Introduction

Abstract

This chapter examines the question of what changes are being brought about by digital technology and what consequences this has for the economy and society. Its particular focus is on the challenges for economic policy. The chapter briefly presents the key questions and the corresponding analytical focus of the book. It then explains the extent to which the central principles of the market economy, as formulated by Walter Eucken, can be used as a heuristic access structure in order to better understand the challenges which digitalisation poses for economic policy and in how far this determines the chapter structure.

Especially so far as economic policy is concerned, principles are practically all that we have to contribute. (Hayek 1963, 227)

1 The Impact of Digitalisation

This chapter treats the question of what changes are being brought about by digital technology and what consequences this has for the economy and society.

It is intuitively comprehensible to everyone that digitalisation has a massive impact on all areas of life. Perhaps the answer to the question of which individual and social areas are not affected and changed by digitalisation says more than the attempt to rank all areas covered by digitalisation: This answer will be very brief in any case.

The umbrella term “digitalisation” includes a wide range of phenomena. It is simply comprehensible that this is not just another new technology like the four-wheel drive, the Teflon coating or the microwave oven. Digital technology can not only improve existing products. It changes products and services as well as the processes necessary to create them. Digital technology has made entirely new goods and services possible. It connects people and things. It is, formulated in everyday language, able to learn. If cycles of social and economic development based on certain technologies can be identified, then digital technology is certainly the new leading technology after steam and electricity. It is, as will be discussed, a new general purpose technology (Bresnahan and Trajtenberg 1995).

At first glance, this is obvious to everyone. However, we still know very little about what this actually means for our society and economy. As with all leading technologies, one has to admit that the long-term consequences of their application are initially unpredictable. Perhaps this is today truer than ever.

Much about the current change is indeed radical and remarkable. Fundamentally its speed; the extent to which it encompasses the most diverse areas of technology, science and the social sphere in general. The interplay of actors and devices in complex networks with increasing dynamism repeatedly produces surprising developments. Digital technology has radically changed existing markets and also given rise to new ones. Wherever one looks, the extent of change exceeds anything that has gone before. Y. N. Harari rightly discusses the separation of intelligence and consciousness as an unprecedented revolutionary event—“intelligence is mandatory but consciousness is optional” (Harari 2017, 183); the revolution of communication via social networks has a disproportionately greater social impact than the use of the telephone; the economy of the internet suspends economic “laws” such as falling marginal costs. It would be easy to continue the list of examples.

2 The Task for Economic Policy

The following section outlines the extent to which the changes brought about by digitalisation pose particular challenges for economic policy.

Where is this development leading? In what ways can it be influenced or controlled? Or do we now simply have to resign ourselves to the “VUCA world” often discussed in management literature (see, e.g., Jankowska et al. 2020; Nandram and Bindlish 2017 or Mack et al. 2016)? For the individual, this may be partially true. For those responsible for economic policy, which must set the framework for sustainable and balanced development, as enshrined in numerous constitutions today, this cannot and must not apply. The question raised by the economist Walter Eucken,

How to give the modern industrialised economy a functioning and humane order? (Eucken 2004, 14, own translation)

seems to be very topical today. All those responsible for economic policy in democratic societies have to ask themselves again and again. Yes indeed, this is an old question. And there have never been simple answers. But, remarkably, the question seems more relevant today than ever. It is the leading question of this book.

That this question has lost none of its relevance is confirmed by even a brief glance at the economic policy agendas of developed economies today, all over the world. The focus seems to be on competitiveness, efficiency and innovation; and digital technology—or, more generally, “digitalisation”—seems to be a suitable means of achieving this. At the same time, policymakers seem to be both the driving force behind the phenomenon and the driven by it. Without exception, they are currently struggling to keep pace with the changes of the digital age. The urge to act is omnipresent. Digitalisation in all areas of life is seen as the key to prosperity. Prima facie, there are several reasons that suggest this assumption to the responsible politicians. For example, companies are more than ever exposed to global competitive pressure. Digital technology can be a key to countering this. Be it by understanding customers better, by using data from them. Be it by being able to offer customised products and services via digital technology. Individualised products are increasingly becoming a requirement of customers in developed economies. Be it that one can offer the same product at a lower price through a more precise control of the value creation processes and/or by robotisation.

