At McKinsey we believe that we are entering an era of a new economic revolution with as much sweeping changes to economic organizations and consumers as the industrial revolution brought. While the industrial revolution was driven by large scale changes in the economics of production, e.g. mass assembly, this revolution will be based on a dramatic improvement in the capability to interact across firms and between firms and people. We've been talking about this all day when we talk about the relationships across firms, when we talk about the culture of openness. I'll discuss in more detail what we mean by interaction costs, but summarize it by saying that one premier economist in the field who did some of the original work called it 'friction in the economy'. It is the searching, coordinating and monitoring that people in firms do when they exchange goods, services and ideas.
Silicon Valley shows what can happen when an economy has lower transaction costs.
Many observers have noted that Silicon Valley has a different business and social culture than many other areas in the world. What may be a more useful way to describe, or at least measure, the difference, would be to say that it has lower transaction costs. By focusing on culture, we may be able to ignore the ramifications to our own region of the world, to our own industry. When we look at Silicon Valley as a harbinger of the future, we cannot ignore the lessons. If we examine Silicon Valley in this light we can see what is possible when we are able to lower the friction in the economy.