The Key Question for the New Economy: Who Owns the Data?

Xu Chenggang is professor of economics at the Cheung Kong Graduate School of Business. He is one of the first recipients of the China Economics Prize for contributions in understanding government and enterprise incentive mechanisms for the transition economy of China.

A version of this article was originally published by the South China Morning Post in August 2019.

The “fourth industrial revolution,” defined by artificial intelligence, has begun. But with it comes a new problem: How can we protect our privacy while utilizing data as an asset? Property rights have been crucial to society since time immemorial, but as technology evolves, rights too are changing, and creating new challenges.

We are in the throes of the ‘fourth industrial revolution’, driven by advances in, and the proliferation of, artificial intelligence (AI) and big data. The importance of big data in the new economy is like that of oil in the old one. But associated with the unprecedented efficiency and convenience of the new economy, one of the biggest challenges we are facing is the aggressive violation of individuals’ rights, including privacy.

In China’s reform and opening up process, a transformative change was the introduction of a private property rights system. In fact, I believe that it was the most important and fundamental force in the so-called “Chinese miracle”. And while the country has indeed made progress in protecting the private property rights of individuals over the past 40 years, compared with developed countries, China’s protection of private property rights is still lagging far behind.

From the perspective of law enforcement, no law can be enforced impartially without judicial independence. Therefore, it is only meaningful to discuss legal issues related to privacy rights in the context of judicial independence. If this problem is not resolved, it will undoubtedly become an obstacle to the development of AI (artificial intelligence) in China and the development of its digital economy.

Government-market relations

In the field of AI, China and the United States are the two countries that are leading the world in terms of application development. Some say that China’s government-led system of innovation contributes to the development of the entire AI industry.  This is because Chinese companies can make full use of the data they collect. In contrast, companies in Western countries cannot make full use of the data they collect because of strict personal data protection laws.

For companies using algorithms and computing power, more data can lead to the faster development of machine learning. Limitations placed on what that data can be used for limits the development of machine learning. And while that may seem simple, it raises a challenging question: What should be the relationship between the government and the market?

Let us go back to 1929 when the US went through the largest financial crisis in human history, which caused the entire country to fall into a decade-long economic depression and triggered World War II. The world looked like this: On the one hand was the recession and crisis of the entire Western world, while on the other was the rapid growth of the Soviet economy. In the 1930s, many people were optimistic about the Soviet model. When the Soviet Union became the first country to launch satellites, many economists even mistakenly thought that the state-owned Stalinist economy  established by the Soviet Union was better.

In 1960, Khrushchev, the leader of the Communist Party of the Soviet Union at that time, proudly announced to the world at the UN Headquarters in New York that socialism with its rapid development would eventually bury capitalism. In his view, the “burial” would not be accomplished by war, but by peaceful competition and the rapid development of the socialist economy. It is easy to see why he, and many others at the time, held this view in the 1950s and 1960s, the Soviet economy was developing much faster than that of the US and Western European countries. However, it is known to all that Khrushchev’s prophecy did not come true. And one of the fundamental factors that led to the eventual collapse of the Soviet Union was that the Stalinist economic system created an insurmountable obstacle to its own economic development.

Comparing the state-based economy with a market economy, we have been able to see two basic facts quite clearly over the past 100 years: First, all developed economies in the world are, without exception, market economies based on private ownership. Second, all state-owned economies in the world are inefficient, without exception, especially in terms of revolutionary innovation. And this will eventually lead to their failure. The collapse of the Soviet Union and Eastern Europe fully proved this.

Hayek and today’s proposition

From the late 1930s to the early 1940s, there was a famous debate on market socialism between Hayek and Mises, and Lange and Lerner. This controversy gave birth to Hayek’s famous book The Road to Serfdom. The book’s primary focus was the Soviet state-owned economy. Hayek’s argument was that the state-owned economy deprives citizens of private property rights, which not only leads to inefficiency, but also undermines the ability of the economy to innovate, which in turn will hinder the long-term development of the economy.

