Section 1:

Technological Creation and Destruction


Before the New Entrepreneurial Growth Conference convened in the summer of 2015, we asked each participant to respond to the following:

Over the next twenty-five years, technology will both create and destroy. Discuss two things you think technology will create, for good or ill, and two that technology will destroy, for good or ill.


These word clouds capture the tenor of their responses:

Created



Destroyed

The two essays that address this question directly offer two visions of our future. William Kerr’s essay, “Our Crazy Forward Predictions,” presents predictions he sees as plausible for the future—although he cautions that they have less than a 25 percent chance of occurring. He believes that technology will create a stronger environment for new invention. Patent data, he explains, indicate that we now rely more on recombinant, rather than completely new, invention. Technological progress and the globalization of research, however, will reverse this secular trend and lead to the creation of more new “building blocks.” He also predicts that technology will create a “fourth estate,” perhaps of labor and humanity organizations, as a result of the changing nature of work and job polarization. And, he suggests that technology will destroy the two-party political system in the United States and the local bias of entrepreneurship such that entrepreneurship will no longer be a hyper-local phenomenon, with most entrepreneurs starting businesses where they already live.

Bowman Cutter takes a different approach in his essay, “The New Entrepreneurial Economy: A Future History.” Presenting his forecasts as a future history, Cutter writes about the twenty-five years to come as if he is looking back from the perspective of the year 2040. He predicts that productivity growth will increase due to technological change and rising firm formation. He foresees that the nature of work for millions of Americans will be fundamentally reorganized as new platforms for organizing workers emerge. And he believes that wages will rise and income inequality will fall. Most strikingly, he envisages that America’s cities and metros will simultaneously lead a governance revolution, and he suggests that the federal political system will become functional again when both political parties recognize that a budget crisis is approaching.

Our Crazy Forward Predictions

By William Kerr Professor at Harvard Business School Harvard University and NBER
William Kerr
William Kerr

I received the fun assignment of participating in the opening discussion at the NEG Conference about technology and what it will create and destroy by 2040, twenty-five years from now. The other panelists and I mostly chose from participants’ survey responses on the day of the conference, but I also decided to stick my neck out in advance and make my own four predictions. In the spirit of full disclosure, this was written by a non-futurist who is not on Facebook and was in a rush since the paper was two weeks past its due date...so buyer beware!

My original paper is presented below with only modest editing to provide necessary clarifications and a few play-by-play depictions from the day of the conference. The exercise proved to be super fun and thought provoking. I also have added to this note a brief section that reflects some other thoughts prepared by attendees. While I cannot do justice to the insights, agreements/disagreements, and sheer craziness of the collective survey, I at least hope to show the range of ideas involved. I predicted in my initial briefing document that the combined wisdom of the attendees would be about forty-three large intellectual steps ahead of my four simple ideas. I got this prediction right, so at worst I will be one for five when the final tally is taken in 2040.

Boundary conditions:

Twenty-five years ago, 1990, I was in high school. At that time, I took a typing class that included correction tape and Wite-Out®. My school only had one computer. At home, we had a top-loading VCR with a wired remote control. It was much cooler than our rotary phone. Since then, the Internet has emerged and gone mainstream, communications have undergone a significant revolution, the human genome has been mapped, etc. But cars still have four tires and most use fossil fuels. Domestic violent deaths still happen with guns that resemble their older brethren (or are their older brethren). I continue to fast forward through commercials on the DVR, just like I did with the VCR in 1990. In fact, debate exists about whether all of the recent inventions and innovations have been marginal (the panel following ours picked up on this theme).

As we look ahead twenty-five years to 2040, I feel it important for this note to skip some stuff that seems certain to be true but is not really “sticking out one’s neck.” One such prediction would be a “major revolution of business from its current spot” (or something like that), through mobile technologies and beyond. To be clear, the likelihood and future effects of such a revolution should not be underemphasized. I think location-based business and the impact of billions of smart phones is in its infancy, and the growing “Internet of Things” and data ubiquity will have huge impacts on business management and economics (e.g., what happens to pooled insurance when every device can be individually monitored and experience rated?). But, these forces are all here and now. Likewise, one could prophesy about an increasingly reality (or perception) of frenetic entrepreneurial and business adjustment to technology and its trends. It is interesting to contrast the declining business dynamism and entry document by John Haltiwanger for this conference with the constant and accelerating upheaval in the curriculum that Harvard Business School builds to teach entrepreneurship to MBA students (e.g., search engine optimization, overseas tech development for mobile apps). It seems that the pace of change for at least some of those staying in the shrinking dynamic core is accelerating. Either way, I also count these into projections of existing trajectories, and so I skip them.

In making my predictions, I hope to propose ideas that are plausible, but that have less than 25 percent chance of actually happening. Accordingly, many experts in the relevant domains will strongly disagree with my predictions, but in this case, that might be a good sign. After all, very few experts predicted the collapse of the financial system that started the Great Recession. Sometimes, it may be necessary to be at arm’s length or further from a topic to really guess at a major change. I have purposely made predictions that would seem to be long shots, and I will consider my divinations to be successful if even one of the four comes true.

Finally, as a boundary condition, I skip a number of important things that popped into my head but that I felt technology will serve to both create and destroy simultaneously. This includes such things as equality, happiness, and so forth. Technology over the last twenty-five years has created and destroyed simultaneously on many dimensions, and I don’t see any reason why this will not continue. I want to consider potential outcomes where I can guess at a more lopsided impact.

Technology will create:

Prediction #1 is that technology will create a stronger environment for new invention. This prediction may sound a little odd, so let me walk through it. It is a reflection of some work I have undertaken with Ufuk Akcigit and Tom Nicholas. Examinations of patent data find that we increasingly rely on invention that recombines past technology building blocks in new and interesting ways, but that we are creating fewer new building blocks. This decline in the creation of new technologies is in both absolute and relative terms and is persistent over the twentieth century. References for this work on recombination include Weitzman (1998), Strumsky et al. (2012), and Akcigit et al. (2014). The first figure below shows some representative trends from United States Patent and Trademark Office data, where I plot the total count of patent subclasses in the USPTO system, the number of these subclasses that are utilized in the patents granted in a given year, and the number of new subclasses created. Patent subclasses are the lowest level of the USPTO system and number more than 150,000 during our study period.

A surprisingly large number of past subclasses are in constant use—more than 80 percent of technologies ever developed are still used during the course of a decade today. But the relative and absolute rates of new subclass creation are declining. As a share of patents granted, patents with novel technology elements have fallen from 31 percent in the 1800s to 0.5 percent since 1970. The average annual count of patents containing novel technologies that were filed by U.S. domestic inventors was 977 during the 1800s. For 1900–1934, 1935–1969, and 1970+, the averages decline to 755, 659, and 209, respectively. This decline in absolute numbers occurs despite the fact that the U.S. economy is much larger and grants many more patents each year. As this new literature is investigating, the focus of invention instead appears to be shifting toward the development of new combinations of subclasses not seen before, although much remains to be done in understanding fully these trends and ruling out institutional factors (discussed more in Akcigit et al. 2014).

