I'm few weeks late getting to this piece from Irving Wladawsky-Berger and, although much of this ground is familiar to our readers, it benefits from Irving's viewpoint (not to mention the highest density of hyperlinks in the known universe in the first paragraph):
I just read an interesting article that was published last summer in Foreign Affairs, - New World Order: Labor, Capital, and Ideas in the Power Law Economy. The article was written by MIT professor Erik Brynjolfsson and MIT Principal Research Scientist Andy McAfee, who are also Director and Co-Director respectively of the Initiative on the Digital Economy; and by Michael Spence, professor in NYU’s Stern School of Business, professor and dean emeritus of the Stanford Graduate School of Business, and recipient of the 2001 Nobel Prize in economics.
A
major transition is now taking place in our digital economy. Over the
past few decades, advances in technology, and the Internet in
particular, have helped create an increasingly global marketplace for
labor and capital. A highly connected, global economy has been rising
all around us, whose magnitude and implications were brought to light by NY Times columnist Tom Friedman in his 2005 bestseller The World is Flat: A Brief History of the Globalized World in the Twenty-first Century.
Another bestseller, The Second Machine Age, published last year by Brynjolfsson and McAfee, is now helping to explain our new era of data science, AI and advanced automation. These second age machines are being increasingly applied
to activities requiring intelligence and cognitive capabilities that
not long ago were viewed as the exclusive domain of humans, while
enabling us to process vast amounts of information and tackle ever more complex problems.
These advanced machines are ushering a new kind of digital capital economy, quite different from the flat-world economy
of only a decade ago. The winners are no longer those able to compete
solely based on cheap labor or ordinary capital, both of which are being
squeezed by automation. “Fortune will instead favor a third group:
those who can innovate and create new products, services, and business
models,” says the article. “So in the future, ideas will be the real
scarce inputs in the world - scarcer than both labor and capital - and
the few who provide good ideas will reap huge rewards. Assuring an
acceptable standard of living for the rest and building inclusive
economies and societies will become increasingly important challenges in
the years to come.”
Internet-based Globalization
The industrial economy that prevailed through much of the 20th century saw the rise
of major corporations like IBM, GM, GE, P&G and Kodak. Their
capital assets, - including plants and equipment, sales and
distribution, and finance, - enabled them to achieve the necessary scale
to compete across the country and around the world. Their management
skills enabled them to effectively organize and deploy the necessary
large labor force.
Late
in the 20th century, the digital technology revolution began to
radically change the business environment. Capital assets and a large
labor force were no longer the keys to success, and in fact were often
viewed as a noose around legacy companies, making it harder to compete
against lean startups in the fast changing digital economy. Given
dramatically lower communications and transaction costs, companies
disaggregated their various processes, kept some in-house and outsourced
others to supply chain partners around the world in order to optimize
the overall costs of their products and services. As the Foreign Affairs
article notes, this globalization era is succinctly characterized by
these 8 words that you’ll find in the back of iPhones, iPads, and other
Apple products: “Designed by Apple in California. Assembled in China.”
“All
of this creates opportunities for not only greater efficiencies and
profits but also enormous dislocations,” it adds. “If a worker in China
or India can do the same work as one in the United States, then the
laws of economics dictate that they will end up earning similar wages
(adjusted for some other differences in national productivity). That’s
good news for overall economic efficiency, for consumers, and for
workers in developing countries - but not for workers in developed
countries who now face low-cost competition.”
Automation-based Globalization
But
the economy has since evolved. “Even as the globalization story
continues, however, an even bigger one is starting to unfold: the story
of automation, including artificial intelligence, robotics, 3-D
printing, and so on. And this second story is surpassing the first,
with some of its greatest effects destined to hit relatively unskilled
workers in developing nations… As intelligent machines become cheaper
and more capable, they will increasingly replace human labor, especially
in relatively structured environments such as factories and especially
for the most routine and repetitive tasks. To put it another way,
offshoring is often only a way station on the road to automation… In
more and more domains, the most cost-effective source of labor is becoming intelligent and flexible machines as opposed to low-wage humans in other countries.”
The
article points out that the share of labor in the US economy averaged
64.3% between 1947 to 2000, and has been declining ever since, falling
to 57.8% in 2010. Similar declines in the labor share have been
documented in many ofter countries, including China, India and Mexico.
Capital is now a larger share of overall production, and capital-based
technologies are rising in importance, including physical assets like
computers, robots, and IoT-based smart products of all kinds, as well as intangible assets like software, patents, copyrights and brand value.
But,
despite the higher share and importance of capital in the economy,
higher earnings are not necessarily accruing to the general investors in
those companies. In a free market, the biggest returns are earned by
the scarcest and hence most valuable resources in the economy. A major
portion of capital is now digital capital, including software
and hardware technologies, both of which are increasingly ubiquitous and
inexpensive. Software can be replicated and distributed at marginal
costs. And the digital technologies that go into computers, robots and
smart equipments keep getting cheaper and more powerful over time....MORE
