February 7, 2014


'The Second Machine Age,' by Erik Brynjolfsson and Andrew McAfee (Steven Pearlstein, January 17, 2014, Washington Post)

What enables these breakthroughs, Brynjolfsson and McAfee argue, is not just the amount of data available and the speed at which it can be processed. It's also the ease with which these new capabilities and new ideas can be combined and recombined. Economic historians tell us that it took several decades for earlier breakthrough technologies, such as the steam engine or electricity, to reach the point of ubiquity and flexible application at which they fundamentally changed the way people lived and businesses operated. Information technology and digital communication, they argue, are now just reaching that same inflection point. Rather than approaching a period of mature decline, as Gordon and Cowen have suggested, according to the men from MIT, these technologies are about to take off.

The big winners in this new era will be consumers, who will be able to buy a wider range of higher-quality goods and services at lower prices. The other winners will be those who create and finance the new machines or figure out how best to use them to gain competitive advantage. Great wealth will be created in the process.

To illustrate the point, Brynjolfsson and McAfee cite the example of Instagram and Kodak. Instagram is a simple app that has allowed more than 130 million people to share some 16 billion photos. Within 15 months of its founding, Instagram was sold to Facebook -- a company with 1 billion users -- for $1 billion. It was only a few months later that Kodak, the Instagram of its day, declared bankruptcy. The authors use this little vignette to illustrate two points. The first is to point out that the market value of Facebook/Instagram is now several times the value of Eastman Kodak at its peak, creating, by their calculation, seven billionaires, each of whom has a net worth 10 times greater than George Eastman ever had. Such is the "bounty" of the second machine age.

But the evolution of photography also demonstrates how unevenly that bounty has been divided -- what the authors somewhat inelegantly call the "spread." Not only has it created a new class of super-rich entrepreneurs and investors, but it has done so with a company that employs only 4,600 workers. Compare that with Kodak, which at its peak employed 145,000 workers in mostly middle-class jobs.

In the first machine age -- the age of Kodak -- productivity, employment and median income all rose in tandem. In the second, the growth in productivity has essentially been decoupled from jobs and income. And this divergence has its roots not in labor law or tax codes, Brynjolfsson and McAfee argue, but in the very nature of the digital economy, in which a set of goods and services can be provided to an infinite number of additional customers, all at the same time, at a cost that is often close to zero.

Posted by at February 7, 2014 6:14 PM

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