[>Htech] [RRE]The Market Logic of Information

From: Eugene.Leitl@lrz.uni-muenchen.de
Date: Wed Oct 04 2000 - 14:58:12 MDT

From: Phil Agre <pagre@alpha.oac.ucla.edu>

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  The Market Logic of Information

  Philip E. Agre
  Department of Information Studies
  University of California, Los Angeles
  Los Angeles, California 90095-1520


  This is a draft. Please do not cite it or quote from it.

  4400 words.

There can be no doubting that advanced information technologies
will bring large-scale social change. The technology is advancing
at an extraordinary rate in quantitative terms, and it will probably
continue to improve by a factor of 100 each decade. Sheer computing
power and communications bandwidth will be abundant. The hard
question is what direction the consequent social changes will take.
The technology is not only increasingly powerful but highly malleable.
Its qualitative architecture is capable of evolving in many different
directions, depending on who can assemble the resources to build
it and secure the cooperation of others to use it. And that
is a political and economic question, as much as it is technical.
Social institutions will shape the technology, even as the technology
provides raw material for the reshaping of institutions.

Every new technology creates a vacuum of imagination, and the
imagination of the West takes definite forms. One of these forms of
imagination begins with a dualism between the corrupt world of the
flesh and the purity of the spirit. In the Internet world this form
of imagination gives us cyberspace, the technological equivalent
of heaven, the purely abstract space-apart that is constructed from
the mathematical ideals of computing. The virtual reality fad of
the early 1990s was one version of cyberspace, and another is the
concept of an online community. Of course, Western imagination is
not all wrong, and there do exist virtual reality technologies and
online communities. Nonetheless, experience is making clear that
the idea of cyberspace is misleading, and that the uses of advanced
information technologies do not constitute a space apart from ordinary
reality. Quite the contrary, for most purposes advanced information
technologies are deeply bound up with the rest of the world. Virtual
reality is simply one end of a spectrum of applications, each of
which embeds networked hardware and software into the world in a
different way. It is the great philosophical virtue of ubiquitous
computing technologies and spontaneous wireless networking protocols
like Bluetooth to make this clear, and to help tear down the ancient
mind/body divisions that have long narrowed our conceptions of
computing and of ourselves.

Notions of online community are equally misleading. People do
form social bonds through new digital media. But communities are
analytically prior to the particular technologies that their members
use. The worldwide community of stamp collectors, for example,
existed long before the Internet, and it conducts its collective
life through many media besides the Internet. Its members even meet
face-to-face. The same goes for the thousands of other communities
of shared interest -- professions, associations, extended families,
political parties, and so on. Use of the Internet might change the
dynamics of these communities, and many striking stories of community
change have been recorded. But Internet use is embedded in something
larger. Even communities that form online often develop other means
of interaction, for example by holding caucuses at conferences. In
each case, the notion of cyberspace limits our vision by directing our
attention to a small corner of a large phenomenon: the interaction and
coevolution between new technologies and the institutional orders and
ways of life in which they are embedded.

Although the imaginative structures of cyberspace descend from a
long philosophical tradition, their recent history is explained just
as much by political economy. Simply put, cyberspace is a lobbying
campaign. The notion that the computer industry seeks to avoid
regulations and other government involvement is scarcely credible,
given the large number of laws that it has successfully supported
throughout the world. Government interference through draconian
intellectual property laws is an example. Nonetheless, many other
lobbying campaigns do draw on the imagery of cyberspace as a new and
separate world, completely different in its workings from the old
world of smokestacks and railroads, a kind of fragile spaceship that
democracy could only harm.

Yet at the same time, cyberspace has been imagined as a force that
will bring about the perfection of the market that government is said
to obstruct. By removing friction from the market mechanism, it is
said, networking information technology will bring about something
resembling the utopia of Adam Smith: an efficient market consisting
of large numbers of producers and large numbers of consumers, none
of whom possesses the kinds of economic or political power that we
associate with the industrial era. This second form of imagination,
it should be noted, is wholly incompatible with the first.
Information is no longer expected to stand apart from the material
world, but quite the contrary is expected to descend upon the world
and reorder it according to another vision of heaven, this one derived
from the dynamic, self-ordering equilibria of 19th century physics
(Mirowski 1989).

