Friday, November 4, 2011

General Purpose Technologies

I'm discussing Erik Brynjolfsson and Andrew McAfee's book Race Against The Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy, a riveting, fascinating little distillation of many of the dilemmas of the modern economy.

We discussed their review of the different explanations of the problems in the labor market at present. They argue in some ways the predicament is worse than we realize. Researchers had thought that jobs like truck driver were almost impossible for machines to replicate. Then Google announced in late 2010 they had already been driving automated cars (accompanied by human drivers in the back seat) over thousands of miles of American roads.

Information technology is becoming a general purpose technology, much as steam power or electricity, they argue. It is something which spreads throughout an economy setting off "innovative complementarities" which feed on each other and trigger further rounds of change. It is causing a third industrial revolution.

In fact, the impact is potentially more profound than previous general purpose technologies because the advances in IT are so much larger. Computers are many thousands of times faster than they were thirty years ago. Steam power never advanced so much or so fast.

And it is not just a matter of computer hardware following Moore's Law and getting faster, either. The advances in software, such as better algorithms, is also accelerating. They cite a study which examined improvements in solving a standard optimization problem between 1989 and 2003. The solution routine improved 43 million-fold. The processor got 1000 times faster. The algorithm got 43,000 times better.

Gradual progress builds on itself and becomes exponential, especially as better tools help with the discovery and design of even better tools.

Large chunks of middle America may now be vulnerable to seeing their jobs automated.

These changes alter the distribution of rewards, too. "Winner-take-all" competition can increase the earnings of a few superstars at the expense of a wider range of people, for example. It used to be that if you were the best at an activity in your town, you had a living. Digital technology collapses distance. Now you may face competition from the person who is the best in the world.

This helps explain why incomes are increasingly skewed towards the top. It is not just exploitation by "the 1%" or "bankers". There are problematic structural changes in the underlying economy.

The companies who adapt best to this have changed their organizational structure and culture.

The most productive firms reinvented and reorganized decision rights, incentives systems, information flows, hiring systems, and other aspects of organizational capital to get the most from the technology.

Incidentally, this may be the main reason American firms have been more productive in recent years than similar British or Canadian firms within their own industries. American firms in their vast flexible internal market are often forced to make organizational innovations faster.

But even if we do our best to adapt, the pace of change may be very disruptive.

However, when the changes happen faster than expectations and/or institutions can adjust, the transition can be cataclysmic. Accelerating technology in the past decade has disrupted not just one sector but virtually all of them. A common way to maintain consumption temporarily in the face of an adverse shock is to borrow more. While this is feasible in the short run, and is even rational if the shock is expected to be temporary, it is unsustainable if the trend continues or, worse, grows in magnitude.

The problem is our skills and institutions can't keep up with the pace of change, they say.

What can we do about this?

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