The new technological revolution encourages subtle exploitation – don't believe the hype about 'innovation'

Innovation is not necessarily associated with strong economic growth and innovative economies are not always the most successful. Stories abound of coders living eight to a single bedroom or in a shipping container to work in their dream job

Technology isn't always a guaranteed force for good (Alamy)

Policy makers throughout the world now espouse the need for “innovation”. It is a manifestation of “techno-nationalism”, a term coined by technology historian David Edgerton in his book The Shock Of The Old.

The reason for this focus is simple. Innovation is seen as a way of boosting flagging growth, delivering improved living standards and allowing high levels of debt to be dealt with painlessly. Innovation is also viewed as a way to deal with environmental change (itself the result of uncontrolled and untempered technologies) without serious impact on economic activity and wealth.

This faith is founded more in hope rather than reality. Innovation is not necessarily associated with strong economic growth and innovative economies are not always the most successful.

First, the idea of innovation as expressed by policy makers is vague. It ranges from fuzzy ideas of progress to more narrow industry policy. The objective is to increase growth and create employment, especially well-paid work. However, the connection between new inventions or innovation and the identified objectives is tenuous, at best.

Second, there are few specific policy proposals, other than advertising campaigns, subsidised financing or investment programs, tax incentives and provision of infrastructure.

Ironically, some measures reverse earlier funding cuts. They seek to re-establish research facilities that were scaled back previously. Tax and financing incentives generally attract astute businesses, often foreign-based. These firms avail themselves of the benefits, but there is no guarantee that they will continue to operate in a specific location once the subsidies are discontinued.

Longer term initiatives, such as funding basic research, improving education or promoting science, may produce the best results. But they are inherently long term exceeding political temporal horizons.

Third, the prospects of success are uncertain. Genius and innovation cannot be engineered on demand. The rate of technological change of the nineteenth century, when, the method of invention was invented, may be difficult to rediscover.

Fourth, even if successful, smaller countries may be unable to capture the benefits. Business will naturally migrate to locations which are attractive in terms of finance availability, cost, ability to attract a suitable workforce, proximity to major customers and also tax structures. Public investment and support may create success which does not provide returns to the sponsoring nation. Many innovations now allow relocation of activities to lower cost providers remote to the purchaser.

Fifth, technology affects inequality.

New technologies may by-pass traditional structures and institutions, empowering the disadvantaged. However, they also divide the digital haves from the have-nots. Lower income families frequently lack access to technology, essential to participation in the knowledge economy which affects educational and employment opportunities.

The new technological revolution encourages subtle exploitation. The attraction of unicorn riches has attracted a new generation, who serve as cheap labour accepting shares in lieu of salary in the hope of a large pay-day when the firm goes public. Stories abound of coders living eight to a single bedroom or in a shipping container to work in their dream job. In effect, it does not create the well-paid jobs that would sustain expanded economic activity.

New technology such as robotics subtly affects the ability of emerging countries to develop. Historically, this has taken the form of using cheap labour to act as a manufacturing or business process outsourcing hub for developed nations. Automation, such as robotics, alters this process. Advanced economies, where higher labour cost structures have historically driven this form of outsourcing, are now choosing to retain these functions substituting technology for labour.

The process of “near shoring” or “radical inshoring” affects both economies. In advanced economies, it may reduce employment opportunities and wages. In developing economies, it restricts a familiar development trajectory in a process termed “premature deindustrialisation” by Harvard Professor Dani Rodrik. In the US, manufacturing employment peaked at around 25 per cent of the work force and 40 per cent in Germany. In developing countries, the peak appears to be much lower around 15-20 per cent. Given the strong link between manufacturing and development, this affects the economic prospect of emerging and frontier markets. Given that the process also affects global trade, it may also affect overall economic growth.

Sixth, many technologies require scale and the ability to operate globally. But fear of a new digital colonialism is leading to barriers to entry into many markets.

The tension was highlighted by comments by entrepreneur Marc Andreessen defending Facebook’s Free Basics, a controversial programme providing free mobile internet in poorer nations banned by Indian regulators. Andreesen used Twitter to criticise India’s ideological reasons for denying online access. He argued that the move was an economically suicidal decision based on India’s imperial history of fighting foreign economic intervention to the detriment of its own development and the interests of its people. Facebook founder Mark Zuckerberg quickly disassociated himself from the remarks. Andreessen belatedly deleted the tweet and issued contrite retractions. The public relations disaster damaged the firm’s business interests and its efforts to expand its audience and subscriber base.

The exchange highlighted deeper and legitimate concerns, focused around global domination of the Internet and technology by a few firms, unfair competition damaging indigenous competitors and control of crucial intellectual property and information.

Seventh, while some new innovations may prove significant, their overall impact will be limited. While a few creators capture large benefits, innovation now has a limited effect on economic growth. The new technologies have not created entirely new large-scale industries which increase employment and income levels, as was the case with many 19^th century inventions. Innovation has frequently entailed replacing labour with capital, reducing skill requirements, employment and wages. Given consumption makes up 60-70 per cent of economic activity in developed economies, this is significant.

In the US, technology remains small (less than 10 per cent) in terms on its share of gross value added of total output of US private enterprises and share of total private employment. IBM and Dell employ over 400,000 and 100,000 people respectively compared to around 10,000 for Facebook and around 50,000 for Google. Only around 0.5 per cent of US labour force is employed in industries that did not exist in 2000. Even in Silicon Valley, only 1.8 per cent of workers are employed in new industries.

The debate is not new. In 1955, showing off a new automatically operated plant, a company executive asked UAW head Walter Reuther: “How are you going to collect union dues from those guys [the robots]?” Reuther countered: “And how are you going to get them to buy Fords?”

The embrace of innovation is reminiscent of Alice’s encounter with the unicorn in Lewis Carroll’s Through the Looking Glass. The Unicorn tells Alice: “Well, now that we have seen each other, if you'll believe in me, I'll believe in you.” For the moment, with mounting economic problems and limited available options, policy makers have no choice but to place their faith in innovation.

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’.