Intelligent Technology

• Author: Hal Varian

Intelligent Technology Finance & Development, September 2016, Vol. 53, No. 3

Hal Varian

As digital applications encroach on various aspects of daily life, the impact on the economy will help us live smarter and better

A computer now sits in the middle of virtually every economic transaction in the developed world. Computing technology is rapidly penetrating the developing world as well, driven by the rapid spread of mobile phones. Soon the entire planet will be connected, and most economic transactions worldwide will be computer mediated.

Data systems that were once put in place to help with accounting, inventory control, and billing now have other important uses that can improve our daily life while boosting the global economy.

Transmission routesComputer mediation can impact economic activity through five important channels.

Data collection and analysis: Computers can record many aspects of a transaction, which can then be collected and analyzed to improve future transactions. Automobiles, mobile phones, and other complex devices collect engineering data that can be used to identify points of failure and improve future products. The result is better products and lower costs.

Personalization and customization: Computer mediation allows services that were previously one-size-fits-all to become personalized to satisfy individual needs. Today we routinely expect that online merchants we have dealt with previously possess relevant information about our purchase history, billing preferences, shipping addresses, and other details. This allows transactions to be optimized for individual needs.

Experimentation and continuous improvement: Online systems can experiment with alternative algorithms in real time, continually improving performance. Google, for example, runs over 10,000 experiments a year dealing with many different aspects of the services it provides, such as ranking and presentation of search results. The experimental infrastructure to run such experiments is also available to the company’s advertisers, who can use it to improve their own offerings.

Contractual innovation: Contracts are critical to economic transactions, but without computers it was often difficult or costly to monitor contractual performance. Verifying performance can help alleviate problems with asymmetric information, such as moral hazard and adverse selection, which can interfere with efficient transactions. There is no longer a risk of purchasing a “lemon” car if vehicular monitoring systems can record history of use and vehicle health at minimal cost.

Coordination and communication: Today even tiny companies with a handful of employees have access to communication services that only the largest multinationals could afford 20 years ago. These micro-multinationals can operate on a global scale because the cost of computation and communication has fallen dramatically. Mobile devices have enabled global coordination of economic activity that was extremely difficult just a decade ago. For example, today authors can collaborate on documents simultaneously even when they are located thousands of miles apart. Videoconferencing is now essentially free, and automated document translation is improving dramatically. As mobile technology becomes ubiquitous, organizations will become more flexible and responsive, allowing them to improve productivity.

Let us dig deeper into these five channels through which computers are changing our lives and our economy.

Data collection and analysisWe hear a lot about “big data” (see “Big Data’s Big Muscle,” in this issue of F&D), but “small data” can be just as...