Digital economy: the search for new governance mechanisms

By Jiro Kokuryo, Faculty of Policy Management, Keio University, Tokyo, Japan

The expansion of the digital economy is raising important ethical questions about the use, governance and regulation of information technologies like big data and artificial intelligence (AI). The specificities of the rapidly evolving digital economy, outlined below, are fueling the need to find new philosophical principles to inform the development of effective digital governance policies.

As we transition from the industrial economy to the digital economy, the time is ripe to re-visit the philosophical underpinnings of the modern market economy. In seeking new approaches to digital governance, we need to cast the net widely, and also consider how Eastern philosophies can inform and enrich approaches to digital governance for the benefit of all. More specifically, we should rethink the role of individualism and the derivative modern institutions based on the exchange of ownership, in favor of altruistic social sharing of data. We should also recognize that humans are an integral part of the cosmos and not at its center.

Why the institution of the industrial economy fails to govern the digital world

The digital economy has at least three distinct features that separate it from the industrial economy, and which are urging us to rethink existing institutions and align them with the contemporary economy.

First, the digital economy is being reshaped by the “network externality” of data where the value of data increases exponentially as they connect. Take a single piece of data (a datum) as an example. Alone, it does not generate much value, but as part of a data collection, which exhibits certain patterns, it does have value. This means that the entity responsible for assembling data enjoys monopoly power over the value it creates. That is one of the important reasons why data governance is a critical issue for society. The network externality of data arguably makes a strong case for the social sharing of data, as opposed to claiming ownership over it and limiting access to it.

The expansion of the digital economy is raising important ethical questions about the use, governance and regulation of information technologies like big data and artificial intelligence (AI).

The second distinguishing characteristic of the digital economy is the very low marginal cost of digital services, where the cost of adding another user to a platform is negligible compared to the fixed cost of originally developing it. In practical terms, this means that an increasing range of online services can be offered for free to attract users to a platform. This aspect of the digital economy is causing market pricing for resource allocation to malfunction as demand for, and supply of, free digital services are outside the control of the pricing mechanisms that served the industrial economy so well.

The third distinguishing factor of the digital economy is the enhanced traceability of goods. The industrial economy developed under the assumption that the ability to trace mass-produced goods sold to unidentifiable customers in distant locations was limited. However, today, information technologies, notably sensors, automatic identification systems, and wireless technologies, are drastically changing our ability to track and trace goods in supply chains across industries at a very low cost. This allows sellers to monitor the location of any goods they sell and allows buyers to identify the original sellers and track the product’s journey.

Enhanced traceability favors the shared use of goods managed via control mechanisms. Take, for example, the “sharing economy,” where houses, cars, and more, are offered as services, either on a subscription basis or through temporary rental arrangements and not by exchanging physical objects with money. As such, the exclusive ownership of goods exchanged in the market, a dominant characteristic of the industrial economy, is no longer necessary.

These three factors demonstrate that the digital economy is fast outgrowing the norms of the industrial economy and creating significant new forces that are prompting a rethink of the philosophical foundations of modern society.

Characteristics of industrial society

Appreciating the need for new thinking requires an understanding of industrial society.

The mass production enabled by the Industrial Revolution required the large-scale distribution of goods to large markets. Lacking the powerful communications technologies of today, the so-called “anonymous economy” emerged and was dominated by the exchange of goods for money among strangers, often in distant lands. Many mechanisms and institutions evolved to make the anonymous economy work. Property rights (the exclusive right to dispose of a good) and the market were pillars of the industrial economy and were supported by powerful nation states to guarantee their continued function. These mechanisms were essential to economic activity along with the modern transport systems that improved mobility. 

Since the Industrial Revolution, the history of modernization has been one of bringing goods, services and intangibles, like knowledge, into the realm of ownership rights. These rights are also closely wedded to the values of individualism, which is so central to the Western philosophy that underpins industrial society and the market economy. Individualism assumes an independent person is capable of making autonomous decisions and has the right to claim the fruit of their actions and to be responsible for the consequences of them. As such, the individual enjoys inviolable human rights, including privacy and property rights, which can be exchanged in the market.

The advent of AI and big data, however, is challenging the core assumptions of industrial society, in particular with respect to the belief that humans have a monopoly on intelligence.

Big data governance: rising tensions

The foundational undercurrent created by the institutional changes forced by the rise of the digital economy is evident in various forms. For example, the West is currently grappling with data privacy and the governance of big data (the huge data sets generated from multiple sources by multiple online users).

Through the lens of industrial society, this struggle centers around the need to balance the use of data for commercial purposes with the social good stemming from the protection of personal privacy and dignity. In this context, privacy is closely wedded to the individualistic values of modern Western society and is considered a human right.

However, rather than seeing data as a private asset to be commercially exchanged, Eastern philosophies, which are based on mutual trust among people, recognize data as a collective resource serving the common good, where contributors are respected, protected, and rewarded.