The background to Hayek’s book was the second industrial revolution, the development of widespread electrification and advances in telecommunications from the telephone to television, and the third industrial revolution, marked by the development of computers and computing. At that time in the West, many engineers and scientists mistakenly believed that human beings could fully plan the future of humankind. They mistakenly believed that scientists had mastered the basics of science and could better determine the fate of society as a whole. Therefore, they thought, if property rights were concentrated in the hands of the government, allowing scientists and economists to plan, organize and operate everything, the economy and society would be at its most efficient. Hayek made a deliberate analysis of this issue and pointed out its fatal flaw. But in those days, many people did not think that Hayek’s views were convincing, and saw Hayek as being either an extreme liberal, or an extreme right-wing intellectual.

But times have changed. It was only much later, when the ills of the planned economy were clearly exposed to the whole world, that people began to realize that Hayek may have been on to something. When people talk about artificial intelligence and the digital economy today, the nature of the problems they face are not exactly the same as the ones that Hayek discussed in the past, but they are closely related.

Who owns the data?

In July this year, Facebook agreed to pay more than $5 billion to settle a case over its responsibility in the Cambridge Analytica scandal, in which the British firm abused the data of more than 80 million Facebook users to manipulate voters in the 2016 US presidential election.

Such scandals have prompted calls for regulation. The European Union rolled out the General Data Protection Regulation (GDPR) in 2018, to give individuals greater control over how their personal data is collected, stored and used. But instead of being a solution, the GDPR has become a focal point for debate. The essence of the issue is property rights, which now extend to rights over individuals’ personal data.

Traditionally, property rights referred to the control of tangible assets, such as gold or oil, or the control of intangible assets like patents and copyrights. In the digital era, technology can create huge amounts of intangible assets from individuals’ data without their knowledge. How the data is used can bring not only great benefits but also, potentially, great harm. This raises a crucial question: who has the right of control over these new assets?

Going fast or slow?

When a new technology emerges and people are worried that it will have a negative impact on society, should the government vigorously promote the development of the new technology or slow down its growth to better address problems that have risen? When the voice of doubt forces you to slow down and forces you to face social concerns, I believe that the government should slow down the pace of the technology’s development in order to face the problems at hand.

As an economist, I know that many mechanisms can be designed to help gain information, and information is the basis on which to make decisions. The simplest mechanism is to invite all stakeholders to a debate. Scientists and economists have no basis for decision-making when people won’t, or can’t, discuss the issues.

In the old economy, private property rights and institutions protecting property rights were the foundations for development. This is because, with private property rights, individuals are highly motivated to use and allocate their assets efficiently, through the market or, in the case of collective decisions, through democracy.

Now, in the new economy, the question is whether private property rights will be as important? The answer is: “yes.”

Recognizing and protecting property rights to each individual’s data, or all individuals’ data, is vital to determining the fate of the new economy, although how to define these rights precisely poses huge challenges which are yet to be resolved.

Consistent with the basic principles of human rights and private property rights, the GDPR, which recognizes each individual’s basic control over his or her data, is the first step in the right direction. Giving large companies the right to control how they use an individual’s data may seem efficient, but is inconsistent with the fundamental principles of human rights and property rights. The Cambridge Analytica data scandal could well be only the start.

At the same time, however, state ownership or control of individuals’ data is much worse than control by large companies in a society with the rule of law. State ownership of individuals’ data will lead to inefficiency and a lack of innovation as people lack the motivation they would have if they had control.

But a much deeper worry is that state-controlled big data, together with state AI capabilities, would create a regime that directly damages social welfare by violating human rights.

Moreover, if the government had an unconstrained capacity to mobilize resources and silence society, the probability of economic catastrophes would be drastically increased.

One of the key reasons why China lagged far behind advanced economies before the post-Mao reforms was a complete lack of private property rights. Although such rights are now recognized by China’s constitution after a quarter of a century of reforms, the country, which is without judicial independence, still has a long way to go compared with developed nations. Now, as the new industrial revolution emerges, China faces severe challenges in protecting the rights of individuals to control their data.

No one knows what will happen in the future. The only thing that is clear is that it is likely that some people will suffer in the era of artificial intelligence. These people should be heard. To guarantee a stable society, these people’s demands need to be addressed and accordingly compensated. What is worrisome is that a highly-centralized society may choose to suppress the interests of some people in society for the sake of technological development. The Catch-22 situation lies in how new technologies could lead to a certain level of social instability, but technology cannot be developed in an unstable society.