Despite the surface contradiction, the underlying pattern is clear
enough: information, it is said, will impose its own order on our
lives, which will henceforth participate in its transcendental purity.
I propose to take seriously this idea of an order of information.
If we are to take seriously the interaction of information technology
and market economics, what order *will* the Internet be imposing on
the world? It is a partial and loaded question, of course. It is
altogether unclear that the world's people wish to have any such
order imposed on them, and it is equally unclear that such an order
could actually be imposed in practice. Nonetheless, technology and
ideology alike are exercises in applied imagination, and precisely
because imagination is a material force in the world it will be a
useful exercise to recover the order of information that emerges from
information technology and markets as they are practiced.

As a window onto the way that business imagines the Web, let us
consider the projects reported in a 9/18/00 Business Week supplement
on 50 companies that the magazine's editors regard as "Web smart".
All of these companies are using Web-based technologies to improve
their operations. Some companies are using the Web to exchange order
information with customers and suppliers. Others are using this
same information to predict shortages or other market conditions, or
to accelerate product cycles. A university is tracking its clinical
trials. One group of manufacturers is sharing unused space their
trucks; another manufacturer is gathering data from all the machines
in its factory and making that data available to all of the machines'
operators, for example so that bad product batches can be detected
more quickly. With only a few exceptions, all of these projects can
be described as instances of two overlapping visions, which might be
summarized as follows:

  (1) Digital shadows (Agre 1994, Clarke 1994). Make the whole
object continuously and interactively accessible to everyone who has
a relationship with it.

  (2) Centers of calculation (Latour 1987). Make a whole population
of objects likewise accessible to everyone. Continuously perform
calculations on this population of objects -- scheduling, market-making,
mapping, forecasting, cash flow, aggregate outcome measurement, data
mining, etc. Make the results of these calculations interactively
available to everyone who can use them, and accelerate action cycles

These prescriptions require a little explanation.

 * "Object" here does not mean object-oriented programming, or
physical object, or the pejorative sense of treating someone as an
object, although any combination of those things might be present.
Rather, it means that a person or thing is treated under some
professioanl framing -- treating a person as either a student or a
patient, for example -- and that the unit of analysis is the person
or think together with digital representations and data about it.

 * It is the "whole" object in that *all* such representations and
data are made available for every important attribute of it. This can
mean that digital "roots" have been grown into it -- a truck engine
or factory machine, for example -- to record its operating parameters.
It can also mean maintaining a history of it, for example the history
of changes to an airplane or transactions on an account.

 * "Accessible" means that this data is available on the Web,
wirelessly or wireline, real time, all the time. It means tracking
the object physically and/or bureaucratically.

 * "Interactively" means that everyone with the appropriate authority
can change or control the object remotely, either its virtual side
or its physical side or both, depending on what makes sense for a
given application. When the object is a person, the interaction can
mean reaching "through" the virtual side and getting a synchronous
connection to the person, for example customer service, a particular
person who signed some information in a knowledge base, or a large
number of people who might be assembled on a distance basis for a
training course.

 * "Everyone" can include the object's owner (monitoring one's car
at a distance), the manufacturer (appliances "phoning home" for
preventing maintenance or restock), or an employer (checking in on
expenses incurred by drivers on the road).

It remains to be seen, of course, which of these projects ever gets
working, and which ones prove to be worth the trouble. Business
Week's own evidence is sometimes equivocal, and its upbeat summaries
surely gloss over a world of hidden agendas and messy details. None
of the projects, moreover, reaches the full generality of the two
models that I sketched. Nonetheless, a clear picture does emerge of
the deep structure of a business vision of information technology, one
that grows naturally from the project of rational ordering and control
that has informed business computing practice from the start. It is a
version of what David Gelernter (1991) calls the mirror world: making
the whole world digitally available at every point in the world. This
is the promise and illusion of Web search engines.

