I've been interested in the new technologies since the mid-1990s when I was a business reporter for The Independent newspaper here in the U.K., and they sent me to report on the flotation on the stock market of a company called Unipalm, which was the first commercial Internet service provider in this country. They were raising money, and they had set up a webcam on the Golden Gate Bridge for investors and journalists. It broadcast traffic live across the bridge in the San Francisco sunshine that autumn afternoon, and I was impressed by this technological capability, and have been researching digital markets, digital technology and its impact on our economy and society ever since.
Technology is a fundamental driver of economic growth and the things that we do in everyday business and life. Technologies drove the Industrial Revolution. Without the arrival of new technologies, in energy, textiles, manufacturing, transport and communications, at around the same time, we would never have escaped what we call the Malthusian Trap – that the population grows until it can't feed itself. Then, the starvation sets in, and the population shrinks again. Previously, that had been largely the story of all the centuries of human existence. Technology sprang that trap and brought us modern economic growth with benefits for our health, longevity and quality of life, which has continued. There have been waves of what we economists call “general-purpose technologies” ever since. These are fundamental technologies that change activity across a vast lifespan.
Creative disruption
The Industrial Revolution brought us the first wave of general-purpose technologies, like the steam engine, the railways and canals, the looms and spinning machines and the cotton mills. The second wave brought chemicals, electricity, radio communications and TV. Then the third wave was built on digital capabilities, like the use of new materials and biomedical technologies. These transform the way people do business, the way that we live our everyday lives. They affect the whole economy. They're always quite disruptive, and they create periods of what Joseph Schumpeter famously described as “creative destruction,” where many businesses will go bust. Still, new ones arrive and drive new goods and services and increase productivity and people's living standards.
Technology is the fundamental driver of modern economies, and it has been since the Industrial Revolution. Technologies always are incredibly disruptive. Economists tend to focus on things like which businesses will succeed and which won't: ‘What will happen to aggregate GDP growth and productivity and therefore, living standards over time?’ However, there are also always social consequences, too. In particular, communication technologies like the printing press in the 15th century, or radio and TV in the 1920s and 1930s, or social media now, have had social ramifications. It's the curse of modern economies: On the one hand, we need these technological changes if we want to carry on experiencing innovations that can improve our lives. On the other hand, they cause all kinds of social and economic tensions.
Digital has enabled globalisation
The revolution that we're living through, the digital revolution, started in the years immediately after the Second World War with a suite of innovations in transistors, materials and computing architecture. This revolution is having a wide range of effects on people's lives. It fundamentally reduces the cost of processing and exchanging information. People gain an innate benefit from communication because as a human species we enjoy communicating with each other, learning about life in other countries, being able to speak to grandchildren who are across the city or the world. Additionally, people can access all of the entertainment that we get now through these technologies.
They have also increased efficiency in production in many other areas of the economy. For example, any new or big business now uses cloud computing. The money that companies used to spend on installing computer servers, buying equipment and hiring skilled people to manage that equipment is now spent on the service from one of the big cloud computing providers, which costs much less. This is an efficiency which they could decide to pass on in reduced cost to their consumers, or they could choose that it will enable them to do what they're doing much better and deliver a better service.
Digital has enabled globalisation. Without digital communications, we would not have seen the production chains that stretch from Vietnam or China to your local supermarket, and how it’s affected people positively and reduced the cost of products like children's clothes or certain kinds of food exponentially. The amount of money that people with low incomes have to spend on necessary products has been decreasing over time. The reorganisation of production that digital technology allowed has catalysed this shift.
You can see all kinds of other potential benefits and different types of business models. On the one hand, we've got big digital platform companies that have brought us the online harms caused by social media, and which many people believe have too much power. On the other hand, there's been an opening for new companies to deliver different kinds of services. Some of them don't involve money at all. I use one that exchanges goods among people. It's a non-monetary sharing economy platform.
Social organisation has also been enabled. During the pandemic, our local community has been able to organise food delivery to people who couldn't leave their houses through the use of digital technology. There are all kinds of opportunities that have been created by the ease with which we can now access and exchange information. This new access to information is more efficient and allows us to do new things that we couldn't have done before, creating whole new markets that didn't previously exist. For instance, you can sell handicrafts on Etsy now. Many people have set up small businesses doing precisely that in their spare time from the kitchen table. The cost of digital is prominent in public debate, but it has brought us many benefits as well.
The challenge of new technologies
I grew up in a cotton town in Lancashire, in the UK, and my family worked in the cotton mills weaving and spinning and dyeing fabric. They were horrible jobs. Their automation led to high unemployment in our town as the mill shut down. Nonetheless, losing those jobs was no loss to human well-being. They were noisy, dangerous, unpleasant, and poorly paid. The challenge with any new technology is to invest in ways to make people's work more satisfying, better paid, and simultaneously ensure that people can crystallise those opportunities that are potentially created.
In practice, we often see the opposite, that only a small number of people benefit from automation. For example people who work for digital companies have an excellent job – we’ve all heard the stories about the free food and the lovely environment on these digital campuses. However, automation winds up leaving many out of work.
We are now challenged to think about future waves of automation that might occur due to A.I. –whether it’s reading legal documents or scanning medical images, all the kinds of things that are routine and at some point will be automated. What do we do about people? This is quite an open debate in economics at the moment. There are many suggestions. One such suggestion is that you just don't automate; that there should be some kind of tax on robots to slow it down so once that transition occurs at least it's at a slow enough pace that allows people time to adjust. Another one that's frequently talked about is education. You've got to give people the skills so that everybody can work with these new technologies and get better jobs, which must be part of the answer, too.
