Why Mainstream Economists Miss Digital Innovation – NewsReports.com

The Digital Age arrives

Economists often perform wonders in making sense of complex topics, but in some areas, there is still work to be done, particularly in the issue of innovation. It is telling that the word “innovation” doesn’t appear even once in the Wikipedia’s 50-page article on the subject of “economics.“ To learn anything about the economics of innovation, one has to go to a separate subject in Wikipedia, “Innovation economics” where one learns that it is “only in recent years that the innovation economy has become a mainstream concept.” It may need to become even more mainstream than it has been so far, as the Age of Digital arrives.

The Mainstream Economics Of Scarcity

According to the Wikipedia article on the subject of ‘economics’, it states that “the most commonly accepted current definition of the subject of economics” was that developed by Lionel Robbins in 1932: “Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses.” Robbins wrote that economics focuses on “a particular aspect of behavior, the form imposed by the influence of scarcity.”

Thus, the assumption underlying mainstream economics is that means and resources are scarce. That was largely true of the industrial era which mainly concerned the production of physical products. In that era, resources, time, and cost were all constrained.

Our current era—the digital age—is dominated by the abundance generated from exponential digital technologies. For instance, while users’ time remains scarce, the resources to which that time may be deployed are now abundant, almost infinite, and available to anyone on the planet with access to the Internet, often for free, or almost free. Thus, we have access to the entire world’s information; we can listen to almost all the world’s music, view every piece of art, take and share unlimited photographs, stream videos globally, look at the map of any place on the planet, text with friends, all at zero, or near-zero, cost, in real time. Moreover, services are almost infinitely scalable. As a result, the economics of the digital age are increasingly concerned with the monetizable deployment of abundance, not scarcity.

The Problem Of Services

Even before the onset of the digital age, similar issues were emerging with the economics of services. Thus in 1987, Nobel-Prize-winning economist Robert Solow struggled to understand the possibility of an economy in which services were becoming steadily more important. Thus, Solow wrote in a famous New York Times article that the notion that digital services might one day have independent economic existence was a fantasy spread by people who “tell war stories and go in for heavy breathing. (Revolutions and Transformations come thick and fast).” The ‘real economy’ was about physical products.

It was thus unthinkable to one of the world’s top economists in 1987 that the largest firms in the world would soon be those delivering primarily digital services. Even more unimaginable was that just five of those firms would be worth some $9 trillion—equivalent to around 40% of the U.S. Gross Domestic Product.

The Arrival Of ‘Big Tech’

The financial world was awakened to the emergence of the digital age on August 20, 2011. with Marc Andreessen’s article in the Wall Street Journal, “Why Software Is Eating The World.” Andreessen argued that strange looking firms. like Facebook, Skype, Twitter, and Foursquare, coming out of Silicon Valley that made money without any “real physical products” were building real, high-growth, high-margin, highly defensible businesses, that were significantly undervalued at the time. Wall Street soon agreed, and the valuations of some tech firms began to soar.

Mainstream economists were slower to grasp what was happening. They often sought to reconcile themselves with the apparent economic anomalies by referring to these companies as existing in a separate world known as ‘Big Tech.’ Big Tech was different, they conceded, with mysterious things like cloud storage, machine learning, algorithmic decision making, artificial reality, blockchain, data as an asset, and quantum computing. But Big Tech was a world of its own, not part of the “the real economy.” The thought that all companies would soon need to be using these technologies was still far away.

How Economists Miss Innovation

A quintessential exponent of mainstream economic thinking is Robert J. Gordon, the Stanley G. Harris Professor of the Social Sciences at Northwestern University. His magisterial work, The Rise and Fall of American Growth: The U.S. Standard of Living since the Civil War (Princeton, 2015) has been widely cited, and in 2016 he was named as one of Bloomberg’s “top 50 most influential people in the world.”

For Gordon, the great innovations occurred before 1970, when things like household electricity, appliances, air-conditioning, and flushing toilets made their appearance in everyone’s home. “The special century was special,” wrote Gordon, “not only because everyday life changed completely, but also because it changed in so many dimensions”.

By contrast after 1970, according to Gordon, innovation slowed. “Progress after 1970 continued but focused more narrowly on entertainment, communication, and information technology… By 1970, the kitchen was fully equipped with large and small electric appliances, and the microwave oven was the only post-1970 home appliance to have a significant impact.”

Gordon records the arrival of the iPhone as a minor event in entertainment and communications. He does not mention that it obliterated not only most of the existing telephones but also a vast array of products in many different sectors. Nor does he mention that digital technology has transformed how we work, how we communicate, how we get about, how we shop, how we play and watch games, how we deliver health care and education, how we raise our children, how we entertain ourselves, how we read, how we listen to music, how we watch theater and movies, how we worship, in short, how we live.

It is happening more slowly in some sectors than others, but it is only a matter of time before all are affected, given that individual technologies are not only evolving exponentially but also interacting with each other. Everything is becoming easier, simpler, quicker, cheaper, and different.

Stasis In Retailing?

For instance, Gordon saw “stasis in retailing,” For Gordon, “Since the development of ‘big-box’ retailers in the 1980s and 1990s, and the conversion of checkout aisles to barcode scanners, little has changed in the retail sector…. the share of e-commerce in all retail sales in 2014 was still only 6.4 percent, a fraction too small for e-commerce to have a major impact on productivity growth in the overall retail sector.”

What Gordon’s book missed was that e-commerce has been growing exponentially. It has now doubled to to reach 14% of all retail sales in 2021. But even more significantly, a 2019 study showed that 57% of respondents had used a mobile retail app to look for more information about a product or a service. In effect, digital has already transformed the dynamic of retail, even where the product is purchased in person.

The Neglect Of Innovation By Mainstream Economics

Mainstream economists can thus miss that digital innovation has changed almost every aspect of human life. This may reflect the fact that mainstream economics and innovation economics are proceeding in parallel universes. Given the predominant role that innovation is now playing in the real world, it could be time for mainstream economics to recognize the centrality of innovation.

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