But the business vision is actually more specific than the mirror
world, and more suggestive, in its emphasis on the relationships
that structure computing links. A family's relationship to its
refrigerator, a manufacturer's relationship to each of the cars
it has made, an investment firm's relationship to its clients --
each of these relationships has an institutional and informational
architecture that can be inscribed in the architecture of the data
links that join the two sides. By complicating the architecture of
the data links, one can provide additional functionalities or increase
the efficiency of existing ones.

>From the point of view of the individual, or of the artifact or
organization, the change is striking. Relationships that may formerly
have been episodic, their participants interacting only when jointly
present or when talking on the phone, or through the arm's length of
paper records that might not be up to date, are now to be continuous,
always-on, 24/7. We should not conceive the change as discontinuous,
much less as a rewriting of an underlying institutional logic.
Nonetheless, the development of a portfolio of always-on relationships
-- to people, organizations, and things -- does call us to revisit
traditional conceptions of the person. No longer, for example, are
particular relationships tied to particular places. Rather, everyone
is tied to everyone else all the time. All of our potentially
thousands of relationships compete for attention through wireless
devices whose interfaces -- not based on the obtrusive ringing of a
telephone, one supposes -- are as yet hardly imagined.

Central to such a world are institutions and technologies that
might be called switchboards: the practical means by which people
establish, maintain, and evolve relationships. These might be
market relationships of whatever structure, longer-term contractual
relationships, professional ties, family relations, shared memberships
in associations, and many others. Lower-level switchboards might
have functionality no more complex than an Internet router or mailer,
while more complex switchboards might layer on the functionalities
of a marketplace, library, event notification, gaming environments,
workflow tools, supply chain integration, geographic information and
tracking, or many others. The architecture of these switchboards is
obviously a matter of some concern from a legal and moral standpoint,
as well as economic and technical.

Identifying the technical basis for the maintenance of relationships,
however, does not tell us the form that the resulting network of
relationships will take. For that purpose, it will help to return to
the second of the two business visions of cyberspace that I sketched
at the opening: the friction-free electronic economy that will deliver
us to the idealized market of Adam Smith. Let us leave aside the
question of whether such an outcome would be desirable, and instead
ask whether will actually happen. The argument for it is clear
enough. It is based on Ronald Coase's (1937) epochal paper "The
Nature of the Firm", which introduced the concept (though not the
phrase) of transaction costs. Coase asked, given that Adam Smith's
market of individual artisans and consumers is the economically
optimal way to organize the economy, why do firms exist, much
less large corporations? What is the economic reason for these
often-substantial islands of centralized command and control? The
answer, Coase suggests, is that the market mechanism itself entails
costs. Buyer and seller must seek one another out, establish the
quality of the goods, negotiate, handle money, monitor one another
for honest performance of the deal, and perhaps even litigate about
it afterwards. All of these activities are costly, and Coase argues
that a transaction will be organized within the boundaries of a
firm if it can thereby be done more cheaply than it could on the
open market. This is likely to happen, for example, when two parties
are likely to do a steady stream of business whose nature is hard to
specify in advance, so that it is worth creating a stable relationship
of employer and employee between them. The parties still incur
organizing costs, but these might be less than the transaction costs
that they would incur on the market.

Coase's argument, then, lays the boundaries of firms around those
regions of the economic landscape that are more efficiently organized
that way. It is crucial that Coase's argument depends on the
relative level of organizing costs and transaction costs. Despite
the arguments of the cyber enthusiasts, it is not the case that
new technologies, by reducing transaction costs, move the economy
toward the idealized market. Businesses may even move toward
technology-enabled business practices with higher transaction costs
if they can make or save more money elsewhere (North and Wallis 1994).
And a technology that reduces transaction costs may reduce organizing
costs even more. Many authors have observed that Coase's argument
is frustratingly indeterminate in practice, given that the relative
values of transaction and organizing costs are so hard to measure
or predict. Yet the overall direction of contemporary industrial
organization provides powerful clues about the true picture. First
of all, we are witnessing a historically unprecedented period of
industrial concentration. Firms in both North America and Europe
are merging at a rate of trillions of dollars per year. On the other
hand, firms are also selling, spinning off, or outsourcing their
non-core activities at a high rate as well. These developments may
seem contradictory, in that the first one makes firms larger while
the second makes them smaller. They are united by a single thread,
however, and that is the role of economies of scale. Economies
of scale are those forces toward industrial concentration that are
created by the fixed costs of production. If a firm can sell its
goods at a smaller unit cost by making a billion-dollar investment
in a factory, and if the market is large enough to distribute that
billion-dollar fixed cost while still underselling a competitor whose
fixed costs are lower, then the market will become dominated by a
smaller number of larger firms.

