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Commentary by our General Manager, Keiichi Shimada
Innovations in technology in areas such as artificial intelligence (AI) and the Internet of Things (IoT) are attracting significant attention as innovations with the potential to change society.
AI research already has a history of more than 50 years and has also attracted attention in the past. Current advances in AI are even being referred to as the third AI boom. In addition to its capacity to recognize massive amounts of information including voice and image recognition, the latest AI is attracting attention for its capabilities in self-learning and autonomous development.
IoT means connecting all kinds of devices to the Internet. When this happens, those connected devices, in other words, a wide array of products, will independently collect and analyze information and will be capable of communicating with each other via the Internet. With this understanding in mind, let us think about the significance from a social science perspective of how our society might change as a result of AI and IoT.
In the economic society where we engage in daily activities, we can still observe aspects of life that are unreasonable, wasteful or incongruous, and in many situations we often encounter inconvenience, inefficiency and unfairness. The number one reason for this is the continued existence of various barriers among organizations, firms and industries that support our economic activities, and these are not necessarily “connected” in a rational, efficient manner. For example, if we consider the cities and towns where we live, transportation consists of various means including railway, subway, bus and individual automobiles. If there were some sort of mechanism to optimally “link” these, convenience would improve dramatically. In health management too, if we could organically connect doctors, hospitals, insurance companies, and public institutions responsible for social welfare, we would be able to provide more effective, efficient care from prevention to treatment.
AI and IoT will establish new “links” for an economic society, which will transcend the walls of organizations, companies and industries. If the information “collected” in real time via IoT and the information “shared” across organizations, firms and industries could be “analyzed” and “utilized” via AI, we may be able to create rational, efficient “links” that will reduce as much as possible the unreasonable, wasteful and incongruous aspects in our daily lives. Repeated initiatives of this nature in various areas of society would also dramatically enhance productivity of our social system as a whole.
Our daily economic activities consist of activities where economic entities such as individuals and firms collaborate and cooperate with each other to achieve goals. In such circumstances, each economic entity must find the most appropriate partners that it can trust and mutually agree with its partners on appropriate prices for achieving results. Such activities will incur expenses based on the time and labor spent for this purpose. These are called “transaction costs.” In a manner of speaking, these are essentially the costs required for connections or “links.”
Transaction costs consist of: (1) access costs (costs required for searching for the most appropriate business partners and maintaining contact points with the partners), (2) interaction costs (such as costs involved in confirming whether partners engaging in goods and services transactions are reliable, and in negotiation and coordination of transaction agreements) and (3) distribution costs (costs required for the delivery of goods and services to other parties). Although these are called transaction costs, they do not constitute all costs incurred when closing a deal between companies. Even in the same company, for example, if department A and department B cooperate in a project, some costs will be incurred for the time and labor required. Innovations in technology like AI, IoT, and big data will dramatically reduce the labor involved in collecting, sharing and analyzing information, and therefore also significantly reduce transaction costs.
Reductions in transaction costs will lead to industrial mergers and restructuring beyond the framework of existing industries, and eventually lead to greater efficiency and optimization of the economic society as a whole. In the past, disparate companies and industries did not mutually share or utilize information and data, which inevitably resulted in unreasonable, incongruous and inefficient elements. In the future, however, numerous industries will merge, reorganize, and offer new services.
There are many social systems where monopolies exist and suppliers of services are limited. In such cases, while the suppliers possess an overwhelming amount of information, the information and choices provided to customers are limited. If the information is to be shared with the customers, the supplier side will plan a service that addresses customer needs, and firms and individuals using the service will be able to select more efficient, valuable services.
As reductions in transaction costs for time and labor, etc. progress, the following will become general practice: service users will, (1) as required, (2) utilize optimal services and (3) pay for these based on the volume and value of the services used. As this practice becomes established, firms and individuals will eventually embrace the view that purchasing services when they want to use them is preferable to actually owning goods.
While there are still many areas where “linkages” will improve efficiency and convenience, system and structural changes are also essential for making these linkages possible. The establishment of existing systems and structures are based on the current industrial structure and corporate relationships. Therefore, it will be necessary to promote system reforms and deregulation that will accommodate a new environment, based on public-private agreement.
Hitachi Research Institute is proposing an “Innovation to ZEROs Revolution” aimed at enhancing service standards and efficiency by taking up the challenge to minimize unreasonable, wasteful and incongruous elements in our social system. In the Japan of the future where a decline in the working population and reduction in the rate of savings are unavoidable as a consequence of progress in decreasing birthrates and an aging population, the most important policy issue will be determining how to maintain economic viability. If Japan can develop a new social system that takes into account energy and environmental considerations and offers services high in value, as a model that can be deployed to the world, it could lead not only to revitalization of the economy but also to a new, worthy contribution to the world.