Where is technology taking the economy?
We are
creating an intelligence that is external to humans and housed in the virtual
economy. This is bringing us into a new economic era—a distributive one—where
different rules apply.
A year ago in
Oslo Airport I checked in to an SAS flight. One
airline kiosk issued a boarding pass, another punched out a luggage tag, then a
computer screen showed me how to attach it and another where I should set the
luggage on a conveyor. I encountered no single human being. The incident wasn’t
important but it left me feeling oddly that I was out of human care, that
something in our world had shifted.
That shift of course has been going on for
a long time. It’s been driven by a succession of technologies—the Internet, the
cloud, big data, robotics, machine learning, and now artificial
intelligence—together powerful enough that economists agree we are in the midst
of a digital economic revolution. But there is less agreement on how exactly
the new technologies are changing the economy and whether the changes are deep.
Robert Gordon of Northwestern University tells us the computer revolution
“reached its climax in the dot-com era of the 1990s.” Future progress in
technology, he says, will be slower.
So in what way exactly are the new
technologies changing the economy? Is the revolution they are causing indeed
slowing—or is it persistent and deep? And if so how will it change the
character of the economy?
I argued a few years
back that the digital technologies have created a second economy, a
virtual and autonomous one, and this is certainly true. But I now believe the
main feature of this autonomous economy is not merely that it deepens the
physical one. It’s that it is steadily providing an external intelligence in
business—one not housed internally in human workers but externally in the
virtual economy’s algorithms and machines. Business and engineering and
financial processes can now draw on huge “libraries” of intelligent functions
and these greatly boost their activities—and bit by bit render human activities
obsolete.
I will argue this is causing the economy
to enter a new and different era. The economy has arrived at a point where it
produces enough in principle for everyone, but where the means of access to
these services and products, jobs, is steadily tightening. So this new period
we are entering is not so much about production anymore—how much is produced;
it is about distribution—how people get a share in what is produced. Everything
from trade policies to government projects to commercial regulations will in
the future be evaluated by distribution. Politics will change, free-market
beliefs will change, social structures will change.
We are still at the start of this shift,
but it will be deep and will unfold indefinitely in the future.
The
third morphing
How did we get to where we are now? About
every 20 years or so the digital revolution morphs and brings us something
qualitatively different. Each morphing issues from a set of particular new
technologies, and each causes characteristic changes in the economy.
The first morphing, in the 1970s and ’80s,
brought us integrated circuits—tiny processors and memory on microchips that
miniaturized and greatly speeded calculation. Engineers could use
computer-aided design programs, managers could track inventories in real time,
and geologists could discern strata and calculate the chance of oil. The
economy for the first time had serious computational assistance. Modern fast
personal computation had arrived.
The second morphing, in the 1990s and
2000s, brought us the connection of digital processes. Computers got linked
together into local and global networks via telephonic or fiber-optic or
satellite transmission. The Internet became a commercial entity, web services
emerged, and the cloud provided shared computing resources. Everything suddenly
was in conversation with everything else.
It’s here that the virtual economy of
interconnected machines, software, and processes emerges, where physical
actions now could be executed digitally. And it’s also here that the age-old
importance of geographical locality fades. An architecture firm in Seattle
could concern itself with the overall design of a new high-rise and have less
expensive workers in Budapest take care of the detailing, in an interactive
way. Retailers in the United States could monitor manufacturers in China and
track suppliers in real time. Offshoring took off, production concentrated
where it was cheapest—Mexico, Ireland, China—and previously thriving home local
economies began to wither. Modern globalization had arrived and it was very
much the result of connecting computers.
The third morphing—the one we are in
now—began roughly in the 2010s, and it has brought us something that at first
looks insignificant: cheap and ubiquitous sensors. We have radar and lidar
sensors, gyroscopic sensors, magnetic sensors, blood-chemistry sensors, pressure,
temperature, flow, and moisture sensors, by the dozens and hundreds all meshed
together into wireless networks to inform us of the presence of objects or
chemicals, or of a system’s current status or position, or changes in its
external conditions.
These sensors brought us data—oceans of
data—and all that data invited us to make sense of it. If we could collect
images of humans, we could use these to recognize their faces. If we could
“see” objects such as roads and pedestrians, we could use this to automatically
drive cars.