Economic theory holds that economies of scale are limited, and that
their magnitude determines whether the natural structure of the
market is fragmentation, oligopoly, or monopoly. Economies of scale
are a longstanding challenge to those who believe that the natural,
unregulated state of the market is one of efficiency, because a
sufficiently large oligopolist or monopolist can develop market power
and extract economically inefficient rents. A rhetorical emphasis
on technologies that reduce transaction costs tends to alleviate
this embarrassment by presenting a plausible scenario by which the
electronic economy can transcend industrial-age concentration. The
argument, however, is mistaken. No Coasian analysis of the electronic
economy is complete until we assess the impact of distributed
information technologies on organizing costs and economies of scale.
And in both cases the picture is clear. Simply put, distributed
information technologies make it vastly easier to capture economies of
scale and coordinate a large firm.

The particular economies of scale that matter most here are the ones
that derive from fixed costs in information. Because information can
be duplicated very cheaply, nearly all of the costs associated with
it are fixed. And firms experience many fixed costs of information,
including software, policies, forms, regulatory filings, public
relations and advertising, market research, and product designs.
Computer networks can easily distribute these information objects
or their inputs and outputs throughout a far-flung global corporation
without regard for the number of operating units that have to be
served. The key is that the operating units should all do the same
thing. Information technology rewards scale, but only to the extent
that practices are standardized.

That is a major reason why companies merge: to capture economies of
scale by laying off the information-producing head-office workers
of the acquired firm. And that is why companies sell, spin off, or
outsource non-core activities: to eliminate activities that do not
enjoy economies of scale because they are different from the core
activities that do. Transactions are complex beasts, embedded as
they are in a matrix of longstanding relationships and practices
(Hodgson 1988). It is hard to reduce transaction costs. Organizing
costs, however, are regularly reduced by large percentages, simply
by capturing economies of scale. And so, quite to the contrary
of the "friction-free economy" model, it is altogether plausible
that information technology is a primary contributor to the wave of
industrial concentration that we read about each day in the business

This wave of concentration, to be sure, is not all bad. Economies
of scale are still economies, and an industry that captures more
such economies will pass them along to the consumer so long as the
market remains competitive -- that is, until market power emerges.
Conventional economists were largely unafraid of market power because
they believed in diseconomies of scale: the various factors that
limit economies of scale in practice. Economies of scale require
standardization, but the world is not standardized. Consumers' tastes
differ, as do cultures, legal systems, media, technical standards,
and other features of the market environment. As globalization
proceeds, however, all of these types of diversity are being reduced.
English is spreading as a global language and technical standards are
converging on a global basis, in each case because of the benefits
of cross-border compatibility. Trade treaties are harmonizing
many institutions, and economies of scale are driving a global
homogenization of mass media.

As diseconomies of scale are destroyed, it becomes more and more
practical to run a globally integrated firm -- indeed, a global
monopoly -- provided, again, that the firm maintains a strong focus,
picking one activity and doing all of it for the whole world. The
picture that results is a large collection of focused monopolies,
each of them taking a precision "slice" through the world economy by
means of global computer networks and by the grace of the standardized
world that it both depends upon and helps to create (Bryan, Fraser,
Oppenheim, and Rall 1999).

