Most of us have lived through the last wave of digital innovation, using personal computers, the internet and e-commerce, and smart phones. But the next wave of digital innovation is upon us, in part spurred on by COVID-19 shutdowns. This wave will not only build on existing devices and systems; it will incorporate emerging technologies such as 5G communications, sensors, robotics, and artificial intelligence.
This next digital economy will be significantly more connected (with many more types of things networked), more automated (as systems enable more work to be done by “machines”), and smarter (as algorithms help make sense of all this data).
Most of these technologies work together. 5G wireless, for example, is not only significantly faster than 4G, enabling enhanced mobile broadband, it also supports massive deployment of Internet of Things sensors in factories, farms, cities and other places. These millions of connected sensors generate data, and continual improvements in artificial intelligence will mean that this data can be acted on to make better decisions; for example to guide an autonomous vehicle, develop a new drug, or determine how well a machine is working. And faster computer chips enable 5G and AI, as well as autonomous systems like robots.
While the most recent technology wave was about using computers in offices and the internet for sales and communications, the current wave will affect many more industries and functions. Take agriculture for example. American farmers now operate sophisticated autonomous tractors, guided by precision GPS, and collecting massive amounts of data. And companies like Silicon Valley-based Farmers Business Network use algorithms based on data from farmers to help them optimize their operations. 3D printing and robots could significantly transform construction, making home buying much cheaper. Fintech startups are reshaping the banking industry, bringing financial services to anyone with a smart phone. Food service is being transformed by wireless or kiosk ordering and paying, with robotic food preparation and delivery (both to the table and the home). Companies like Amazon are experimenting with drones delivery. Manufacturing is becoming smarter, with the ability to more easily and cheaply make more customized and higher quality products.
Perhaps the most important question about these emerging technologies is whether they will be enough to turn around the productivity drought the United States (and Europe) has been in for the last 15 years. Labor productivity – the amount of output produced by each worker – is the single most important determinant of living standards. And even with the introduction of smart phones, cloud computing and broadband, recent productivity growth has been low.
Given the broad-based application of these new technologies, the prospects for a technology-led productivity turnaround are promising. If the technology lives up to its promise, and if government policy enables, rather than hinders, transformation, U.S. labor productivity growth could very well increase from around its recent rate of around 1 percent a year to perhaps 2 or even 2.5 percent a year. This may not sound like much, but just as higher interest rates generates a bigger retirement nest age after a few years of compounding, higher rates of productivity do the same.
This next technology wave could also impact the U.S. labor force. Many pundits and activists have advanced dystopian scenarios about the so-called end of work and the need for universal basic income to support an immiserated proletariat. This is nonsense. Productivity growth has never led to higher rates of joblessness and it won’t now for the simple reason that it generates lower price and higher wages, which in turn lead to demand for more production. And despite warnings that high-skilled occupations like doctors and lawyers could be replaced by AI, the reality is that this new technology wave is most likely to impact lower-wage jobs. While this could be hard for some workers in the short run, in the medium-term they will benefit significantly because while there will be the same number of jobs, a higher share will be middle- and upper-wage jobs.
Finally, these technologies are likely to continue the longer-term trend in the U.S. economy toward larger firms. Over the last two decades, the average firm in America has gotten larger as digital technologies enabled economies of scale (where larger firms can operate more cheaply than smaller ones). Technologies like AI and robotics will likely expand economies of scale, enabling larger, more efficient firms to take market share from smaller, less efficient firms. In addition, the economy could see a continued trend toward “platformization”, with digital platforms conducting more functions – such as finance, insurance, logistics and others. For example, there might be a handful of platforms providing fintech services, instead of 5,000 banks. Both should be good for consumers, and workers, as long as governments monitor platforms actions to ensure firms they are not behaving in anticompetitive ways.
These potential benefits – higher productivity, better jobs and more convenience – are not assured. Perhaps the biggest risk for the United States is that too many advocates are advancing dystopian narrative where these technologies are stealing our privacy, killing our jobs and discriminating against the vulnerable. Rather than promote the technology, they want organizations to reject it and governments to restrain it—just as the Lilliputians tied down Gulliver. However, these fears are vastly overstated and can be more than adequately addressed with policies that balance protection and innovation (something the EU has failed to do).
As long as the United States continues to embrace change, welcome technological innovation, and not fall into the trap of paranoia toward “Big Tech” and emerging technologies it will likely see an economically bright 2020s.