Objective: Explain how the advances in computation and communication are being used to automate the flow of paperwork in the political economy. Progress requires constant reorganization of people and technology. The index for this section is:
The second aspect of the production of goods and services is the handling of informational objects (paperwork). The automation of paperwork is facilitated by the transfer of activities from paper to electronics. For example, the shift of many aspects of market activities to the social nervous system will permit the automation of market transactions paperwork. Transferring paperwork from paper to electronics requires much more than simply transferring the activity to electronics. To be an innovation, that is achieve better performance, with the new combination of hardware, software and humans the activity generally must be completely reorganized (reengineered) to achieve the potential efficiency. Moreover, the new technological combination offers possibilities for new services previously not economical. In automating paperwork, the advance of artificial intelligence defines the limit for substituting software for humans. Also, the growth of new information services provide new employment opportunities.
The initial application of microelectronics to paperwork led to an increase, not a decrease in the amount of paper because the initial applications were to standalone equipment such as wordprocessors and laser printers. This technology increased the quality and reduced the cost of producing reports on paper and provided no mechanism for electronic communication. The reduction in paperwork requires the creation of communication networks and standards to automatically communicate messages. The development of such communications networks is taking place sequentially in three stages of increasing difficulty:
1. First, equipment in an office has been connected into LANs.
2. Second, equipment in the various offices on a public or private institution is currently being connected into WANs.
3. Third, communication protocols are being established so that institutions can increasingly communicate electronically.
Creating a LAN within a single office was the easiest step because the office could buy compatible equipment and network software. Also, it was relatively easy to install a broadband (high capacity) communications line within an office.
Today, local area networks, LANs, are widespread. To understand the their gain in efficiency, let us review the technological advances in an office. The technological revolution of the 19th century was the typewriter. The creation, filing, and transmission of documents and letters on paper were labor intensive operations. The introduction of wordprocessors into the office increased the productivity of secretaries by a factor of four. However, as long as wordprocessors remained standalone devices, paper remained the primary media of communication. Technological advances such as laser printers primarily function to produce better paper copies. The volume of paperwork increased not decreased.
The move towards reducing paper depended on linking all office equipment into a LAN so that filing and communicating documents can be performed automatically by software. For example, this reduces the flow of paperwork throughout the office because messages and documents can be sent E-mail. Today some institutions such as USAA are moving to have all paperwork transferred to electronic memory when it enters the office. At USAA, worker at their workstations in their client-server networks can retrieve the complete file for any customer. The rapid growth of LANs is now just beginning to decrease the flow of paper, this assertion is reflected in the fact that the number of administrative support workers peaked several years ago at 19M workers.
Now let us consider an example of how technological innovations on paperwork processing reorganized the role of workers. Paperwork administration in offices prior to the computer was generally organized in paperwork assembly lines. Each person was responsible for a single box on a form. This approach was very inflexible and errors were hard to detect and, thus, correct. With the introduction of mainframes, the paperwork assembly line was entered into the mainframe as a batch job. A major technical advance was linking hundreds of terminals to the mainframe coupled with much better software. A single person using this software, which had prompts to aid the worker, could handle the entire flow of information for an administrative action. In services such as insurance, this enables customer representatives to handle all the needs of a customer using a software program. The customer representative was much more productive because (1) errors were reduced, (2) the customer related to one individual customer representative, and (3) the firm could offer all kinds of new services supported by software.
Moreover, technological innovations can reduce the firm's costs by transferring labor to the customer. For example, when phones were invented, a human operator made the connections. With the automatic exchange, however, the customer assumed this labor in dialing because it was faster and cheaper. Also, with bank ATMs the customer performs the labor formerly performed by the human teller. Finally, the customer can find and book the best flight using the airline reservation systems accessed through information utilities available through modems of personal computers. By making software more intelligent, the customer can assume much labor formerly supplied by sales representatives. In some markets, like real estate, the agents will resist the move because it will eliminate their monopoly profits. By assuming the labor costs, the customer can obtain a cheaper product. The time spent interacting with the program is no greater than the time spent interacting with the sales representative.
