The Economics of Digital Profits

It’s over nearly three decades since I completed my economics degree, but I often wonder how much more interesting the subject would be now. Sure we’ve had global crashes, recessions and all sorts of financial scandals, but to some extent we’ve always had events like these throughout the last century.

There’s little doubt that if you follow economics you’ll see how uncertain a science it really is. Pick up a copy of the economist from any given time and you’ll see articles about how well an economy is doing. I can remember reading about the powerhouses of Brazil and Turkey from only a few years ago. Incredible stories of economic success and huge growth rates have almost inevitably been replaced with currency crashes, inflation and corruption scandals.

These tales of economic boom and bust are almost inevitable most underdeveloped countries almost inevitably experience this sort of growth. It’s not really these situations that I find most interesting in the world of economics – it’s somethign much newer and unique.

It’s called the digital economy and in many aspects has the potential to change the economics of the world. There is little doubt that those countries in the forefront of the global digital economy have a distinct advantage and there’s huge potential to add significantly to their GDP. However one of the advantages that the developed world has is the ability to incorporate these ‘new economic sectors’ into the taxation system.

Take for example the millions of people who now make some or all of their living online. Through websites, blogs or even video channels many people are making very decent incomes. Unfortunately for governments this income can be difficult to monitor and track and hence more difficult to tax than traditional employment. many countries already struggle with gathering taxes from their citizens, even a relatively successful economy like Turkey has huge issues in collecting tax revenue. It is largely cited that collecting taxes (or not) played a large part in the demise of the Greek economy too.

Can these countries successfully collect revenues based on income from YouTube or Amazon or from online casino sites? It’s much more difficult to collect and the more citizens that move to these income models the more important that this will become. One of the problems is that the methods of making money in the digital economy are extensive and varied which obviously means that the source of the income changes too.

For example, in the US there’s a huge market for people buying and selling online via a myriad of different sites. These are often little more than buying and selling without the needs of stocks, manufacturing and business premises. yet the numbers involved may be actually much larger. In the ‘streetwear’ market there’s lots of individuals making huge amounts of money buying goods online. One such market is for branded sneakers, which are released in limited numbers by companies like Supreme, Nike and Adidas. Individuals attempt to buy these and then resell at huge multiples.

This is possible because of the scarcity of these releases yet people develop systems to purchase these in bulk. They use software programs called ‘bots’ and location hiding devices servers called proxies to make multiple purchases. You can read all about these sort of systems in this article which explains the whole system and what are proxies for bots, and how you make money from them. Remember there are literally millions of people doing similar things all across the globe and making huge incomes.

In the US, UK and other developed countries there has been some effort to incorporate these people into the taxation system but it’s not easy. It relies heavily on self assessment methods in most places and can be very difficult to trace income if it’s not declared. Much of this income doesn’t even have to end up in a traditional bank account either. I know many internet entrepreneurs who deal primarily in digital currencies like Bitcoin and transfer through various electronic payment processors on the periphery of the traditional banking systems.

It’s easy to find negatives in the ‘digital economy’ however it’s important to realize that for many people it’s become increasingly important. What’s more in the ‘less developed’ countries it offers a potential for individuals to escape poverty and set up online businesses which are much easier to set up than traditional bricks and mortar ones.

The world is changing in many ways due to the internet, it’s important that economics keeps pace. Both to maximize the opportunities and to adapt to them.

John Heather
Blogger and technology journalist who writes on a variety of subjects all over the web. He also covers the world where technology and entertainment overlap, read this article about the Netflix and copyright blocks.

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