Will Economic Theory Shift?

by Jay Deragon on 03/06/2008

Will Economic Theories Shift?Economic theories evolve over time based on markets, consumers, government policies and the interactions of all three. Bear with me as we define economics and the possible changes in theory brought on by the social web.Theory is defined as a model or framework (made up of a body of principles) to explain phenomena. The word ‘theory’ derives from the Greek word ‘theorein’, which means ‘to look at’.

Economic theories are constantly changing. Keynesian theory, with its emphasis on activist government policies to promote high employment, dominated economic policymaking in the early post-war period. But, starting in the late 1960s, troubling inflation and lagging productivity prodded economists to look for new solutions. From this search, new theories emerged:

Supply-side Economics recalls the Classical School’s concern with economic growth as a fundamental prerequisite for improving society’s material well-being. It emphasizes the need for incentives to save and invest if the nation’s economy is to grow.

Acceleration principle is a theory of investment in modern macroeconomics. It asserts that the level of investment is accelerated only through the rate of increase in output, which is the gross domestic product. Since the acceleration principle links investment to output, it is has explanatory value also in understanding the development of business cycles.

These theories and others have been debated and tested. Some have been accepted, some modified, and others rejected as we search to answer these basic economic questions: How do we decide what to produce with our limited resources? How do we ensure stable prices and full employment of resources? How do we provide a rising standard of living both for now and the future?

Will the Social Web Create New Economic Theories?

The internet has fueled changes in business, society and economics. The internet disrupted traditional “shopping and information habits” of consumers. The internet has fundamentally redefined media, sales, marketing, distribution and communications which have been the basis for many economic theories of the past. The redefinition of media, sales, marketing, distribution and communications channels has created a shift from control by the few to influence by the many.

The economic models of the old internet were largely driven by “hits” which attracted advertisers to certain web sites. “Hits” were then used to convert “eyeballs” into clickthroughs from attraction to creative advertising banners and messages. Advertisers and portals gained economically. Users have been enticed with minimal gains from this model by sharing (Google Adsense) in the advertising revenue generated from their own web sites. This simply followed the “trickle down” economic model.

Trickle-down economics” and “trickle-down theory,” is a term used in political rhetoric to classify economic policies that are perceived to primarily benefit the BIG. The theory holds that the policies create incentives for top earners to work harder and increase productivity, and that this increase in productivity results in more jobs for middle and lower class individuals. Trickle down economics is when you give tax cuts, grants, or other welfare to the top; thinking the BIG will use it to create jobs, share revenue and thus the money trickles down to the small.

Instead of “trickle down” economics the social web is creating “trickle up” economics. Trickle up economics starts with economic stimulation at the bottom which then flows up. Trickle up economics is the opposite of trickle down economics: even to the point that up works when down does not.

What Will Create the Trickle Up?

The Cluetrain Manifesto asserts that “conversations are markets”. Transaction occur as the result of a conversation and subsequently it is transactions that stimulate an economy. There are an awful lot of intensely important conversations that are just now being heard about in the presence of business thanks to the social web. (Have you really listened to what your customers’ stories reveal?).

As the social web progresses and the silos come down the more the conversations will trickle up. The economics of these conversations will be defined by the transaction influenced by the conversations and new markets created as a result of the subsequent transactions.

The social web will no longer be fueled by advertising or eyeballs rather by conversational rivers of influence that create subsequent social commerce with existing markets (those that engage) and the formation of new markets.

What say you?

Comments on this entry are closed.

{ 1 trackback }

Previous post:

Next post: