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The fear of virtual bureaucracy

Published: February 10, 2012
Section: Opinions

In the past two decades, the field of information technology has changed significantly. As time passes and technologies advance, the idea of these changes creating oligopolistic environment has slowly shifted from absurd to alarming. Indeed, Net surfers’ fear about their privacy for the last couple of years intensified along with the emancipation of the Information Technology industry.

I have never given much thought to this issue until the beginning of this semester when I enrolled in “Internet and Society,” a class that examines the way that the creation of the Internet and other associated technologies impacts our society.

In one of the books assigned for this class, “The Social Life of Information,” authors John Brown and Paul Duguid explore how technology has altered the way that individuals interact with information.

Brown and Duguid discuss how these changes have affected the mass distribution of information. It explains: “Given that information technologies are particularly good at taking advantage of large networks, the information economy in certain circumstances actually favors the aggregated, massified firm.”

What the rational and analytical “Web consumer” can deduce from this popular assertion is that the world-wide Web will ultimately merge and integrate itself just like the PC industry did in the 1990s. The recent global recession and the failure of many financial and real-estate firms gave incentives to sophisticated investors to proliferate the Internet revolution; and just like almost any of these, what comes after is bureaucracy. Indeed, the Web has distinct characteristics from the rest of profitable businesses: (extremely) low barriers to entry along with the ability to reach hundreds of millions of online users through substantial social networks such as Facebook, Google+, LinkedIn, LivingSocial and so forth.

Despite that, we continue to have confidence that it will end defectively for the simple reason that the main players and platforms will sooner or later consolidate in a form of virtual overpowered bureaucracy. We are missing something here though; the large volume of the high technology Venture Capital and Angel Investment market (in 2011 in the United States only) approximated $22 billion in 2700 deals. In consequence, the overcrowded early stage investment market limits and contradicts as described in Brown and Duguid’s argument; they say that “the small, agile firm with big ideas and little money is less likely to be the viable start-up of legend.”

Yet, it is true that since 2001, Google acquired more than 100 multi-stage start-ups, spending about $23 billion to date in a wide range of acquisitions. Nonetheless, the fact that high technology is today’s fastest growing sector eventually derives into a talent drain. In turn, the Net titans are finding much more difficulty in attracting the best software developers and designers, who could have had a huge impact at places like Google or Microsoft. One reason for this is that those talented engineers, armed with “the next big thing” can get funded easily enough that they would rather start their own projects. Therefore, this inevitable cycle of breakthrough technological innovations will allow for this diffusion of skilled developers and product designers. Indeed, with the help of an over-funded start-up market, it seems that this cycle is the only escape to our phobia of the “massified firm.”

Let’s pause to recollect the notion of transaction costs as proposed by the Nobel Prize-winning economist Ronald Coase in the 1930s: “These are the costs of using the marketplace, of searching, evaluating, contracting, and enforcing. When it is cheaper to do these as an organization than as an individual, organizations will form. Conversely, as transaction costs fall, this glue dissolves and firms and organizations break apart. Ultimately, the theory suggests, if transaction costs become low enough, there will be no formal organizations, but only individuals in market relations, […] information technology is relentlessly driving down these costs.”

This issue suggested is outdated. One cannot deny the fact that the downtrend of these costs systematically eliminates thousands of jobs and intermediaries in today’s economy.

Nevertheless, in the long run, people will benefit from these institutions and the environment that is driving down these costs. In the future, the current employment cuts triggered by Information Technology during the last 20 years will be strongly attenuated, if not replaced.

How is this possible?

The growing number of tech/social start-ups requiring substantial human resources to shape our social system and fulfill the needs of a growing Internet community will cover the losses incurred today.