Despite this picture, I believe that upcoming technological progress, especially “infrastructure” technology like supercomputing power, biological and genetic mappings, nanotechnology, and transformative material science, will stop this process over the next twenty-five years and reverse it in absolute numbers, and perhaps also in relative shares. This can affect both discovery and commercialization.

Figure 1

One example is Terrapower, a startup trying to commercialize a new way of producing nuclear energy. Bill Gates, an early backer of Terrapower, noted that rapid advances in computing power provide this startup with significant advances toward experimentation. In the past, Terrapower would have had to construct an entire nuclear power plant to test whether their new technology would work in practice, a process that would have cost several billion dollars and taken years to complete, making it impossible to finance in the first place. Now, with the introduction of supercomputers, Terrapower’s engineers can simulate the inside of a nuclear reactor, learn whether their technology will work, and make rapid (and much cheaper) iterations to gain much more confidence about the potential of the technology before ever constructing the physical nuclear power plant (Sahlman et al. 2012, Kerr et al. 2014).

Intelligent computing systems and machine learning also might help us along by identifying some important building blocks for humans to pursue and how to achieve them. It perhaps also could lower the “burden of knowledge” that we currently face (Jones 2009), although I am not sure this burden is always a bad thing. Helping this along is the increasing number of minds being applied to entrepreneurial and innovative tasks, as global integration brings many more into the purposeful or accidental knowledge discovery process.

Prediction #2 is that technology will “create” a “fourth” estate. Before the French Revolution, I believe we had the clergy, nobility, and commoners. The press got added into the mix at some point. Counting would typically place us at “fifth” estate or beyond, but surely at least one or two of the above should be downgraded from estate status in 2015. Anyway, as I look ahead, I forecast in vague terms that an important entity will come to take up a place alongside business, government, church, etc. If forced to clarify, I would suspect a twenty-first century labor/humanity organization(s) would fill this role. Union membership rates in the United States declined from around 30 percent in the 1950s to the low teens in the 2000s. Moreover, this trend continues and current membership shares are especially low among younger workers.

Figure 2
Figure 3

Unlike some predictions, technology plays an indirect role in this one. Trends in technology (among others) are placing tremendous strains on some groups, and existing institutions have not kept pace and are perhaps entirely inappropriate for the world in 2040. HBS recently held a conference/summit for some top leaders from business, politics, journalism, labor organizations, etc. One emphasis coming out of this event was the need for dramatic rethinking of the institutional framework for the shrinking middle class. There is a long way to go from agreement in principle to action; for example, everyone in my particular discussion group strongly favored better pre-K childcare access, but the consensus starts to break down on details (e.g., simply need to ask whether to fund via increased revenues or adjusted expenditures). But, these include collective choices, and, thus, I predict technology will sire a counterbalance.

Technology will destroy:

Prediction #1 is that technology will destroy the two-party political system in the United States as we know it today. I put this prediction in the “destroy” category because I am completely unable to predict what might replace it (which would be a creation). But from my armchair, technology has placed many strains on the existing parties and their governance systems. These challenges include access to information, greater ability to self-organize groups and raise campaign funds, a news cycle that is very hard for any leader to navigate while also creating a long-term agenda, transparency while governing, and so on. While new technologies are also useful to political parties, it is hard to see how the system as a whole is not ripe for a major change. Less than 40 percent of individuals in the United States have a positive opinion of either party, and, in one recent poll, only 19 percent of respondents had a higher opinion of Congress than of head lice.

In the business world, we would strongly predict a major upheaval for an industry characterized by a stodgy duopoly, sagging product approval ratings that are approaching 10 percent, and a dated business model that appears unable to adapt to the new environment. We would regard this as an industry ripe for disruption—so ripe that you would not be allowed to call it a long shot guess with a 25 percent chance or less of working—and it is not hard to see our current political system in an analogous situation. It has even crossed my mind that the real purpose of the conference was for the Kauffmann Foundation to launch a third political party and kick off this disruption … (At the event, they assured me that this was not true …)

Figure 4 

Technology has transformed many stodgy old industries around the world, and politics could be next. Certainly, youth movements outside of the United States attest to this power (e.g., the enabling role for the Arab Spring), and many young people in America today show record dissatisfaction with our current political structure. Barriers to entry exist in politics and are the strongest argument against change, but they are not absolute (just ask Donald Trump and the Republican Old Guard). New generations of voters may grow up without a strong alliance to any party and will become an increasingly large part of our electorate—the share of political independents is rising (to 39 percent, compared to 32 percent Democrats and 29 percent Republicans). The average number of third-party candidates listed on Senate ballots has risen from 1.4 to 1.9, although ticket splitting has not increased. Play this tape forward for a couple of decades and one feels like it won’t be as simple as red and blue states.

It is also important to note that debate exists about whether or not such a restructuring would aid or hinder democracy. With dealignment, will parties perhaps lose ground to PACs? Perhaps a race to the middle results in weaker choices? Perhaps this is not about new parties at all, but just something very different with the two parties? Bottom line, a scan of other countries with more parties does not lead me to faith that change must take us to a better outcome and improve welfare. I have even less faith that technology by itself will automatically steer the political ship in the direction that we as society would like it to go.

At the conference, I was called a political scientist for the first time in my life. A political scientist in the audience later clarified that I must be the world’s worst political scientist. This prediction is purposefully wild and certainly disqualifies me from being a political scientist, but let me close with one final thought. If we think about some of the major social and political changes over just the last year—e.g., the extension of marriage rights to same-sex couples, attitudes toward the Confederate flag—we often see a system or setting that seems like it will never completely change and in which progress will always be the tiniest of steps … until suddenly it does. We often under-predict initially how long it will take for a major change to come, but then we also can vastly under-predict the speed at which it occurs when the change does happen. That is just amazing to contemplate and build a long-shot prediction on … something working with every belief it will continue, until it suddenly does not.

Prediction #2 is that technology will destroy the local bias of entrepreneurship (LBE). At least one of my predictions had to involve entrepreneurship or the Kauffman Foundation would have rejected the briefing document. As a brief review, LBE relates to the disproportionate connection of entrepreneurs to their regions of birth. It is a very surprising fact for those of us that think more in terms of Silicon Valley and immigrant entrepreneurship than “Main Street” businesses, but LBE is now documented for the United States, Italy, Portugal, and elsewhere (Figueiredo et al. 2002, Michelacci and Silva 2007). In these studies, entrepreneurs are disproportionately from their home regions—specifically, for the United States and controlling for some basic demographics, entrepreneurs are about 4.5 percent less mobile than wage workers – and these hometown entrepreneurs are usually running better businesses than are migrant entrepreneurs to the region. This latter piece is very important, as it suggests that this is not due to lack of opportunity or to misfits being pushed into local self-employment and having no good prospects elsewhere. It is also a bit shocking given that we observe the exact opposite patterns for wage work, where migrants are typically observed to have higher wages than locals (linked, for example, to the actual or psychological costs of migration that they experience).

