Technology Optimists Vs. Pessimists

by: Shareholders Unite

Summary

According to techno-optimists, we're on the verge of an inflection point where technological innovation is accelerating.

Techno-pessimists like Robert Gordon argue that there is nothing in the data to suggest that this is happening.

We think Gordon is largely right, but we also think the third industrial revolution hasn't run its course yet, as Gordon is suggesting.

There are still large parts of the economy which haven't really adapted to the possibilities of ICT, and companies figuring out how stand to gain massively.

We were once interested in a company called VisualMed (OTCPK:VSMD), which had developed a system that automated much of the paper trail in healthcare, greatly reducing medical errors and duplications.

We had witnessed a two-hour live demonstration and were blown away. It was based on electronic patient records, combining all relevant medical data from patients, including scans, doctor notes, and the like.

When doctors prescribed drugs, it automatically sent out orders to a pharmacist, updating records and checking doses and whether it interfered with any other drug that the patient took.

It allowed large-scale data collection, which provided insights into the effectiveness of treatments and doctors alike. There were many other great features (we could go on and on), but you get the picture. Several hospitals actually implemented the system, or parts of it.

This was in the early 2000s, way before iPads, the cloud and at a time when electronic patient dossiers were a fairly distant dream.

We're pretty sure the ICT infrastructure is now vastly more friendly to implementing systems like the VisualMed one, and the benefits of doing so will be very large, both in terms of money saved and, more importantly, in terms of lives saved.

This is only an example but one we happen to be familiar with (unfortunately, VisualMed lost its way a bit, which is really unfortunate as its medical database is top notch).

The example serves a broader discussion. There are technology pessimists like Robert Gordon, from the paper that is a response to an earlier one and contains answers to his critics which he describes as the 'techno optimists' (NBER):

The United States achieved a 2.0 percent average annual growth rate of real GDP per capita between 1891 and 2007. This paper predicts that growth in the 25 to 40 years after 2007 will be much slower, particularly for the great majority of the population. Future growth will be 1.3 percent per annum for labor productivity in the total economy, 0.9 percent for output per capita, 0.4 percent for real income per capita of the bottom 99 percent of the income distribution, and 0.2 percent for the real disposable income of that group.

We'll leave the income conclusions for what they are but zoom in on the technology, but not after remarking that Gordon sees other headwinds causing this decline like demographics, educational attainment, and inequality. The slowing pace of innovation has already happened, according to Gordon:

There is no need to forecast any slowdown in the pace of future innovation for this gloomy forecast to come true, because that slowdown already occurred four decades ago. In the eight decades before 1972 labor productivity grew at an average rate 0.8 percent per year faster than in the four decades since 1972.

And indeed, the figures show this:

Productivity growth clearly slowed down considerably after 1972, with the exception of the dot.com years (1996-2004). That short burst was driven by:

  • an unprecedented and never-repeated rate of decline in the price of computer speed and memory.

  • a never-since-matched surge in the share of GDP devoted to information and communication technology (ICT) investment.

This dot.com party didn't last long though. The internet has only boosted productivity temporarily, mainly through a boost of ICT investment. This shows quite unequivocally that Moore's Law has its limits, or at the minimum, that we haven't figured out how to benefit from it more.

This is an important distinction, because Gordon touts the second industrial revolution as a bringer of 'general purpose technologies,' that is, technologies that had an economy-wide impact. Take for instance electricity:

Within three months in the year 1879 three of the most fundamental "general purpose technologies" were invented that spun off scores of inventions that changed the world. Two of these are well known but the third is not. In October 1879, Thomas Edison created the first working electric light bulb and by 1882 was distributing power by wire to customers in lower Manhattan, a revolution that made possible not only electric light, elevators, high-rise cities, stationary and portable electric power tools, consumer appliances, but also air conditioning that transformed life and work, especially in the American South.

And, it wasn't the only one:

Between 1890 and 1930 the American household became fully "networked," replacing its previous isolation by five types of connections - electricity, gas, telephone, running water, and sewer pipes.

How about that for a 'network' economy. Then, there were automobiles, wireless communication, and after an initial period of design competition, a dominant design emerged, and these inventions spread like wildfire, impacting the entire economy and society.

