, health care,education, and government. We hear daily about ways in which the technology is challenging traditional laws, policies, and institutions. But what we don't have yet is a clear sense of the long-term social and economic implications– the broad outer circle in the diagram.

Although we know that this technology is bringing significant economic, legal, social, ethical, political,and cultural changes along with it, the Federal government has sponsored little social science research in this area.

The National Institutes of Health has its ELSI (Ethical, Legal, and Social Implications) Research Program, but there is no comparable effort in the information technology field.

The Administration's new initiative, Information Technology for the 21st Century, known as IT2, is designed to help us perpetuate and understand the Information Revolution. The initiative corresponds to an increment of $366 million, a 28-percent increase in overall spending on IT research, bringing the total to about $1.8 billion in FY 2000. The IT2 initiative is a team effort involving the White House and several Federal agencies. It is a high priority with the President and with the Vice President.

The initiative has three central goals: (1) to carry out basic research to advance IT, (2) to use the most advanced information technology – for example, computer simulation– to enhance research across all areas of science and engineering and hasten the pace of discovery, and (3) to investigate the social and economic implications of the Information Revolution. Today, I'm going to focus on this latter element of the initiative. We have proposed $15 million for the coming fiscal year for research on the social and economic implications of IT that would be administered within existing agency programs on top of existing funding. We expect this conference and the resulting papers to provide some very useful guidance as we launch this new initiative.

Several of the research topics that might be addressed have already been sketched out at this conference. Let me suggest a few more. Again, I emphasize that I'm posing these for further investigation, not as areas in which we already have the answers or even all the questions.

First, Privacy: using the Internet, businesses have discovered an improved ability to target advertising to individual consumers, making it more cost-effective. This ability has also created an unprecedented market for personal information as an adjunct to e-commerce transactions, raising new concerns about privacy – a potential obstacle to wide acceptance of electronic commerce. We need research to tell us how consumers may feel about technology-enabled options for specifying and enforcing their own privacy preferences or requirements, including selling access to it on their own terms.

Second, Innovating in the Digital Economy: Extraordinarily rapid technological and market innovation distinguishes the digital economy from other parts of the information economy– as well as from other fields of technology. We still know little about how innovative processes at the heart of the digital economy may differ from innovation in physical products and processes. In some sectors of the digital economy innovation may be closer to the processes of scientific research than to the incremental development of new manufactured products. Or it may be so unique as to demand understanding on its own terms. If this is true, how would it affect policies and laws on competition, such as intellectual property protection? And, by the way — how does one measure productivity in this environment? We need to know more here also.

Next, Standards: Most observers agree that openness is an underlying technical and philosophical tenet of the expansion of electronic commerce. The widespread adoption of the Internet as a platform for business is due to its non-proprietary standards and open nature, as well as the huge industry that has evolved to support it. Experience to date shows us that open standards do not have to be engineered by international committees over many years, but can evolve within a large,digitally connected professional community in parallel with rapid development and roll-out of technology by competing companies. Are critical open standards processes still strong and healthy? What are the tradeoffs between openness and exclusivity as drivers of investment? Obviously, network effects have a strong influence on business strategy, but do they suggest a different balancing of interests in policies, laws, and their administration?

Finally, the Digital Divide: We know that the functionality of information technology and Internet services has the potential to segregate non-users from users. It can leave non-users out of important markets and virtual communities within the digital economy. Such segregation not only diminishes the potential of those markets and communities, but also raises the specter of a class of outsiders who face isolation at many levels and in a growing number of contexts. Ultimately, these outsiders may face increasing costs as services and sales performed outside the digital economy lose scale and become comparatively expensive to provide.

The President's Information Technology Advisory Committee (PITAC) helped the Administration focus much-needed attention on this area. And PITAC concluded that we need more data and a deeper understanding of social, economic, and policy issues.

The PITAC report stated:"The research that is required to develop this knowledge should be broad-based,long-term, and large-scale, in its scope and in its promise for continuing the beneficial transformation of our society and economy."

In particular, we need well-designed empirical research that lays a foundation for others to test and build on, whatever their business interests or political persuasion. Otherwise, decisions will be based on guesswork, rhetoric, and politics as usual. The loudest voices may be raised by those who feel most threatened by the currents of the digital economy. Those most focused on creating new value may be least able to take time out for advocacy or litigation.

Laws, once made, are difficult to undo. It would be nice to get the law right in the first place, but that may be asking too much, given how little we know yet about the future digital economy. Last year's Digital Millennium Copyright Act mandates follow-up studies that may tell us how well the law is working, and we have proposed a similar follow-up study for the database protection legislation currently before Congress. At the same time, new laws are benchmarks that offer opportunities to achieve a deeper understanding of how the digital economy works.

Since the goal is to understand implications, the disciplines cannot work in isolation. (Indeed, the disciplinary boundaries between the technical, economic, business, and legal aspects of the digital economy are as blurred and porous as other boundaries in cyberspace.) We need research that draws on and integrates the language,structures, and insights of the different disciplines. We need research that speaks in clear and simple English -- the common currency of Washington, Wall Street, Silicon Valley, Main Street, and the Net.

In closing, let me acknowledge that the digital economy is a moving target. We might be holding conferences dedicated to understanding it for decades to come.

But the digital economy is the major economic and social development of our time, so our stake in making sense of it is high indeed. We need to know how it is or isn't different. We need to know how to pursue privacy, innovation, and other goals in its unfamiliar light. We need to ensure that our exploration of digital technology and applications is undertaken cognizant of the social and economic implications– and vice versa.

And we need to make sure that new knowledge and understanding of the digital economy spreads throughout our society as quickly and widely as the Internet has.

Thank you very much for the opportunity to speak to you, and best wishes for success in the rest of your meetings today. We appreciate your taking the time to participate in this important meeting. And, by the way, if you have further thoughts you would like to share, send me an email (nlane@ostp.eop.gov).Thank you.

Office of Scienceand Technology Policy
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Washington, DC 20502

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