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  • Writer's pictureSteffan Willis

Econ Insights: Falling communication costs enabled new forms of organisation to emerge

In this series, we look at interesting data sets to uncover hidden insights.

A recurring theme of capitalism is the development of dominant forms of organisation and production technology, think of the industrial conglomerates utilising long production lines in the mid-20th century.

The 21st century version of this is the global transnational corporation which separates its production process into individual tasks, from design and marketing to the production and assembly of different components, each of which takes place in the 'optimal' location. The power of this 'invention' is that it allows unit production costs (capital and labour) to be minimised at each stage of the production process. Tasks requiring low skilled labour are located in countries with low wages and working standards to reduce labour costs. Tasks requiring high-levels of technical skills are located in higher cost locations. The higher wage bill offset by higher productivity.

How did this system of production arise? Globalisation is often associated with the implementation of neo-liberal policies in the 1980's which globalised capital flows and reduced state intervention in the economy.

Whilst, this was certainly important, the role of transportation and, in particular, communication costs is often overlooked within the economic development literature.

Shipping rates had been falling gradually since the 1950's as a result of containerisation which enabled the mass transit of goods by sea. However, it was the broadly simultaneous fall in the cost of computing power and air travel which enabled management of globally dispersed firms and supply chains.

Virtual communication costs are now instantaneous, high-quality and effectively free. This potentially enables new forms of organisation but is equally likely to strength the dominant position of transnational firms. In contrast, the future trajectory for transportation costs is much more uncertain. Air travel and shipping account for 4.5% of global carbon emissions and this share is likely to rise as there are few alternative technologies in the pipeline. A global tax on carbon could see transportation costs increase significantly as a share of unit production costs.

Transport and Communication Costs Indexes, 1920-2015

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