Innovation, everybody hopes, will rescue the world from economic stagnation. I’m not so sure.
The extent to which an innovation is significant depends on the degree to which it alters existing activity or the performance of a function. It must create related and ancillary activities that in turn lead to employment, wealth and other discoveries in a virtuous cycle. It must have longevity, being capable of exploitation over long periods. These characteristics are why the second Industrial Revolution (electricity, internal-combustion engines, modern communications, entertainment, hydro-carbons and so on) succeeded in lifting productivity and living standards.
Today’s innovations are unlikely to be nearly as powerful.
Most new technologies have significant benefits but don’t radically reshape the modes of doing things. A driverless or electric automobile is just a new type of car. It isn’t the quantum leap that motorized transport was over its animal-powered predecessors. Email improves the speed of communication but it isn’t as radical as the advent of telephony. Platforms such as eBay Inc., Uber Technologies Inc. and Airbnb Inc. are merely new marketplaces matching buyers and sellers. Big data is just a more sophisticated way to handle information and statistical analysis.
Moreover, many of today’s tech companies focus on consumption, improving the marketing and distribution of existing goods and services. Many center on entertainment and communication, with tangential impact on productivity. Most emphasize enhancing speed, capability, power and efficiency, rather than changing the work itself. Word-processing software didn’t eliminate the need to type out documents but eliminated secretaries and typing pools, leaving individuals to do the task themselves.
New technologies also tend to cannibalize existing industries, limiting their effect on growth and productivity. Smartphones and tablets cannibalized computers, mobile phones, portable music players such as the Walkman and digital assistants such as the once-ubiquitous Palm Pilot. They replaced low-end cameras and watches. They incorporated GPS and other standalone technologies.
The revenue gain for smartphones is offset by reduced revenue from all the products it replaces. New products redirect investment capital, and are not necessarily incremental, at least not significantly.
It’s true that many recent innovations have reduced costs. But they’ve often done so by using lower-quality products or untrained workers, or by extracting revenue from personal assets.
Such disruption changes industry economics. New technologies have reduced advertising rates, benefiting advertisers but harming companies that relied on them. Another reason for skepticism is that many new industries don’t require substantial investment or create well-paying jobs. Many are easily scalable: Electronic platforms mean that expansion of activity doesn’t necessarily require a commensurate expansion in investment and capacity.
Many new tech companies, finally, are based on implausible business models. Rather than displacing competitors through efficiency or creating new markets, they often seek to simply convince investors their future market dominance is inevitable.
In short, there’s little reason to think this current round of innovation will overcome stagnation. Its overall effect on economic activity and living standards is lower than believed. The failure of traditional remedies to restore the health of advanced economies has made policymakers, many of whom need assistants to work their digital devices, vulnerable to the siren song of technology, promising a quick and painless fix.
Satyajit Das is an author and former banker. Distributed by Bloomberg View.