The technological frontier has shifted to creating WANs to link all offices in a firm or public institution. While an institution can purchase a compatible equipment and software to create a WAN, the technical problems are more difficult than creating a LAN. Among widely separated offices, the institution must either set up a satellite communication system or rent lines from a long distance carrier. Given the expense, a great deal of effort in creating WANs is in protocols and compression techniques to obtain the maximum communication flow through the channels among offices.
Corporations are purchasing WANs to communicate text, data and frequently images. Such networks change business decision making. Consider the supermarket. By installing optical scanners, supermarkets are creating an integrated information system linking market transactions with their internal operations. One factor leading to the installation of scanners is that scanners are more efficient in checkout. Scanners also provide opportunities for new innovations in business practice. For example, by reading the Universal Product Code, the computer is able to keep track of inventory and reorder. Controlling the inventory of retail stores via the sales terminal by computer means lower levels of inventory are required. This reduces costs and raises profits. In addition, the computer can compute the profitability of every square inch of shelf space. This new approach enables the seller to perform scientific analysis of his advertising budget. In pharmacies, the computer can cross-check drugs for potentially dangerous interactive effects. Corporatewide data networks make for much more detailed decision-making and faster response to changing conditions.
The creation of WANs for corporations is causing major hierarchical reductions in firms. In corporations, the management hierarchy acts as a filter of information proceeding up the chain of command. With all records in electronic memory and English type languages to manipulate this data, executive assistants of the top management can prepare the reports which formerly flowed through the chain of command. This enables the corporation to``automate'' the chain of command and create effective organizations with many fewer levels of management. Toyota has four levels of management compared to GM's fourteen. Part of the drive for efficiency in the US aims to reduce bloated management by reducing the levels of management together with their associated staff.
The final stage of communicating electronically among institutions requires all institutions to agree on a common standard. The standard which recently was agreed upon is the E-mail standard, x.400. Recently, all US vendors of electronic mail agreed to either switch to the international standard for organizing electronic mail or create an interface so that their clients can effortlessly communicate to anyone. This means that once the national electronic mail directory has been created in the early 1990's, electronic mail will experience explosive growth because regardless of which vendor a customer is using he can communicate with any person listed in the national directory. The gradual emergence of this national electronic mail system will begin displacing the Post Office because electronic mail is currently much cheaper than paper mail and will continue to decrease in relative price. In the next several decades the amount of paperwork on `paper' will drop rapidly.
The trend to eliminate paper is already well under way. Many businesses and even the government have begun utilizing EDI (electronic data interchange). EDI refers to the electronic exchange of business documents in a standard form between firms. EDI is already especially effective in reducing the cost associated with purchasing. Many firms are using EDI to connect directly with their suppliers' computer systems. A direct electronic connection is far more efficient than traditional paper-based purchasing procedures. It cuts costs in several ways. First, EDI reduces human data-entry time substantially and eliminates time-consuming paper transfer. Secondly, it helps firms avoid a significant number of administrative errors and it cuts down on delivery delays. Lastly, it enables a manufacturing firm to keep its inventory at minimal levels. With computer links to suppliers, the just-in-time inventory control system becomes a reasonable possibility (e.g. Harley Davidson). The business applications of EDI are certainly not limited to purchasing. Billing, price quoting, shipping and receiving can all be facilitated by the use of EDI.
But how does EDI work? It is essentially two or more computers with specialized software linked by modem. EDI requires a direct link between firms. The most cost-effective alternative is usually contracting the use of a VAN(value-added network). VAN providers use the existing phone infrastructure but offer the advantage of EDI software knowledge and expertise as well as other types of technical support. Currently, EDI operates on the EDIFACT standard. This international standard specifies nothing about the means of message transmission. Instead, it establishes a syntax for the message, arranging its parts in standarized ways. Unfortunately, EDIFACT is incompatible with X.400, the email standard which deals with the means of transmission. The proposed eventual solution to this problem is X.435, which would be compatible with both email and EDI.
The E-mail standard X.400, which is now accepted worldwide, provides the carrier for EDI, computer-to-computer exchange of business(or government) documents between organizations in a standard electronic format For example, the automakers are using EDI to save up to $2Ba year by having the computer of the automaker order parts directly from the computer of the supplier. This eliminates all the paperwork. For this move to take place the automobile firms and the suppliers must establish the format for the messages. A similar move is taking place between department stores and their suppliers. Similar progress is taking place in documents for foreign trade. Medical costs in the US could be reduced by as much as $30Bby using EDI to transmit all the medical paperwork among doctors, hospitals, insurance companies, government and individuals. Again this would require the creation of an accepted standard for the communication.
