According to Thomas Friedman, IT and fast internet have decreased the transaction costs of information since the emergence of the information economy. While many intuitively agree with Friedman, Philip McCann argues to the contrary.
According to McCann, the information economy actually increased the transaction costs of information. While it is true that data can be transmitted over distance faster, that is not sufficient ground for claiming that the transaction costs of information have declined. To see why this is the case, spatial transmission costs must be distinguished from spatial transaction costs.
- Spatial transmission costs are the costs of moving information across space. These costs have indeed fallen with the introduction of IT and fast internet.
- Spatial transaction costs are “the costs associated with engaging in and coordinating activities across space”. Transaction costs have actually increased because in the information economy, information is more complex and more valuable than before.
The complexity of information arises from the amount of (big)data, the multitude of sources of information. The value of information has increased as more business rely on data for making decisions, or even sell information as business model. In other words, knowledge is so valuable that the opportunity costs of not having information have increased. Consequently, in the information economy where many people perform knowledge-intensive work, it is both important and difficult to have real-time, trustworthy and understandable information.
Managing the complexity and value of information is done by ensuring frequent face-to-face contact between workers both inside and outside the firm. Think for example of consultants who work on location at their clients, or of Silicon Valley firms that are located close to one another. Thus, contrary to what you might expect, for many firms active in the information economy, the transaction costs of information have increased because of the digitalizing world.
Sources:
Thomas Friedman, The world is Flat (2000)
Philip McCann, Globalization and economic geography: the world is curved, not flat (2008)
