It's All in the Head

Politicians don't like it, but technology is flopping an old truth. It's now the intangible economy, stupid.

by Virginia I. Postrel

"What is wealth?" the congressman asks the economist and is unsatisfied with an answer involving the gross national product. The congressman, who's spent most of his career in nonpolitical pursuits, has other things in mind. He worries about an economy too dependent on trade and services. Farming, mining and manufacturing, he believes, create wealth, transforming raw materials into something more valuable. Pretty much everything else -- the work of physicians, for instance -- only consumes wealth.

It's a common fallacy, this notion that physical transformation is the source of all real wealth. And, increasingly, it is a dangerous one, leading bright, well-intentioned political leaders to disparage the most value-creating portions of our economy. And it suits the agendas of static reactionaries who want to halt technical progress and economic change. In his book The End of Work, Jeremy Rifkin bemoans the passing of manufacturing jobs, even as he calls for a special value-added tax on the very sectors of the economy that are providing the jobs of the future: "all computer, information and telecommunications products and services," plus those of the entertainment and recreation industries.

We often speak of the transition to an "information" or a "service" economy. Both terms, though partly accurate, are misleading. They conjure up images too limited to capture the actual transformation taking place. We are, in fact, living more and more in an intangible economy, in which the greatest sources of wealth are not physical. We aren't yet used to an economy in which beauty, amusement, attention, learning, pleasure, even spiritual fulfillment are as real and economically valuable as steel or semiconductors.

To some degree, this has always been the case. The intelligence embedded in steel beams, not to mention in semiconductors, is what makes them more valuable than rocks. But the balance between the physical and the mental, the tangible and the intangible, has shifted, in part because of the spread of information technology.

Indeed, some economists argue that one reason studies often show that computers haven't increased business productivity is that IT has been used to improve service or product variety, but because of competition, has not improved profits. Thanks to these intangible improvements, overall wealth increases, but we feel the benefits as consumers, not as producers.

A greater supply of intangibles isn't simply the result of new technologies, however. It's the logical outcome of an economy that can easily provide the basics, with plenty of resources left over to satisfy other desires. "Most of the economic history of the last 200 years can be explained by us just progressing down a list of our needs and wants: food, clothing, shelter and so on. By now we're pretty far down the list -- to pet psychologists and psychics," says W. Michael Cox, vice-president and economic adviser at the Federal Reserve Bank of Dallas. Restaurants, he notes, are no longer just places to get food when Mom doesn't want to cook. By selling interesting experiences, they've greatly expanded their market -- from 33% of total food spending in 1973 to 43% two decades later. Increasingly, people aren't just buying goods and services. They're buying experience.

And that, to answer the congressman's question, is where all wealth comes from. In his book Pursuing Happiness, Wesleyan University economist Stanley Lebergott writes that what people really want is "diversified, worthwhile experience" -- the best definition of wealth I've seen. Goods can be a means to that end, extending life or making it more pleasant and interesting. Artificial lighting, fast transportation and instant communication gave us more time to experience life. That's why, argues Lebergott, they accounted for the great increases in consumer expenditures in the early part of the century. Now new goods, new services and new media create wealth by giving us new experiences.

For information technologists, the challenge is to keep an eye on that ultimate goal. "The focus should be the experience," says Nathan Shedroff, creative director at vivid studios, a San Francisco company that designs Web pages and other new media products. "The technology is merely another factor to address" in finding that experience. But IT, he observes, has changed all sorts of professions "by giving so many people the ability to realize their ideas and solve problems in new ways." We're all designers now.

The intangible economy, in fact, satisfies the congressman's criteria in a most definite way: by creating something valuable out of the most abundant and insubstantial of raw materials -- out of thought itself.

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