Digitalisation as a potential competitive advantage pushes companies as well as politicians interested in the competitiveness of their economies to invest in digital technology. Moreover, this technology is a way to counter the shortage of qualified labour, because jobs can be robotised. This is all the more imperative as the demographic trend in the developed economies is not making the situation on the labour markets any easier. And so on.

3 The Approach of This Book

This chapter briefly presents the most important questions and the corresponding analytical focus of this book.

This book does not presume to provide a simple, clear-cut and definite answers. The aim is different. The aim is to present in a comprehensive way the extent to which the economic policy objective posed with this central question—“How to provide a functioning and humane order for the economy?”—has come under new conditions in the age of digitalisation.

Regarding its object area, this book follows a twofold approach. First and foremost, it tackles the economy and asks what digitalisation changes in principle. On the other hand, this book takes the position that the economy as a whole has a technical or, in other words, instrumental character. What does this mean?

The economy is a social technique for reducing the problem of scarcity.¹ Admittedly, this first of all concerns individuals who value something as scarce. Through their behaviour, however, they bring about a phenomenon, which is peculiar enough to occupy a separate science and treated under the term “economy”. This area of the social realm can be seen as a kind of its own and that is of public interest. And accordingly, this area of reality is also an object of normative criticism. In this respect, the economy must satisfy more than just economic criteria. The core question can also be asked the other way round: Does the economy help to reproduce a social whole that can be described as a “humane” order?

Of course, what is “humane” has always been the subject of debate based on social and cultural conditions. It is discussed differently by economic ministers in the Far East than in Northern Europe, for example. There can be no single, one-size-fits-all recipe for dealing successfully with the phenomenon of economy. And in this respect, to stay with the term “humane”, it would be wrong to go into detail about what this means exactly, or what, for example, the derived term “social market economy” should mean. There are different ideas about that, too (see Goldschmidt and Wolgemuth 2008).

But whichever way you look at it, the very assumption of an instrumental character of the economy as a whole is normative per se. This assumption is the starting point of this book, because it will have to be shown that it is precisely with a view to this instrumental character that far-reaching changes are currently taking place. Before this happens in the following, however, it is important to make the normative presuppositions that signify the preconditions of the instrumental character in developed economies explicit. These are typically Western presuppositions that underlie the Occident’s conception of man and society. We limit ourselves, it must be said, explicitly to these presuppositions.

Firstly, with regard to the individual level, this book is based on a liberal concept of man.² Each person and ence economic actors should be able to make decisions at his or her own discretion and take responsibility and behave accordingly. Secondly, with regard to the level of society, material inequalities should be avoided to the extent that this could lead to destructive tendencies for the whole and endanger peaceful coexistence. Thirdly, in the sense of linking the second condition back to the first, the amount of material goods that individuals acquire should, as far as possible, be based on their performance and not on their status.

The economy, as the sphere of social activity concerned with the reduction of scarcity, must be able to meet or to approximate these goals in a sustainable manner. As will be demonstrated, normativity and economic law are two sides of the same coin called “market economy”. This connection becomes explosive insofar as an economy that follows these principles always produces unpredictable changes and innovations, not least technical ones. Digitalisation is one of them.

