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Let’s Face Facts, The Digital Revolution Has Been A Huge Disappointment

2019 June 23
by Greg Satell

One of the most often repeated episodes in the history of technology is when Steve Jobs was recruiting John Sculley from his lofty position as CEO at Pepsi to come to Apple. “Do you want to sell sugar water for the rest of your life,”Jobs asked, “or do you want to come with me and change the world?”

It’s a strange conceit of digital denizens that their businesses are something nobler than other industries. While it is true that technology can do some wonderful things, if the aim of Silicon Valley entrepreneurs was truly to change the world, why wouldn’t they apply their formidable talents to something like curing cancer or feeding the hungry?

The reality, as economist Robert Gordon explains in the The Rise and Fall of American Growth, is that the measurable impact has been relatively meager. According to the IMF, except for a relatively short burst in  growth between 1996 and 2004, productivity has been depressed since the 1970s. We need to rethink how technology impacts our world.

The Old Productivity Paradox

In the 1970s and 80s, business investment in computer technology was increasing by more than 20% per year. Strangely though, productivity growth had decreased during the same period. Economists found this turn of events so strange that they called it the productivity paradox to underline their confusion.

The productivity paradox dumbfounded economists because it violated a basic principle of how a free market economy is supposed to work. If profit seeking businesses continue to make substantial investments, you expect to see a return. Yet with IT investment in the 70s and 80s, firms continued to increase their investment with negligible measurable benefit.

A paper by researchers at the University of Sheffield sheds some light on what happened. First, productivity measures were largely developed for an industrial economy, not an information economy. Second, the value of those investments, while substantial, were a small portion of total capital investment. Third, businesses weren’t necessarily investing to improve productivity, but to survive in a more demanding marketplace.

Yet by the late 1990s, increased computing power combined with the Internet to create a new productivity boom. Many economists hailed the digital age as a “new economy” of increasing returns, in which the old rules no longer applied and a small initial advantage would lead to market dominance. The mystery of the productivity paradox, it seemed, had been solved. We just needed to wait for the technology to hit critical mass.

The New Productivity Paradox

By 2004, the law of increasing returns was there for everyone to see. Google already dominated search, Amazon ruled e-commerce, Apple would go on to dominate mobile computing and Facebook would rule social media. Yet as the dominance of the tech giants grew, productivity would once again fall to depressed levels.

Yet today, more than a decade later, we’re in the midst of a second productivity paradox, just as mysterious as the first one. New technologies like mobile computing and artificial intelligence are there for everyone to see, but they have done little, if anything, to boost productivity.

At the same time the power of digital technology is diminishing. Moore’s law, the decades old paradigm of continuous doubling in the power of computer processing is slowing down and soon will end completely. Without advancement in the underlying technology, it is hard to see how digital technology will ever power another productivity boom.

Considering the optimistic predictions of digital entrepreneurs like Steve Jobs, this is incredibly disappointing. Compare the meager eight years of elevated productivity that digital technology produced with the 50-year boom in productivity created in the wake of electricity and internal combustion and it’s clear that digital technology simply doesn’t measure up.

The Baumol Effect, The Clothesline Paradox And Other Headwinds

Much like the first productivity paradox, it’s hard to determine exactly why the technological advancement over the last 15 years has amounted to so little. Most likely, it is not one factor in particular, but the confluence of a number of them. Increasing productivity growth in an advanced economy is no simple thing.

One possibility for the lack of progress is the Baumol effect, the principle that some sectors of the economy are resistant to productivity growth. For example, despite the incredible efficiency that Jeff Bezos has produced at Amazon, his barber still only cuts one head of hair at a time. In a similar way, sectors like healthcare and education, which require a large amount of labor inputs that resist automation, will act as a drag on productivity growth.

Another factor is the Clothesline paradox, which gets its name from the fact that when you dry your clothes in a machine, it figures into GDP data, but when you hang them on a clothesline, no measurable output is produced. In much the same way, when you use a smartphone to take pictures or to give you directions, there is considerable benefit that doesn’t result in any financial transactions. In fact, because you use less gas and don’t develop film, GDP decreases somewhat.

Additionally, the economist Robert Gordon, mentioned above, notes six headwinds to economic growth, including aging populations, limits to increasing education, income inequality, outsourcing, environmental costs due to climate change and rising household and government debt. It’s hard to see how digital technology will make a dent in any of these problems.

