The internet revolution isn’t changing our lives as much as you think

The new technologies do not entail a radical reshaping of modes of doing things. A driverless car is still a car. The internet and email may improve the speed of communication but it is not as radical as the advent of telephony

Satyajit Das
Sunday 30 October 2016 13:42 GMT
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Many recent ‘disruptive’ innovations such as Uber rely on decreased cost, using lower quality products or using untrained individuals or personal assets
Many recent ‘disruptive’ innovations such as Uber rely on decreased cost, using lower quality products or using untrained individuals or personal assets

Innovation entails a series of discontinuous, highly significant technological jumps, followed by gradual adoption and modest incremental improvements.

Economist Robert Gordon argues that the Second Industrial Revolution, entailing developments in electricity, internal combustion engines, modern communications, entertainment, petroleum/ hydro-carbons and chemicals, had the most impact on productivity and living standards. The Third Industrial Revolution, based around computing and the internet, appears to be less important. Its reduced impact is the result of its focus, and structure.

First, unlike key inventions of the Second Industrial Revolution, the emphasis has been on improving existing processes to expand its usage or increase efficiency. Computers have helped automate repetitive, routine and low-value administrative and clerical work. Increasingly sophisticated software, such as computer-aided manufacturing (CAM) and design (CAD), improved industrial efficiency. Linking users through sophisticated telecommunications, such as high-speed broadband and wireless connectivity, has extended this process, improving existing technologies, enhancing efficiency, speed, capability and power.

In many cases, the changes did not reduce the workload but used digital technology to disperse it across the workforce. For example, word processing software did not eliminate the need to type out documents but eliminated secretaries and typing pools leaving individuals to undertake the task themselves. It was a philosophy of doing more with less.

The new technologies also do not entail a radical reshaping of modes of doing things. A driverless car is still a car. The change is not equivalent to the shift from animal-powered transportation. The internet and email may improve the speed of communication but it is not as radical as the original advent of telephony and modern communication.

Second, the focus is on consumption, improving marketing and distribution of existing goods and services. It also centres on entertainment and communication, with tangential impact on productivity.

In June 2014, Amazon announced its latest innovation, a smartphone that uses image recognition technology to allow customers to purchase products by pointing it at more than 70 million objects in its online store. The “weapon of mass consumption” or a "point and shoot yourself in the foot" device was designed to minimise frictions and barriers to spending and provide instant gratification.

Alphabet (formerly Google) is, in reality, a giant advertising company, deriving a large proportion of its US$75bn (£61.5bn) in revenue from this source. Much of this is from search advertising where Google places ads related to what someone is looking for online, exploiting the firm domination of the global search markets (around 70 per cent market share). Facebook’s business model is similar. Like Google, its size and large user base allows it to gain personal and behavioural information, interests and connections enabling it to target advertising effectively.

The post-2000 internet boom has focused on instant messaging, online gaming, video games and new media. A major area has been social media, which one commentator wryly dismissed as “just places for people to express their narcissism cheaply”.

Interestingly, by 2016, users were complaining of fatigue as they were increasingly inundated by a flood of addictive but useless and invasive messages from a variety of fragmented applications.

Third, many new technologies displace or cannibalise existing industries, limiting the effect on growth and productivity.

For example, gramophone records were replaced successively by cassette tapes, CDs, MP3, and digital media such as iTunes and live streaming. Some 30 years after it was displaced, analogue vinyl re-emerged as an expensive, fashionable niche product, completing the cycle. Although it made minimal difference to their enjoyment, people owned the same music in several different media, together with the associated paraphernalia, creating a peculiar form of economic activity.

Smartphones and tablets cannibalise desk top and lap top computers. They have cannibalised mobile phones and BlackBerries, portable music players such as Sony’s CD Walkman or MP3 players and personal digital assistants like the once ubiquitous Palm Pilot. They have also replaced low-end cameras and watches. They are incorporating GPS and other standalone devices. The revenue gain for smartphones is offset by the reduction in the products it replaces.

Google and blogs divert revenue from newspapers, publishing and libraries. Digital advertising diverts revenue from traditional newspaper, magazine and TV advertising. Email supplanted the existing system of communication via mail. Online entertainment and gaming replaces pre-existing modes of delivery of these products.

Fourth, the Third Industrial Revolution emphasises disruptive technologies, a term associated with Harvard professor Clayton Christensen and his influential 1997 book The Innovator's Dilemma. It differentiated between sustainable innovations, which improve products and make valuable changes for a firm's current customers, and disruptive innovations, cheaper, poorer-quality products that initially reaches less profitable customers but uses the threat of new potential products and new customers to seek to dominate the industry.

Many recent ‘disruptive’ innovations rely on decreased cost, using lower quality products or using untrained individuals or personal assets. Airbnb allows people to rent out their own lodging for accommodation. Uber, a ride-sharing application, allows individuals to use their own cars to provide transportation. Alternatively, it entails arbitraging regulations to lower costs. Many online media or entertainment services rely on unpaid labour that contributes their services for free.

The most notable effect is the alteration of industry economics. New technologies changed advertising rates in the US. The US$51 per thousand views in a newspaper became US$29 for TV, $15 magazines, $4.70 for desktops, $4.42 for tablets and $1.31 for mobile devices. In the words of one commentator: “newspaper dollars have turned to digital dimes – ten cent pieces – and those in turn are turning into mobile pennies”. In effect, innovation turned “analogue dollars” into “digital pennies”.

While advertisers benefitted, the loss of earnings of traditional media businesses resulted in less employment, less investment, and lower research and development expenditure. Arguably, it increased the diversity of information available. But the absence of fact checking and editorial oversight contributed to a loss of accuracy and quality.

Fifth, the key innovations of the Third Industrial Revolution are, by their nature, easily scalable. Electronic platforms and the pervasiveness of the internet mean that expansion of activity does not necessarily require a commensurate expansion in investment and operational capacity.

Many innovations also piggy-back off existing infrastructure. E-tailing and online stores rely on existing distribution and delivery infrastructure. The creation of automobiles required the parallel development of material suppliers, like steel, aluminium, lead and rubber, fuel supplies, servicing and repairs as well as the entire road and highway system. In contrast, new technologies rarely create this scale of ancillary and supporting industries.

These factors contribute to higher efficiency but reduce the overall economic impact.

Sixth, the hardware and software technologies that underpin some innovations are dynamic. This reduces their life cycle. It also leads to waste in terms of investment and also affects the speed of adoption.

Seventh, the new technologies have complex side effects. Computing and connectivity have destructive unintended uses, like spam, propagation of viruses and facilitating cyber crime, including identity theft. It creates a redundant cycle of destructive innovation and counter measures, such as anti-virus and anti-malware software, which does not generate true economic value.

While it may simply be too early for the full impact to become evident, the Third Industrial Revolution does not appear to have driven the epochal change of electricity or the internal combustion engine.

Satyajit Das is a former banker. His latest book is 'A Banquet of Consequences' (published in North America as The Age of Stagnation to avoid confusion as a cookbook). He is also the author of Extreme Money and Traders, Guns & Money.

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