As a result, in the last ten years or
more, what became prominent was the development of methods, intelligent
algorithms, for recognizing things and doing something with the result. And so
we got computer vision, the ability for machines to recognize objects; and we
got natural-language processing, the ability to talk to a computer as we would
to another human being. We got digital language translation, face recognition,
voice recognition, inductive inference, and digital assistants.
What came as a surprise was that these
intelligent algorithms were not designed from symbolic logic, with rules and
grammar and getting all the exceptions correct. Instead they were put together
by using masses of data to form associations: This complicated pixel pattern
means “cat,” that one means “face”—Jennifer Aniston’s face. This set of Jeopardy! quiz
words points to “Julius Caesar,” that one points to “Andrew Jackson.” This
silent sequence of moving lips means these particular spoken words. Intelligent
algorithms are not genius deductions, they are associations made possible by
clever statistical methods using masses of data.
Of course the clever statistical
techniques took huge amounts of engineering and several years to get right.
They were domain specific, an algorithm that could lip read could not recognize
faces. And they worked in business too: this customer profile means “issue a
$1.2 million mortgage”; that one means “don’t act.”
Computers, and this was the second
surprise, could suddenly do what we thought only humans could do—association.
The
coming of external intelligence
It would be easy to see associative
intelligence as just another improvement in digital technology, and some
economists do. But I believe it’s more than that. “Intelligence” in this
context doesn’t mean conscious thought or deductive reasoning or
“understanding.” It means the ability to make appropriate associations, or in
an action domain to sense a situation and act appropriately. This fits with
biological basics, where intelligence is about recognizing and sensing and
using this to act appropriately. A jellyfish uses a network of chemical sensors
to detect edible material drifting near it, and these trigger a network of
motor neurons to cause the jellyfish to close automatically around the material
for digestion.
Thus when intelligent algorithms help a
fighter jet avoid a midair collision, they are sensing the situation, computing
possible responses, selecting one, and taking appropriate avoidance action.
There doesn’t need to be a controller at
the center of such intelligence; appropriate action can emerge as the property
of the whole system. Driverless traffic when it arrives will have autonomous
cars traveling on special lanes, in conversation with each other, with special
road markers, and with signaling lights. These in turn will be in conversation
with approaching traffic and with the needs of other parts of the traffic
system. Intelligence here—appropriate collective action—emerges from the
ongoing conversation of all these items. This sort of intelligence is
self-organizing, conversational, ever-adjusting, and dynamic. It is also
largely autonomous. These conversations and their outcomes will take place with
little or no human awareness or intervention.
The interesting thing here isn’t the form
intelligence takes. It’s that intelligence is no longer housed internally in
the brains of human workers but has moved outward into the virtual economy,
into the conversation among intelligent algorithms. It has become external. The
physical economy demands or queries; the virtual economy checks and converses
and computes externally and then reports back to the physical economy—which
then responds appropriately. The virtual economy is not just an Internet of
Things, it is a source of intelligent action—intelligence external to human
workers.
This shift from internal to external
intelligence is important. When the printing revolution arrived in the 15th and
16th centuries it took information housed internally in manuscripts in
monasteries and made it available publicly. Information suddenly became
external: it ceased to be the property of the church and now could be accessed,
pondered, shared, and built upon by lay readers, singly or in unison. The
result was an explosion of knowledge, of past texts, theological ideas, and
astronomical theories. Scholars agree these greatly accelerated the
Renaissance, the Reformation, and the coming of science. Printing, argues
commentator Douglas Robertson, created our modern world.
Now we have a second shift from internal
to external, that of intelligence, and because intelligence is not just
information but something more powerful—the use of
information—there’s no reason to think this shift will be less powerful than
the first one. We don’t yet know its consequences, but there is no upper limit
to intelligence and thus to the new structures it will bring in the future.
How this
changes business
To come back to our current time, how is
this externalization of human thinking and judgment changing business? And what
new opportunities is it bringing?
Some companies can apply the new
intelligence capabilities like face recognition or voice verification to
automate current products, services, and value chains. And there is plenty of
that.
