Disrupted Economics – Will technology create wealth or economic depression?

Will technology create wealth or economic depression?

It stands to reason that innovation creates wealth. It is just that reason is not always right. A new book, iDisrupted by John Straw and Michael Baxter, provides a tour de force on disruptive technologies: the good, bad and ugly.

Don’t get me wrong, I am not arguing against innovation. We are on the verge of the greatest era of innovation in history. The result should be more wealth for all, not to mention longer and healthier lives. It is just that we may mess it up. More to the point, there are signs that this is precisely what we are doing. One thing is for sure, if we want innovation to be a force for good, it is time we began to face up to reality.

Some people deny that things are changing; they say the best days of innovation are behind us. Others are more like Luddites or King Canute, who think they can stop innovation. Others are like ostriches, with their heads buried deep in the sand. Not only are they all wrong, they are dangerously wrong.

Let me briefly explain why we are on the cusp of such a significant technological revolution. Firstly, there is Moore’s Law, which says that computers double in processing power every 18 to 24 months. Thanks to the unwinding of Moore’s Law, there is more processing power in an iPhone today than the whole of NASA had at its disposal during the moon landings. Faster computers make things possible, for example advances in artificial intelligence, which in turn is creating both wondrous and terrifying possibilities.

You can apply the idea of technology advancing at a geometric rate to many areas, such as energy storage or solar power, both of which are seeing rapid advances in economic efficiency. Alternatively, there is genetics, where the cost of sequencing a genome has fallen from several billion dollars to few thousand dollars in just a few decades.

Secondly, there is the internet. Innovation depends on the spread of ideas, and convergence as those ideas come together to create something new. The internet is the greatest medium ever invented for spreading ideas and creating convergence.

So the revolution begins. We will see the advance of the internet of things and big data, 3D printing and robotics, nanotechnology, new materials – such as graphene – and artificial intelligence. Moore’s Law, the internet and convergence are making it possible.

We will see the rise of the free economy, with an increasing number of digital products carrying a zero price tag. Then there is the sharing economy, which in turn will converge with self-driving cars. Within two decades, few of us will own a car because we won’t need to.

Technology will destroy jobs, but there will be certain things technology will always struggle to provide. Jobs that require empathy or social skills, such as social workers, counsellors, carers and nurses, will require a human touch. The internet of things, 3D printing and robotics will lead to a more localised form of production in which we can have products to meet individual tastes. To quote from iDisrupted, “Urban legend has it that Henry Ford famously said: ‘You can have any colour you like as long as it is black,’ illustrating how specialisation was key in assembly production; the more identical copies of the original design that can be made, the cheaper they could become. In a mass customisation economy, you will be able to have any shape, size or colour you like, as long as you are prepared to pay for it.”

But for the jobs to be created, we need demand. The great technology companies, such as Google, Facebook and Microsoft, are major contributors to global GDP, but their contribution to employment is relatively modest. Unless we can find a way of ensuring that the fruits of innovation trickle down into higher wages for those jobs computers can’t do, the economy will be starved of demand.

As Paul Krugman has said, it can be argued that growing inequality caused the finance crisis of 2008. However, if technology causes inequality, won’t that create the risk of even worse financial and economic crises in the years ahead?  Won’t the sharing economy and free economy starve governments of tax receipts, and lead to greater government debt at a time when fiscal stimulus is more important than ever before?

There was a time lag of around 100 years between the onset of the industrial revolution in the UK during the 18th century and rises in average wages. The great industrial revolution that began around 1861 and ended in 1913 was followed by a World War, a Great Depression and another World War. It was not until the 1950s and 1960 that we saw the kind of economic growth that one might have expected given the scale of innovation seen in the late Victorian era and early 20th century.

The trick is to ensure that demand rises in tandem with the rate of innovation. This may involve government stimulus in the form of tax cuts, tax credits and investment in infrastructure funded by central banks, or the taxation of profits from technology. It may involve reforms to taxation and pensions, which give the mass population an incentive to own shares in the giant tech firms.

One thing is for sure, the King Canute and Luddites and ostriches don’t have the answer. Take a look at the iDisrupted book – now on Kindle