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In the Nation's Interest

Turning "Cool" Into Productive:  Leveraging Innovation to Achieve (Macro) Economic Growth

Economists have been puzzling over the simultaneity of, on the one hand, obviously amazing, useful advances in digital technologies and products that we all value highly at a personal level, and yet, on the other hand, very mediocre figures on the growth and productivity of the overall economy.  Are economists just not able to attach dollar values to the “utility” value consumers get from technologically-produced goods and services or the value-added that digital technology and services add via production “supply chains” to the value of final goods and services?  Or are these recent technological developments that comprise the “New Digital Economy” (e.g., mobile technology and applications (“apps”), ubiquitous internet access, “cloud” data storage and computing) simply not as revolutionary and economically “game-changing” or ”earth-shattering”—nor as economically fundamental? Are the new technologies more frivolous (and “virtual”) than tangibly real in value compared with what prior technological advances—such as electricity, cars, airplanes, and air conditioning—meant for the productivity of the real economy as a whole?  All those factors are likely operating to some extent, and yet none reconciles the lack of synchronicity between the trends in innovation (upward) and the trends in economy-wide productivity (flat).

Harvard professor Dani Rodrik recently described this scratching of economists’ heads and the different theories and perspectives on the influence of innovation on productivity, in a column called "Innovation is Not Enough":

"We seem to be living in an accelerated age of revolutionary technological breakthroughs. Barely a day passes without the announcement of some major new development in artificial intelligence, biotechnology, digitization, or automation. Yet those who are supposed to know where it is all taking us can’t make up their minds.

"At one end of the spectrum are the techno-optimists, who believe we are on the cusp of a new era in which the world’s living standards will rise more rapidly than ever. At the other end are the techno-pessimists, who see disappointing productivity statistics and argue that the new technologies’ economy-wide benefits will remain limited. Then there are those – the techno-worriers? – who agree with the optimists about the scale and scope of innovation but fret about the adverse implications for employment or equity."

I would suggest that leaves most economists in the “techno-wonderers” more than “worriers” category.  (We like to remain unbiased and noncommittal, after all.)  Why haven’t all these cool, new, technological innovations “lit a fire” under larger swaths of our economy?  Why haven’t we seen output per worker rise as it becomes easier and faster for humans to get our jobs done with all the new technology? 

Rodrik goes on to explain that merely inserting innovation into certain (tiny) corners of an economy “is not enough” to make that economy everywhere more productive.  That “good stuff” has to be spread around broadly and effectively absorbed by all the parts of the economy that are most thirsty for it and that would most benefit from it.  (One must swish that fluoride rinse in your mouth “vigorously” and “like you mean it,” after all.)

"What distinguishes these perspectives from one another is not so much disagreement about the rate of technological innovation. After all, who can seriously doubt that innovation is progressing rapidly? The debate is about whether these innovations will remain bottled up in a few tech-intensive sectors that employ the highest-skilled professionals and account for a relatively small share of GDP, or spread to the bulk of the economy. The consequences of any innovation for productivity, employment, and equity ultimately depend on how quickly it diffuses through labor and product markets.

"Technological diffusion can be constrained on both the demand and supply sides of the economy… In rich economies, consumers spend the bulk of their income on services such as health, education, transportation, housing, and retail goods. Technological innovation has had comparatively little impact to date in many of these sectors.

"Consider some of the figures provided by the McKinsey Global Institute’s recent report Digital America. The two sectors in the United States that have experienced the most rapid productivity growth since 2005 are the ICT (information and communications technology) and media industries, with a combined GDP share of less than 10%. By contrast, government services and health care, which together produce more than a quarter of GDP, have had virtually no productivity growth.

"Techno-optimists, such as the McKinsey authors, look at such numbers as an opportunity: There remain vast productivity gains to be had from the adoption of new technologies in the lagging sectors. The pessimists, on the other hand, think that such gaps may be a structural, lasting feature of today’s economies."

So how to better spread and speed up such “technological diffusion” to translate innovation into economy-wide productivity gains?  In a new report on the digital economy, The Conference Board recently took a closer look at the technological innovations of the “new digital economy” and the forms and extent of take-up by different industries.  In two blog posts (“The New Digital Economy is not paying off in terms of higher productivity—yet” and “Making dollars (and sense) out of the New Digital Economy”) chief economist Bart van Ark explains (emphasis added):

"Despite rapid digital innovation, booming spending on digital services, and spectacular tech-price declines, the New Digital Economy of mobile, broadband, and cloud has had little visible impact thus far on hard measures of growth, productivity, or profits…

"…why are we not seeing the productivity effects of all this activity? As we describe in our report, it turns out that more spending on digital innovation doesn’t give us the productivity growth yet. That also requires business innovations, for example the ability to turn data analytics into insights that help to generate new product and service offerings. Companies need to do a lot more than buying cloud services to go through this digital transformation process. For example, we find that higher investment in knowledge based assets, such as product and service design, workforce training and organizational improvement, are highly complementary with increasing spending on [Information and Communications Technology (ICT)] services. But it will be a while before we will see the effects on productivity.