This form of industrial organization can be understood in terms of
the market dynamics of knowledge. It becomes economically practical
to create, codify, practice, and extend a body of knowledge only
once enough venues have been discovered where that knowledge can
be profitably applied. Knowledge in this larger sense is not just
the contents of books and heads and hands, but a global network of
locations where the objects of that knowledge have been discovered,
created, counted, measured, and brought into a practical alignment
with the organization and its business plan. Everyone and everything
in the world is criss-crossed with these knowledge-shaped slices,
and every one of them is an "object" in the sense that I described
earlier, bound digitally into an always-on network of relationships
on a global basis.

It does not follow from this picture of rampant standardization,
of course, that the world is becoming utterly homogeneous, even if
one believes in the economic logic of information in its pure form.
Economic evidence suggests that nations and regions are specializing
to a degree within the world system, evolving the local configuration
of public and private institutions that supports a particular
model of production within the overall picture that I am describing
(Hollingsworth and Boyer 1999).

More fundamentally, however, computer scientists know that the
commonplace association between standards and homogeneity is entirely
misleading. The Internet, for example, is a standard that provides
a platform for the construction of a great diversity of activities.
Networked computer applications, more generally, are organized into
layers, each one built on top of others, and each providing a clearly
defined interface for others to be built on top of it (Messerschmitt
1999). This layering scheme has engineering advantages for the
management of complexity and the division of labor in system design.
But it also has economic advantages for the capture of economies of
scope: the ability to use a single asset, in this case a computer
protocol and hardware and software conforming to it, for a variety
of different purposes, each of which helps to pay off its fixed
costs. Each protocol then tends to become dominant through the
network effects of compatibility (Shapiro and Varian 1998), though
the dominant protocol may or may not be owned, either legally or in
practice, by a single firm. In this way, the logic of information
is modularizing large parts of the world. Not all of it: a firm like
Microsoft that does own a particular service layer (in Microsoft's
case, personal computer operating systems and certain office
productivity applications) can attempt to leverage that monopoly
into other areas through nonmodular design. The market dynamics of
modularity are complicated (Baldwin and Clark 2000, Schilling 2000).
But on the whole, the logic of focused monopolies together with the
logic of layered economies of scope are modularizing large parts of
the world.

Is this good or bad? In many ways it is good. If it is possible to
outsource every possible aspect of a firm then it is easier to start
a firm. Anyone with the ideas and connections can get moving quickly
because they can focus on the particular knowledge that provides them
with a competitive advantage. Building the global network of sites
for the exercise of that knowledge -- whether through personal contact
or the distribution of a product -- is still a major undertaking,
and the building of a multitude of global professional networks was
one of the great unwritting stories of the 1990s. This is an entirely
different picture of the work of starting a firm than was commonplace
even ten years ago, and it is still nascent and poorly understood.
The new picture is also beneficial for the efficiencies that derive
from the real-time wiring of global relationship networks, just as it
is dangerous for the increased potentials for globalized market power.

The greatest danger, however, lurks beneath the explosion of
innovation and diversity that modular business and protocols make
possible. Let us distinguish between two kinds of diversity: deep
and shallow. Deep diversity is diversity that arises from independent
evolution in unrelated and completely incommensurable institutional,
cultural, and technical contexts. Shallow diversity is diversity
that is generated from within a shared framework such as a grammar, a
set of modules, or the settings of parameters. Shallow diversity can
apply to the structure of different products, or it can apply to the
infrastructures by which the products are designed, manufactured, and

Deep versus shallow diversity is obviously a continuum, with deep
diversity an impossible ideal at one end and shallow diversity a
common but not inevitable case at the other end. Human biology, for
example relating to the universals of language, limits deep diversity,
as do millennia of encounters between cultures. Nonetheless, as a
relative matter it is clear that many kinds of deep diversity are
disappearing from the world. Indigenous languages and cultures
are dying, audiences for local literature and music are absorbing
"global" cultural influences, technologies and institutions are being
harmonized, and so on.