Might the traditional altruistic Eastern philosophies of Confucianism, Buddhism, and animism offer a more effective alternative for data governance and data sharing while upholding and protecting the dignity of individuals? Interestingly, the concept of fiduciary responsibility suggests there is some common ground between Eastern and Western philosophies in this regard.

AI governance: differing perspectives

When it comes to the governance of AI, and the notions of “mind” and “autonomy,” especially with respect to machines, we see a similar parallel. The Western perspective sees humans as superior to other beings (and machines) because of the human “mind” or intellect and the autonomy that derives from it.

From this perspective, the prospect of “general artificial intelligence,” which assumes human-like intelligence (which may even surpass human intelligence) becomes a serious threat to the mastery of humans over the cosmos. Here again, the Eastern animistic tradition, which sees humans as an integral part of nature, offers an interesting alternative view.

Asians are generally far more accepting of robots, perceiving them as human-friendly peers with minds and emotions. This contrasts starkly with the Western perception of robots and androids, which is typically characterized as a master-slave relationship, with any reversal of that relationship considered a threat.

As we transition from the industrial economy to the digital economy, the time is ripe to re-visit the philosophical underpinnings of the modern market economy.

Reflections on Japan’s experience

Japan was the first Asian country to embrace the Western philosophy of individualism. From the 19^th Century, Japan accepted Western technology and legal norms, including in relation to intellectual property, and became a major industrial economy. In the digital age, however, this strategy appears to be faltering as other Asian economies have caught up with, and in some cases, overtaken Japan in the digital sphere. This has led some commentators to suggest that success in the digital economy requires a completely different approach to that adopted in the industrial age.

China’s remarkable success in the digital arena – underpinned by Confucian and Marxist traditions – adds impetus to the question of whether data governance could be better guided by the traditional Eastern philosophies. This new thinking is fueling the need to find common ground on which to develop values that are broadly acceptable around which to develop governance mechanisms for the emerging digital society. As noted earlier, the concept of fiduciary responsibility could be a good starting point for this endeavor.

Time for a new paradigm beyond individualism

There are solid reasons to believe that the market-based governance mechanism of the industrial economy will have to evolve to address the economic and technological realities of the expanding digital economy.

We are already seeing the emergence of new digital business models, such as subscription and sharing models where “access rights” to the use of given goods are “licensed” among “trusted members” in electronic communities. These business models contrast with those of the industrial market economy where ownership of property (i.e., the exclusive rights of disposal) is exchanged for money anonymously among individuals (and corporations).

Figure 1 offers a visualization of the design of the economy in a world with enhanced traceability where everyone has a good (including data), which is useful to others and contributes to the right to use that good. In what might be called a “potluck economy,” such shared use of physical goods (and data) is monitored and rewarded by society. The model retains the notion of ownership since the platforms that coordinate the granting of licenses bear a fiduciary responsibility to protect the interests of its participants or trustees.

Cyber civilization through an Eastern lens

At a time when policymakers rooted in the Western philosophy of individualism are grappling with the challenges of an expanding digital society, Asian altruistic philosophies may help us develop the foundational philosophies and ethics to govern emerging digital social structures. Confucianism, Buddhism, and animism are distinct beliefs, but they each emphasize honoring the trust others place in a social entity or institution. This contrasts with the Western emphasis on protecting the rights of individuals.

The treatment of personal data highlights these differing perspectives. Modern Western thinking considers a breach of privacy to be a violation of the rights of individuals who should have control over their personal data. In contrast, Eastern philosophies consider the misuse of personal data entrusted to a platform to be a betrayal of the trust placed in the platform. While the differences in approach are subtle, they are significant in terms of how governance mechanisms are designed.

The Western emphasis is to ensure that the collection and management of data comply with the “will” of the individuals supplying the data so they remain in control of it, whereas the Eastern emphasis is on ensuring that data is protected and used in ways that are loyal to the “interests” of those entrusting the data, regardless of the existence of explicit permissions to collect and manage it.

This discussion also raises the issue of the recognition of responsibility. A popular point of discussion in the area of AI governance is whether or not it is realistic to continue to hold humans ultimately responsible for the malfunctioning of man-made objects.

The Western assumption that humans have a monopoly on autonomy and intelligence gives humans ultimate authority over and responsibility for all man-made objects, as reflected in the product liability laws of various Western civil and criminal legal systems.

In contrast, the Asian wisdom of conviviality with nature may well become a guiding principle. Why? Because in time, it seems inevitable that machines will at least have intelligence-like capabilities. We need, therefore, to prepare ourselves to recognize personality in machines if we are to allow them to interact so closely with humans.

Toward generally acceptable principles based on trust

The aim of exploring the differing perspectives between East and West is to find common ground for developing a new set of ethics suitable for the emerging data-driven world. As both share the notion of fiduciary responsibilities, this seems a good starting point to develop effective data governance mechanisms equipped with a democratic system of checks and balances that benefit all. My hope and belief is that humanity is clever enough to develop such a system and to use the huge technological opportunities it has created in a civilized manner.

This article is an abridged and modified version of Kokuryo, J. An Asian perspective on the governance of cyber civilization. Electronic Markets (2022).