Beneficial Interactions and Economic Actors in the Digital Economy

The goal of this text is to explain why there is a need to broaden the scope of some core economic concepts such as “transaction” and buyer” and how that can be done.

Initially, I started from a simple idea: the concept of transaction is understood in a too limited way if one wants to design business models that benefit from network externalities. I also wrote a book about this. In the book I suggest that network externalities should be understood as a feature of all transactions. Somewhat according to the feedback view but also taking into account the differences between individuals, their respective organisations and society at large, a distinction between the direct and indirect impacts of transaction are crucial for proper design of transactions and thus business models.

Afterwards I have realised that this conceptual change is insufficient if one wants to grasp most possibilities of digital economy.

Current theoretical toolkit in the economics is too limited to explain many aspects of the digital and platform economy. There are many examples of economic topics, which are not sufficiently explained by current practical theories. In the industrial capitalist economy,

• workers gained subsistence for their skills and work time.
• beneficiaries had rational needs they fulfilled in the markets
• firms were valued based on the tangible inputs (raw materials) and outputs (products)
• products are often considered excludable and rival; and they are consumed by the wear and tear that causes them to lose value
• markets were separated based on the products that served the same needs
• banks valued firms using double-entry book keeping and created new funds for investments via creating credit.

However, we now know that

• workers are motivated not only by their physical needs but also via their need for self-actualisation and identity
• beneficiaries have also irrational needs that are beyond economic rationalities
• most of firms value typically comes from intangible resources and social capital.
• products can be become more desirable when they are used, or encourage more use when they are used more broadly
• negative interest rates make it reasonable for banks to not accept loan paybacks, altering previously agreed preferences in the economic system

These are not new realisations for the field of economics. On the contrary, within economics, from behavioural economics to modern monetary theory, there are many explanations on each of these phenomena. What is lacking is a synthesis of these relatively new ideas.

Towards a new social science?

Conceptual change in one domain or another is insufficient if one wants to grasp most possibilities of digital economy. This is due to several reasons.

There are different kinds of accumulations that cause network externalities. Not all network externalities stem from transactions. In fact, most commonly it’s understood that they stem from increase in users. Further, there can also be network externalities that stem from use of (intangible) products.

“Buyers” organise in networks around common resources. The current conceptualisation of economic system emphasises the organisation of the seller (firms) but assumes that buyers act as more or less rational individuals. In platform models it’s obvious that this is not the case: buyers are not rational in the sense that their decision-making optimises single utility of their purchases and they are not necessarily alone but work and negotiate as a part of the network they belong to. Network of buyers is a sort of an anti-organisation: instead of the common goal of the firm, it taps into a common resource.

Accounting focuses on value and transactions of physical goods. Accounting is recording the transactions that happen. It only consider physical assets and their inputs and outputs. It relies of singular monetary value, while most value in today’s companies is intangible and based on multitude of different incommensurable values such as trust, collaboration and attention. Despite this, double-entry accounting is the backbone of firms and the current monetary system due to its ability to create more money against credit.

Market convergence. Markets used to be conceptualised as distinct entities, which contained a list of similar products, needs and transactions. Because of the market convergence due to digitalisation, this is no longer makes sense in many contexts.

None of this is really new. There is a broad established literature on market convergence, valuing the intangible assets, networks of beneficiaries categorised in multisided markets, and network externalities. What is at times lacking is a usable synthesis of these features of the economy.

I aim to work towards such a synthesis in this text starting from general principles. The end goal is to broadly describe a new social science that combines insights from communications research and platform economics.

The core of the economy is the beneficial interaction and activity of different kind of actors: sellers, buyers, consumers, institutions… Similarly to any human system, economic system consists of participating actors and their activity. Thus, the following parts of this text are about proposed conceptual changes in beneficial activity and regarding economic actors.

Beneficial activity

Economic transactions provide people with goods and benefits. Making transactions is only intelligible if the outcomes of transactions are used in one way or another. In this text, the outcomes of economic transactions are called “goods”, because they are “good” from the perspective of the buyer.

I’ll discuss first goods as contexts of activity, and at the end of this chapter point out that transactions are more and more often just one additional perspective to use of goods. In other words, I claim that use of goods is becoming transactional.

Different kinds of goods

here are different kinds of goods. Most often, goods are considered to be rival and excludable. A cup of coffee is such a product. It’s rivalrous, because if I drink it, you cannot drink it. And it’s excludable, because it’s possible to keep you from accessing it if you haven’t paid for it.

When Nobelist Elinor Ostrom argued for differences between common-pool resources and public goods, she used a definition matrix that demonstrates that there are both nonrivalrous and non-excludable goods.

Ostrom E (1990). Governing the Commons. The evolution of institutions for collective action.