The fact that the economy is of public interest and therefore always instrumental is anything but trivial against the background of endogenous technological change. It has already been mentioned above that the scope of the changes brought about by digitalisation is perceived by many social groups as well as by numerous scientific disciplines. Sometimes the impression emerges that people, and also the responsible politicians, are no more than mere spectators of what is happening. Is that a bad thing? Should not the economy be left to act independently? Here it is worth taking a closer look.³

The nuclear physicist and philosopher Carl Friedrich von Weizsäcker described this problem area in connection with the threats of the nuclear age in such a way that man is therefore both a technical actor and merely an observer of technological development, since modern technology is in many respects “untechnical”. One would not sufficiently understand what technology actually is, namely a means to an end. Modern technology, however, was partly an end in itself and partly an instrument of particular interests, more precisely, economic or political power. He assessed this constellation as potentially destructive and derived from it a demand for acquiring knowledge: “A culture cannot be robust whose means are by a scale better developed than the consciousness of their ends” (Weizsäcker 1977, 104, own translation). For the subject of this book, this means an important message. If we assume that we live and want to live in a free society that makes use of the market economy and the division of labour, then it is necessary to understand to what extent digitalisation challenges the principles of our previous way of doing so.

Admittedly, this desideratum is very complex and, yes, at first glance too complex. It should only be mentioned here that Friedrich August von Hayek (1979, 164) already pointed out that we have “(…) never designed our economic system. We were not intelligent enough for that. We have stumbled into it (…)” and ultimately have little idea of the unspoken rules—strictly speaking, therefore, also techniques—on which it is based. Moreover, the quotation from Weizsäcker should not mislead us into thinking that a cultural-theoretical investigation is being undertaken here.

No, the intention is more modest. The book wants to make clear the extent to which the technology digitalisation poses new challenges to the principles of the free-market economy, a market economy that is supposed to serve people and society as a technique, i.e. instrumentally. Digitalisation is also a technique, and even a deliberately created, constructed one, this distinguishes it from “mere” culture.⁴ It should therefore at least be possible to show where the effect of this technology comes in, what it sets in motion, and what it means for the economic order and an appropriate economic policy. If the economy serves the public interest, i.e. its character is instrumental, and if it is accordingly the task of the respective policy to ensure that the economy is a prosperous affair for our society as a whole, then it must be clear where opportunities lie and where dangers lurk. This book would like to contribute to the better understanding of these issues.

A technique, i.e. a means to an end, will only be handled appropriately if one understands the laws according to which it functions and which one cannot change. While von Weizsäcker, from whom we have borrowed this thought here, was thinking of laws of nature, here, by focusing on the realm of the social, we must focus on the conditions under which, by people acting freely, an economy can unfold freely, which then in turn meets our normative expectations. This is quite a high level of abstraction. Böhm-Bawerk (1914) may have summed up the problem of the acceptance of preconditions and the feasibility of normatively motivated desires in the most succinct and prominent way: “Power or economic law?”.

4 Heuristical Access

The following section explains the extent to which the central principles of the market economy, as formulated by Walter Eucken, can be used as a heuristic access structure in order to better understand the challenges which digitalisation poses for economic policy.

The present considerations enter an explosive area. Namely, the question arises as to what an economic perspective can achieve with regard to a new phenomenon such as digitalisation. In view of the scope and complexity of current developments and the challenges they pose for economic policy, the quotation that precedes this introduction seems to express a highly topical and appropriately modest desideratum: “Especially so far as economic policy is concerned, principles are practically all that we have to contribute” (Hayek 1963, 227).

It is the merit of the economist Walter Eucken, in whose work the position of the Freiburg School crystallises to a certain extent,⁵ to have summarised the prerequisites for the emergence of a modern, industrialised economy in the form of a few principles in his work “Principles of Economic Policy”.⁶ He compiled a group of seven basic prerequisites, which he summarised under the term constitutive principles⁷:

• (1) A functioning price system

• (2) Primacy of monetary policy

• (3) Open markets

• (4) Private property

• (5) Freedom of contract

• (6) Liability

• (7) Continuity of economic policy.

Since, on this basis, a market economy would be able to develop, but would probably not be able to secure itself in the long run, Eucken supplemented these principles with four so-called regulative principles,⁸ which represent categories of potential state intervention that have the purpose of securing the very constitutive principles:

• (1) Competition policy

• (2) Income policy

• (3) Correction of externalities

• (4) Correction of anomalous labour supply.