Meanwhile, economies of scale and scope are producing many strong
drives toward shallow diversity. These drives allow a manufacturer
to move away from a single monolithic standard to a degree of
mix-and-match, and flexible manufacturing technologies, together
with computer-aided design, make it possible to change products
rapidly from within a standardized system of distribution. From this
perspective, the world is not moving toward an extreme of homogeneity,
but to a high level of shallow diversity. The world is still heavily
standardized, but the standard applies not to the overall product
but to the framework that is used to generate a shallow diversity of

Shallow diversity is certainly adequate for many purposes. But a
world without deep diversity would nonetheless be much poorer. The
hyperefficiency that settles on particular frameworks of shallowly
diverse production may be brittle and lacking in the capacity to
shift to a qualitatively different model should circumstances require
it. A world of shallow diversity might be caught in a local optimum
of historical development: productive to be sure, but not nearly as
productive as it could be if it shifted to a qualitatively different
path of development. Many theories of institutional learning,
such as that of Friedrich Hayek (1960), require different islands
of evolutionary development to generate the deep diversity over
which natural selection operates, but the whole purpose of globally
integrated production networks is to absorb such islands and bring
them into conformance with the standard.

Lastly, a world without deep diversity would leave us poorer as human
beings. Perhaps we will maintain always-on connections to everyone we
know, but that will do us little good if none of those people knows or
feels anything that is deeply different from what we know or feel in
our own lives. It is only through the encounter with difference that
we are able to question our own assumptions, and it is only through
the encounter with difference that we can tell the difference between
our own heads and the radical strangeness and challenge of the real
world. In a world of shallow diversity, we will prosper and we will
die. We must learn to value and conserve deep diversity, and we must
learn what it would even mean to replenish what has been lost.


Philip E. Agre, Surveillance and capture: Two models of privacy, The
Information Society 10(2), 1994, pages 101-127.

Carliss Y. Baldwin and Kim B. Clark, Design Rules, Volume 1: The Power
of Modularity, Cambridge: MIT Press, 2000.

Lowell Bryan, Jane Fraser, Jeremy Oppenheim, and Wilhelm Rall, Race
for the World: Strategies to Build a Great Global Firm, Harvard
Business School Press, 1999.

Roger Clarke, The digital persona and its application to data
surveillance, The Information Society 10(2), 1994, pages 77-92.

Ronald H. Coase, The nature of the firm, Economica NS 4, 1937, pages
385-405. Reprinted in Oliver E. Williamson and Sidney G. Winter,
The Nature of the Firm: Origins, Evolution, and Development, Oxford:
Oxford University Press, 1991.

David Gelernter, Mirror Worlds, or the Day Software Puts the Universe
in a Shoebox, Oxford University Press, 1991.

Friedrich A. Hayek, The Constitution of Liberty, Chicago: University
of Chicago Press, 1960.

Geoffrey M. Hodgson, Economics and Institutions: A Manifesto for a
Modern Institutional Economics, Cambridge, UK: Polity Press, 1988.

J. Rogers Hollingsworth and Robert Boyer, eds, Contemporary
Capitalism: The Embeddedness of Institutions, Cambridge: Cambridge
University Press, 1999.

Bruno Latour, Science in Action: How to Follow Scientists and
Engineers through Society, Cambridge: Harvard University Press, 1987.

David G. Messerschmitt, Networked Applications: A Guide to the New
Computing Infrastructure, Morgan Kaufman, 1999.

Philip Mirowski, More Heat than Light: Economics as Social Physics,
Physics as Nature's Economics, Cambridge: Cambridge University Press,

Douglass C. North and John J. Wallis, Integrating institutional change
and technical change in economic history: A transaction cost approach,
Journal of Institutional and Theoretical Economics 150(4), 1994, pages

Melissa A. Schilling, Toward a general modular systems theory and its
application to interfirm product modularity, Academy of Management
Review 25(2), 2000, pages 312-334.

Carl Shapiro and Hal Varian, Information Rules: A Strategic Guide to
the Network Economy, Boston: Harvard Business School Press, 1998.

Margaret Wertheim, Pearly Gates of Cyberspace: A History of Space from
Dante to the Internet, Norton, 1999.


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