Technology Innovation – Are We Lagging?
Are we technological laggards? Lawrence Solomon suggests we are. In his recent Financial Post column, Mr. Solomon laments that technological innovation of the past 70 years has not been of the same order of magnitude as the end of the 19th century and early 20th century. During this supposed golden period, we witnessed inventions that fundamentally changed society, such as the light bulb, automobile, telephone, airplane, radio, phonograph, electricity, refrigerator, vacuum cleaner, sewing machine, and more.
Mr. Solomon claims that the innovations by software companies such as Google, Facebook, and Amazon are not of the same order of magnitude. Google and Facebook, he says, are merely advertising companies but do not exhibit “fundamental technological advances.” There were search engines before Google and there were social networks before Facebook. They just made them better.
This change in innovative capability is, according to Mr. Solomon, due to some extent on government regulation. While I am sympathetic to this view, I think Mr. Solomon does a horrible job of defending it. I found four things troubling with his article.
First, he performs a bait and switch. While extolling the virtues of innovative products from the 19th century, he bashes 21st century companies. And while products are the drivers of successful companies, they are not one in the same. This allows Solomon to focus on successful products and ignore unsuccessful companies from the 19th century, while simultaneously ignoring breakthrough products from the 21st century to focus on companies and any perceived flaws there-in. Edison, an extraordinary inventor, was only a moderately successful businessman. His innovations created several billion dollar industries, but not through his company. While discussing today’s innovation, Solomon focuses on Google, Facebook, Twitter, and Amazon, but does not analyze search engines, social networks, and e-commerce as they fundamentally change society.
This leads to my second problem, Mr. Solomon does not seem to see software as innovations. Notice how all of his examples from the 19th century are physical products. Yes, they were amazing. Yes, they fundamentally changed things. But so has software today. Accounting information system allowed businesses to shed thousands of clerks that did nothing but number crunching. Software spreadsheets further drove this trend. Productivity soared. The World Wide Web, invented by Tim Berners-Lee in 1990, fundamentally changed how information was displayed over the Internet such that the masses could consume the information is a readable format. It’s akin to adding an engine to a wagon so that the wagon could move autonomously, marking the assent of automobiles. More recently, innovations like e-books and 3D printers show similar potential to radically change our society. Yet, these mostly software solutions are ignored. When he does talk about software, