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The concept of a post-industrial society and economy was first broached in the 1950s, as researchers became aware of a gradual expansion of non-agricultural, non-industrial sections of advanced industrial economies. Seeing these sections to be the core of a new emerging economy, the term “post-industrial” was often used to describe this economy. It implied that the main features of this new economy were not yet sufficiently clear or understood, so the new economy was simply defined in terms of the old economy it was replacing.

Early studies of the “post-industrial” economy mistakenly saw it as a service economy. One of the first authors to correctly recognize the main feature of the new emerging economy was Machlup (1962), who used the term “knowledge-based industry” to describe it. He found that by 1959, knowledge-producing occupations had surpassed the other occupations in terms of numbers. As late as 1973 though, authors like Daniel Bell (1973) continued to refer to the emerging economy as a “post-industrial” one. In 1977, Marc Uri Porat (1977), who was later joined by Rubin, wrote a 9-volume dissertation that measured and estimated the size of this economy, and described this emerging sector as the “information economy”. His work has since then been widely quoted and cited as the first major use of the term “information economy”.

As digital technology made possible the production of exact copies of text, images, audio, video and other information materials over unlimited generations, the information economy grew rapidly. With the emergence of the Internet and later the World Wide Web, the information economy gradually matured into the full-blown economy that it is today.

One of the more recent efforts to estimate the size of the US information economy was done by Apte and Nath (2004), who found that the US information sector’s share of the total GNP grew “from about 46 percent in 1967 to about 56 percent in 1992, and to 63 percent in ¬1997”.

Information: from a sector to the whole economy

The most commonly cited definition of the “information economy” is that of Porat, who distinguishes between two economic domains: the domain of matter and energy, and the domain of information. The latter he calls the information sector and the former includes agriculture and industrial sectors. The information sector involves the transformation of information “from one pattern to another”.

An economy becomes an information economy when information-related work begins to exceed work related to the other sectors. Based on Porat’s measurements of the various sectors, this occurred in 1967, when 53% of the US workforce was engaged in “information work”.

Porat categorizes the information sector into the primary information sector and the secondary information sector. The “primary information sector” workers are those who are almost wholly concerned with creating or handling information, like scientists, writers, librarians, etc. The “secondary information sector” workers are those who work mainly on non-information items but whose work involve information work as a secondary aspect. They are the workers in non-information firms and industries who produce information for internal use in the production of agricultural or industrial (i.e. non-information) goods.

Porat includes in the primary information sector the following industries:

1) knowledge production and invention (private R&D and information services);
2) information distribution and communication ¬(education, public information services, telecommunications) ;
3) risk management (insurance and finance industries);
4) search and coordination (brokerage industries, advertising);
5) information processing and transmission services (computer based information processing, telecommunications infrastructure);
6) information goods (calculators, semiconductors, computers);
7) selected government activities (education and postal service);
8) support facilities (buildings, office furniture);
9) wholesale and retail trade in information goods and services.

Porat includes in the secondary information sector “all information services produced for internal consumption by government and non-information firms”, except those government activities which belong to the primary information sector such as education and printing, but including government activities such as planning, coordination, monitoring, regulatory, evaluation and decision-making activities. Also included in the secondary information sector are those portions of private non-information firms and industries engaged in information work or the production of information which are not for sale or rent in the market but only to support the production of non-information goods, including internal data processing and library services.

The OECD (Organization for Economic Cooperation and Development) has adopted Porat’s definition in its studies on the nature, size, and growth of information economies. Other definitions of the “information economy” are variations of Porat’s or Machlup’s definition.

The elusive boundaries of the information economy

The issue of which activity or good to consider part of the information economy, foreshadowed by differences in the approaches of Machlup and that of Porat, continues to fuel the debates today about the information economy. For instance:

 Should information-producing activities within firms that do not themselves produce information goods for the market be included in the information sector? After all, every occupation produce and handle information. Farmers, machinists, shoe-shine boys and janitors also require information, produce it, and use it for their own purposes. Since they don’t produce information goods for sale or exchange, some argue that they should not be counted as part of the information sector.

 In estimating the size of the information sector, should intermediate outputs (which serve as inputs to other production activities) be counted or not?

 Should the information sector be limited only to those activities that produce information, or also to those that manipulate, distribute, display, etc. information?

 Should industries that produce tangible goods (e.g., computers, monitors, routers, etc.) be considered part of the information sector?

 Should services that provide information, but not information products for the market (e.g., a physician making a diagnosis or dispensing medicine) be considered part of the information sector? One can argue that they should not, because the service they provide does not have the same near-zero marginal cost of production as information goods.

 Should categories be based on existing national income accounts, or should activities not included in these accounts - perhaps because they did not exist before - be included?

 Should the estimate of the GNP contribution of the information sector be based on “value-added” or on “final demand”? Final demand is based on product sales, while value-added is based on income.

 Should the information economy be defined in terms of its relative size vis-à-vis other sectors of the economy, or when a specific level of informatization has been reached within an economy?

