Digital economy accelerates the shift toward a buyer’s market where consumers’ intellectual and emotional needs are highlighted. Photo: TUCHONG

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Amid the rise of the digital economy, traditional methods of production, lifestyle, and governance are undergoing a fundamental transformation. Economic development is advancing through a spiral progression of “technology - production - demand.” The economic structure is shifting from a seller-dominated model to a buyer economy that focuses on satisfying consumer demands. The driving forces of the economy now include the data factor, alongside traditional factors such as capital, labor, and technology, ushering in a new era for human life.

‘Technology - production – demand’

The traditional economy was primarily concerned with fulfilling basic human needs such as food, clothing, shelter, and transportation. During this period, production largely depended on technologies based on physics and chemistry for manufacturing material goods. Since the 21st century, technological progress has boosted labor productivity, enabling the fulfillment of basic human needs and shifting social life from a stage of “material scarcity and meeting minimal survival needs” to one of “abundant living and fulfilling diverse demands.” 

The relationship between production and consumption has evolved from “producing what is consumed” to “consuming what is produced,” with information playing an increasingly significant role in both processes. Internet-based information technology has empowered and enhanced the role of information in the economy, propelling humanity into the digital economy era. As the economy transitions from traditional to digital, it continues to follow the upward spiral of “technology - production - demand.” 

In the digital economy era, consumer preferences and demands will replace traditional production capacity and commodity supply as the primary drivers for formulating product plans. As these economic activities grow in significance within the overall economy, the satisfaction of consumer demands becomes increasingly important to businesses. Additionally, consumers, in the enjoyment of having their needs met, may explore new desires, thereby fostering a positive feedback loop of “demand - satisfaction - higher demand.” The core of the digital economy lies in meeting these emerging demands, with the creation and production of intellectual products marking the advantage of the digital economy over traditional agricultural and industrial economies. At its core, the digital economy represents a new economic form, where the buyer economy and digital technology evolve in tandem, gradually shifting the economic structure to meet higher-end human needs, in response to both the upgrading of consumption and technological advances. 

Buyer’s economy 

In the era of the agricultural economy, family-based and small-scale farming dominated, with agriculture accounting for a significant share of the gross domestic production (GDP). For example, when the People’s Republic of China was founded, the added value of agricultural accounted for 51% of GDP, and the agricultural labor force made up 83.5% of the workforce. During this period, underdeveloped techniques led to low production efficiency, limited supplies of food and basic necessities, and living standards were heavily influenced by the natural environment, which made it difficult to effectively manage famines and disasters. As a result, living conditions were generally poor, and people primarily relied on self-sufficiency to meet their basic needs. 

As urbanization and industrialization accelerated, the economic structure shifted towards an industrial economy, with a decreasing share of agriculture and a rising share of industry. After China’s reform and opening-up, the proportion of industrial added value in China’s GDP steadily increased from 47.7% in 1978, maintaining a high level for a period of time. In the United States, the proportion of the industrial sector in GDP peaked in 1973 at approximately 30.57%. During this stage, manufacturing and heavy industries became the primary drivers of economic growth, boosting employment and improving productivity. This allowed residents’ living needs to be more fully met, with improvements in the range and quality of products. However, the market exhibited characteristics of a seller’s economy, often facing product shortages and marked by a high degree of homogeneity, limiting consumer choice. Innovation and development of brand value were slow, which hindered the ability to meet diverse demands. 

With the advent of the digital economy era, the economic structure has undergone an even more profound transformation. The rise of the service sector and the digital economy has become a new driving force for economic growth. Statistics show that, in 2020, the service sector accounted for over 80% of GDP in the United States. In China, the service sector surpassed the industrial sector for the first time in 2019, making up 53% of GDP. The digital economy not only diversifies the range of products and services available but also enhances market flexibility and adaptability, offering consumers more choices and driving the transition from a seller’s economy to a buyer’s economy. 

