Governance in the Digital Economy The Importance of Human Development

• Author: Don Tapscott and David Agnew
• Position: Chairman of the Alliance for Converging Technologies (Toronto)/Executive Director of the Alliance for Converging Technologies' Governance in the Digital Economy program

The Internet and related technologies are revolutionizing the way people live, communicate, and work. What impacts will these far-reaching changes have on the structures and functioning of our governments?

What kind of governments do citizens need in the twenty-first century? Indeed, what kind of governance do people want in the next millennium? These are perhaps among the most fundamental questions, and now is an appropriate time to pose them. But not just because we are on the cusp of a special date in the calendar, as memorable as this New Year's Eve is bound to be. No, the reason we ask them now is because we recognize that we are living through one of the most exciting periods of change in history. Virtually everything we do in our daily lives, in our work, and, yes, throughout our governance structures, is experiencing-or will soon experience-fundamental transformation.

This transformation is called the digital revolution. And although many people are more comfortable with a pace of change that is incremental rather than supersonic, the reality today is different. Internetworked technologies, of which the Internet is the most publicly visible form, are turning the world upside down as they achieve critical mass in societies around the world.

Increasingly, as networks take hold, they are reshaping the way people live, communicate, and work. Those same technological changes that are transforming the business world and civil society will also revolutionize the way government does its business and the very nature of public life.

In its wake, the digital revolution will remake the two distinct yet intertwined relationships between people and their governments: the one between the government and the citizen as customer or consumer of public services, and the other between the government and the citizen as owner or shareholder.

In the digital era, no less than a radical rethinking of the nature and functioning of the organization called government is required; no less than a dramatic transformation of the citizen-government and business-government relationships will result.

E-business: emerging models

To understand why and how the institutions of our system of governance will be so profoundly affected, it is useful first to examine the enormous impact of the digital economy on business.

Far from being simply another round of reorganization or the adoption of the latest wave of business theory, internetworked technologies are spawning new business models that are sounding the death knell for the industrial-age corporation-the basic operating structure that has served the marketplace for decades. Around the globe, commercial enterprises are scrambling to avoid not only being left in the dust of the upstarts but also being made irrelevant as suppliers and customers alike embrace new ways of doing business.

Many years ago, the economist Ronald Coase, in a famous article ("The Nature of the Firm," Economica, Vol. 4 (November 1937), pp. 386-405), asked a simple but penetrating question: why does the firm exist? In a rational world, based on classic economic theory, why don't workers, suppliers, and customers wake up every morning, shop the market, and make a deal? Why have these huge infrastructures and fixed plants when in a perfect world-or at least in a theoretical world-the laws of supply and demand would dictate pricing, and before breakfast was cold, we would see the world unfolding as it should?

Coase's answer was common sense. The economy was too complex, and, more important, the cost (in both time and money) of transacting all those arrangements was far too high to proceed with anything other than a highly organized, semipermanent structure called the firm.

But fast forward to today, and some of those same barriers to much more fluid arrangements among suppliers, infrastructure partners, and even labor (now...