Technology Is Never Enough To Change The World

Perhaps the biggest reason that the digital revolution has been such a big disappointment is because we expected the technology to largely do the work for us. While there is no doubt that computers are powerful tools, we still need to put them to good use and we have clearly missed opportunities in that regard.

Think about what life was like in 1900, when the typical American family didn’t have access to running water, electricity or gas powered machines such as tractors or automobiles. Even something simply like cooking a meal took hours of backbreaking labor. Yet investments in infrastructure and education combined with technology to produce prosperity.

Today, however, there is no comparable effort to invest in education and healthcare for those who cannot afford it, to limit the effects of climate change, to reduce debt or to do anything of anything of significance to mitigate the headwinds we face. We are awash in nifty gadgets, but in many ways we are no better off than we were 30 years ago.

None of this was inevitable, but the somewhat the results of choices that we have made. We can, if we really want to, make different choices in the days and years ahead. What I hope we have learned from our digital disappointments is that technology itself is never enough.  We are truly the masters of our fate, for better or worse.

– Greg


Image: Wikimedia Commons




4 Responses leave one →
  1. Michael Breeden permalink
    June 24, 2019

    It seems futile to respond to this. You state the answer. “What I hope we have learned from our digital disappointments is that technology itself is never enough.” “Technology Is Never Enough To Change The World”. So what is? Oh, you said it was something besides technology. Last week, you said “These 4 Major Shifts Will Drive The 21st Century”, but all you talked about was technology. Will those really change anything then? You talk about digital transformation. May I recommend reading a discussion of the Navy’s progress and research. ( They are doing a fantastic job of digital transformation, well enough that the limitation is revealing itself. As you say, it’s not the technology. What is the limitation the Navy is finding? It’s the human element. You have a choice. Make the world about technology or make it about humans using technology. The technology is being used to save money by replacing humans. That is what the digital transformation is. Humans aren’t competing with machines. They already lost. It is now corporations competing by using machines. Humans that are still necessary to the system are like the Navy found, at their intellectual limits. That is the limit on the benefits of the digital transformation. The better you make the automated systems, the more you inevitably stretch the requirements for the humans that are still parts of the system. You can’t make systems that don’t require humans and if you advance the system too far, anything like a normal human cannot do their part in the system. Look at the various special forces that are what warfare is moving to. Small groups of highly intelligent, super trained individuals. Look at DARPA and its relatives. “They” concluded that it took small groups of exceptional people to get exceptional results. What about the rest of the people though? Your system needs to plan for them or you will not have a practical system. … It’s OK, no one listens to what I say about humans anyway. Technology may progress, but as far as humans go, we’re completely stuck in the past. There’s no obvious profit center.

  2. June 24, 2019

    The main result of technological revolutions was the change of legal system: from monarchy to republics and then to socialism.

    Digital technology will change not only the national legal systems but also the international law which is in the crisis because of globalization, Internet and climate change.

    The most significant is the establishment of the digital property as the extending of private property. As well as transition from national geo-political pragmatism to geo-cultural identity and democratic individualism as highest level of personal responsibility before society.

  3. June 26, 2019

    The “Race Against The Machine” (2011) is the consequences of industrial period. AI needs human knowledge as well as legal governance.

    Digitalization means interpretation (modeling) of reality. It increases and empowers the reality. The Internet, digital communications, AI, VR/AR significantly impact the businesses, management and industries. But very often digitalization becomes gross formal simplification (reduction) of reality which leads to loss of control.

    “Uncertainty” is the main “disappointment” of digital transition to new complex xD-reality. Governance of digitalization is the tough open issue. Digital id-identification, technological compatibility, Big Data, digital security, IoT are beyond the national regulation. Attempt to solve these problems within the global project Industry 4.0 failed 2 years ago.

    But to solve many problems is very easy if you add human to computer by establishing the “digital property” and deploying the institutional frame for legal regulation. Without this extension “digital uncertainty” will grow.

  4. June 30, 2019

    Politics drives decision-making; technology merely drives the quality of the results. The Chinese invented gunpowder and used it to celebrate significant events; the Europeans used it to build empires. In the coming decades, those nations that make healthcare and education a right will have a prosperous populace. Those that deem healthcare and education to be commodities will have prosperous corporations.

    If you don’t like the results, maybe the problem isn’t the technology.

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