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Transaction rules the Industrialized world. Here prices are set by those who control the manufacturing, distribution and retail systems. Customers do have an influence on prices, but only in the form of aggregate demand. The rates at which they buy or don't buy something determines what price the "market" will bear — in a system where "market" means aggregated demand, manifested in prices paid and quantities sold. Here the whole economic system is viewed mostly through the prism of price, which is seen as the outcome of tug between supply and demand.

Price still matters in the "Digitalized World", but relationship matters more. It's a higher context with a higher set of values, many of which are trivialized or made invisible when viewed through the prism of price. Relationship is not reducible to price, even though it may influence price. Families and friends don't put prices on their relationships. Love, the most giving force in any relationship, is not about exchanging. It is not fungible. You don't expect a payback or a rate of return on the love you give your child, your wife or husband, your friends.

The above quote is from an old article Building a Relationship Economy of Doc Searls. I found this article because I'm searching for more stuff about social capital. The Whuffie Factor made me think. In the new economy, the bits economy, relationships matter more than transactions.

Currently I have been reading "The Whuffie Factor" by Tara Hunt. From the first chapter "How to Be a Social Capitalist" I want to highlight a few sentences:

p. 2 People are on social networks to connect and build relationships. Relationships and connections over time lead to trust, which is the key to capital information.

p. 4 Whuffie is the residual outcome - the currency - of your reputation.

p. 5 Financial transactions are part of the market economy, whereas whuffie is part of the gift economy, where services are performed without need for direct payment.

p. 6 Market capital now flows from having high social capital.

p. 7 Market and social capital are converging more than many recognize. There may even come a day that social capital is seen as viable currency in the market economy.

So true. It is another way of describing the shift from Atoms to Bits.

Technology is linking us in ways we never imagined possible: Twitter, Google, Wikipedia, and other - all blend to create a web of intereconnected minds.

Dan Brown, The Lost Symbol, p. 504

Sohail Tahir Inayatullah is a Pakistani-born political scientist and futurist. He currently lives in Australia. Recently he gave a presentation “Futures of the World Economy”. It is an analysis of the consciousness and myths, underlying how we perceive this crisis. Each perspective requires its own solution which nobody can solve. A meta-approach is required.

Below you can find the seven views on the crisis which I have taken from the notes of mister Inayatullah:

1.      A Mortgage Crisis - The narrow view is that this is just a mortgage crisis – there were a lack of regulations as to whom banks could lend money to – the famous sub-prime crisis.

2.      Global Banking Crisis - If one believes the core issue, the mortgage crisis, it has led to a contagion throughout the banking and broader financial system. And it is not just the U.S.A that has to set its house in order but the entire world. Global regulation is required and a change in global values is required.

3.      Creative Destruction - In contrast are the supporters of capitalism. For them, this is just the normal if extreme part of the business cycle. In this process of creative destruction, let the losers lose and new winners will emerge from the wreck. They will innovate, create new products, find new markets and all will be well again.

4.      Geopolitical Shift - Other see this as not merely a crisis of housing and banking but also as signalling change in the world economy. Hu Jintao, the Chinese leader, sees the crisis as American created, based on incorrect macroeconomic policies and lack of savings, but now it has become everyone’s problem.

5.      God’s Plan - Crisis is caused by God. God wishes to humble humans so that they return to thinking about him and acting as he wishes them to.

6.      Symptoms of Capitalism – The mortgage and banking crisis is seen as a symptom of a deeper problem in the culture behind world capitalism. Essentially a lack of equity. The highest since prior to the great depression. Instead of increasing wages, debt has been the solution in the U.S.A. The analysis is clear – the system does not work for the majority of people on the planet.

7.      Eco-Social-Spiritual - A new world currency is required as are new governance rules. This is an opportunity to do something different. There needs to be are shift from the corporatist model to the cooperative model, new measures are needed to account for progress. The metaphor is that of the great transition to another type of world economic system.

In my opinion, the seven views add up to each other. The current financial crisis is a punctuation point in time. We are shifting from atoms to bits. A new system is required to overcome the flaws and errors of the current capital system. And parts of this new system are now defined by the Arab states, China, Russia, Japan, Brazil and France.

Still, the boiled-frog problem on the economy is nothing compared with the problem of getting action on climate change.

Put it this way: if the consensus of the economic experts is grim, the consensus of the climate experts is utterly terrifying. At this point, the central forecast of leading climate models — not the worst-case scenario but the most likely outcome — is utter catastrophe, a rise in temperatures that will totally disrupt life as we know it, if we continue along our present path. How to head off that catastrophe should be the dominant policy issue of our time.

Also read the article Boiling the Frog by Paul Krugman.

Also read the article The New Efficiency by Steve Ballmer.

Carlota Perez, professor of Technology and Socio-Economic Development ,  is the author of the book “Technological Revolutions an Financial Capital” (2002). In her book she further develops the earlier work of Nikolai Kondratiev (waves) and Joseph Schumpeter (creative destruction). She defines the concept “Techno-Economic Paradigm Shift”, in which she explains how a new technology lies at the base of every revolution (Kondratiev wave). She distinguishes several technologies which have caused a great impact on the economy. According to Perez we are now experiencing the fifth wave of Kondratiev. ICT is the technology that started this wave and it’s causing a new paradigm shift.

"When the economy is shaken by a powerful set of new opportunities with the emergence of the next technological revolution, society is still strongly wedded to the old paradigm and its institutional framework. The world of computers, flexible production and the internet has a different logic and different requirements from those that facilitated the spread of the automobile, synthetic materials, mass production and the highway network. Suddenly in relation to the new technologies, the old habits and regulations become obstacles, the old services and infrastructures are found wanting, the old organisations and institutions inadequate. A new context must be created; a new ‘common sense’ must emerge and propogate."

