When we look at the so-called New Economy, it can be concluded that a significant change has occurred to the current economy, and this change is very likely to lead us into a new phase of development. What will this change bring to our economy? Can we describe the consequences now? These are the questions that this essay intends to address.
I have been following this trend over the past few years, even though not researching into it with great depth. I would like to share my view on the New Economy at this saloon, and bring about the topic of evaluation of the New Economy’s contribution to our economic growth. And I am open to suggestions and criticism with the hope that further studies in this area will bring forth fruitful results.
The New Economy is a rather broad concept that incorporates many aspects. Besides, the definitions of the New Economy vary greatly. In order to approach it properly, I would like to narrow the definition down to online retail, that is web-based retail excluding B2B and wholesale. This is an explicit way to deal with the final products that are sold by retail online.
Firstly, allow me to talk about how we should study the New Economy, and examine the potential of online retail. I have been following institutional economics methodology over the years, which is a very simple way of handling such studies. It entails the analytical method of utilising transaction cost. As we know, the great institutional economist Douglas North once said that one of the features of modern industrial revolution is mass production, and the premise of mass production is mass sale. However, the premise of mass sale is the expansion of the market, where the transaction cost is brought down by technical and institutional innovations.
Professor Steven N. S. Cheung further argues that “transaction cost is the dissipation of rent.” This is a very important theorem. To put it in a metaphor, it bears the weight of Einstein’s energy-mass conversion. When the transaction cost is high, the same amount of rent is dissipated, causing economic loss. On the other hand, when transaction cost is lowered, economic efficiency is raised as rent dissipation is lowered.
I discussed this in a footnote to an article I wrote in 1992. What I said in that article was that, when we talk about transaction costs, we normally say certain measures will save the transaction cost. However, the saved transaction cost does not only lead to saved cost, but also enables transactions of goods and services that have previously been impossible for transaction.
In that footnote, I wrote, “for example, through transaction, certain resources can be used for purpose B instead of purpose A, and thus obtaining 10 RMB profit. If the transaction cost of this change of purpose is lowered from 10 RMB to 5 RMB, it will make all those transactions with transaction cost above 5 RMB previously possible and profitable. As a consequence, the whole resource allocation of the society is improved.” Besides the 5 RMB saved transaction cost, more transactions with a profit margin of 5RMB can be undertaken now. How much then? We’ll discuss this later in this article.
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