"While [“General Purpose Technologies”] always take time to evolve, there are two reasons to be concerned that it is perhaps taking unusually long to see the results from the New Digital Economy. First, slow growth in the aggregate economy doesn’t help even though there are different opinions about the causes.  These include demand constraints due to disincentives to spend and invest, or supply constraints—like slowing labor force growth and weak productivity growth—that are holding growth back.

"Second, it may simply be harder this time for an organization to fully accomplish the digital transformation process. Digital technologies and the data they produce need to be employed to connect organizations, people, physical assets, processes, etc. for the purpose of rapidly developing new products, services, markets, and business models to capitalize on emerging customer needs. So it’s not just about buying the right digital assets and services, but about business innovations which build on those to create real value for a business. It is not difficult to see that is significantly more disruptive and impactful for organizations today to develop business solution[s] for the New Digital Economy than it was in the Old Digital Economy, when the PC was introduced and the internet was used primarily for marketing and e-commerce."

The Conference Board report highlights several steps companies can take to accelerate their own “digital transformation” and move faster from the installation phase toward the deployment phase:

  • "Taking advantage of ongoing rapid price declines in ICT assets and services to obtain significant cost reductions, without running up cost elsewhere.
  • Leveraging the shift from investment in ICT assets to purchased digital services to increase business flexibility in raising productivity and speeding up the bringing to market of new products and services.
  • Creating key knowledge-based assets (product and services design, workforce training, and organizational improvements) to strengthen innovative capabilities.
  • Assessing and managing different degrees of talent shortages among digital workers and tech-savvy workers.
  • Utilizing local innovation ecosystems by taking advantage of access to talent, partnerships, and shared services.
  • Creating agility and resiliency to anticipate and respond to the disruptive impact of new technology.

"To fully capture the growth and productivity effects the New Digital Economy offers, a digital strategy needs to be broad based as it touches on virtually every function and task in an organization. As the economic environment provides many headwinds, business leaders need to do continuous reality checks on opportunities and risks."

What about the concern that innovation and technological progress in the form of automation can actually replace (and displace) human workers?  Not to worry, according to (“techno-optimist”) McKinsey&Company (“Four Fundamentals of Workplace Automation”).  There are certain tasks where the “human touch” and “human thinking” will always out-perform machines.  The key is for businesses to leverage the technological capacity of machines to free up human workers to do more of what they are uniquely best at.  McKinsey’s “core insight”:

"[T]he road ahead is less about automating individual jobs wholesale, than it is about automating the activities within occupations and redefining roles and processes."

Some jobs and tasks cannot be fully “automated” and require the uniqueness of human creativity.  If machines can take over the more boring, repetitive-task work, it can leave the more interesting work experiences to the humans, encouraging greater labor force participation—just the opposite of reducing human work:

"Capabilities such as creativity and sensing emotions are core to the human experience and also difficult to automate. The amount of time that workers spend on activities requiring these capabilities, though, appears to be surprisingly low. Just 4 percent of the work activities across the US economy require creativity at a median human level of performance. Similarly, only 29 percent of work activities require a median human level of performance in sensing emotion.

"While these findings might be lamented as reflecting the impoverished nature of our work lives, they also suggest the potential to generate a greater amount of meaningful work. This could occur as automation replaces more routine or repetitive tasks, allowing employees to focus more on tasks that utilize creativity and emotion. Financial advisors, for example, might spend less time analyzing clients’ financial situations, and more time understanding their needs and explaining creative options. Interior designers could spend less time taking measurements, developing illustrations, and ordering materials, and more time developing innovative design concepts based on clients’ desires."

So, I think there’s no reason to be pessimistic about the influence of innovation on productivity; we economists just need to be patient.  At the same time, producers of economic activity and employers of our economy’s productive resources (whether for-profit businesses, non-profit organizations, or governments) need to be more proactive to better take advantage of technology in their own operations.  To better diffuse and leverage digital technologies to boost economy-wide productivity, a lot of innovation needs to happen within and across all kinds of organizations, and not just limited to the output and practices of businesses that fall within the “tech sector” and are at the productivity “frontier.”  We need to be re-designing human occupations and our organizational “eco-systems” to better take advantage of the “comparative advantages” of humans (vs. machines)—and the great variety of humans.  Indeed, some very talented humans continue to build these awesome and cool digital technologies.  The rest of us just need to use it more, in everything we do—whether for “work” or for “fun.”