April 2014

Comments on THE SECOND MACHINE AGE: Work, Progress and Prosperity in a Time of Brilliant Technologies

By Jack Fahrenbach

I begin my comments by recalling what the first machine age is. The first machine age dates from the first Industrial Revolution and the improvement of the steam engine in the second half of the 1700s and includes the second Industrial Revolution with the introduction of electric power systems and the internal combustion engine in the late 1800s and early 1900s. During this first machine age, human and animal muscle power were replaced by new energy sources which much of our modern life is built on.

In their recent book The Second Machine Age, Erik Brynjolfsson (director of the MIT Center for Digital Business) and Andrew McAfee (principal research scientist at the MIT Center for Digital Business) tell us, “Now comes the second machine age. Computers and other digital advances are doing for mental power ... what the steam engine and its descendants did for muscle power. They’re allowing us to blow past previous limitations and taking us into new territory.”

To start this exciting and very readable new book, the authors set forth the basic ideas and attributes of the second machine age by introducing the key idea of an innovation inflection point. They give many examples of innovations which demonstrate that we might be at such an inflection point: “Self-driving cars, Jeopardy! champion supercomputers, and a variety of useful robots have all appeared just in the past few years ... They all contribute to the impression that we’re at an inflection point—a bend in the curve where many technologies that used to be found only in science fiction are becoming everyday reality.” The second machine age with this inflection point is happening now because it is exponential, because it is digital and because it is combinatorial.

The exponential growth of Moore’s Law is very familiar to most readers. The authors believe we are now on the second half of the well-known checker board used to describe exponential growth so that the absolute gains in computer performance are and will be quite impressive. The gains are also multi-dimensional, not just “Cramming More Components Onto Integrated Circuits” as Moore predicted in 1965. Supercomputer speed, energy efficiency, Internet download speed and hard drive cost efficiency all show that same exponential improvement.

The digital component of this innovation inflection point is summed up nicely in a chapter title, “The Digitization Of Just About Everything.” A quote from Lord Kelvin on this chapter’s title page brings home the point, especially for actuaries—“When you can measure what you are speaking about, and express it in numbers, you know something about it; but when you cannot express it in numbers, your knowledge is of a meager and unsatisfactory kind.” Hard data is the life-blood of science and the authors believe that we have reams and reams of hard digital data on “just about everything.”

The third component of innovation in this second machine age is the recognition that innovation is actually based on combining and recombining ideas and previous innovations. “Like language, printing, the library, or universal education, the global digital network fosters recombinant innovation.” Citing numerous examples of how this works in practice, the authors summarize this idea by saying, “This progression drives home the point that digital innovation is recombinant innovation in its purest form ... Each development becomes a building block for future innovations. Progress doesn’t run out; it accumulates. ... As a result of these two forces (Moore’s law and digitalization), the number of potentially valuable building blocks is exploding around the world. ...” By seeing innovation in this way, the authors predict that “innovation and productivity will continue to grow at healthy rates in the future.”

This confidence that the three forces of exponential, digital and recombinant power will continue and expand is based on two extremely important, one-time events occurring now: “the emergence of real, useful artificial intelligence (AI) and the connection of most people on the planet via a computer digital network.” As one of many examples of AI in our lives today, they discuss the use of Watson in medical school as a diagnostician. To complement the author’s discussion here, the 2/22-23/2014 edition of the WSJ contained an article by Robin Cook (medical doctor turned best-selling author of 33 novels) and Eric Topol (a cardiologist at Scripps Clinic) titled, “How Digital Medicine Will Soon Save Your Life” in which they describe how the use of “your smart-phone, loaded with a heuristic medical algorithm, is poised to become an avatar physician.” This development along with the digitization of your medical information, the use of nanotechnology and ever cheaper genome sequencing will transform medicine. AI combined with the vast number of new markets and ideas which will come from the connection of the seven billion people now living on the earth will ensure the continuation and expansion of the second machine age.

This first part, then, of the book focuses on the nature of the second machine age. The middle section explores how these developments will affect our labor markets and jobs. The authors start with a discussion of the positive impact IT has had on productivity growth, especially in the 1990s and beyond. And while they caution that the business cycle has not been eliminated, they are convinced that “... the fundamentals are in place for bounty that vastly exceeds anything we’ve seen before.”

But while expecting “bounty,” the authors also caution about “spread” which “means there are large and growing differences among people in income, wealth and other important circumstances of life.” They note, ominously, that “there is no economic law that says all workers, or even a majority of workers, will benefit. ...” The authors support this by pointing to three pairs of winners and losers in this second machine age: those with human capital (and those without); those with non-human capital (and those without) and the superstars with great talent or luck. In short, the authors maintain that we have “... job polarization: a collapse in demand for middle-income jobs, while non-routine cognitive jobs (such as financial analysis (actuarial analysis?)) and nonroutine manual jobs (like hair-dressing) have held up relatively well.”

