Why New Technologies Take Decades to Change the Economy - Barron's

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Imagine you are an investor in 1919. While nascent technologies such as electricity and the internal combustion engine have been around for decades, the key companies making up the Dow Jones Industrial Average are firms like American Sugar, Baldwin Locomotive, and Central Leather. Yet by 1930, all of them will have fallen off the index, replaced by companies like Atlantic Refining, Radio Corporation of America, and Procter & Gamble .

While it was far from obvious at the time, the 1920’s proved to be an inflection point. In fact, the powers of disruption unleashed were so significant that only 50% of the Dow component companies would remain on the index a decade later. Even today, the suddenness of the shift can seem puzzling. Thomas Edison built his first power plant in 1882. General Electric was one of the founding companies of the Dow, in 1896. So why did everything explode in the 1920s?

A paper by the economist Paul David helps explain what happened. If you think back to how a factory operated at the turn of the century, electricity wasn’t such a big advantage. They were powered by steam turbines that ran through the center of the plant. Hooking up electricity would give you clean light, but not much else.

However, in time industrialists began to understand that electricity could save them on construction costs and, before long, most new factories were built with electricity in mind. Another improvement came when it was realized that by putting a small electric motor on each machine, rather than a large one to run the whole factory, would make it unnecessary to shut down the entire operation when even a single component needed maintenance.

Yet the real shift came not from technology, but mindset. Once managers began to understand that, with electricity, their machines didn’t need to be arranged around a central power source, they began to design the factory floor to improve workflow. That shift in focus from capital to process helped define the practice of management and productivity rose significantly.

An even greater boost, however, came from secondary inventions. Household appliances helped replace hours and hours of backbreaking labor. Radios transformed communication and helped to improve business decision making. It wasn’t any of these in isolation that was decisive, but the combination drove a 50-year productivity boom that lasted until the 1970s.

Whenever a new technology arises that has the potential to change the world, we see the invention in terms of its improvement on what came before. So electricity gives cleaner and better light than kerosene lamps. Yet it is never a particular invention, but a new ecosystem that arises, that transforms the world.

Consider that in the mid 90s, computers had been around for half a century with little or no impact on economic productivity. Yet when that technology combined with the Internet and computer engineers started collaborating deeply with subject matter experts to create industry and function specific applications, that drove a productivity boom. Once again, it is not so much new inventions, but new ecosystems that drive advancement.

We’re at a similar point today. With Moore’s law ending, we are nearing the end of the digital revolution and entering a new era of innovation. There are a number of new, powerful technologies rising to the fore, such as quantum computing, artificial intelligence, synthetic biology and advanced materials science. These inventions already exist, but to date we’ve seen little measurable impact.

Over the next decade, however, we can expect that to change. In quantum computing, for example, IBM has assembled a Q Network of partners, ranging from national labs and major global companies to startups like QxBranch and Strange Networks, which are building software tools for the new technology. In synthetic biology, we’re seeing new companies arise, such as Synthego, that create tools to facilitate the new industry, much like gas stations arose a century ago to support the automobile industry.

In artificial intelligence, which is probably the closest to impact, we’re have already seen a massive shift from stand-alone systems like IBM’s Watson to an ecosystem of algorithms and tools that can be customized for industry and process specific applications. As Josh Sutton, CEO of Agorai, a firm that is creating a platform to help businesses access these tools, explained to me, “AI is not a magic box, it’s a force multiplier.”

The same could be said for any transformative technology. Things like electricity and computers have been catalysts for transformation, not transformation in and of themselves. We can expect the same of these new technologies, still in their nascent stage.

That is why today, we are most likely very much like those investors a century ago, in 1919, who saw electricity all around them, but could not imagine the industries yet to be created. Nevertheless, it was the secondary inventions, spawned by ecosystems, that changed the world beyond recognition.

Greg Satell is an author, speaker, and innovation adviser whose latest book, Cascades: How to Create a Movement that Drives Transformational Change, will be published in April, 2019. His previous book, Mapping Innovation, was selected as one of the best business books of 2017.

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