It can be argued that the basic arguments of the “Freiburg School” are laid down in concentrated form in these principles.

On the one hand, this book is based on the conviction that these principles are still valid today. And on the other hand, precisely the perspective of these principles is an excellent heuristic to illustrate where the effects of digitalisation challenge the market economy, and that this is a qualitatively new process.

There is no doubt that the literature on the topic of digitalisation in economics alone is literally almost endless. What is lacking, however, are presentations that attempt to describe in an overarching way the extent to which the change actually represents an enormous challenge for the instrumental character of our economy as a whole. The principles mentioned, as a heuristical access structure at a sufficiently general but differentiated level, are suitable for that. One might argue that it is more topical than ever. Thus, the level of observation of this book is relatively abstract. But it is by no means remote or lacking pragmatism. Hence the approach of the Freiburg School is a pragmatic approach and offers an instructive way to assess the scope of the digital transformation and provide guidance for sensible, responsible economic policy. The analytical approach of the “constitutive” and “regulative” principles of the market economy is comprehensive and clear and offers the necessary flexibility to adequately categorise specific situations.

This book does not aim at a strictly “Freiburg School” or “Euckenian” interpretation of current events. The principles will be used as a starting point and serve as an access structure to make clear, where the effects of digitalisation come in and where they change the actual functioning of the economy and its relation to individuals, firms and society. To this end, they will also be partially summarised, specifically in relation to the focused problem of digitalisation. In the application of this access structure or heuristic, more modern economic approaches will also be used, such as transaction cost theory, the property rights approach or the perspective of institutional economics among others.

5 Chapter Structure

This chapter briefly introduces the structure of the book.

The first part briefly introduces the theoretical basis and explains in a first step what is meant here by digital transformation. In a second step, the background and the most important arguments, such as those of the proponents of the Freiburg School, are presented. Then Eucken’s principles are discussed in detail, and the way in which they are to be used as an organising structure for the present study is explained. The second part then goes into detail on the problem areas resulting from the structure of the principles with regard to digitalisation.

The chapters are written in such a way that, on the one hand, they should enable independent reading, and on the other hand, they should also be accessible to a readership that has not yet dealt with this tradition of economic thinking and/or is not familiar with the discussion in the relevant areas. Each chapter therefore endeavours to disclose basic thoughts and facts at the beginning—which is sometimes also necessary because facts that have long been considered basic, and are covered in every textbook, have now come under new conditions. This approach to presentation inevitably leads to overlaps in individual areas, but this is also due to the high complexity of the phenomenon of digitalisation, which is to be examined from different perspectives. A summary and an outlook conclude these reflections.

This book is a theoretical enterprise positing that it is necessary to develop an appropriate view to adequately understand the current practical challenges of those economic policy actors who are committed to sustainable policies for the populations of liberal and democratically constituted societies. This is precisely why the book strives for a holistic perspective and does not focus on singular economic phenomena such as the problem of marginal costs in the age of digital goods or the extent to which evidence-based policy is or is not more important today. In this respect, this book takes a position that has gone out of fashion in the field of economics. With its subject matter—namely the change in the conditions of economic activity through technological development and the effects of this on society—it is dedicated to a highly abstract question. However, it cannot be denied that such questions are timely and must be asked today. This book is therefore aimed at a wide audience, at all those who are interested in the extent to which the way in which the modern, industrialised economy changes under digital conditions.

On the one hand, I have therefore endeavoured to use a tone that is as generally comprehensible as possible and at times also intentionally provocative, which certainly differs in some cases from the standard style of academic literature, without thereby compromising the actual argumentation. On the other hand, in view of the multitude of topics addressed and the interdependence that exists in some cases, it was necessary to deal with the references to the corresponding academic discussion with a sometimes extensive footnote apparatus to help the flow of reading in the main text.