The authors also present an extensive analysis of the returns to non-human capital and the stars and superstars among us. It has been much discussed recently in the public media that the returns to capital have risen while the returns to labor have fallen and the authors agree with this. The authors also have an excellent chapter on who are “The Biggest Winners: Stars And Superstars.” Winner-take-all is something like the old 80/20 rule on steroids. In this environment, the distribution of returns changes from approximately normal to more of a power law distribution.

On a closing thought for the middle section of the book, the authors note that while most economists today believe that technological innovation creates more jobs than it destroys and has done so over the last two centuries, the authors point out that “... the data also show that, more recently, job growth decoupled from productivity in the late 1900s. ... Which history should we take guidance from: the two centuries ending in the late 1900s, or the fifteen years since then? We can’t know for sure, but our reading of technology tells us that the power of exponential, digital, and combinatorial forces, as well as the dawning of machine intelligence and networked intelligence, presage even greater disruptions.”

Such disruptions are addressed in the third and last section of “The Second Machine Age.” With respect to individuals, their advice is “... straightforward: work to improve the skills of ideation, large-frame pattern recognition, and complex communication instead of just the three Rs.” They also make six policy recommendations: improve our schools; encourage startups; help employers and employees come together; support science and scientists; fix our infrastructure; improve our tax system.

Brynjolfsson and McAfee believe we are at a bountiful time in our history, at an inflection point bringing a wave of innovation. But not everyone agrees. Robert J. Gordon, the Stanley G. Harris Professor in the Social Sciences and Professor of Economics at Northwestern University, presents an alternative view in ,“Is U.S. economic growth over? Faltering innovation confront the six headwinds,” published in September, 2012. (Followed by, “The Demise of U.S. Economic Growth: Restatement, Rebuttal, and Reflections,” an NBER working paper published in February, 2014.)

Highlights of Professor Gordon’s article, which is all we have space for here, would begin by noting that after a review of both the first Industrial Revolution (IR1—steam engine, railroads) and the second Industrial Revolution (IR2—electric power, internal combustion, indoor plumbing with running water) and their impact on productivity and our standard of living, Professor Gordon, in a key point, says, “The computer and internet revolution (IR3) began around 1960 and reached its climax ... in the late 1990s, but its impact on productivity has withered away in the last eight years ... and do not fundamentally change labor productivity or the standard of living in the way that electric light, motor cars or indoor plumbing changed it.” Further on, Professor Gordon adds, “The benefits of ongoing innovation on the standard of living will not stop and will continue, albeit at a slower pace than in the past. But future growth will be held back ... by six “headwinds” buffeting the U.S. economy. ...”

In summary, the six “headwinds” facing the U.S. economy are: (1) a reversal due to retirement of the baby boomers and other causes of the “demographic dividend” of females entering the labor force in last half of the 20th century; (2) negative aspects of our educational system including the rising costs of higher education and an increased high school dropout rate; (3) income and wealth inequality; (4) reduced wages in the United States due to globalization and other causes; (5) costs associated with the environment and energy; (6) high levels of debt for the federal, state and local governments along with private debt.

To quantify these ideas, Professor Gordon presents a long-term forecast by “... assuming that future innovation propels growth in per-capita real GDP at the same rate as in the past two decades before 2007, about 1.8% per year.” He notes that this assumption is very optimistic since it makes the “... heroic assumption that another invention with the same productivity impact of the internet revolution is about to appear. ...” He then subtracts from this 1.8 percent rate amounts for each of the six headwinds to arrive at a projected long-term growth rate in real consumption per capita for the bottom 99 percent (the bottom line for us as consumers) of .2 percent per year. He ends the forecast with the remark, “The particular numbers don’t matter, and there is no magic in the choice of 0.2% as the long run growth rate. ... Any other number below 1.0% could be chosen and it would represent an epochal decline in growth for the U.S. record of the last 150 years of 2.0%. ...” A sobering conclusion, for sure.

The authors of this book and article agree that innovation will continue to benefit us in the future. But one key difference between them is the rate or amount of innovation in the future. The Second Machine Age authors believe that the recent slowdown in productivity is temporary and that we are at an innovation inflection point. The future is bountiful, especially for those with the right skills, talents or capital. On the other hand, Professor Gordon believes that the benefits of innovation will continue but at the slower pace of recent years and will confront major headwinds which will blunt that slower paced innovation to produce much lower improvements in productivity and living standards than we have become accustomed to. Your view is?