Government usually imitates successful innovations in the private sector. As machines talking to machines, EDI, become commonplace in the private sector, such machine communication will also become commonplace within the government and between the government and political economic agents. The burden of government paperwork will ease as software firms create programs which automatically create government mandated reports and automatically send them to the appropriate government agency via electronic mail. One current example is tax returns to the IRS.
Some interesting sites to surf for the switch away from paper are:
The paperwork associated with market transactions is rapidly being automated. To discuss the move of markets to the social nervous system, we need to partition market transactions into four components: making comparisons, the sale, the payment, and the delivery.
The financial asset markets (stocks, bonds, commodities, futures, etc) have proceeded the furthest towards total immersion in the social nervous system. A financial market that has moved totally to an electronic network is the over-the-counter market, NASDAQ. The market is a totally computerized communications network with nodes (market makers) for each stock. Once the information comes up on the screen, the deal can be consummated. Before automating the over-the-counter market was very small. Now it rivals the NYSE. The success of NASDAQ forced the other exchanges to automate.
With improved communications and networks, financial players such as pension funds and mutual funds can trade stock between themselves and avoid the traditional market altogether. Reuters, a British financial firm, has established two worldwide automatic trading systems, Instinet and the Crossing Network in which traders can consummate transactions without brokers. Another automatic trading system is POSIT and a new one is GLOBEX for commodities.
In addition, financial institutions have created whole new classes of financial assets. One made famous by Miliken is junk bonds. Another are known as derivatives. These include options, futures and composite securities which bundle securities to reduce market risk. These composite securities did not perform well in 94.
Another aspect of the impact of computers on asset markets is the new computer programs to play the market. These programs are based on a variety of quasi-intelligent software and optimization techniques. These programs contributed to the magnitude of the crash in 1987. Before these programs were introduced into the asset marketplace the stock market might take several months to correct for excessive evaluation. Now such corrections are frequently made in a single session.
For the individual investor the new computer-communications technology have made possible access to asset markets through personal computers 24 hours a day. There has been a proliferation of information services accessible through personal computers such as the Dow Jones information service, which enable the customer make comparisons between financial alternatives. Consumers can also obtain financial information and brokerage services through AOL, CompuServe, Prodigy, on the Internet. You can trade any time of the day of night. Also, one aspect of the growth of Internet has been in increase in asset information sources and brokerage firms.
Other markets are following the trends set by the financial markets. In the residential real estate market, listings have been computerized. The broker, not the customer, however, makes the comparisons. In consumer shopping, catalog sales are growing faster than sales in malls. In many marriages, both husband and wife work which leaves less time for shopping in stores. Currently, the shift of consumer and industry markets into the living room is in its infancy. There are three types of electronic home and office shopping:
The payments mechanism is gradually becoming completely immersed in the social nervous system. Much technological advancement is directed at reducing the cost of current payment mechanisms such as checks and currency. Magnetic numbers on checks facilitate machine operations. A check can be cleared automatically once the amount has been entered in the computer, if the checks are not returned to the customer. Automatic tellers for transactions and dispensing currency are becoming commonplace. One factor which is inhibiting a more rapid switch to automatic tellers is the cost structure. Banks are charging as much as 1.00 per transaction at automatic tellers and are making no charges for the service of human tellers. This is an example where tradition is a stronger incentive than economics. The underlying costs are about 10 cents for the electronic approach and 1.45 for the human approach.
Technology has created new services such as Visa and Master Charge. Technology has also created funds transfer systems: CHIPS and Fedfunds. The incentives to use the technology lies in the ability to debit a persons account at the time of purchase. Visa and Master card have a great incentive to do this to reduce float. Stores would eliminate bad checks if payment was instantaneous. To compensate for the loss of float, wages could be paid automatically on a daily or even hourly bases. The switch to an immediate electronic payment system is primarily a matter of standards and a question of the costs and benefits of the investment. The system would have to interface with a wide variety of hardware and software used by banks. An interface standard is required. While the electronic system would be much more efficient, it is a public good. Thus, all will benefit, but individual incentives for its creation are lacking. The move to immediate payment will probably proceed through the expansion of the bank ATM system to include point of sale terminals and by the creation of competing debit credit cards by Visa and Master Charge. For example, here in Austin, customers could for a time purchase gasoline from Diamond Shamrock with their ATM cards. The progress will be gradual and overnight payment will occur long before instantaneous payment occurs.Note that for an automatic clearing mechanism to be desirable for both customers and stores, it would have to be able to reliable process the busiest Christmas shopping day with no more than a ten second delay.
