Professor Dr Arayah Preechameta, a lecturer at the Faculty of Economics, Thammasat University
Professor Dr Arayah Preechameta, a lecturer at the Faculty of Economics, Thammasat University

Efficiency and fairness in era of disruptive technology

Economy May 26, 2018 01:00


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TECHNOLOGICAL change and modern innovation can lead to tremendous and fast-paced impact on the economy. In the past, these changes are driven by a parade of technologies that have developed exponentially within a short period of time; be it digital communication technology, machine learning, artificial intelligence, autonomous vehicles, advanced genomics, fintech or digital assets etc.

The state’s crucial role in developing the economy to effectively and fairly adapt to disruptive technology in the 4.0 Era is not only about skill development, technology capabilities, or investments in infrastructure. Institutional factors also serve as a key to unlock opportunities for small businesses to pioneer new frontiers despite the higher risks and to bear the rising costs if they remain competitive in the market system. 

What, then, are these ‘institutional factors’?

To obtain tangible and practical answers, let's first discuss the issue of “Institutional factors related to economic efficiency” with an example from European history, particularly the transitional period from the Middle Ages to the Renaissance. During this period, cultural and beliefs changes paved way for people to accept the idea of "interest rates on loans" which was previously considered illegitimate in the medieval times. This change in institutional factor helped relinquish the medieval beliefs on the limitation of capital ownership (and new financial innovations that were invented by Jewish people at the time), leading to an increase in “private property rights in financial instruments”. 

As a result, the average cost of debt in the market in the form of interest, paid by European retailers in the 17th century, was significantly reduced to just one tenth of the cost of borrowing in the 15th century. 

This is due to the fact that the capital market has become more efficient because of the change in the aforementioned institutional factors, which eventually led to unprecedented expansion of the economy.

However, economic efficiency alone cannot bring about sustainable economic growth in the long run. When the economy continued to grow to a certain level, capitalists, politicians, and leaders in Europe began cooperate to construct laws and regulations that gives commercial and economic privileges to their groups by claiming improvement in economic efficiency, which is grounded in the principles of individualistic capital ownership rights, as an excuse. Consequently, concentration of capital and wealth within small but powerful groups in the society ensued. At the same time, social exploits in various forms were ubiquitous. Eventually, this led to economic turmoil caused by uprisings of workers and the poor in the societies who were discontented with their living conditions and the current economic and social disparities. They called for a change in institutional factors that will contribute to a more fair and just society.

What are the institutional factors relating to economic fairness in the society? 

A clear example in the case of a change in institutional factors that may lead to greater economic fairness and directly affect the principles of “the individual ownership of capital” besides a system of tax that fosters fairness and reduces inequality, are the principle of community title deed and community forest, which are currently gaining steam. As for recent innovations, one might look at examples of social business models or the Grameen Bank microfinance system in Bangladesh. But overall, the main limitation of the concepts and principles of these initiatives is that the effects are still limited. 

That is, most of the aforementioned initiatives will yield desirable outcomes when the project size is still small or the numbers of projects are limited. 

In conclusion, the policy implications of all the analysis above culminates in a demand or expectation for governments and delegations of the world’s altruistic nations to keep in mind that the power of the state to issue laws and social rules is solely intended to provide long-term welfare and economic benefits that are fair for the society at large.

Contributed by Professor Dr ARAYAH PREECHAMETA from Faculty of Economics, Thammasat University, and SARULCHANA VIRIYATAVEEKUL from Center for Research on Inequality and Social Policy.

For more details, please follow The Centre for Research on Inequality and Social Policy, Faculty of Economics, Thammasat University.