More radical change comes when companies
stitch together pieces of external intelligence and create new business models
with them. Recently I visited a fintech (financial technology) company in
China, which had developed a phone app for borrowing money on the fly while
shopping. The app senses your voice and passes it to online algorithms for
identity recognition; other algorithms fan out and query your bank accounts,
credit history, and social-media profile; further intelligent algorithms weigh
all these and a suitable credit offer appears on your phone. All within
seconds. This isn’t quite the adoption of external intelligence; it is the
combining of sense-making algorithms, data-lookup algorithms, and
natural-language algorithms to fulfill a task once done by humans.
In doing this, businesses can reach into
and use a “library” or toolbox of already-created virtual structures as Lego
pieces to build new organizational models. One such structure is the
blockchain, a digital system for executing and recording financial
transactions; another is Bitcoin, a shared digital international currency for
trading. These are not software or automated functions or smart machinery.
Think of them as externally available building blocks constructed from the
basic elements of intelligent algorithms and data.
The result, whether in retail banking,
transport, healthcare, or the military, is that industries aren’t just becoming
automated with machines replacing humans. They are using the new intelligent
building blocks to re-architect the way they do things. In doing so, they will
cease to exist in their current form.
Businesses can use the new opportunities in other ways. Some large tech companies can
directly create externally intelligent systems such as autonomous air-traffic
control or advanced medical diagnostics. Others can build proprietary databases
and extract intelligent behavior from them. But the advantages of being large
or early in the market are limited. The components of external intelligence
can’t easily be owned, they tend to slide into the public domain. And data
can’t easily be owned either, it can be garnered from nonproprietary sources.
So we will see both large tech companies
and shared, free, autonomous resources in the future. And if past technology
revolutions are indicative, we will see entirely new industries spring up we
hadn’t even thought of.
Reaching
the ‘Keynes point’
Of course there’s a much-discussed
downside to all this. The autonomous economy is steadily digesting the physical
economy and the jobs it provides. It’s now a commonplace that we no longer have
travel agents or typists or paralegals in anything like the numbers before;
even high-end skilled jobs such as radiologists are being replaced by
algorithms that can often do the job better.
Economists don’t disagree about jobs vanishing,
they argue over whether these will be replaced by new jobs. Economic history
tells us they will. The automobile may have wiped out blacksmiths, but it
created new jobs in car manufacturing and highway construction. Freed labor
resources, history tells us, always find a replacement outlet and the digital
economy will not be different.
I am not convinced.
Erik Brynjolfsson and Andrew McAfee of the
Massachusetts Institute of Technology point out that when automotive transport
arrived, a whole group of workers—horses—were displaced, never to be employed
again. They lost their jobs and vanished from the economy.
I would add another historical precedent.
Offshoring in the last few decades has eaten up physical jobs and whole
industries, jobs that were not replaced. The current transfer of jobs from the
physical to the virtual economy is a different sort of offshoring, not to a
foreign country but to a virtual one. If we follow recent history we can’t
assume these jobs will be replaced either.
In actual fact, many displaced people
become unemployed; others are forced into low-paying or part-time jobs, or into
work in the gig economy. Technological unemployment has many forms.
The term “technological unemployment” is
from John Maynard Keynes’s 1930 lecture, “Economic possibilities for our
grandchildren,” where he predicted that in the future, around 2030, the
production problem would be solved and there would be enough for everyone, but
machines (robots, he thought) would cause “technological unemployment.” There
would be plenty to go around, but the means of getting a share in it, jobs,
might be scarce.
We are not quite at 2030, but I believe we
have reached the “Keynes point,” where indeed enough is produced by the
economy, both physical and virtual, for all of us. (If total US household
income of $8.495 trillion were shared by America’s 116 million households, each
would earn $73,000, enough for a decent middle-class life.) And we have reached
a point where technological unemployment is becoming a reality.
The problem in this new phase we’ve
entered is not quite jobs, it is access to what’s produced. Jobs have been the
main means of access for only 200 or 300 years. Before that, farm labor, small
craft workshops, voluntary piecework, or inherited wealth provided access. Now
access needs to change again.
However this happens, we have entered a
different phase for the economy, a new era where production matters less and
what matters more is access to that production: distribution,
in other words—who gets what and how they get it.
We have entered the distributive era.
The
realities of the distributive era
A new era brings new rules and realities,
so what will be the economic and social realities of this new era where
distribution is paramount?