Governments should be prepared
It’s a slow fix if you see automation happen quite rapidly. There are also all kinds of policy interventions that one might think about because when the axe falls on a certain kind of activity, it's got geography. It happens in particular places. What can governments do to help people in those places make the technological transition smoother, so we don't make the same mistakes we made in the early 1980s and early 1990s of experiencing deindustrialisation and without any replacement.
There are things that governments could do, but they don’t. Job guarantees are a perfectly feasible policy to protect workers against automation-related job loss. There are all kinds of public services that have been undersupplied for which the governments could use to aid people in the transition. Yet, in the long term, these things wash out because economies continue to expand and create new activities. The labour market adjusts so that people develop the skills they need to do these new activities. It can take 50 years to adjust, and that must change. If we are aware that the next episode of automation is coming, can we shorten that transitional period and ensure people who will be most affected by automation are sustained throughout that transition? Can we ensure to protect these people from unemployment and poverty?
Policymakers are not digital natives
Policymakers know that they've not kept up with the digital revolution, and this is partly due to their lack of skills and understanding. Most of them are too old to have been digital natives and need to rely on technical experts to explain concepts to them. There's a knowledge gap, particularly among those who are trying to regulate digital companies. However, it also concerns power because there's a real advantage to scale the way digital markets work. The more people use Google search, the better my search results. The more people are on a social media platform like Facebook, the more likely I am to find the people I want to connect with. If they succeed and become big, that's a formidable advantage to overcome because of what we would call “network effects,” which benefits their users. The scale is in itself a good thing for the people using the platforms. Still, these happen to have been substantial American and Chinese companies. Both countries have huge internal domestic markets, which allow the companies to get to the scale they are now. It's become a question of geopolitics for people in Europe or elsewhere in the world because we depend on these digital platforms. This has become particularly true during the pandemic. How can we imagine what we did before, what we would have done in these circumstances if we didn't have these digital technologies?
The question for me as an economist is: ‘How do we make sure that power is contestable?’ If there’s an economic advantage to being big, then there will probably always be big digital companies. However, we can make sure that it doesn't always have to be the same one, so that the power that the company has doesn't become so embedded that they are able to alter the way markets operate in self-interest by political lobbying. We know that these big companies lobby a lot. There are ways I can think of that you can do that – to inhibit the growth of a few big companies. Some ways require an effort to work with the grain of the market and allow new entrants in and become the next Google. If you talk to Hal Varian, the chief economist at Google, he would say this is what keeps him awake at night. He thinks somebody can come along with better search technology and overtake Google in the same way that Facebook overtook MySpace or different browsers knocked Internet Explorer off the top slot.
I think it would be almost impossible, without some kind of intervention, for somebody else to come along and be the next Google or be the next Facebook. The question then is: What interventions would succeed? One that we've talked about in the UK is access to data. Part of the advantage that embeds these big platforms is they have customer data. They can therefore bring in more revenue by selling advertising that makes their servers better. The more data companies have on individuals, the easier it is for them to deliver an improved service to their customers. That's an embedded advantage. Can you require them to give access to customer data, to potential newcomers in the market? Just as we've done with the banks in the UK, we've required them to give customer information to new entrants so that the customer can switch easily or try new products, if their customer wants them to.
That would be a very pro-competitive way to go about it, but it might not work, and if it doesn't work, people have other kinds of interventions in mind. For instance, through direct regulation – the way we regulate electricity companies and phone companies – to break up these digital giants. This might be on the cards if the situation doesn't change. It is a geopolitical question because this involves the European Union, the European Commission, fundamentally in a confrontation with American authorities who see the big digital companies as national champions. It's quite hard at the moment to tell how this will play out. However, I think a political reaction is inevitable, not because of the economics, not because people care so much about not having another search engine, but because of the damaging effect the online world has had, which we’ve witnessed – misinformation has damaged our civic life and our health. I can't see how governments would fail to react to these damages at some point.
An extraordinary year
It's been quite an extraordinary year in our lives and economic experience. We have all spent more time online for work as well as to socialise, and it’s hard to imagine how we would have gone through this experience without access to digital technology. At the same time, it's brought home the importance of some deficient tech aspects of the economy and life: the importance of getting baskets of food to people who can't go out to the shop because they're shielding, the importance of those workers who have continued going out and making sure that the electricity is still running and that there’s still transport. All of those essential services provided by essential workers are not digital. We've also pondered the resilience of the economy that we have created for ourselves.
We have outsourced a lot of basic economic and manufacturing activity to countries on the other side of the world for efficiency reasons. They can provide labour-intensive activities more cheaply than we can, even if we factor in the cost of transporting them back. Still, it means that we've lost those capacities ourselves so that we couldn't produce the personal protective equipment we desperately needed, for example. We had to import it. We even outsource medications. A pharmaceutical company will own the patent and know how to make the compounds, but it will outsource the manufacturing to a company that specialises in that activity somewhere else. Therefore, I think it's bringing about a re-evaluation of the relationship between the advanced digital sectors and the basic manufacturing sectors.
We've seen manufacturing activity substantially shrink in all of the advanced economies, even in Germany and Japan, which have the largest manufacturing sectors. It’s not a terrible development because it has led to job creation elsewhere. Moreover, we've had access to all the things that we needed except for in this global emergency. I think it's making people ask whether the balance has been right and whether we have lost too much know-how. It’s okay to outsource production if you knew how to produce it yourself should you need to. We don't necessarily want to rebuild factories that can make face masks and gowns, but we want to know that we can repurpose other factories to do so quickly if need be. It's not the factories and the machines that matter, it’s the know-how and the day to day engineering skills or “tacit knowledge” – things that you can't write down, but you need to learn by experience. This is going to be another of those big post-pandemic economic questions that are related to whether or not efficiency should be the sole driver of how we organise the economy. We need to consider all aspects of the balance of activities in our lives and in the economy and what kinds of things we value.
