Where are the next innovations that drive our economy coming from?

We are living through a time which seems to be pulling us rapidly into a future painted by science fiction. We touch a screen and the world is quite literally at our fingertips. We can dictate a question into our cell phones and an instant search of the world’s knowledge returns an answer. Through social media we can watch events unfold in every corner of the world, and keep in multimedia contact with loved ones no matter where they are. Cloud computing allows us to access sophisticated software to run a competitive business with a skeletal staff and monitor our homes, and we’ve watched twentysomething entrepreneurs with market-ready ideas become billionaires in a startlingly short time frame. 3D printing is in its infancy but even now we can see its potential to transform manufacturing, and self-driving cars are already on the road. The rate of technological innovation is breathtaking.

And yet, some influential economists are feeling pessimistic about our ability to generate the kinds of innovations that have driven growth over the last two hundred years. Although there is a general consensus amongst economists that innovation is a major driver of productivity, what they do not agree upon is whether innovation – and therefore productivity – is currently on an upward or downward trend. The answer to that question is obviously of vital interest to investors who benefit from the markets created by new products and services.

“A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”  This statement by the Nobel winning economist Paul Krugman sums up the relationship between prosperity and productivity. In mid-20th century America, the real output per person in America was growing at 2.5% per year, a rate at which productivity and incomes double once a generation; it started falling in the 1970s and in the 2000s fell below 1%. [Source: The Economist, Jan 12, 2013, Has the ideas machine broken down?]

Let’s put this in an historical perspective. Consider the long-term effects of the new technologies that brought about the Industrial Revolution, with the introduction of the steam engine in the mid-1700s; followed in the late-1800s by electricity, indoor plumbing and the combustion engine. Building upon these inventions drove accelerating change deep into the 20th century.  By augmenting the physical capabilities of human labour with increasingly sophisticated machines, cascading innovations over two hundred years drove dramatic increases in productivity and prosperity. They also made many staples of the agrarian economy they supplanted superfluous. For example, apart from recreation, there was little need for horses as railways, cars and farm machinery replaced work they had done for centuries. As many types of jobs were automated over time, workers were displaced and people had to learn new skills. So, with great change and extraordinary benefits for the general population came great disruption in successive segments of the economy.

An important observation is that it took over two hundred years to unlock the potential offered by the new technologies and incorporate them into the mass market. Change didn’t happen in a smooth, uninterrupted flow and not all technologies were developed at the same time: consider space exploration, which made dramatic advances until its political relevance diminished at the end of the Cold War. Innovations which were developed in one sector gradually cross-pollinated into another (i.e., light weight, highly efficient clothing developed for astronauts found a use in sportswear). Space technology has just lately started to move forward again, this time with the backing and marketing knowhow of the private sector (i.e., Elon Musk’s SpaceX).

By the mid-20th century, the next ‘big idea’ was taking root, with the power to transform our lives and extend our human capabilities in ways we still have trouble imagining. The internet and other innovations generated by powerful new information and communications technology have already brought dazzling changes to our lives, as well as producing extraordinary wealth. Furthermore, the rate of change has been explosive, with innovations within the last decade permeating our entire lives, both business and personal. They have transformed the way we access information (‘google’ became a verb); communicate with each other (e-mail, virtual meetings and social media); and collect, analyze and use a world of information (Big Data). New services quickly supplant a previous innovation and are put to widespread use, often within months of their introduction. The rate and extent of change seems overwhelming.

While no one disputes the value of the changes technology has brought us over the past couple of decades, some economists hold the view that innovation has stalled and that therefore productivity will stall along with it. In brief, they believe that the economic benefits created by information and communications technology have already been captured, and that further innovations are adding to our enjoyment of life but are not generating significant revenue. Furthermore, with each recession, jobs are lost and not replaced when times improve because technology is replacing many human functions.

In one of the most influential books of 2014 – The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies   ̶  MIT`s Erik Brynjolfsson and Andrew McAfee present a convincing case that a new age of innovation is just taking hold. They argue that we have entered a “Second Machine Age” and that we have just scraped the surface of the transformative and exponential changes that new technologies are bringing. Other sectors – such as medicine, energy and manufacturing – are starting to use these technologies and will inevitably be transformed by them. A central tenet of their argument is that an almost infinite stream of innovations will come from combining and recombining ideas and digitized information. Furthermore, unlike physical material, the bits of information that are the raw material of new technologies are not used up when you use them, which creates a different relationship to scarcity and how we value things. Producing the information is costly, but once it has been digitized, it can be used, duplicated, combined and recombined very cheaply (think of how e-books have transformed the publishing business).

In many ways, capitalism can be described as a creatively destructive force. Early versions of a technology wipe out whole industries, as innovation seldom comes from within the industry that is being displaced. Progress is not smooth and uninterrupted. It takes time for paradigm changing technologies to be fully incorporated and the endless possibilities explored and exploited. Because the new technologies increasingly compete with human labour, social policy will have to develop in step with technological change. However, given all these challenges, for those with the courage and foresight to explore new ideas and the new ways of doing things, the world is full of opportunities.

This article was originally published by Daryn Form in Business Advisor.

Daryn Form is a Senior Financial Advisor with Assante Capital Management Ltd. providing wealth management services to principals of family-owned and privately held companies. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and is registered with the Investment Industry Regulatory Organization of Canada.  The information mentioned in this article is for general information only. Please contact him to discuss your particular circumstances prior to acting on the information above.  The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd.  Rates are not guaranteed and are subject to change at any time without notice.