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Digital technologies at an inflection point: cornucopia but also extreme wealth inequality and structural unemployment
on 24 March 2014
The thesis of the book is simple but profound, the documentation impeccable with a wealth of data, statistics, graphs, and figures while the writing is clear, concise, informal, smoothly flowing, inviting, and well structured.
The focus of the book concerns our impressive technological progress and explains why the scale and pace of digital technologies is bound to accelerate in the future. The centrality of the book relates to the two economic consequences of this progress namely bounty and spread. Bounty is the increase in volume, variety, and quality and the decrease in cost of the many offerings brought by modern digital technologies. Spread, the negative and troubling aspect of this progress is increasing wealth inequality, progressive unemployment, and reduction in social mobility. Spread has been demonstrated to increase in recent years. It is destined to accelerate in the second machine age unless we intervene. The book stresses that the economic goals should be to maximize the bounty while mitigating the negative effects of the spread. The choices we make will determine the world we are going to live in.
In order to understand why digital technologies are presently unfolding we have to obtain an insight into the nature of technological progress in the era of digital hardware, software, and networks. Its three key characteristics are exponential, digital, and combinatorial.
Exponential growth eventually leads to staggeringly big numbers which defy our intuition and imagination. The critical building blocks of computing - microchip density, processing speed, storage capacity, energy efficiency, download speed etc. have been improving at exponential rates for a long time and they presently are at an inflection point.
The digitization of just about everything. The unique economic properties of digital information: such information is non-rival, and it has close to zero marginal cost of reproduction. In plain English we might say that digital information is not 'used up' when it gets used, and it is extremely cheap to make another copy of a digital resource. - Making things free, perfect, and instant might seem like unreasonable expectations for most products, but as more information is digitized, more products will fall into these categories.
Digital technologies are general purpose technologies for they are pervasive, improve over time, and able to spawn new innovations; additionally digital innovation is recombinant information in its purest form.
Unlike the steam engine or electricity, second machine age technologies continue to improve at remarkably exponential pace, replicating their power with digital perfection and creating even more opportunity for combinatorial information.
Production in the second machine age depends less on physical equipment and structures and more on four categories of intangible assets: intellectual property, organizational capital, user generated content, and human capital. Digital technologies have very wide application e.g in photography, music, the media, in finance and publishing, in retailing, distribution, services, and manufacturing.
Both theory and data, however, suggest that the combination of bounty and spread is not a coincidence. Advances in technology, especially digital technologies, are driving an unprecedented reallocation of wealth and income. Digital technologies can replicate valuable ideas, insights, and innovation at very low cost. This creates bounty for society and wealth for investors, but diminishes the demand for previously important types of labor, which can leave many people with reduced incomes and progressive unemployment.
For about two hundred years, wages did increase alongside productivity. This created a sense of inevitability that technology helped (almost) everyone. But more recently, median wages have stopped tracking productivity, underscoring the fact that the decoupling of productivity and employment is not only a theoretical possibility but also an empirical fact in our current economy. The median income fell by by 10% from 1999 to 2011 even as overall GDP hit a record high while the distribution of wealth is skewed towards the wealthy: for the first time since before the Great Depression, over half of the total income in the United States went to the top 10 percent of Americans in 2012. The top 1 percent earned over 22 percent of income, more than doubling their share since the early 1980s. The share of income going to the top hundredth of one percent of Americans, a few thousand people with incomes over $11 million, is now at 5.5 percent, after increasing more between 2011 and 2012 than at any year since 1927-1928.
I shall conclude the review by drawing from the book of two other eminent authors cited in the book under review instead of delving in the correct but rather sketchy remedial measures suggested by the authors:
In 2012 economist Daron Acemoglu and political scientist James Robinson published 'Why Nations Fail', an account of hundreds of years of history aimed at uncovering, as the book subtitle puts it, 'the origins of power, prosperity, and poverty,'
According to Acemoglu and Robinson, the true origins are not geography, natural resources, or culture. Instead they are institutions like democracy, property rights, and the rule of law; inclusive ones bring prosperity, and extractive ones - ones that bend the economy and the rules of the game to the service of entrenched elite - bring poverty. Something like this we witness presently taking place in the United States.
I join Acemoglu and Robinson, Brynjolfsson and MaAffee in their plea that not only in USA but globally we strive for inclusive and not extractive societies.