The Rise of the Information Economy

The transition to the services phase was driven by growth, efficiency, and technological advancements, enabling societies to shift focus from agriculture and manufacturing to more information-centric activities. Over the past 50 years, the services sector underwent significant digital transformation, capturing vast amounts of information and creating fertile ground for knowledge work to flourish.

In my last article I defined knowledge work and wrote about how it changed economic sectors.

Often I hear marketers or customers talk about "digital transformation" or "the information economy", without being specific about how they mean. In this article I want to take a side-quest to explore how this narrative fits in with overall rise of knowledge work in the economy.

Information as Raw Material and Manufactured Good

In the early 1900s, service businesses used data primarily through manual record-keeping and basic analytical methods. They maintained physical ledgers, logbooks, and appointment books to track transactions, customer interactions, and employee activities. Businesses relied on basic accounting for financial management, customer surveys for feedback, and census data to identify market opportunities. Retailers and service providers manually tracked inventory, while banks and insurance companies used credit and claims records to assess risk and manage services. Marketing efforts involved direct mail campaigns and monitoring newspaper advertisement responses, with all processes being labor-intensive and prone to human error.

While data collection was limited to face-to-face interactions, physical documents, and public records, it played a vital role in decision-making and service optimization. Statistical tools like averages and ratios were used to analyze trends, and time-and-motion studies helped improve labor efficiency. Specific industries such as transportation, healthcare, and hospitality utilized data to refine operations and enhance customer experiences. Although constrained by the lack of technology and standardization, these early practices laid the foundation for the more sophisticated data-driven approaches seen in modern times.

Data collection in the early 1900s was limited by manual processes that were slow, labor-intensive, and prone to human error. Businesses relied on a narrow range of data sources, such as customer interactions and physical records, and faced challenges due to the lack of standardized record-keeping, making it difficult to aggregate or compare information across organizations.

The Disruption of Technical Change

The services industry shifted heavily into knowledge work due to technological advancements that digitized information, enabling faster and more efficient operations. The advent of the internet facilitated distributed systems and globalization, while the influx of online data allowed businesses to leverage insights for decision-making. Computers accelerated productivity and efficiency by enabling faster data processing, improving team coordination, and streamlining operations. Information processing was co-evolving with the introduction of new technology, increasing productivity.

In his 1957 paper "Technical Change and the Aggregate Production Function," Robert Solow defined "technical change" as a shorthand for any shift in the production function, encompassing various factors like slowdowns, speed-ups, and improvements in the workforce.

Computers and data processing quickly drove productivity gains ("technical change") in all sectors of the economy, quickly dispelling the notion that software was a fad.

Over the past 50 years, the services sector has undergone significant digital transformation, and today the services sector accounts for around 84% of all workers in the United States. Knowledge work stands out within the services sector because it focuses on transforming data, information, and knowledge into valuable outputs.

In the current phase of the economy, knowledge work mirrors earlier economic transformations by focusing on the conversion of inputs into valuable outputs. Just as labor once transformed raw materials into physical goods, knowledge workers now transform data and information into data-driven products and insights. The transformation of information in knowledge work sectors mirrors the agricultural and manufacturing processes of earlier eras.

The Dawn of Information Manufacturing

The services economic era is different from previous eras because the output itself is information, not tangible goods like crops or manufactured products. Better methods of information transformation creates progressively more effective levels of productivity gains.

Technology changed the services sector and knowledge work through the digitization of tabular data and the application of computers to basic information processing tasks. Once data was being processed into information with computers, this allowed better software methods to accelerate information processing.

The companies that adapted their information processing methods with computers and technology benefited and gained a competitive advantage in their market cohort. The companies that did not adapt fell off the lead lap competitively and we're less fit to compete for growth. Once the competitive herd was thinned, the new software methods became "table stakes" and became the minimum viable technology investment to compete in a market.

The Red Queen demands that we constantly look for ways to be more productive, where technology is the divining rod, and knowledge work is the evergreen field of opportunity. And that is how we arived in an age where knowledge work and software dominate the competitive landscape in every ecnonomic sector.

We'd arrived in an age where applying technology to information processing was not only required by also a key differentiator in the competitive landscape.