Tech

Innovation Won't Overcome Stagnation

Policy makers think technology will save them. It’s an illusion.

Not exactly a revolution.

Photographer: Dursun Aydemir/Anadolu Agency

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 like the once-ubiquitous Palm Pilot. They replaced low-end cameras and watches. They incorporated GPS and other standalone technologies. Alphabet Inc. and Facebook Inc. divert advertising revenue from newspapers and magazines. Amazon.com Inc. and other online sellers have taken market share from existing retailers. Netflix Inc. has cannibalized television, video stores and cinemas.

Few of these businesses create completely new streams of income. 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. Airbnb allows people to rent out their own lodging for accommodation. Uber allows people to use their own cars to offer rides for others (or entails arbitraging regulations). Many online media or entertainment services rely on contributors who offer their services for free.

Such disruption changes industry economics. New technologies have reduced advertising rates, benefiting advertisers but harming companies that relied on them. Uber and Airbnb have had the same effect on taxis and hotels, reducing the earnings of incumbents. Lower-cost products and services leave more disposable income for consumers to spend elsewhere. But the decreased cost typically comes at the expense of employment or wages. The loss of income offsets the savings. In an economic model that is 60 to 70 percent powered by consumption, this affects total economic activity.

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. Although they may have limited long-term growth and productivity potential, such businesses can still appeal to venture capitalists, who hope to extract short-term value by selling out to an incumbent or going public. Typically, competition increases spending through higher expansion and customer-acquisition costs, extending the period before investment is recovered and resulting in poor long-term returns.

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 policy makers, many of whom need assistants to work their digital devices, vulnerable to the siren song of technology, promising a quick and painless fix.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Satyajit Das at sdassydney@gmail.com

    To contact the editor responsible for this story:
    Timothy Lavin at tlavin1@bloomberg.net

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