There is however one very big difference with the earlier economic cycles we have experienced. The other cycles (water, steam, steel and oil) were all focused on producing tangible resources. The outcome of the ICT cycle is completely different. We are now producing intangible resources. It is a shift from atoms to bits.

In the Industrial Revolution we were faced with the concept of scarcity. Now we have abundance of information. With a click on a button data can be copied and distributed freely on the internet. Transaction costs are reduced to zero. We need new rules. We need a new framework for the new economy. And it is not just our economy, it affects our society as wel. We are now defining the network society!

In my humble opinion, the current credit crunch is just the tip of the iceberg. It may be caused by ICT, but the implications go much further than we now can foresee.

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The current credit crisis makes painfully clear that capitalism is not without errors. Self-regulation, self-interest, greed and senseless consumerism have cracked the system. Blind faith was put in the mechanism of the invisible hand, not only as a distribution mechanism, but also as a supplier of equality, justice and even freedom.

In 2005, former Federal Reserve Chairman Alan Greenspan mentioned: "Private regulation generally has proved far better at constraining excessive risk-taking than has government regulation.'' In 2008 Mr. Greenspan had an appearance before the U.S. House Oversight and Government Reform Committee: " I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms ".

In recent decades money made the world turn around. Money tied everybody and everything together. “In the past few years we have seen the rise of another global network that connects all peoples in all countries and efficiently communicates information about supply and demand: the Internet.” The world revolves around a new core: technology. With the failure of the capitalist system it becomes clear that a fundamental transition takes place: a shift from transactions to relationships.

The rules of the atomic economy of the 20th century no longer apply to the bits economy of the 21st century. In the atomic economy, the value of a product or a service was defined n terms of money. It is the main incentive whether or not to take action. Money opens closed doors. And money does strange things to people. Expensive clothes, big cars, huge houses, just to show how rich you are. Capitalism provides an ideal breeding gr ound for this senseless consumption, for this abundance. The main concern is on earning as much money as possible. The focus is on the tangible aspect. The social component - the intangible: “do well for one another” - is conveniently overlooked.

The digitalization of society has made clear that the world no longer turns around money. Writing for Wikipedia, the development of Linux, uploading photos in Flickr, storing favorites in Del.icio.us are all examples of people contributing for free. The intangible aspects are far more important than earning money. Other things come into play here. Online collaboration, sharing of knowledge, expressing yourself on the Web are all part of the climb to the highest level on the hierarchy of Maslow. No money involved, just because you and I are all better off in the end. People working together towards a better world.

The virtualization of the physical world does emphasize that previous assumptions about the economy no longer apply and that they should be radically modified. The rules of economy were inventend during the rise of the Industrial Revolution. It is madness to still trust these rules and the underlying framework. The economy is no longer a simplistic model of our reality. 

The new world is constantly changing. A world with its own dynamics. It is a world in itself. A system of systems. An ecosystem that sustains itself. Previously, our economy was nothing but a machine that was driven by large multinational companies. Now our economy is transformed into an organic being: a global network society. We are all elements of this complex organism. A small disturbance immediately has large consequences.

The idea that an economy is a transparent and rational system, which constantly results in an economic equilibrium of price and quantity, is no longer supported by a growing number of experts. The new economics sees the economy as a Complex Adaptive System (CAS) - a concept developed by researchers from the Santa Fe Institute in New Mexico at the end of last century - always in motion and only short-term equilibriums exist. This science is based on complexity/chaos theory and brings new insights on economic forecasts, strategic planning and risk management.

The markets today are fundamentally chaotic: they are complex, nonlinear and literally as unpredictable as the weather. The nature of the beast (nature of the firm) has been permanently changed. The nature has had its course. The economy has its own ecosystem with its own opaque and a very difficult to drive momentum.

The world no longer revolves around transactions, but around relationships. With the World Wide Web transaction costs no longer exist, they approach zero. Value is no longer about how much something costs. True value resides within the experience of the customers. 

The focus of government and companies is on the current credit crisis. This is very unfortunate. There are much bigger problems. The credit crisis is only part of a larger whole. At global level we are experiencing a “crisis of survival”. The way we live is disputed. For centuries, the earth has been considered as an inexhaustible resource. Practice teaches us that we are pushing the limits to opportunities. The future of mankind is at stake. In the short term, we are facing global problems such as global warming, dependence on fossil fuels and the global shortage of clean drinking water.

Transparency is central to the bits economy. Information is at real time available to everyone.The fact that anyone can use this data holds a promise. An acceleration of knowledge can occur. A much needed acceleration to solve the issues that our planet is facing. The cognitive surplus of our combined talents must help us to change the world for the better.

At this moment we still struggle with the separation of the physical and the virtual world. We see these two as separated worlds. This is an illusion. There is only one world in which we live. The fundamental transformation we are now experiencing must overcome this barrier. After the paradigm shift the world will be forever different. A world where terms like value and growth will have new meaning.

This transition does not happen automatically. Regulation is required. New global institutions are needed to ensure that past mistakes are not made again. Institutions own a specific problem for which they have the mandate to act upon.  When these institutions are realized, we will all reap the benefits of the new era.

Inspired by:

A new approach to economics

The Next Evolution in Economics: Rethinking Growth and other 1.0 concepts

Hobby (jobless) economy or hjobbie: the Internet productivity paradox

Was recent productivity growth an illusion?

The no straight lines of authentic value in the networked society

The no straight lines of authentic value in the networked society [2]