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Wired for Innovation: How Information Technology Is Reshaping the Economy

Erik Brynjolfsson and Adam Saunders
The MIT Press, Cambridge, MA, 2010
154 pp., illus. 13 b/w. Trade, $18.95
ISBN: 978-0-262-01366-6.

Reviewed by John F. Barber
Digital Technology and Culture
Washington State University Vancouver

jfbarber@eaze.net

Despite decades of investment in information-processing equipment and software, the Information Technology (IT) industry—computer system design and related services, publishing, motion pictures and sound recording, broadcasting and telecommunications, and information and data processing—amounts to less than 7 percent value added to the U.S. economy. But, as economists Erik Brynjolfsson and Adam Saunders argue in their new book, Wired for Innovation: How Information Technology is Reshaping the Economy, the story is quite different when we consider innovation. According to Brynjolfsson and Saunders, IT is responsible for most of the resurgence of productivity in the United States since 1995.

Companies seeking the highest returns on their IT investments are inventing new forms of organizational capital assets like information sharing, incentive systems tied to performance, paring non-core products and processes, increased training and education, and decentralized decision making. Such innovation is fostered by digital capabilities that are interconnected as a system of practices, and are adding tremendous intangible assets valued in the market but not directly visible on a balance sheet and therefore are virtually invisible in national Gross Domestic Product (GDP) statistics.

One example is keyword search. Internet users' demands for information searches drives the keyword advertising market at search engine sites and also drives visitors to websites maintained by keyword advertisers, or other, related, content or retail web sites. The two sides of the market mutually reinforce each other, creating information compliments.

Such information compliments may, in fact, subsidize one side of the market in order to promote growth in the other. Adobe giving away its Reader software in order to enlarge the market for its PDF-writing software is an example. Wikipedia, YouTube, and weblogs, through their generation of free goods and services, are, argue Brynjolfsson and Saunders, accounting for an increasing share of value in the world economy. Those businesses that continually innovate and redesign their businesses become successful. Those that drain their intangible assets by not continually innovating and investing become outdated.

Organizational capital is an emerging research area within economics and one immediate problem is how to best measure its value to individual companies and the market as a whole. Brynjolfsson and Saunders suggest consumer surplus, the aggregate net benefit of using a product or service after subtracting its original cost, to empirically value the introduction of new goods or value changes in the variety, quality, process redesign, convenience, and timeliness of organizational capital. They argue the use of consumer surplus data will produce perhaps trillions of dollars of heretofore unmeasured economic benefits. Developing our ability to measure consumer surplus is increasingly important as more and more of the real economic value in the U.S. is affected by IT.

As an example of organizational capital at work, Brynjolfsson and Saunders point to Amazon which, rather than lamenting the replacement of physical books by e-books, embraced the latter and developed its own reader for them, spawning an entirely new product line and business model. Organizational capital, they argue, has the potential to improve management performance and accelerate the dissemination of successful innovative practices.

Using the right combination of IT and market rules to design and implement alternative market mechanisms and encourage innovation for information goods suggests the potential for enormous value added to our economy. Open source projects, social media networks, wikis, and user-centered content efforts illustrate how large numbers of individuals can work together in new ways, beyond traditional hierarchical management structures and market incentives, to coordinate and amplify collective intelligence in ways otherwise impossible.

The problem will not be with technological capability, which Brynjolfsson and Saunders predict to double three times in the next five years. Rather the problem will be our ability to understand how to use the technology in order to achieve the highest returns of value.

Wired for Innovation provides an essential guide to understanding how IT is and will continue reshaping the economy, as well as how it will create value in the coming decade.


Last Updated 1 February, 2010

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