I am not an economist, but sometimes I play one on this blog. Why? Turns out understanding economics is important. Feel free to correct or argue the points I make.

Socioeconomic (Kondratieff (Kondratiev), Schumpeter, Kuznets) theory seems to be driving the current deflationary cycle more so than fiscal economic (Keynesian / Monetarist) or political economic (Libertarian/Austrian) theories offer the opportunity to reverse it. Socioeconomic theory basically says in order to get out of a deflationary cycle, it is an sociological problem as much as a fiscal one. The solution is the appearance of revolutionary technology promising large profits for investment in order to start the next boom cycle, and snapping the society out of the blue funk created by an economic downturn.

OK, so you expect me to say to get on the bandwagon and say, social media that will be the key to the next economic boom right? I don’t think so but I do think social media could help mitigate the damage caused the deflationary and cycle and may be instrumental in constructing the next opportunity for technological innovation.

But first I want to start a discussion to try to understand what the objective economic potential is of the social media revolution.

Social media uses technology to enhance the ability of people to interact with others.  Technology powered interaction, connection, trust and relationship building. In the business world this means establishing trust and communication channels that support and enable collaboration, and build engaged teams by removing barriers and frustration created by traditional structures.

Social media especially in the form of collaboration has the promise of unlocking hidden knowledge in organizations when needed, lowering the cost of software through open source collaborations, finding relevant information more quickly, and making organizations more agile and responsive. But these are mostly cultural changes which usually occur slowly.

So the promise for change is there, even though will take longer right?  Yes, but the technology needed to invest in to bring these changes about is relatively cheap.

Social media will bring change, though.  It has the promise of creating more efficient companies through collaboration, a greater variety of information services at low cost through mashups and open source, and a lower cost to product and service messaging, when the product or service has great appeal.

But, at the same time social media is having a destructive effect on major existing industries. Traditional advertising media is becoming less and less effective as the more audience becomes more networked and attentive to one another. Friend of a friend referrals, rating sites or consumer oriented websites will become the norm and rely on their objectivity to maintain trust with their followers, therefore are not as subject to trying to manipulate their audience based on the promise of big advertising revenue. Make no mistake, manipulation is clearly part of the social media landscape, but the ability for anyone to broadcast and be heard by large audience networks means it is more difficult and will in the end be the exception rather than the norm.

Retail product distribution may also take a hit because of social media, since e-commerce services are being enhanced with a layer of crowdsourced social intelligence ‘people who bought X also bought Y’. Also large companies can offer lower prices but still, through social media, have a personal touch, previously the advantage of the small business. Essentially this is pushing toward the commodization of all mass produced products and the markets of the future which have opportunity for larger profits will be niche markets requiring subject matter expertise and customization.  Essentially all growth markets in the future will be niche markets.

So in the short term, social media’s gains in economic investment may be offset by the disruptive role it has in traditional industries.  In the past technology changes lead to obvious and simple routes to large scale increases in productivity and demand. A path for social media methods to lead to an increase in productivity and demand in a short amount of time is less obvious since it requires a cultural change as much as a technological one.   In the longer term, as the culture adopts it to the full potential of social media, there may be large scale increases in productivity but in the near term social media is not providing a clear path for investment to lead to gains efficiency and productivity and even that ROI for social media applied throughout the economy is still anecdotal rather than proven.

Another question to ask is whether social media can help mitigate the damage done during this deflationary cycle.

Tightly knit communities survive economic stress better and social media allows more of the world to get and feel connected.  Also it actually gives people something to do if there is a lack of economic activity.

The motivation for this seems to be a sort of reputation economics which motivates people to do things like create open source software, do reporting on events, and a lot of other information services which before the internet, people would absolutely be expected to be paid to do. This is allowing rich content, development of useful products etc to be done without investment but with returns, such as any business which hosts their websites on linux servers or uses open office to create and manage documents.

In addition, these longer term efficiencies such as the ability to create complex systems such as an operating system (think Linux) at a very low cost and rather quickly, could help bring out a new technological innovation which present a clear path to increase productivity and demand. If we could determine what that innovation is and how to bring it about more quickly, then we might be able to shorten the deflationary cycle which the socio-economic theories predict.

Watch for future posts on why that technological innovation we need, may be the knowledge web promised by the Linked Data concept.

Ken Fischer

Ken is the CIO at ClickforHelp.com Inc and Director of Gov20Labs.org. He focuses on connecting web efforts to organizational outcomes through measurement, metrics, findability and usability.

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