Technology and Productivity

The Science and Technologies developed through the 19th and early 20th century have fundamentally changed our lives. The steam engine, railways, electricity, steel making, chemicals, the combustion engine and mass production have completely transformed our economies and dramatically raised living standards across the population.

Since the 1970s though, the economic impact of new technologies has seen dimininishing returns in terms of economic growth. This led economist Robert Sorow to famously proclaim that “you can see the computer age everywhere but in the productivity statistics”. Maybe economists have been looking in the wrong place. May be the computer age did something different: accelerating the shift from economic production to rent seeking.

The discussion of rent seeking and the emergence of economic extractive sectors is broad, but below are three examples

First, let’s look at healthcare in the US, which is now 18% of GDP. The productive service is done by doctors and nurses. Medical technology and medication are tools that make doctors and nurses more productive. However, to organize health care other activities are needed - insurance, administration, pharmaceutical sales, etc. What is striking is that the cost of administration, insurance and medication is growing much faster than the cost of doctors and nurses. In effect, the non-productive segments are extracting increasing economic rent from patients without enabling a better core service. This is clear to see once we look at life expectancy vs health care costs in the US versus other countries

Computers provide some benefit to making doctors and nurses more productive, but the majority of the technology is deployed in the extractive segments: patient profiling, billing, coding, prior authorisation, denial, appeal and collection; targeted drug advertising; management activities. The emergence of computers dispropriortionally facilitated the growth of the non-productive activities in health care.

A second example is the US housing market. The productive activity is to provide housing to citizens enabled by primary mortgage lending as a financial service. However, the fee based infrastructure on top of it - origination, speculative lending, securitization, packaging of mortgages in MBS, tranching into CDOs, the Credit Default Swaps, the credit rating fees, the insurance premiums - have proven to be extractive, if not destructive. This financial infrastructure did not manage lending risk - as was promised - but created a financial bubble that was then socialized back to tax payers. Computers provide very limited benefit in reducing the cost of owning a home, but the vast financial compute infrastructure is there to support the extractive fee based businesses.

Finally, the attention economy may be the cleanest example. As the adagium goes: if you don’t pay for it, you are the product - be it your wallet or your voting preferences. It is difficult to see that any of it is productive in a traditional economic sense. It is obvious though that all of it relies on the widespread adoption of compute and communications technologies.

Artificial Intelligence is thought to bring the next industrial revolution, promising an “infinite growth” in productivity. Whether it increases core productivity or enables a further shift to rent seeking sectors remains to be seen. If it is the latter, it would explain the enthusiasm of the investment community