Another trend will be the creation of electronic cash cards which individuals will obtain from their banks. Unlike Visa and Master cards, these bank cash cards provide the customer with anonymity. Anonymous cash cards are opposed by police organizations because they would make it easier for drug pushers to launder money. Entrepreneurs are creating several new payment mechanisms on the Internet, which hackers would find very difficult to intercept.
Some interesting sites to surf for electronic market transactions are:
Information services of all kinds are an important growth sector of the economy. For example, lawyers have an information service called Lexis which is used to locate all cases involving a precedent. In this subsection let us consider just three: (1) information utilities, (2) credit rating services, and (3) airline reservation systems. Another giant system which we will not discuss are medical records used by life insurance companies to evaluate potential customers.
Private information utilities such as America on Line, Prodigy and CompuServe are commercial services available through your personal computer modem in your home. There are also public domain information services such as Internet. These information utilities offer a wide variety of information services. For example, a partial list of the services offered by CompuServe is: (1) New, Sports, and Weather; (2) Electronic Mail; (3) Reference library; (4) Shopping; (5) Financial Information; (6) Travel &Leisure ; (7) Entertainment and Games; (7) Membership Support Services. These services in such specifics as a brokerages service, an airline/hotel reservation system, shareware software, and member forums using interactive text communication. As a growth industry information utilities must overcome certain problems to reach market saturation such as current TVs. First the systems must be made much more ``used friendly'' to attract a wide audience. In this regard perhaps America Online has gone the farthest with an icon interface (Mac or Windows) so users can point and click. Second, these utilities must keep experimenting to provide a mix of services that households want at a competitive price. Finally, man is a visual animal. As the capacity of the communication system expands the use of dynamic images will greatly increase to provide a visual environment which humans like.
The second example is the growth of computerized credit ratings. Currently credit information on almost every household in the US is stored in these systems. Merchants for a fee can rapidly determine the credit rating of a customer. The positive aspect of this development is that it makes our credit oriented consumer markets possible. Without these files it would be a very difficult, time consuming process to obtain credit for an automobile or a house. A basic problem is the accuracy of the files. The industry lobbied and obtained a national law, the Fair Credit Reporting Act of 1984, which supersedes common law absolving them from law suits over the accuracy of the data. Over time consumers have obtained the right to examine their files. However, the onus is on the consumer to correct the information in the files. In an extreme case he might have to go to court to have his file corrected. If these firms had of remained under common law, they would have been expected to exercise due care in collecting the data. You could sue them for damages. Under common law, collecting the data would be more expensive; however, there would be many fewer errors in individual records.
Airline reservation systems are another innovation based on computers. Without airline reservation system it simply would not be possible to process the volume of airline traffic. In this respect alone airline reservation systems are an innovation. But these systems are also very interesting because of the inherent conflicts of interest. Travel agencies use the airline reservation systems to book flights for customers. The airline developing the system will place its flights first. During the collapse of Braniff, it was alleged that the American airline reservation system showed Braniff flights as always being full. This is possible true because the programmers were forced to take a cut in pay and could not fly Braniff flights because of Braniff's tactics.
Airline firms with reservation systems have a competitive edge over airline firms without such reservation systems because the former can easily calculate the profitability of every flight listed in the system. They know how many passengers were on board and can make an excellent estimate of the rivals costs.
For a truly competitive market, each airline needs equal treatment. Can this be obtained when the airline providing the information service has a conflict of interest? The fact that American sells this service in lessor airlines including the new Braniff indicates that the conflict of interest issues are being at least partially resolved by contract negotiation.
A characteristic of the new information systems is that they are capital intensive in hardware and software. As customers become computer literate, they will be able to make their own reservations using the reservation systems in AOL, Internet, CompuServe, and Prodigy.
Some interesting sites to surf for electronic market transactions are: