By Bowen Feng
(From October 11, 2019)
Societies are shaped by our means of decision making, coordinating action, and allocating resources. With every major innovation in one of these areas, we witness a profound change in the structure of the society.
Just think of the impact of the invention of language, the invention of the printing press, or more recently, digital networks such as the internet on the very fabric of society.
With the emergence of Web 3.0 and the Network Society, we find ourselves at the brink of yet another major societal re-structure.
Characteristics that define our world in the Network Society include hyperconnectivity, open access, decentralisation and data as the new raw material. This represents a radical change from the factors driving the industrial age, which saw the growth and dominance of large hierarchical organisations, optimised for the mass production and processing of physical goods.
In this article, we’ll dive into some of the characteristics of this new economy and how it will drastically change how we coordinate and gain access to what we deem most valuable.
Characteristics of the Network Society
Whilst we’ve been attracted to networks such as markets for a long time, the rise of the internet and digital communications has lead to a profound shift in how these networks can operate. Through ICT, the networks we can be part of and contribute to, are no longer constrained by physical limitations such as geography.
This means today a citizen can be simultaneously part of a network on a physical, local realm such as a local community, as well as multiple online digital networks without boundaries, all at the same time. This liberation of individuals away from networks of geographic constraint simply didn’t exist before.
In this new hyperconnected world, value within society and organisations increasingly comes from growing the number of connections being made within its boundary, and connectivity and communications becoming the defining feature of these organisations.
Think, for example, of the huge valuations of Airbnb and Uber. What actual value do they provided to their respective industries?
Their value did not come from expanding ownership of physical assets, such as building more hotels or purchasing more taxis, but instead by providing a means of connecting buyers and sellers within their network.
2. Open Access
With the rapid rise and growth of these digital networks, we also experience a breaking down of organisational and social boundaries. The effect of this is an increasing ease of not only consuming within, but also contributing to such networks.
Prior to Airbnb, for example, the entry barriers to starting up an accommodation business were large. It typically required large amounts of upfront investment in physical assets, certifications etc. These relatively high barriers lead to a fairly centralised industry, with a few established brands taking a large share of the market.
How Airbnb revolutionised this, was by forming a decentralised network (OK, within their centralised network – but it’s still an improvement, more on this later) of accommodation seekers and providers. This lowered barriers to entry, and effectively split up the profits of the hospitality industry so that more people were able to benefit – both providers and consumers.
Similarly, the rise of Web 2.0 liberated the average internet user away from merely a passive consumer of information to also being a contributor. This radical shift is what paved the way for the success of Wikipedia and all the social media platforms we take for granted today.
A consequence of this rapid increase in communications and connections between people, is that change now happens – fast. Large, traditional firms are feeling the pain of this, as their vertical hierarchical structures make them extremely slow to adapt and respond to environmental changes.
This type of volatile environment favours more flat, decentralised, networked organisations, as they tend to be adept at responding rapidly to change.
Let’s say that there’s a huge surge in demand for accommodation in a specific area. Due to the fixed, resource ownership model of hotels, they would have no way of responding to this surge, other than raising prices in their existing rooms. Supply is fixed in the short term. However Airbnb – due to its decentralised, open network of suppliers and buyers – would see a surge in quantity of accomodation up for rent, in response to this lucrative increase in demand. The structure of the Airbnb ‘organism’ is proven to be far more flexible and adaptive than its traditional counterpart.
Another argument for why network organisations will become the norm, lies in a Nobel prize winning idea by the economist Ronald Coase. Coase set out to answer the question, why do firms exist, as opposed to people simply transacting through the market?
Say you were looking to build a house. What would lead you contact a corporation to do the work for you, rather than individually contracting with a builder, plumber, electrician etc.?
The answer, Coase claims, lies in the cost of transacting with the market. This includes cost of searching and communicating with contractors, cost of writing and enforcing the contract, and time required to do all of these. When the cost of transacting with the market is high, this favours the formation of large organisations who create a more efficient ‘internal market’. If costs of transacting with the market go down, firms will tend to become more decentralised.
Taking this view, let’s consider the impact of the internet on these transaction costs.
When Coase first proposed his idea in 1937, it was certainly hard to imagine a world of large online spaces where freelancers and clients could easily find and connect with each other, through platforms such as UpWork or Fiverr. The internet has radically improved our ability to scour the market, communicate with candidates and write and enforce contracts. No wonder we’ve seen such a recent surge in the number of freelancers globally.
4. Networks & Data > Physical Resources
In the information age, data is the new oil.
Just a few decades ago, the list of most valuable corporations were dominated by large oil firms. Now, they’re dominated by technology companies – the likes of Facebook, Amazon, and of course, Google.
What do these new incumbents do? They don’t own or manufacture much in the way of physical resource. Instead, they are are champions of hoarding and processing consumer data.
This represents a realisation of what’s been called the Network Economy. And with this, we see value in the emerging economic system being generated primarily through the production and exchange information, rather than that of physical resources.
This will have a profound effect on the dominant organisational structures in this new economy. In the industrial age, the vertical, hierarchical structures optimised for managing and transforming physical resources reigned supreme. However, in the network economy, decentralised network organisations which are optimised for information processing, tend to be far better suited.
As you can see, this new paradigm largely favours platform models – such as Airbnb, Google or Facebook – over centralised, hierarchical models such as hotel chains.
In this new networked economy, goods and services will be increasingly traded on the basis of access, rather than ownership. So instead of owning your own CDs, you might choose to gain access to a music streaming service, such as Spotify. And rather than owning your own car, you gain access to a car sharing service, such as ZipCar.
People don’t really want products. They want to be connected to the services that allow them the context for living the quality of life they desire.
Looking Ahead & Final Thoughts
Throughout this article I’ve been using platform organisations such as Airbnb and Uber to illustrate the rise of these digital networks. However, as I’ve mentioned, we’ve seen they are far from ideal for society at large. Due to network effects and switching costs, the few platforms that have succeeded do so in a big way, and grow to become gigantic entities welding unsettling levels of wealth and power.
It appears we’re reaching the saturation point of a new stage, where rather than large resource-rich companies being the dominate players, a new type centralised corporation has emerged. An organisation whose primary goal is the curation and mediation of large digital networks. Where data acts as the new oil providing these entities with unprecedented levels of power and influence over society. Clearly, this new order comes with its own dark sides.
Fortunately, this is already being addressed with the emergence of Web 3.0 and the rise of peer-to-peer, institutional technologies such as blockchain. Many visionaries and pioneers of today, see the rise of centralised platforms as just one step towards a more truly decentralised and prosperous society.
I sure hope they’re right. But for now, let’s buckle in, and prepare for the ride.
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Credit to the work of Systems Innovation and Manual Castells for inspiring this post.
This article is part one, of a three part series on exploring an emergent paradigm, built on the interactions surrounding 3 key phenomena: the Network Society, New Institutional Technologies, and Networked Organisations.