 Are monopolistic approaches such as patents and copyrights, commonly known as intellectual property rights (IPR), the most appropriate means of ownership over information?
Apte and Nath (2004) summarize the differences between the approaches of Machlup and Porat. A deeper analysis can be found in Huber and Rubin (1986).

As can be seen above, while the “post-industrial” economy has now been clearly identified as an “information economy”, debate continues as to which activities and goods should be classified under the information sector of such an economy.

A range of goods and facilities having an impact on the process of production

1. An information economy is an economy where the information sector has become more dominant than the agriculture or industrial sectors of the economy.

2. The information sector is that part of the economy that deals with the creation, manipulation, processing, transmission, distribution, and use of information, where information is defined as the reduction of uncertainty, and uncertainty is a measure of the number of possibilities. The smallest unit of information is the bit, which resolves the uncertainty between two equally possible outcomes. Information is a non-material, non-energy entity and takes physical form only in so far as it is stored in a physical medium (as in a hard disk) or communicated in physical form (as in a radio signal).

3. Information by this definition includes software, databases, music, video, book content, designs, genetic information, human and organic memories, and other entities which may eventually be represented, stored and communicated as bits. These may be called information goods. They are sometimes placed under the category of information content. Information goods include goods which are not purely information, but whose amount of information contained is such that it contributes the biggest portion of the price of the good. They also include Internet Protocol (IP) numbers, domain names, formats, standards, and similar items used in information equipment and facilities.

4. The information economy also includes the physical equipment and facilities used for information generation and processing, although these equipment themselves may have been produced outside the information economy. These physical equipment include computers, communications equipment, switching equipment, networking equipment, audio and video equipment, printing presses, radio/TV studios and stations, ¬libraries, cinemas, DNA sequencing machines, and similar equipment. These may be called information equipment and facilities.

5. The information economy further includes the people engaged in generating and distributing information.

6. Information is a non-material entity/non-energy entity, and matter/energy is needed only in so far as information needs to be stored/communicated. As information technology continues to advance, ways of storing/communication information that use less matter/energy continue to be developed. Thus, the cost of reproducing (i.e., duplicating, making copies) information is approaching zero.

7. The preceding paragraph uniquely defines the economics of information: a good that may take a significant amount of matter or energy to create, but costs practically nothing to reproduce leads to an economy that is uniquely different from the economy of physical goods (i.e., goods which contain in each unit a fixed amount of matter and energy consumed, which will be inevitably reflected in the cost of such goods). Information goods may be reproduced at practically no cost (i.e., near-zero marginal cost of production), which means that once created, the scarcity of this good can be ended at practically no cost. Thus a study of the information economy should involve not only a conventional study of the economics of scarcity, but also a study of the economics of abundance.

8. Information goods today can be owned through a mechanism called intellectual property rights (IPR), which include such monopolistic statutory mechanisms as patents and copyrights. IPRs create an artificial scarcity, negating the potential abundance of an information good once it is created and enabling IPR holders to artificially maintain the price of an information good at an arbitrary level. An information economy that relies on such monopolistic mechanisms as IPRs to reward intellectual activity may be called monopolistic information economy. In the future, we may also see the emergence of non-monopolistic information economies, where intellectual activity is rewarded through non-monopolistic means only, enabling the public to enjoy fully the abundance of information goods once they are created. Information equipment and facilities are owned in the same traditional way as industrial equipment and land, even while individual aspects of such information equipment and facilities may also contain patented or copyrighted material.

In monopolistic information economies, payments for the use of both information goods and information equipment and facilities, do not involve any transfer of ownership, but only a temporary permission to use the good, equipment or facility. These payments therefore take the form of rent. Propertied classes of the information economy, who own either information goods, equipment or facilities, are therefore rent-seeking classes. These rentier classes may be called the landlords of cyberspace or cyberlords.

Related concepts, variant(s)

 The information and communications technologies (ICT) sector includes commodities in the industrial and information sectors related to information storage, handling, processing, transmission, display, and use. They may be tangible or intangible goods.

 E-commerce refers to the use of the Internet and other national or global communications infrastructure to initiate or conduct commercial transactions, such as inquiries, placing orders, making payments, or documenting transactions.

 Often used synonymously with the information economy is the term “knowledge economy” or even “knowledge industries” or “knowledge-based industries”. These were the terms originally used by Machlup. It is still used today as a common term to refer to the information economy. Where the two terms are seen to be different, some authors regard the “knowledge economy” and others the “information economy” as the more encompassing term.

This author prefers the term “information economy” because it is information, not knowledge, that is transferred or exchanged. Information becomes knowledge only after it is properly processed internally by a person. Persons who acquire the same set of information may internally generate different kinds of knowledge from the same set. Furthermore, the information ¬sciences have a very specific and commonly-agreed upon definition of information in terms of resolving uncertainty and means and units of measuring it, but no such commonly-agreed upon definition or unit of knowledge exists.

References and external sources

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Pattinson, Bill. E-Commerce - Toward An International Definition And Internationally Comparable Statistical Indicators. Information, Computer and Communications Policy Division, OECD. http://www.insee.fr/en/ppp/sommaire...

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