Looking ahead, I would not be surprised if the higher rate component of LBE persists, and if, in 2040, if we still find entrepreneurs being disproportionately located in their hometowns. But I think any advantage will erode significantly. This is, in many respects, a way of projecting out technology features like global online labor markets (soon to be super-augmented by natural language translation), broader and geographically dispersed sources of financial capital (soon to be augmented by equity-based crowdfunding and similar advances), cloud computing services and similar fractionalized access to needed inputs, efforts by local governments to build cities to attract entrepreneurs, and so on. Some of these contributions are small now, while others, like Amazon Web Services are already substantial. None of these forces shows signs of abating, and we moreover see complementary business models like Rocket Internet that are arbitraging ideas around the world at frightening rates. As a more Main Street example, one entrepreneur recently told me of a plan to build a national chain of nail care salons, overhauling a fragmented industry comprised of local business establishments and a major foothold for independent Vietnamese immigrant entrepreneurship. The combination of these forces, I predict, will lead to a very different relationship of entrepreneurship to geography than what we have known thus far. Geography will remain important, but different.

The wisdom of the crowds:

Participants in the pre-panel survey came up with a long list of ideas about what technology will create and destroy, covering topics from health care to energy to government. They ranged from near-certainties to goofy and exciting ideas that could have come from the pages of a science fiction book. Sadly, the full five-page list is too extensive to include here, but some interesting themes emerge.

One is the rise of automating or transferring everyday work to other entities—for example, moving toward self-driving cars or other automated transport systems; robots taking over jobs previously held by humans; or even (as one participant projected) a sort of “virtual you,” a digital agent that can act and react like its owner and can be useful for anything from marketing to matchmaking. (I would have fired my high-school virtual you for poor performance on the matchmaking front!) Another recurring theme was the idea of “mass customization” of goods and services, from large-scale, individually customized learning plans or curricula, to increased flexibility for manufacturers and consumers as 3D printing becomes ubiquitous, to individually targeted marketing campaigns. One participant proposed that the entire manufacturing-distribution-consumption chain will be totally revolutionized within the next few years through the linking together of concepts like consumption-on-demand (e.g., Amazon Prime Now), self-driving cars, and shipping alternatives like Shyp. Generally, respondents did not hesitate in predicting the total transformation or even destruction of many of the institutions that are around today: paper-based libraries, private universities (ouch!), physical currency, or even full-time employment.

Respondents’ ideas also showed a wide variety of opinions on the state of humanity and the world twenty-five years in the future. Some were unabashedly optimistic—to hear us tell it, by 2040 we will have nearly solved the problems of aging, will have the ability to grow replacement organs, and will augment our intellects and abilities through genetic engineering or even human-machine interfaces that, e.g., will allow people to “think in code” or even let us cheat death by uploading a “digital self” to a computer. Energy is also predicted to become affordable, reliable, scalable, and pollution-free, education will be cheap and accessible for all, and one of the more futuristic responses suggested that we may even have undersea cities, which I would like to see.

On the other hand, some people cautioned about the sacrifices of privacy or personal liberties that we will see as ever more personal data becomes available both to governments and private companies, and the danger posed by hackers as more of our systems become digitized. Many people also expressed concern that middle-wage, low-skilled or unskilled jobs will disappear (possibly taken by robots), that wage inequality will rise, and that shorter cycles of creative destruction will mean greater instability and an increase in national anxiety levels. Some people also brought up the possibility that interpersonal interaction will decrease, or that our willingness to tinker with nature or human development could lend itself to huge abuses and a truly dystopic future.

I was asked to find one idea to agree with and one to disagree with. For agreement, I chose that technology would destroy the “democratic system (as we know it).” See rant above. For disagreement, I selected one that suggested that technology will create “undreamed-of information from and greater effectiveness of government.” The “information” part I agree with, and I actually have argued to local leaders on several occasions that more data equals more entrepreneurship. Policymakers seeking to promote entrepreneurship don’t need to come up with how the data will be utilized; they just need to make it available. But “effectiveness” I am less certain about. Looking backward, technology sometimes provides permanent gains that we should celebrate and carry forward—for example, the delivery of clean water and removal of sewage was monumental for cities to prosper. But, we also tend to create new issues for each generation, either through brand-new problems like cybersecurity threats (the “live” event right now is the cyber theft of millions of personnel records from the federal government) or through the renewal of perennial threats like the disappearance of the social safety net. It is also worth keeping in mind that “effectiveness” may vary depending on who defines it—what the voters deem effective may not align with the views of those in power, a facet of human nature bundled into the history of political corruption that is unlikely to change much. Moreover, our happiness can have a “what have you done for me lately?” flavor that is impossible to quench. This is not to say that government efficiency is doomed—I expect that we will see government productivity increase with better technology, just as we will see productivity enhancement in other areas. I am just a bit less optimistic about the dramatic nature of the change brought about by “data.gov.”

Conclusions:

There is a saying: “may you live in interesting times.” Technology and its commercialization have made the last twenty-five years interesting, to say the least, and I am sure it will do the same going forward. This panel discussion and survey can really only cover the beginnings of what we might project for ourselves as technology continues to grow and evolve at a rapid pace. I look forward to the tally in 2040, especially as I played it safe and don’t have any money riding on it!

About the Author
William Kerr is a Professor at Harvard Business School. Bill is the faculty chair of the Launching New Ventures program for executive education, and he has received Harvard's Distinction in Teaching award. Bill focuses on how companies and economies explore new opportunities and generate growth. He considers the leadership and resources necessary to identify, launch and sustain dynamic and enduring organizations, and his recent work on Launching Global Ventures especially emphasized global opportunities. Bill is a recipient of the Ewing Marion Kauffman Prize Medal for Distinguished Research in Entrepreneurship.

References:

Akcigit, Ufuk, William Kerr, and Tom Nicholas, “The Mechanics of Endogenous Innovation and Growth: Evidence from Historical U.S. Patents,” Working Paper (2014).

Decker, Ryan, John Haltiwanger, Ron Jarmin, and Javier Miranda, “The Role of Entrepreneurship in U.S. Job Creation and Economic Dynamism,” Journal of Economic Perspectives 28:3 (2014), 3–24.

Figueiredo, Octávio, Paulo Guimaraes, and Douglas Woodward, “Home-Field Advantage: Location Decisions of Portuguese Entrepreneurs,” Journal of Urban Economics 52:2 (2002), 341–361.

Gordon, Robert, “Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds,” NBER Working Paper 18315 (2012).

Jones, Benjamin, “The Burden of Knowledge and the Death of the Renaissance Man: Is Innovation Getting Harder?,” Review of Economic Studies 76:1 (2009), 283–317.

