Michael Spence

Long Chen

In any economy, there are two interconnected layers.  In the more physical or tangible one, goods are produced (using tangible capital and labor and other inputs like energy and natural capital), people are employed, goods moved around, and are bought and sold on markets, or used by companies to invest in the capital.  The second layer, which is much less tangible, is where information and knowledge are generated and exchanged, relationships are built (coordination), and decisions are made. Hereafter we will call the information, coordination, and decision layer the ICD layer.

At a slight risk of overstatement, most of economic theory (meaning economic models) deals with the first layer.  The second layer is there of course.  Nothing works in the tangible layer without it, but it is largely unmodelled.  There are important exceptions: there is an important body of economic theory dealing with various aspects of the ICD layer: innovation, search in several dimensions, informational asymmetries, with credible communication, and contracts, the role of intermediaries, the theory or organizations and the coordination of activity via non-market processes, and so forth. But in much basic economic theory, the ICD layer is implicit and taken for granted.

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