And, all these general purpose inventions happened almost all at once, creating a wave of cumulative change.

they hardly existed in 1880 yet were nearly complete in urban America by 1929. The third surprising aspect is that economic progress through 1972 mainly consisted of consolidating the incomplete aspects of IR #2 across many subsidiary and complementary inventions

This process was more or less exhausted (or reached considerable diminishing returns) by the early 1970s. For instance, by the 1930s, basically all urban households were electrified, and by the 1970s, all households had electrical appliances.

Answering Techno-Optimists

Techno-optimists are arguing that technological innovation is accelerating, but Gordon rightly questions this and asks accelerating compared to what. Another line taken by techno-optimists is that the future is simply unknown.

Gordon cites many past publications, from Jules Verne to the diaries of inventors like Edison, Bell, and Benz, to even popular magazines like The Ladies Home Journal(!), showing that the future didn't exactly come as a surprise.

Too pessimistic

Where Gordon can be wrong:

  • AI

  • Applying ICT in the service sector

Starting with the latter, Gordon argues (our emphasis):

Our basic forecast of future productivity growth assumes that innovation over the next four decades will proceed at the same rate as over the past four decades. A bit of skepticism is warranted about the next four decades of innovation, because we have already experienced the digital revolution for the past 40 years during which the most fruitful applications of electronics have by now occurred.

We're not quite convinced about that. We mentioned VisualMed at the start of the article, but here is Michael Mandel, from FTAlphaVille:

Michael Mandel, chief economic strategist at the Progressive Policy Institute, joined Alphachat to talk about his report, "The Coming Productivity Boom", co-authored by Bret Swanson of Entropy Economics. Mandel argues that the decades-long productivity stagnation will end once companies in the "physical" industries - transportation, construction, manufacturing, healthcare, wholesale and retail trade - start investing in information technology the way that companies in the digital industries have.

We'll leave AI for another time, but the point about investing in ICT is even corroborated by Gordon himself. For instance, what is the main cause behind the dot.com interlude, the eight-year period from 1996 to 2004 where productivity growth boomed? Here is Gordon:

First, there was an investment boom in those years:

And, that investment boom was basically in ICT:

Any new investment boom in ICT is liable to produce a similar effect, even if it is unlikely to happen in anywhere the same magnitude.

What we do say is that the ICT revolution is far from complete. Whole sectors of the economy have been resistant and haven't figured out how to best use ICT, that is change business models and practices.

If there is anything we can learn from the work of Gordon, it is that these general purpose technology revolutions happen quite slow. The tech spreads quite fast, but what lags is figuring out the best ways to use it, to adapt business practices, models, and strategies.

For instance, it is worthwhile to revisit the VisualMed technology. Here is the description from Google Finance:

VisualMED Clinical Solutions Corporation is a provider of complete electronic patient records. The Company is primarily engaged in activities related to the distribution of medical software. The Company's computerized physician order entry (CPOE) module with more than 30 levels of decision support is a system with knowledge base and inference engine that validate information provided by the user. The Company's platform supports a variety of applications in the field of pharmaceutical research, clinic research, and personal health information systems. The VisualMED electronic patient record includes all doctors' and nurses notes, as well as notes from all other members of the healthcare team, care plan, medication administration record. The VisualMED Clinical System is a single clinical point-of-access for the healthcare team which communicates with existing systems including Admissions (ADT), pharmacy, laboratory, radiology and PACS through HL-7 interfaces.

It is far from the only company which is pursuing this. If you put this stuff in the cloud and start to add AI applications, it will not only streamline the whole medical process, avoid duplications and errors, it would also start to generate knowledge and provide transparency (best practices, best doctors, best treatments, etc.).

Major obstacles to overcome here are privacy, access, and data security, but perhaps technologies like blockchain could help here (or some other technology). Blockchain is starting to get traction in the financial sector already.

Perhaps not enough for a notable acceleration in productivity, but it will keep us going for a while.

Conclusion

Gordon quite rightly pointed out that bar a relatively short interlude when there was massive investment in ICT boosting productivity, the third (ICT based) industrial revolution isn't on the same level in terms of boosting productivity and growth as the second one.

However, this could be at least in part blamed for whole sectors of the economy where the effects of ICT have been rather limited. It's not guaranteed that this will remain.

As Gordon himself argued, it takes a while for general purpose technologies to spread, and it often takes much longer for most sectors and businesses to figure out how best to adapt and make use of them.

We think that there are still significant benefits to reap in erstwhile resistant sectors like healthcare, government, education, transport, and the like.

What's more, we think there is a lot of money to be made for investors betting on innovative companies which figure this out.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.