1. The criteria for assessing policies
will change. The old production-based economy
prized anything that helped economic growth. In the distributive economy, where
jobs or access to goods are the overwhelming criteria, economic growth looks
desirable as long as it creates jobs. Already, unpopular activities such as
fracking are justified on this criterion.
The criteria for measuring the economy
will also change. GDP and productivity apply best to the physical economy and
do not count virtual advances properly.
2. Free-market philosophy will be more
difficult to support in the new atmosphere. It
is based on the popular notion that unregulated market behavior leads to
economic growth. I’ve some sympathy with this. Actual economic theory has two
propositions. If a market—the airline market, say—is made free and operates
according to a host of small-print economic conditions, it will operate so that
no resources are wasted. That’s efficiency. Second, there will be winners and
losers, so if we want to make everyone better off, the winners
(big-hub airlines, in this case) need to compensate the losers: small airlines
and people who live in remote places. That’s distribution, and overall everyone
is better off.
In practice, whether with international
trade agreements or deregulation or freeing up markets, the efficiency part
holds at best sort of; often unregulated behavior leads to concentration as
companies that get ahead lock in their advantage. And in practice, in the
United States and Britain, those who lose have rarely been compensated. In
earlier times they could find different jobs, but now that has become
problematic. In the distributive era free-market efficiency will no longer be
justifiable if it creates whole classes of people who lose.
3. The new era will not be an economic one
but a political one. We’ve seen the harsh beginnings of
this in the United States and Europe. Workers who have steadily lost access to
the economy as digital processes replace them have a sense of things falling
apart, and a quiet anger about immigration, inequality, and arrogant elites.
I’d like to think the political upheaval
is temporary, but there’s a fundamental reason it’s not. Production, the
pursuit of more goods, is an economic and engineering problem; distribution,
ensuring that people have access to what’s produced, is a political problem. So
until we’ve resolved access we’re in for a lengthy period of experimentation,
with revamped political ideas and populist parties promising better access to
the economy.
This doesn’t mean that old-fashioned
socialism will swing into fashion. When things settle I’d expect new political
parties that offer some version of a Scandinavian solution: capitalist-guided
production and government-guided attention to who gets what. Europe will find
this path easier because a loose socialism is part of its tradition. The United
States will find it more difficult; it has never prized distribution over
efficiency.
Whether we manage a reasonable path
forward in this new distributive era depends on how access to the economy’s
output will be provided. One advantage is that virtual services are essentially
free. Email costs next to nothing. What we will need is access to the remaining
physical goods and personal services that aren’t digitized.
For this we will still have jobs,
especially those like kindergarten teaching or social work that require human
empathy. But jobs will be fewer, and work weeks shorter, and many jobs will be
shared. We will almost certainly have a basic income. And we will see a great
increase in paid voluntary activities like looking after the elderly or
mentoring young people.
We will also need to settle a number of
social questions: How will we find meaning in a society where jobs, a huge
source of meaning, are scarce? How will we deal with privacy in a society where
authorities and corporations can mine into our lives and finances, recognize our
faces wherever we go, or track our political beliefs? And do we really want
external intelligence “helping” us at every turn: learning how we think,
adjusting to our actions, chauffeuring our cars, correcting us, and maybe even
“nurturing” us? This ought to be fine, but it’s like having an army of
autonomous Jeeveses who altogether know too much about us, who can anticipate
our needs in advance and fulfill them, and whom we become dependent upon.
All these challenges will require
adjustments. But we can take consolation that we have been in such a place
before. In 1850s Britain, the industrial revolution brought massive increases
in production, but these were accompanied by unspeakable social conditions,
rightly called Dickensian. Children were working 12-hour shifts, people were
huddled into tenements, tuberculosis was rife, and labor laws were scarce. In
due time safety laws were passed, children and workers were protected, proper
housing was put up, sanitation became available, and a middle class emerged. We
did adjust, though it took 30 to 50 years—or arguably a century or more. The
changes didn’t issue directly from the governments of the time, they came from
people, from the ideas of social reformers, doctors and nurses, lawyers and
suffragists, and indignant politicians. Our new era won’t be different in this.
The needed adjustments will be large and will take decades. But we will make
them, we always do.
By W. Brian Arthur
https://www.mckinsey.com/business-functions/mckinsey-analytics/our-insights/where-is-technology-taking-the-economy?cid=other-eml-alt-mkq-mck-oth-1712
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