Goods, according to this definition can be either rival such as food, cars and clothing, or nonrival such as parks or TV. Rivalrous goods are subtractable. This means that they are consumed by use: they have wear and tear. But what about products such as an online multiplayer game that are better when they are used more? Indeed, there are many intangible products that have negative subtractability. These “antirival” products improve from use. Let’s take a look at them shortly.

Furthermore, according to Ostrom and others, some goods are excludable and some are not. A television channel owner can block your access to satellite television, but a radio channel owner cannot block your access to FM radio stream. Often the questions of excludability are not really physical barriers. Instead, they are questions of the legitimacy of the limitation. The freedom to roam laws in Finland legitimace all forests as non-excludable public goods. In some other countries it might be possible to build physical walls and use immaterial contracts to “protect” such forests.

Excludability has many features one of which is that excludable goods have limits in how they can be spread. If some digital goods are “viral”, these goods are “antiviral”: limiting access rights limits their reach. Or to put it in the other way: if a good is antiviral by nature, it makes sense to monetise via excludability. Similarly, non-excludable goods are not antiviral. Non-excludability does not guarantee virality, but it doesn’t diminish it either.

As we noticed, there are rival, nonrival and antirival goods. Could there similarly be antiviral, non-antiviral and viral goods?

A broader conceptualisation of goods

Antirivalrous goods

Intangible goods have several well-known features that distinguish them from material goods. For example, information can be copied without loss of quality. Indeed, intangible goods are typically non-depletable, more versatile and regenerative assets. Still, they are not considered capital assets and there are no agreed ways to measure e.g. the value of information that a company possesses.

It’s often mentioned that these features make information products non-rival, while in fact they are often antirival. In other words, they do not only not care about if the copies are consumed, but they moreover might improve from every time they are used. According to Lawrence Lessig, open-source software code and natural language can have such properties. If I share a code I’ve written, anyone can use it and improve it. I can benefit by sharing it. The subtractability is not zero; it’s negative.

By limiting these effects to a certain subgroup (or network of users), antirival product becomes antiviral. This is often necessary in business to create value from scarcity, but it might also have beneficial use cases. An online multiplayer game might be impossible to play alone but also not functional if there are more than eight players. Such a game is both antiviral and antirival. Pekka Nikander has called this category “Network goods”.

When the antirival good has no excludable barrier, it is a “symbiotic good” (again according to Pekka Nikander). An example of such a category is the scientific results that build on each others.

Antirivalrous goods cause something opposite to Ostrom’s tragedy of commons. In some cases, when the value of the product increases when they are used, this motivates more people to use them or users to use them more, thus causing a feedback loop. Veikko Eranti coined a term Ecstasy of Commons for this feature. It means that without external barriers, the value of these goods can increase exponentially based on their use. While there is an obvious case for governance in the tragedy of commons, there is also a need for a new kind of governance mechanisms to control the Ecstasy of Commons.

Viral goods

Oftentimes, virality is a feature of the transaction or actors, so I want to emphasize that here I’m instead talking about the virality of the use of goods.

Using viral good makes it more accessible for others. What does that mean? As I pointed out earlier, excludability is oftentimes more about the legitimacy of the exclusion than the actual physical barriers. This is also the case with virality. One simple case of how a good can become viral is via change of norms. Consider Pokemon Go, where playing the game was clearly visible for bystanders on streets. This changed the norm that it was acceptable for adults to play such a game, thus reducing the barrier of use.

As illustrated in the table above, there can be rivalrous and nonrivalrous viral goods. If the supply of the good is limited (rival), but the cost to use the good is diminishing, the good is a “stratagem good”. Selling such good would increase it’s availability or reduce transaction costs to get it.

If, on the other hand the good cannot be consumed but the cost of use is getting smaller and smaller, the use of the good becomes a fashion. While there are many kinds of costs, a social cost provides easy example. If more and more people start using long johns with shorts, it becomes more acceptable for all to do that. Thus, I call this category “Vogue goods”.

Transactions as use: antirival virality

Are there goods in the last category: the antirival virality? Such goods would gain value from use and simultaneously reduce the costs (barriers) of using them. Yes there are. I call them “Culture Goods”.

For example, the aforementioned Pokemon Go fulfills both of these conditions. The more people there are playing the game, the better the game becomes because there are more potential actions between gamers. At the same time, the more people see other people playing the game on the streets, the easier it becomes for them also to play it in different locations: first on a private street, then in busy street corners and lastly even on someone else’s property.

A Tesla car improves its value when all Teslas around the world drive around, because the car improves its self-driving features based on the in-vehicle sensors. Because of the recent advancements in machine learning (Ng) and considering the complex use case, there are really no diminishing returns regarding this acquired data. Later, this developing self-driving feature can also be used to make it easier for people who are bad drivers or even those who are not allowed to drive to use the car.