In the digital economy era, consumers increasingly prioritize product quality over quantity. They focus more on whether products fulfill intellectual or emotional needs rather than basic survival needs. As a result, “social needs,” “esteem needs,” and “self-actualization needs” have become the central concerns of consumers. More and more consumers are willing and able to pay to fulfill these needs, often spending far more on these desires than on basic necessities. For instance, consumers’ expenditures on virtual reality and augmented reality experiences, online premium education and healthcare services, as well as smart homes and the Internet of Things, often exceed their total spending on food over the past year or even several years. 

Data as the core  

In agricultural societies, agricultural activities formed the foundation of the social economy. Farmers directly participated in material and food production through farming and land management. Thus, the effective allocation and utilization of labor and land resources were the primary forces driving the development of the agricultural economy. With the advent of the Industrial Revolution, the socioeconomic structure underwent a significant shift. The human economic lifestyle transitioned from an agricultural economic form to an industrial economic form centered on mechanized production. During this phase, production markedly focused on the development and utilization of energy and resources. Large-scale industrial production could not be achieved without financial support. Wealth accumulation was not only tied to labor but was closely linked to the advanced nature of capital and technology. Consequently, capital and technology emerged as indispensable core production factors in the industrial society. 

Research by Simon Smith Kuznets on the industrialization of developed countries revealed that per capita output differences between developed European nations before and after industrialization were nearly five times greater. This gap became even more pronounced after 1770, with per capita output in developed countries being roughly ten times that of the agricultural economy period. This shows the significant advantage in per capita output growth rates since the Industrial Revolution. Thus, compared to agriculture, the industrial economy is a more effiecient economic form. This heightened efficiency is largely a result of improvements in labor and capital quality. 

With the continuous innovation and development of information technology, particularly the widespread application of digital technologies such as big data, artificial intelligence, cloud computing and block chain, the production mode centered on digital knowledge and information has brought about another profound shift in the economic form. In his book The Digital Economy: Rethinking Promise and Peril in the Age of Networked Intelligence, Don Tapscott describes the new economic form following the industrial society as the digital economy. In this era, the circulation and processing of information have facilitated market transactions, making them the core of the economic activity. As the medium for information, data has become a key production factor for realizing market transactions and economic activities. Unlike traditional economic production, where marginal costs cannot approach zero, digital technologies, due to their non-competitiveness, non-exclusivity, virtuality, and replicability, make the dissemination and use of information and data highly efficient, demonstrating a marked reduction in marginal costs. 

Though research and development costs and fixed costs (specific equipment) form sunk costs, technologies in the digital economy typically represent knowledge products. Once these technologies are developed, the marginal costs for producing additional knowledge-based products decrease substantially, approaching zero. In contrast to the law of diminishing marginal returns seen in traditional production factors, data as a production factor displays increasing marginal utility. This is due in large part to the crucial role of information mining in the digital economy. As data volume increases, its heterogeneity grows, and the value derived from mining this data increases. Therefore, the characteristics of diminishing marginal costs and increasing marginal utility in digital technologies not only attract more market participants but also enhance value creation capabilities, driving innovation, improving efficiency, and leading to “creative destruction” in the market. 

From the agricultural economy to the industrial economy and now to the digital economy, each economic form transformation has been marked by innovation in production methods and efficiency improvements. These changes have not only spurred economic growth but also reshaped people’s lifestyles and the economic structure. Unlike traditional production methods, the digital economy uses automation and intelligence to replace traditional intellectual labor, improving decision-making efficiency and accuracy. Furthermore, the digital economy can precisely identify, predict, and explore potential demands, even proactively generating new needs, offering consumers more personalized and customized products and services. This new economic form signifies the shift from a traditional seller’s market to a buyer’s market, fully illustrating the deep integration of digital technology into economic activities. Recognizing the driving forces behind the digital economy and understanding the evolving trends in economic structures will help form sound economic policies, promoting high-quality growth of the Chinese economy.

Yang Xiaoguang is a research fellow from the Academy of Mathematics and Systems Science at the Chinese Academy of Sciences. Mei Yingdan is an associate professor from the School of Applied Economics at Renmin University of China.

Edited by ZHAO YUAN