Kerr, William, Ramana Nanda, and Matthew Rhodes-Kropf, “Entrepreneurship as Experimentation,” Journal of Economic Perspectives 28:3 (2014), 25–48.

Michelacci, Claudio, and Olmo Silva, “Why So Many Local Entrepreneurs?,” Review of Economics and Statistics 89:4 (2007), 615–633.

Sahlman, William, Ramana Nanda, Joseph B. Lassiter III, and James McQuade, “Terrapower,” Harvard Business School Case Study 813-108 (2012).

Strumsky, Deborah, Jose Lobo, and Sander Van der Leeuw, “Measuring the Relative Importance of Reusing, Recombining, and Creating Technologies in the Process of Invention,” Working Paper (2012).

Weitzman, Martin, “Recombinant Growth,” Quarterly Journal of Economics 113:2 (1998), 331–360

The New Entrepreneurial Economy: A Future History

By Bowman Cutter Former Managing Director, Warburg Pincus; Former Director, National Economic Council; White House Senior Fellow and Director, Economic Policy Initiative, Roosevelt Institute
Bowman Cutter
Bowman Cutter

As part of the discussion about the technological future, and informed by my work leading the Roosevelt Institute’s Next American Economy initiative, I chose to take a broad look at the next 25 years. Yogi Berra cautioned against making predictions, “especially about the future,” but I’m going to take a stab at describing an optimistic future for the U.S. economy. I take as the vantage point my retirement year of 2040.
Looking back, the years between 2020 and 2040 turned out to be the best twenty-year period of U.S. economic performance since the 1950-1970 miracle years.
  • Productivity growth averaged slightly more than 2 percent throughout the period, leading to average per capita real economic growth of about 2 percent and average total annual growth of close to 3 percent. (After bipartisan immigration reform legislation passed during 2017, there was a slight uptick in legal immigration.)
  • Growth in new business formation first stopped falling, and then grew to the highest rate since the 1960s. 
  • Labor force participation continued to fall to a low of 62 percent during 2019, and then grew steadily for 15 years, reaching a new high of 68 percent during 2035. In part, steady growth in the elderly’s participation in the labor market drove this trend, as 76 became the retirement age norm.
  • The unemployment rate remained relatively high, averaging between 5.5 and 6 percent. Growth drove the rate down while increasing participation pushed the rate up. Long-term unemployment fell to 15 percent of all unemployment. High job churn returned. Surprisingly, at the time, the fastest growing job sector was "self-employed," reaching 30 percent of all employment by 2035, and continuing to grow.
  • Federal debt began to decline as a percent of gross domestic product (GDP), from a high of 76 percent during 2018 to roughly 60 percent today. And the Steuerle-Roeper Fiscal Democracy Index recovered from 5 percent during 2015 to 25 percent twenty years later.

These past 20 years, however, were not even remotely a rebirth of the old economy. The 1950s did not just come back. Instead, as a result of big changes that no one predicted, but which seem inevitable now, the economy very rapidly evolved.

Much about how Americans work and take care of themselves changed substantially. A higher proportion of the economy was composed of smaller and more specialized firms.  Many jobs were automated. New, more flexible (and less secure) work options have taken their place. "Work" did not disappear, but the "job" — stable long-term employment with one firm — fell as a percentage of all work. As a result, Americans have found themselves more responsible for managing exigencies, like health insurance and retirement planning, which were once handled by employers. 

All of these changes involved immense and difficult adjustments, but they did not mean economic disaster. Ordinary women and men were better off than all the trends suggested twenty-five years ago.

What happened?

Ten Surprises

In brief, the economic resurgence we have seen during the past twenty-five years was driven by the following ten surprises and their consequences

1. The rate of technological change and productivity increased; business formation turned around.

Productivity growth in the U.S. economy turned down during the mid-1970s and, with the exception of a brief jump, during the late 1990s, stayed down. By 2010, this was accepted as a boundary condition of the U.S. economy, and most/all respectable long-run forecasts assumed long-term productivity growth of 1.2 to 1.5 percent with a long-run, per-capita economic growth rate of 1 percent or marginally higher. Explanations varied, but a core debate centered on Robert Gordon’s argument that the possibilities of economically meaningful innovation simply had declined. Professor Gordon posited that the information technology revolution, the fact of which he did not contest, simply did not provide the multi-decade opportunities — the platform — for fundamental economic innovation, and for the ensuing product and service innovation that steam power, electricity, and the internal combustion engine had provided in the eighteenth and nineteenth and twentieth centuries.1

  1. Robert Gordon: the possibilities of economically meaningful innovation simply had declined. Professor Gordon posited that the information technology revolution, the fact of which he did not contest, simply did not provide the multi-decade opportunities — the platform — for fundamental economic innovation, and for the ensuing product and service innovation that steam power, electricity, and the internal combustion engine had provided in the eighteenth and nineteenth and twentieth centuries.

Of course, technological change and productivity trends began to turn up at precisely the moment their stagnation was accepted as a fact of life. What happened?

History repeated itself.

From the late nineteenth century through the first sixty years of the twentieth century, the fundamental reaction of the economy to the successive steam, electricity, and combustion engine revolutions was the emergence of a "new business system" — a new economic platform. That new platform was the "factory system" — a multi-decade, continuous adaptation to lowered costs of organization, plant design, product manufacturing, distribution, and logistics. Along with that system came a new educational system, a pervasive multidecade political response to a new class (the middle class worker), the growth of unions, and the welfare state. Much of the investment of this era went toward building the right platform for the factory system.

Almost the same thing began to happen again during the first decade of the twenty-first century. As during the nineteenth century, however, the patterns took a long time to emerge and become apparent. (These developments also were obscured by the “Great Recession” of 2007-2009.) During the first decades of the information technology revolution, individual technologies and products were apparent. But by the mid-1990s, these individual changes began to coalesce into something quite new. The combination of enormous increases in computing power with the rise of the Internet and the emergence of fundamentally new technologies (nano-technologies, 3D printing) represented changes in costs and factors of production every bit as substantial as and even more pervasive than the industrial revolutions and the emergence of the nineteenth century factory system. But, if anything, this combined set of changes was more difficult to adjust to than the changes that occurred during the mid-nineteenth century. It took thirty years for businesses to adjust to electricity. Because the pieces of today's new system began to emerge in the mid-1990s, the emergence twenty years later, between 2015 and 2020, of the enormous impact of the new economic system was right on schedule.

I'll return to this new system below. A significant effect of the emergence of this new business system was a turnaround in business-formation and startup trends. The new technology complex provided both new opportunities for services and products entrepreneurs could exploit, and a new capability to form any new businesses more easily, more rapidly, and much less expensively.