The example of Tesla car is especially revealing, because it makes us to ask if the data collection that happens while driving is actually something more than just tracking of activity. What if it’s actually a gift from the users, or a theft by the car company? Or could it actually be a transaction between the company and the driver?

Currently, transactions are considered as voluntary rational economic exchanges between two (or rarely more than two) parties. In fact, there are four different ways to do exchange of goods (as defined in this text).

• If the transfer of utility is not voluntary and not reciprocal, it’s a theft.
• If the transfer of utility is voluntary and not reciprocal, it’s a gift.
• If the transfer of utility is voluntary and reciprocal, it’s a transaction (a market).
• If the transfer of utility is not voluntary but it’s reciprocal, then it’s a vendetta or revenge.

In this conceptualisation of a transaction, there are buyers, sellers and valuables (goods and money). But because many digital goods have so called negative subtractability, it makes sense to broaden the concept of transaction to include another party I call a “spy”. As mentioned before in this text, negative subtractability means that these goods benefit from using them, unlike physical goods that are limited and break down or are consumed from use. But oftentimes this added value is not useful to anyone, at least not if there is no mechanism to capture this value. So this is what Tesla (the corporation) does: it spies the use of the car.

In the mathematical theory of communication, there are three actors in addition to the message itself: sender, receiver and noise. Noise doesn’t care about the message but impacts on it in any case. But we can also imagine something opposite of noise: an actor that cares about the message without interrupting it. Mathematical theory of communication is a helpful approach to look at transactions, because transactions are conversations and markets are a communication device for prices.

• if transactional parties don’t know about the spy, it’s a theft
• if they do know but don’t really care, it’s a gift
• if they transact partly because there are additional benefits from the spy, it’s a duel sided market with network externalities.

Spy is not external to the communication system, because it can both influence the rational basis of the communicative system and influence the benefits of the next act of communications. How does this happen? Let’s look at different kinds of actors to understand the mechanisms of such network externalities better.

On economic actors

By “economy” one often refers to all the institutions that enable beneficial interaction between people, including but not limited to firms, banks, central banks and tax agencies. But economy can also mean just the beneficial interaction itself: a negotiation and exchange happening between a buyer and a seller. In the previous chapter, I consciously broadened the definition of transaction, the smallest atom of the economic activity, to include a “spy” and pointed out that the activity of use of goods is merging with the activity of exchanging goods in the digital economy.

These conceptual changes are massive, but they are not enough. To understand how to better understand the roles of different kind of actors in the digital economy, two things need to be considered. First, it’s necessary to reconceptualise “buyers” by going beyond the dichotomy of buyers and sellers and look at beneficiaries of economic activity in a more detailed way. Second, it’s necessary to reconceptualise the contexts where firms operate: the change of the market structures should be understood from this perspective. These two perspectives together guide us towards a multivalue perspective in transactions, business models, firms and economy at large. And that in addition to the novel way to understand activity will provide enough ammunition to understand beneficial interaction in the digital economy and use it in practice in business and governance design.

Markets on the point-of-view of the beneficiaries

Platform business models are often said to be multisided markets. A food delivery app, for example, serves the diners, the restaurants and the delivery drivers. All of these “markets” need to benefit from the interactions. To avoid confusion with a later point I’m going to make regarding market convergence, I call the sides of these multisided markets “beneficiaries”.

An old media economics conceptualisation called the “duel market model”, with beneficiaries of readers and advertisers, is a good place to start unrolling the changing model. The duel market model worked in the way that people bought magazines, and then the advertisers bought the number of eyeballs reading the magazines. What’s interesting is that there are actually more beneficiaries than these two in the old paper magazine business model. Robert Picard calls them “the five markets of media”: advertisers, readers, journalists who agree to work on a relatively low pay, investors who gain double digit returns from their investments and society (or public sector) who benefits from the increasing collective understanding of events (a requirement for democracy).

There is a small difference between the dual market conceptualisation and the five market model. The first two beneficiaries — readers and advertisers — pay with cash. If our conceptualisation of value in transactions is limited to monetary transactions, we miss the other three markets. Journalists pay with their time, and gain power and prestige. Society pays in many cases with reduced value added taxes. Investors provide funding for new investments easier when they expect double digit returns.

Such atypical “payments” are normal in the platform business models. Facebook user pays with attention and Crowdsurfing users pay with the delight of meeting new people.

Another important perspective to notice is that the beneficiary can be on many different system levels. A “society” can be the beneficiary as well as the “citizen”. Even thought society consists of citizens, the needs and values of these two differ. A distinct market is required to satisfy the needs of either one of these beneficiaries.

