When I taught economics, I always told my students that technology was important but also was known. It was up to the economist to determine the most optimal allocation of resources given the prevailing technology. OK, we also discussed the optimal exploitation of productive knowledge over time. But we always waited until Newton developed his insights after the apple fell on his head. We never wondered about when apples would fall, whether a Newton would be hit, and how he would react.
Of course, future technology is not known. What is known is the economic results of exploiting prevailing technology. However, we cannot even say whether the current exploitation is optimal. Nevertheless, those in the technology arena can learn something from economists, even as we await the results generated by technologists (a much better word than geeks).
We know we are in the midst of a major technology wave. Economists are debating whether this wave began in 1991, 1995 or soon thereafter. We know, however, that adjusted for normal cyclical changes in productivity, a fundamental improvement in output from prevailing resources began developing sometime in the 1990s.
In the previous two decades, output per unit of input grew less than a percent per year. Since the mid 1990s, productivity gains have been more than 3 percent per year. Indeed, some of the strongest productivity gains occurred early in the decade, when many production processes did not have sufficient quantities demanded to run at optimum rates.
One explanation for this surge is simple: we exported the use of hands. Then we exported the rote mind activity, even to the point of sending code writing, form filling, and simple diagnostic readings abroad. Even simple reporting (putting press releases into the available space) is likely to have a Bangalore byline. As an economist, I know that such exporting will continue until the earnings abroad are sufficient to overcome barriers to travel here (some constraints, such as transfer costs, must keep qualified people from traveling to the higher paying country). Brilliant politicians, if you erect immigration barriers, more jobs will be exported to overcome the inability to have the human capital migrate here.
A second explanation is semiconductor technology and its adaptation to widespread uses. Apparently, this continued improvement in processing and reduced size has not yet hit a barrier, though we are slicing the wafers almost atom width thin.
A third is the improved processes used for economic transactions. We call this the “back office” enhancements. Is the revolution over here and now we are looking at the slower evolution as better processes are developed?
A fourth is related to the genome and the explosion of pharmacare. In 2005, fewer U.S. inhabitants died than the year before. Except for years following a death surge, such as the Spanish flu almost a century ago, this does not happen. Yet, heart disease deaths are declining while many cancer deaths are leveling off. And this is despite evidence that individual preventive activity, such as weight control and exercise, is decreasing on average.
I am sure other explanations can be added to the list. I would view internet communications as a cost reduction, but it clearly allows innovation. Will we need movie theaters when we can have home theaters allowing rapid downloading and viewing of content on demand?
In Atlanta, communications and software were the recipients of venture capital when the internet bubble was about to burst. Some of that communications hardware clearly was becoming obsolete. Can you remember when the Norcross plant of AT & T produced the most fiber optic cable in the world? That was less than a decade ago.
Because venture capitalists thought communications along with internet retailing would be the next big things (and Atlanta did not finance much of the latter), Atlanta received a lot of capital to develop new ventures. Of course, internet retailing struggled once the catalogs were digitized. Amazon was able to exploit book and then some other inventories. Ebay, with the aid of digital photography, offered every household the opportunity to become a retailer. However, except for price discovery (who would again fall for those overstated auto prices from sales personnel once they visited Edmunds, for example) and some inventory management, the retailing did not displace brick and mortar.
Although some claim that venture financing is back, much of the new funding is the result of a few large successes that reliquified the venture community. To a large extent, these gains were concentrated in California, though some Boston, Dallas, and DC funding also surfaced. From the fourth highest recipient of venture funds in 2001, Georgia has fallen out of the top ten today. Our communications efforts have not been very profitable. We are developing medical implements and have always done well with transactions processes, whether medical or financial. Interesting work is developing in some of our universities, although the most successful university venture so far is golf grass.
This absence of financing is unrelated to the absence of talent. Recent studies indicate that Atlanta is one of the premier destinations for young professionals. Because of the concentration of universities, Atlanta is ranked among the most literature populations of any major U.S. city. Indeed, entrepreneurship remains significant, as more Atlantans per 100,000 population started businesses than in any other major city. Yet, the financing for these entrepreneurs remains anemic.
Whether Atlanta will have the successes that will attract sufficient venture capital to cultivate our talent remains to be seen. If not cultivated here, that talent will drift elsewhere.
In the meantime, I am wondering whether the latest technology wave has crested. Productivity gains remain good (2.1% in the past year), but they definitely are slowing. Could this be a normal cyclical slowing related to learning the capabilities of current capital before adding more? Or have the best uses of the current technology already been identified, if not yet fully exploited?
I remain skeptical. The returns created by additions to capital have rarely been higher. For the entire economy, and this includes decaying industries and resource based activity where productivity is partially decaying over time, returns on new capital are well over 10 percent. Those efficiently adding to their capital may be achieving more than 15 or even 20%. At the same time, investors are willing to accept very low returns for risk.
I cannot say who without analyzing individual companies, but I can say that such high returns in an era where investors are not demanding that much for risk (except in their choice of whether to provide funding at all) need to be more fully exploited. This means that capital budgets should be expanding, not slowing, as they did in the past two quarters. Do the CIOs know what their capital is returning and how to garner resources to add to profitability? Are the CEOs aware of how high the returns on capital currently are? Now those are questions upon which an economist can work.