Simultaneously, the same technology changes created new waves of industry disruption across much of the economy, creating even more opportunities for new business. All of this together began to yield, beginning between 2015 and 2019, the highest level of new business formation in the U.S. economy since the 1960s. The incumbents of the previous sixty years were unable to sustain their business models and equally unable to change them. Across the economic spectrum, new entrants were able to outcompete the incumbents.

As a result of increased opportunity, and much greater ease of starting a business, startups became even more democratized and, for large numbers of the emerging millennial middle class, the startup — even if quite small — became an entirely logical alternative to "the job.”

2. The Internet became the new "factory," revolutionizing business organization and defining a new business system.

The Internet, as it evolved after 2010, had two major economic effects. These trends were always hidden in plain sight. Broad phenomena, such as the emergence of what was originally called the sharing economy, and a host of new individual services — Uber, as an example — all were early signs of the spring of a new economy, as were the reactions of major, incumbent companies as they tried to stop the new business system from emerging. 

  • It drove the decentralization and disaggregation of enterprise.
  • It rendered the large, integrated company made possible by command-and-control management increasingly inefficient, slow, and way too expensive. 

Start-ups were easier. The advantages of scale diminished substantially as smaller companies found new approaches to supply chain management, to distribution, even to human resource management. The creation and management of partnerships and joint ventures through technology were far cheaper, and much more flexible compared with internalizing those markets through mergers and acquisitions, and then managing them through command and control. (Because the vast proportion of mergers and acquisitions fail, any trend that puts them at a disadvantage improved shareholder value. This had the added value of reducing the profits and scale of the financial behemoths that characterized our financial sector.)

Finally, very large companies were disadvantaged by a steady increase in the general diseconomies of command-and-control management. Remember, the capability of information systems doubled every two years, and the capability of software doubled at an even more rapid rate. Therefore, the cost of the new systems of management constantly declined. The cost of command and control rose forever.

Equity markets enforced and reinforced these differences. As we increasingly saw, equity markets almost always valued large, integrated, diverse companies less highly than the sum of their component parts. Why? Because they were less valuable. Diversification, and command and control almost always reduced or destroyed value.

The other major effect of the Internet 2.0, 3.0, and so on was to drive the disaggregation and decentralization of enterprise. The Internet effect is obvious. Together with information technology, it reduced the economies of scale of a large number of production processes and creation processes. For example, companies did not have to be giants to afford top-quality financial management systems. Today, separate businesses offer all of the most crucial and central business processes as information technology services. At the same time, the Internet made distance much less relevant.

In parallel, new technologies — such as 3D printing or highly automated logistics  — reinforced these trends. As 3D printing evolved, so did a new manufacturing system. Of course, the ordinary household did not make everything. Instead, "maker tiers" evolved. Small, local businesses specialized in making everyday items, and more complicated products were made by larger, regional and/or national companies.

3. The "gig economy" took off and revolutionized the organization of work.

As the new business system emerged, the nature of jobs, work, and careers changed substantially. The inevitability of the forty-hour-per-week, five-days-a-week, long-term job came to an end. This organization of work had been the centerpiece of our industrial economy for 100 years, and it continued to be how many millions of men and women made their way in our economy. But the "job" was not the centerpiece of the "good economy," and it was not what was happening at the margin of our economic change.   

"Jobs" of the traditional nature remained, but it also clearly became unwise for most women and men to plan their lives exclusively assuming that they would find and keep a traditional job. And getting our collective heads around such a fundamental change was one of the more important conceptual hurdles we faced. 

But work and the necessity to make one's way through life and earn a living did not go away. So what began to take the place of the "job?”

Three phenomena became more and more important: part-time assignments, portfolio careers, and more pervasive entrepreneurialism.

First, for many women and men — far more than anyone imagined during 2015 —  "work" consisted of short-term assignments, and a career became composed of a bundle of such assignments over a lifetime. The “gig economy" fully emerged.

Second, many people carried more than one of these short-term assignments at any given time. Not everyone wanted to manage a "portfolio" of assignments, but many saw this as a way of making the most of their talents and of raising their incomes.

Finally, an element of entrepreneurialism and personal responsibility became a more important aspect of all work.

If the rote, predictable, slow-to-change "job" was mostly going away, then everyone had to plan for work that was not rote, less predictable, and more rapidly changing. As a result, everyone had to be much more responsible for their own careers. In particular, everyone had to think much more constantly about the next assignment, the skills required for that assignment, and the education and credentials required to gain those skills and provide evidence of them to others.

But if the downside was that individuals had to be more entrepreneurial in planning their lives, there also developed many more possibilities at all levels of work for defining even what was seen as inevitably low-value-added work in more valuable ways. Specifically, in the vast sector of individual and household services, the combination of human skills, new technology, and knowledge provided enormous scope for individual ingenuity and innovation to define ways of adding value and income to what always had been considered low-level jobs.

Work, in the new economy, became at least as good and maybe more fulfilling for most men and women than it was at the heyday of the twentieth century economy. But the emerging new economy also asked more of individuals — more attention to anticipating the next gig, and more focus on the skills required for that next gig. Every person had to be his or her own entrepreneur. 

4. New "platforms" revolutionized the organization of workers. 

As economies, industries, and work have changed, the organization of markets, workers and skills have always also necessarily changed. As the commercial economy of Europe began to self-organize during the early Middle Ages, trade fairs were a central institution. Later, guilds were crucial in the organization of work and of skills. Labor unions and chambers of commerce grew in parallel with the rise of our industrial economy. 

The same pattern has repeated itself. We did not predict the precise shape of the new platforms, and new ones continue to develop — but we now know the roles they carried out, and the nature of early prototype structures.

New platforms have met three changed needs. First, they offered new means of marketing and selling goods and services. Second, they provided ways for workers at all levels to know about new assignments, to qualify for and schedule assignments, to collect payments, and to meet such needs as health care, insurance, pensions, childcare, and elderly care. And finally, they offered education and career-management services. 

The latter two roles — which for decades we assumed were simply aspects of what major (and minor) companies did — emerged as companies virtually everywhere went out of the business of managing workers and careers. All of these new platforms have the Internet as a fundamental part of organizing the new economy.
 
It was harder twenty-five years ago to imagine clear examples of new platforms for the organization of work and the management of skills. However, all of the following were points from which these kinds of platforms grew:

  • Labor unions. By 2015, unions represented approximately 8 percent of nonpublic-sector workers. The major public companies with thousands of workers and major unions representing those workers were significant elements for three quarters of the twentieth century, and, while often antagonists, they each depended on the other. But, major companies changed substantially, and unions had to change also. Some did — the best began to manage work-paths, education, and careers. Plus, as agents always have done, they continued a negotiating and intermediary role in compensation. But the innovator’s dilemma afflicts large unions just as it does large companies, and very few unions made the shift.
  • Temporary work companies. These were naturals, and evolved into broad-based work- and career-management platforms. Their specific focus was already what the new economy was becoming, their natural business model allowed for substantial broadening of their mission, and the changes required precisely paralleled their strategies. Companies such as Kelly Services became pivotal actors in the next economy.
  • Business and technology consulting firms. These also were naturals.  They already had taken advantage of disaggregation of major companies and the manufacturing sector, they knew how to manage skilled people, and they became substantial parts of the way the gig and artisanal economy emerged. McKinsey, Accenture, and Bain Consulting all became significant new platforms.
  • Talent agencies. No one predicted this. Talent agencies mostly managed the careers of performing artists and athletes. But they — along with public relations firms and head-hunting firms — had begun to think about and move into managing the careers of high fliers in law, consulting, or senior corporate management. Then, as the new economy evolved, many more ordinary women and men decided they required help in the management of their own talent. This spread of career talent management still is evolving. It is not as high "touch" as that provided to a senior litigator, and it is more technology-based. But more and more of us have decided we want an agent.