Transactions in these markets have many different kinds of values. Of course, the traditional paper magazine business model isn’t a digital business, so there is not so much need to understand the transaction both as multivalued and to consists the “spy” I mentioned earlier. In the dual market model, the magazine sold the number of readers; in the digital advertising model, each eyeball is sold separately. But what is especially interesting regarding digital interactions with many different kinds of beneficiaries is that they indeed do have both of these properties: they have incommesurable multivalue transactions and due to the “spy” different kind of activities within these interactions accumulate network externalities.

Furthermore, it’s at times useful to consider these distinct groups of beneficiaries “networks”. The traditional monetary transactions separated groups of buyers into individual consumers, but with multivalue transactions and the presence of spies, this at times changes. The distinction between sales organisations as firms and buyers as individuals starts to disappear and buyers begin to organise in new kinds of hierarchies. An example of such hierarchy is the service standardisation made by app designers; another one is the recommendations used by buyers as a communicative and normative tool.

When the “buyers” are organised into hierarchies not based on their abstract needs but based on their common resources (data, free cognitive capacity, cars or apartments they own), it starts to make less and less sense for the “sellers” to operate within single, well-defined industries. Indeed, from the sellers’ perspective, markets converge.

Market convergence

From the sellers perspective, a traditionally defined industry of “market” is something what for one can provide certain kinds of goods: e.g. cars, refrigerators or mushrooms. As demonstrated in the previous chapter, digital economy is making this kind of categorisation somewhat redundant.

From the perspective of the firm or producer, there are two reasons for this. The first reason is that the digital substitutes often reveal that there were more fundamental needs that can be served by circumventing the whole market. People don’t want cars; they want to commute. People don’t want to go to doctor; they want to be healthy.

The second reason is that especially the large platform companies don’t often need to care about industry boundaries. Google, Facebook, Amazon, Tencent, Alibaba and others can operate in virtually any industry from selling books to building industrial scale solar panels. Instead, they benefit from the changes in the economic concepts advocated in this text: antirivalrous and viral goods, use of products as transactions, and multivalue user networks shaped around common resources.

These changes force companies to design their business models around

• identified values of each beneficiary group, allowing multivalue business models and multisided markets, and
• according to the principles of transaction that have spies, allowing designing feedback loops and network externalities.

Beneficial interactions in the digital economy

I have now broadened the concept of activity that concerns economic thought to include activities with antirival and viral goods. Simultaneously, I have broadened the concept of buyer to a beneficiary, which takes into consideration multitude of incommensurable values of multisided markets. These features make it easy to explain two core features of the emerging economic system: the network externalities and market convergence. While revealing new useful concepts, this endeavor has at the same time demonstrated that the previous theoretical toolkit of economics has been limited and at times misguiding. Platform business models are already built intuitively by taking these features into account. By synthesising the useful concepts such as negative subtractability, virality as anti-excludability, network externalities and others, I provide a path to a new kind of economic understanding.

When the understanding regarding economic actors, activity and transactions change in a useful way, business models change too. What has been previously been a privilege of few selected intuitive entrepreneurs, can now become commonplace. Furthermore, when business models change, the way people negotiate, govern, price and make agreements changes as well. Then, the goal of economic activity can be understood differently, changing the whole economy.

The greatest insight of Marx was that industrial capitalist economy is a historically specific arrangement. But so far, the winds of history have been blowing too hard to change course. What if this has now changed?

A useful theory has characteristics such as consistency, practicality, ability to open up new avenues for research and practice, and ability to explain phenomena better than other theories. If economy is the science of beneficial interactions between people, and if network externalities and market convergence are core features of the emerging economic order, the reorientation of concepts done in this text can indeed prove useful.

Why, then, should it be a new social science, as I mentioned in the beginning of this text? Because economics is a science of monetary value and utility. It concerns itself with rational exchanges between people. Rationality is not a useful concept if everything that people do is defined rational. That would be circular reasoning. Instead, people and groups at times do irrational exchange of goods; that is, they do exchange with incommensurable utilities. While many of these exchanges can be investigated within the toolkits of other social sciences, e.g. psychology, sociology, political science, and communication research, these traditional social sciences lack the ability to include various systems levels under the same investigation.

Nevertheless, such an ability is needed, if we want to understand theoretically or in practice for example the multisided market of traditional paper media that contributes utility to advertisers, readers, society, journalists and investors. Many platform models are much more complex, and yet they are currently being designed. If this design starts from the industrial era assumptions, aiming to maximise material value of owners and perceived utility measured reducibly in money, it will remain less effective, and cannot carry all the possibilities of the digital world to the society.

Ivan Aivazovsky. Sea battle at Vyborg.