Forget the robots, look out for the networks – a new perspective on the future digital drivers of productivity

Technology, be ready to be disappointed…

Economists are always taught to be careful not to extrapolate from their own experiences to develop conclusions for the economy as a whole. I am conscious therefore that the fact I have worked extensively in the technology and telecommunications sectors may make me too sceptical of claims about the pace at which technology will change our economy and society. Nevertheless, while I am sure we will continue to see technological change, my experience leads me to believe that the rate of adoption and impact will continue to lag the forecasts that regularly capture the headlines.

I am, however, not just a sceptic about the pace of change, I also find myself more in agreement with the likes of Robert Gordon rather than Bryjolfsson and McAfee, and remain unconvinced about many of the predictions of the scale of the upcoming impact of technology. Gordon argued in “The rise and fall of American growth”, that the upcoming range of technologies does not possess the potential to drive rapid productivity improvements of the scale seen in the period 1940 to 1950 with an impact through to 1970.

…which means its hard to find the money…

Prejudice and personal experience aside, the primary reason for my scepticism about the likely rate of change is the level of investment that is required to introduce new technology. With corporate capital investment under pressure in most developed economies and businesses seeking to maximise the useful life of their assets as far as possible, investment is difficult to generate. This is why productivity growth is important – if new technologies are not able to increase the level of productivity in the economy, then the business cases for investment will not be attractive and hence the wave of investment required to drive a major technological revolution looks some way off.

…but maybe I am wrong…

At the heart of the challenge to the benefits of technology in the work of Gordon and others is the failure of increased investment in technology to deliver faster productivity gain. A new paper by Iraj Sanjee, Sanjay Kamat, Subra Prakash and Marcus Weldon published in the Bell Labs Technical Journal provides a convincing narrative of how the potential of technology to improve productivity will be realised. The authors use the analysis of diffusion to identify how previous waves of investment that underpinned the first and second industrial revolutions drove productivity improvement and use the results of this analysis to develop a model to describe the path to realise potential future benefits.

The analysis in the paper identifies four physical “networked” technologies: communication, energy, transportation and health & sanitation as underpinning the productivity gains identified by Gordon. The authors suggest that these are foundational technologies and underpin the other inventions identified by Gordon in the productivity story which unfolded from 1940 to 1950. The discussion then goes on to identify that the major shift in productivity growth came when the penetration of these foundation technologies reached 51% of the population. While the paper stresses that the findings demonstrate a correlation but not a causal relationship, they are food for thought and intuitively appealing.

…digital networks can shape the future…

Looking forward, the paper sets out a hypothesis for future productivity gains based on five digital networks, the digital versions of the four previously identified networks and a new fifth network, digital production based on 3D printing and Edge Cloud systems. Looking forward, these networks will achieve 51% penetration on average between 2028 and 2033 which, if past performance repeats itself, will be when we can expect an upsurge in productivity improvement.

The five digital networks will address more complex needs than was the case with the four foundation networks, reflecting society’s more advanced and sophisticated demands compared to three quarters of a century ago. This is important as it provides a convincing argument to the lack of productivity impact to date. One of my concerns has always been that while we could see innovation, such as smartphones, they were primarily digitalising existing activity rather than creating new possibilities. The five digital networks are combinatorial in nature and the major benefits come from the interaction between them creating new applications such as mobile health and this is what drives the forecast surge in productivity.

As a result of the impact of the five digital networks once they reach scale, a huge amount of time will be freed up. Not only will we be able to do existing activities more efficiently but the resources freed up will be able to be used to do other things. With technology as an enabler, new possibilities will open us as well as the delivery of higher quality in existing activities.

…and then we have a business case…

The expected surge in productivity provides the basis for identifying how the investment required to drive technological change can be generated. The potential productivity gains offer opportunities to both the public and private sector entities to improve their operations and performance, creating business cases that will generate sufficient returns to overcome risk averse investment decision-making. Indeed, conversations with the authors of the report, suggest that private sector businesses are already positioning to benefit from future change with investment in research and pilot projects, and their expectation is that private capital will be the catalyst for the early stage of the investment surge that will facilitate the establishment of the five digital networks.

…that we need to explore further…

I am pleasantly surprised to have had my technological scepticism challenged. My major doubt has always been how we will stimulate the investment required to generate the scale of benefits and level of change forecast without a clear economic and financial case. The identification of network technologies as the core drivers of historic productivity surges and the linkages between this experience and future possibilities is compelling. In particular, the identification of the potential tipping point of 51% penetration and the combinatorial potential of the digital networks acting to free up time provides a believable basis for the future potential and hence for a realisable economic and financial case.

The work has so far only covered one country but is sufficiently interesting to justify a call for further work. We need to understand if the findings hold in other countries and then to seek to identify the potential scale of benefits and the outline distribution of these across society.

This will provide the basis for meaningful policy analysis which should include an analysis of the potential case for public sector intervention to at least support, and potentially look to accelerate, network build. This support could obviously include funding but also the analysis of potential barriers to network delivery. However, the most interesting area could be to consider how the public sector can support the identification and delivery of the combinatorial benefits by providing a framework for collaborative working across sectors of the economy.

Another critical area will be the consideration of the implications for skills development, both to facilitate network development but also to ensure the benefits can be captured. Given the time lags in skills development, this is an issue that should be addressed sooner rather than later to ensure that there are no constraints on either networks being delivered or on the benefits being realised once the capabilities exist.

 

 


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