There has not been a single model, nor a clear linear path along which the platforms of the new economy have evolved. But it has become very evident that the profoundly different nature of jobs and work in the emerging new economy required profoundly different platforms for organizing work and careers. This same changing nature of jobs and work also prompted essential, equally profound changes in public policy. In particular, a completely different approach to the organization of the national safety net emerged.

5. Classic wage income became steadily less important for much of the middle class.

Of course, classic wages have not gone away. In today’s labor force of about 200 million women and men, with about 188 million "working," about 110 million have "jobs" by almost any definition. But even many of these "jobs" are gig economy jobs, which consist of separate assignments for different employers and, involve a close relationship — a membership — with one of the new platforms. Whether these men and women are employed by an employer, by a platform, or are self-employed is ambiguous.

But somewhere between 60 million and 70 million are self-employed owners of sole or very small proprietor enterprises. Their incomes are a blend of "wages" they pay themselves and distributions from the profits of their enterprises. 

The increasing importance of this self-employed or close to self-employed income was driven by both the increase in and the democratization of startups beginning after 2015. The whole phenomenon was also importantly facilitated by the emergence of mini-equity investors, and platforms for those investors. In turn, this began to democratize income from capital.  

6. Growing labor scarcity raised wages.

Between the 1970s and 2015, we experienced a low-growth economy, a falling startup rate, technological change that eliminated a large number of middle-income jobs, and no employment growth — indeed, substantial employment reduction — across the entire large-company sector.

But during the past thirty years, we've seen a much higher rate of overall growth, a rising startup rate (all of our job growth comes from new companies), very high growth of self-employment, a big-company sector that is jobs-neutral, and a decline in technological unemployment.

Under those circumstances, a 3 percent economic growth rate coupled with a 0.7 percent labor force rate of growth slowly uses up any excess labor, and ultimately leads to higher wage increases.

7. Two educational revolutions increased educational attainment.

Another important reason for the collapse of productivity growth after the mid-1970s was a flattening of educational attainment. As Claudia Goldin and Larry Katz showed roughly fifty years ago in their now-classic The Race between Education and Technology, profound changes in education — most notably, the "high school movement" — occurring continuously from the middle 1870s through the 1970s, enabled labor productivity to increase. But educational attainment seemed to stagnate after the 1970s, as did productivity growth. 

There were endless analyses of this, and it was clear that many aspects of the American education system required change as the economy changed. But now, in retrospect, what is clear is that for educational attainment to grow, two new student populations required focus: kids and adults.  

By the early 2000s, it was clear that sustained and targeted childhood mentoring and supplemental teaching interventions, beginning with preschool and lasting long past, offered potentially very large benefits. The additional lifetime income of children benefitting from these programs was estimated to be ten times the total cost of the interventions, or $200,000 versus $20,000. This increase also was predicted to close more than 70 percent of the gap between the future incomes of children from low-income families and children of middle-class earners.

Simultaneously, others observed both that our previous seventy-five years of social-policy emphasis on the elderly had been extremely successful, and that kids were coming up short. Gradually, citizens and their representatives across the political spectrum came to recognize that, for productivity and growth to increase, more investment was needed in the earlier phase of life.

Young adults and everyone throughout their lives were the other glaring omission. During 2015, for a large proportion of our high school graduates, the high school system of the time made a series of nineteenth century assumptions:

You will leave high school. You will find, mostly on your own, an entry-level job. You will stay in that job or one very much like it your entire working life. The content of those jobs will change incrementally, at a pace you can absorb on your own.

But by the same time, this narrative no longer was true for any high school graduate, and has been becoming unreliable for most college graduates.

What was urgently required was a new combination of three elements:

  • A vast array of mini courses made available by approaches linking "high-tech and some touch." Adults had to be able to continuously update their skills throughout their working lives, and do so at times and locations of their choosing
  • A new system of accreditation — mini credentials and authentication — so anyone could demonstrate necessary skills. 
  • New kinds of platforms for lifelong students, enabling everyone to know what mini courses they had to take to maintain their own credentials library and history.


As these two areas of educational focus became evident, we actually began to do something about them. How that happened was another surprise, but as it happened, real educational attainment began to increase and, correspondingly, labor productivity began to increase on a broad front.

8. The National Political system began slowly to work again.

During the "teens," a state of complete disagreement existed between the cores of the Republican and Democratic parties about spending, taxes, deficits, and debt. Short of complete one-party hegemony, the likelihood of passing any major program involving funds was near zero. But the situation could not persist indefinitely.

The centers of both political parties began to fully comprehend the fiscal disaster looming over the American budget, and were forced to do something they had long avoided: act rationally. With entitlement programs and corporate tax expenditures set on growing, predetermined paths, more and more choice and flexibility were removed from the budget process, eroding both parties’ ability to govern. Without a broad compromise, Congress not only was unable to increase spending, but also was unable to change spending.

By 2010, as Gene Steuerle showed in Dead Men Ruling, we reached a point where all anticipated federal revenue for the next ten years was fully allocated to existing commitments. As Steuerle argued, both parties had conspired to put in place programs and tax breaks structured to increase indefinitely, creating a "squeeze that deprived current and future generations of the leeway to choose their own priorities, allocate their own resources, and reach for their own stars." At the time, Steurele concluded by saying, "we are left with a budget for a declining nation that invests ever less in our future, particularly our children, and a broken government that presides over archaic, inefficient, and inequitable spending and tax programs."

Slowly, the rising new constituencies and the politicians who represented them realized the choices they were being deprived of, and began to put aside the existential debate about ultimate deficits, taxes, and spending. Instead, they worked to create those choices.

Democrats agreed to limit the automatic spending growth of all entitlement programs — in effect, forcing some future growth of such programs into an annual budget process. Republicans agreed to parallel limits on all tax expenditures. Some combination of the additional funds then were spent, by agreement, on investment and deficit reduction, broadly reopening a constructive debate about budget priorities.

9. Cities unleashed themselves.

The new importance of cities as platforms for the new economy began to be very clear by the early 2000s. There are many reasons for this, but two of particular importance are the basic nature of our new economy, and governance.

