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by Greg Satell
When Steve Jobs was trying to lure John Sculley from his lofty position as CEO at Pepsi to Apple, he asked him, “Do you want to sell sugar water for the rest of your life, or do you want to come with me and change the world?” The ploy worked and Sculley became the first major CEO of a conventional company to join a hot Silicon Valley startup.
That same spirit pervades the tech world today. People go to Silicon Valley and other technology hubs not just to make money, but to make a positive impact on the world through innovation. By searching frantically for the “next big thing,” they hope to do well by doing good.
In The Rise and Fall of American Growth, economist Robert Gordon throws cold water on that notion. With a painstaking—and fascinating—historical analysis of U.S. productivity, he argues that the innovations of today pale in comparison to earlier in our history and that we might actually be entering a period of prolonged stagnation. He may very well be right.
Was Productivity Growth A One-Time Thing?
To understand Gordon’s argument, imagine what life was like in 1900. Life expectancy was only 41 years. If you got sick, there were no antibiotics. Henry Ford’s Model T was still eight years away, so the horse was still the primary mode of transportation and streets of cities filled up with manure. Lack of refrigeration meant that diets were poor and food was often contaminated.
Houses were not typically networked with water, gas, electricity and sewage pipes. So typical daytime tasks, like taking a bath, cooking dinner or washing clothes required water and firewood to be brought from outside. Life was difficult and few women were employed, partly because there was so much backbreaking work to be done around the house.
Yet by 1940, nearly all of this drudgery was a thing of the past. Most people had cars, plumbing, electricity, heat, air conditioning and even electrical appliances. Since then, these have improved somewhat—cars and appliances are more powerful, convenient and efficient—but their basic function hasn’t changed. Since 1970, productivity has stalled.
Gordon argues that these early innovations were one-time events, not to be repeated. While we may improve our lives incrementally, nothing can match these basic, but transformative, shifts in the human condition.
At the same time that productivity is falling, Gordon argues that there are six headwinds—namely demography, education, inequality, globalization, energy/environment and the overhang of consumer and government debt —that will be barriers to faster growth. To understand his point, let’s look at just a few of them in combination:
As the baby boomers retire, the growth of the working force slows and the increase in retirees soars. At the same time the leveling off of the rate at which people attain higher education, combined with supply side pressures from globalization and higher levels of both public and private debt means that there is a smaller economic base from which to finance retirement.
Or, let’s look at automation, which feeds into income inequality. Bill Gates makes billions, but the bargaining power of the average American worker is greatly diminished, resulting in extreme inequality. Larry Summers argues that this leads to secular stagnation, an economic condition that features excess saving and diminished investment and demand.
So Gordon paints a grim picture indeed and he might be right. The trends he points to are very real. Still, there is also an argument to be made for hope and optimism. No one in 1900 could have predicted what was to come in the next half century and there are nascent trends today that may very well be just as significant.
The Second Half Of The Chessboard
In The Second Machine Age, MIT’s Erik Brynjolfsson and Andrew McAfee tell a story about the invention of chess. As legend has it, the emperor was so impressed with the game that he invited its creator to name his reward. As they described, the inventor’s request seemed modest, he simply told the Emperor:
‘All I desire is some rice to feed my family.’ Since the emperor’s largess was spurred by the invention of chess, the inventor suggested they use the chessboard to determine the amount of rice he would be given. ‘Place one single grain of rice on the first square of the board, two on the second, four on the third, and so on,’ the inventor proposed, ‘so that each square receives twice as many grains as the previous.’
For the first half of the chessboard, the emperor had to pay 232 grains of rice, or about the equivalent of one field, but as the doubling continued, the total amount owed far exceeded all the rice that existed in the world. That, in essence, is the concept of accelerating returns. When growth is exponential, even seemingly insignificant trends can become predominant.
To see how this undercuts Gordon’s argument, let’s take a look at solar technology trends.
The panel on the left shows Swanson’s Law, which states that solar cells drop in price by 20% for every doubling of volume shipped, or about 10% a year since 1980. The panel on the right shows what this means in real terms—solar panels have fallen from a price of $75 per watt to merely $0.30 today.
So far, this has created little impact, because it currently works out to $200 [≈ Low-end bicycle] per megawatt for utility scale solar power, compared to about $100 for coal or atomic plants. But if the trends persist—and there’s no evidence that suggests they won’t—solar power will be just one third the cost in ten years and one tenth the cost in 20.
So while today solar power is struggling to be viable, in the future our energy will cost far less—about half the price in ten years and merely one fifth in 20 (assuming all energy tracks the cost of solar). Considering that energy makes up about 8% of GDP, that will make a vast impact on productivity. The second half of the chessboard does indeed look vastly different.
Is Digital Technology A Narrow Or A General Purpose Technology?
There has been a long running debate about the extent to which computing is a general purpose technology, meaning one that affects the entire economy rather than a single field or industry. Gordon seems to believe that its effects are relatively narrow and that we have already seen most of the benefits in the form of smartphones, email and office applications.
It’s a murky issue, because general purpose technologies do not immediately show an impact. Electricity, for example, only led to productivity gains 30 years after it was widely introduced, because factories and lifestyles needed to be redesigned in order to to take advantage of it. The same appears to be true with digital technology.
In The Singularity Is Near, inventor and futurist Ray Kurzweil takes the counter position to Gordon, arguing that digital technology is powering new technologies, such as genomics, nanotechnology and robotics, that will drive major efficiency improvements in the future, the exponential increase in solar efficiency being just one example.
Another possibility is that, like electricity, managers have simply not revamped their organizations to take advantage of their new capabilities. Brynjolfsson argues that digital technology allows firms to achieve scale without mass, by more allowing them to instantly replicate their innovations in business processes across a far flung enterprise.
There is some evidence to back Brynjolfsson’s argument. In retail, for instance, many firms have shiny new mobile commerce platforms, but those are often tied to legacy inventory, POS and purchasing systems that are decades old, making true omnichannel commerce impossible. As e-commerce makes up for only 7.5% of retail sales, total efficiency gains have been meager. But when the systems become integrated, the gains could be enormous.
Which Future Awaits Us?
The problems Gordon spells out are real and, in some ways, unprecedented. As baby boomers retire, there are less people of working age to support them. At the same time, the aging population increasingly suffers from chronic diseases, like cancer and Alzheimer’s, that are expensive to treat. The costs from climate change leading to increasing natural disasters, have also become clear.
Yet still, we are not mindless cogs who are wholly at the mercy of faceless global trends. We have the power to solve problems. For example, it is the threat of climate change that has spurred investments in renewable energy that have the potential to make our economy exponentially more energy efficient.
And in some cases, Gordon’s data is out of date or in error. For example, he cites a study that shows that the costs of new breast cancer therapies exceed their benefits, but the study was published in 2001, well before new genomic based therapies began to take an effect and new immunotherapies show even more promise.