Much, maybe most, knowledge crucial to the functioning of any business is informal and uncodified, existing in the minds of workers, and the in processes and cultures of specific companies. While this is true of individual companies, it is even more true of groups of companies that are within the same value chains or that are competing with each other. Further, it is, on order of magnitude, increasingly more true of the "complexes of specialization" that now characterize our business system.

To give the simplest possible example, the relationship between a manufacturer and a crucial component supplier is almost always characterized by an intensive flow of information going both ways, and most of this information never is written down anywhere.

These knowledge-intensive specialization complexes work best when the players are near each other — when suppliers, designers, marketers, salespeople, logistics specialists, and information system designers can meet often and informally. These complexes will, inevitably, be located in metropolitan areas.  Our cities, therefore, have become the basic platforms for the emerging complexes of specialization. 

To some degree, of course, this always has been true. But the platform role has become more and more central because, to an important degree, competitive advantage stems fundamentally from the quality of the specialization complex and platform as a whole. The quality of very local governance, infrastructure, and education, and the capacity of cities to choose their own ways of being distinctive, we now recognize as crucial determinants of competitive advantage or disadvantage. 

At the same time, there was the problem of governance. The political stalemate of the 2000-2015 period continued for a decade after 2015. The executive and legislative branches of the national government continued to disagree about everything, and the major agencies of the federal government became less and less able to do anything as discretionary federal funds fell to less than 5 percent of all funding. What became rapidly clear across the landscape was that cities were the only political units combining scale, closeness to real life, and functioning authorities. Cities and mayors were all that worked.

To restate an old expression: If something is inevitable, it sooner or later happens. The cities began to demand more power.

Mayor after mayor came to understand both the demands and the opportunities of the new business system, and concluded that answers were not coming from the federal government or the states. A reinvigorated coalition of mayors emerged with the economy as their political agenda, a surprisingly highly focused agency, and a new set of business constituencies — entrepreneurs and new companies attempting both to improve their own economies, and to blunt the powers of large-company incumbents who owned Washington. Mayors wanted:

  • Power to improve, prune, consolidate, and modernize regulation stemming from any level of government.
  • Very much increased discretion over all educational spending in their jurisdictions. 

They did not achieve anything close to unrestricted discretion in either area, but they won a great deal. And they have done a great deal with what they won. More than fifty major cities, comprising more than 50 percent of our population, have made "ease of starting and building a business" a major regulatory focus, and the index has become a major competitive issue. At the same time, we have seen a revolution in childhood education and lifelong learning. 

10. Income inequality and mobility trends slowly began to reverse from the seemingly inexorable 1980-2015 course.

What happened was pretty simple.  Higher economic growth with higher productivity created job growth and wage growth. At the same time, a higher business startup rate, and the democratization of startups and capital distributed returns more broadly to the top 40 percent of the income strata. And twenty years of investing in all kids raised productivity, mobility, and equity.

Also, the Steurele Grand Bargain broke a log jam. It became clear that small, marginal changes could be made, and added up to a lot during the course of a decade. So other small, incremental changes began to occur, including shifts in retirement and health benefits toward lower income households, and annual increases in infrastructure spending.

Conclusion: The rise of the artisanal economy

Today, our emerging economy is composed of a significantly higher proportion of smaller companies — many close to virtual companies almost entirely mediated via the Internet. The driving force of this economy is an extremely high level of business startups, driven by high rates of technological change.

Economic value in this economy derives from a continual process of specialization in which individuals and the new technologies create highly specialized goods and services at wide price ranges. The factory system that characterized the economy of much of the twentieth century has disappeared.

A 100-year process of aggregation has reversed itself. During a long period of time, manufacturing (and big service companies) came to not only make things, but also to take on a very large set of associated functions — research and development, design, marketing, sales, logistics, information systems, procurement, supply chain management, and finance — all optimized around a system that functioned best when it had very long production runs of essentially commodity products. Many, many "manufacturing workers" never built anything, and never were on a production line. All of them came to be clumped together in command-and-control systems not because they inherently fit together, but because it was the most practical, cost efficient way to manage.

What we now have seen for twenty-five years is a process of disaggregation. Many, probably most, of the previously integrated functions within major businesses have separated, and the ecology of the new business system is very different.

At the core of this ecology are high-tech commodity manufacturers with relatively little employment, and big or small plants (depending on the market) building the core product. Surrounding these manufacturers are independent design, logistics, marketing, sales and supply chain firms that take the core product, and offer highly specialized versions to particular submarkets. Services moved in the same direction. Most of the big service sectors also have come under constant pressure to disaggregate.

There has been a parallel flourishing of very small enterprise — information technology and 3D manufacturing have led to completely different crafts, while knowledge plus information technology plus robotics have led to different household services.

This growth of specialization we foresee is possible because the core basic costs of manufacturing and service provision became much lower. This, in turn, allowed the costs of specialization to be brought into value chains.

The increased degree of specialization was inevitable because of competition and consumer demand. The competitive pressures of many small- and medium-sized businesses simultaneously accelerated the manufacturing disaggregation already occurring, and also created opportunities for the development of very specific submarket niches. Core manufacturers discovered they could not maintain their previous breadth of functions because they were outperformed by relentlessly focused competitors. The opportunities lay in deep knowledge, not in breadth.

The end result was mass specialization at a level that has never been possible before.  And while large-scale business employed many fewer women and men compared with analogous businesses of the past — a trend they had been developing for many decades anyway — the overall system, including all of the specializing companies, employed more.

This new artisanal, mass-specializing economy doesn't look the same everywhere, and hasn’t happened all at once. We are a very large, continental nation of more than 400 million people with an immense economy. We inevitably will have almost any combination of human capability, technology, and specialized products and services imaginable. In some sectors, where existing incumbents had close to monopoly power, the changes have been slower. But during the past 25 years, these changes have been inexorable and pervasive. 

About the Author
Bowman Cutter joined The Roosevelt Institute in October 2009 as Senior Fellow and Director, Economic Policy Initiative after retiring from Warburg Pincus, a major global private equity firm headquartered in New York City, between 1996 and 2009 where he served both as the firm’s economist and as a leader in its international business, with particular reference to Asia.

 
Mr. Cutter served with distinction during two Democratic presidencies -- at the National Economic Council, from 1993-1996 and from 1976 to 1981, at the Office of Management and Budget.  Mr. Cutter also served as leader of the OMB transition team after the election of President Obama.
 
Mr. Cutter is currently the Chairman of the Board of CARE, the global development organization (where he has been a member of the Board for 17 years); and is a founder and current Chairman of MicroVest, a leading global microfinance fund with assets under management now in excess of $150 million. He is also Chairman of the Board of Resources for the Future, one of the most important energy and environmental research institutes in the world; and Chairman of the Tunisian American Enterprise Fund which was founded by the US government to steer investment capital to existing or start-up businesses and help the country recover from revolutionary turmoil.
 
In addition, Mr. Cutter is a member of the Governing Council of the IFMR Trust, in India, focusing upon market based solutions to the problems of severe poverty in India; a member of the executive committee and immediate past co-chairman of the Committee for Economic Development, the leading business “think-tank” in the United States; and a board member of the Russell Sage Foundation. In addition, he is a member of the New York Council on Foreign Relations.
 
Mr. Cutter holds degrees from Harvard University, the Woodrow Wilson School at Princeton University, and Oxford University as a Rhodes Scholar.
- See more at: http://wws.princeton.edu/alumni/stay-connected/what-alumni-are-up-to/cutter-iii-w-bowman#sthash.DKrqTUNV.dpuf
Bowman Cutter joined The Roosevelt Institute in October 2009 as Senior Fellow and Director, Economic Policy Initiative after retiring from Warburg Pincus, a major global private equity firm headquartered in New York City, between 1996 and 2009 where he served both as the firm’s economist and as a leader in its international business, with particular reference to Asia.
 
Mr. Cutter served with distinction during two Democratic presidencies -- at the National Economic Council, from 1993-1996 and from 1976 to 1981, at the Office of Management and Budget.  Mr. Cutter also served as leader of the OMB transition team after the election of President Obama.
 
Mr. Cutter is currently the Chairman of the Board of CARE, the global development organization (where he has been a member of the Board for 17 years); and is a founder and current Chairman of MicroVest, a leading global microfinance fund with assets under management now in excess of $150 million. He is also Chairman of the Board of Resources for the Future, one of the most important energy and environmental research institutes in the world; and Chairman of the Tunisian American Enterprise Fund which was founded by the US government to steer investment capital to existing or start-up businesses and help the country recover from revolutionary turmoil.
 
In addition, Mr. Cutter is a member of the Governing Council of the IFMR Trust, in India, focusing upon market based solutions to the problems of severe poverty in India; a member of the executive committee and immediate past co-chairman of the Committee for Economic Development, the leading business “think-tank” in the United States; and a board member of the Russell Sage Foundation. In addition, he is a member of the New York Council on Foreign Relations.
 
Mr. Cutter holds degrees from Harvard University, the Woodrow Wilson School at Princeton University, and Oxford University as a Rhodes Scholar.
- See more at: http://wws.princeton.edu/alumni/stay-connected/what-alumni-are-up-to/cutter-iii-w-bowman#sthash.DKrqTUNV.dpuf

Bowman Cutter is a Senior Fellow and Director of the Next American Economy Project at the Roosevelt Institute. He has served with distinction during two Democratic presidencies: at the National Economic Council, and worked extensively with the World Bank. He is currently the Chairman of the Board of CARE. Mr. Cutter holds degrees from Harvard University, the Woodrow Wilson School at Princeton University, and Oxford University as a Rhodes Scholar.

References

Goldin, Claudia, and Larry Katz. 2008. The Race between Education and Technology. Cambridge, Massachusetts: The Belknap Press of Harvard University Press.

Gordon, Robert J. 2014. “The Demise of U.S. Economic Growth: Restatement, Rebuttal, and Reflections.” NBER Working Paper 19895, National Bureau of Economic Research, Inc.

Steuerle, Gene. 2014. Dead Men Ruling: How to Restore Fiscal Freedom and Rescue Our Future. New York: The Century Foundation Press.


Session Summary


New Entrepreneurial Growth Conference: Technological Advance and a Networked Society

Discussions of potential technological advances over the next quarter century centered on the idea of an interdependent, networked society based on the emerging Internet of Things. Many participants agreed that the Internet of the future not only will connect to a larger number of devices such as phones and computers, but also increasingly will be connected to material objects such as automobiles and energy systems. Intangible objects (e.g., bank accounts, stock portfolios, credit card accounts, etc.) also will be linked, allowing for mass customization of goods and services. Under this system, participants suggested, data may limit individual choices, and we may see the creation of tiered services, where, for example, people will only be offered the opportunity to buy the cars that their bank accounts indicate they can purchase. As with all technological change, the consequences for everyone—including entrepreneurs—will be mixed.

On one hand, the Internet of Things may offer more opportunities for entrepreneurship. Technology, participants said, will remove some information asymmetries, allowing startups to access more government data, as well as other information that bigger companies have. Some conference participants, however, noted that this developing technological environment also could present more first-mover advantages, bring additional risks, and potentially create barriers to new business creation. Legacy standards from a single software system, for example, would limit plug-and-play opportunities, and intellectual property laws and licensing conditions also could restrain entrepreneurs’ ability to tinker with and add new products and services to the network. Furthermore, the expanded access to knowledge that helps entrepreneurs in certain respects also makes the task of creating a new business more difficult. The information and services that entrepreneurs can bring to the market no longer have the same value, as consumers can access knowledge of codifiable facts and processes more easily themselves. And, in this ecosystem, ideas spread more quickly and can be rapidly copied and scaled.

These changes may lower barriers for entrepreneurial entry in some areas, thereby lowering the risk for potential entrepreneurs, but a more densely networked environment also presents new risks and creates distortions that weren’t present in the pre-network economy. A networked society attracts hackers, both individual, recreational hackers and cyber warfare on a national scale. And, adverse events—those resulting from Internet vandals or from other causes—are inherently more complex in an interconnected, interdependent society. Failures in one part of the network will have ripple effects in others, potentially disrupting the social order. A problem in one sector of the economy now has enormous repercussions for the entire economy, instead of remaining isolated.

While securing the network is key to its success, participants cautioned that security systems could compromise individual liberties or raise walls that create a closed ecosystem and limit new business activity. And, one participant suggested that, while some new platforms may start out as dangerous, they may become better over time if we are able to wait.

It is often easier, of course, to focus on the potential liabilities or threats from new technology than on the unknown benefits future technological change may bring. Participants envisioned innovations in health care that would include the development of customized treatments and replacement organs. Their discussion of the ethical and social consequences of these innovations, particularly those in health care, was largely optimistic. Several contributors cited the historical precedent of the scientific community’s consideration of ethical issues raised by innovation, noting the restraint exercised after the development of nuclear weapons in the 1950s, the invention of recombinant DNA in the 1980s, and, most recently, the effort to establish ground rules for use of techniques to slice DNA.

Pervasive regulatory and policy uncertainty was mentioned throughout the discussion as a significant contributor to risk for entrepreneurs and an obstacle to successful entrepreneurship. It is impossible to assess or price the risks that stem from this ambiguity, as there is no way to predict the policy environment of the future. We do not know, for example, if the U.S. will default on its debt, renew tax cuts, or create incentives for wind power, among many other potential policy changes.

It also may be possible, however, to improve our assessment of such risks. And, after all, entrepreneurs either carry a higher tolerance for risk or have the ability to mitigate risk. The new risks and uncertainty created by technological change and the policy environment also may open up new entrepreneurial opportunities.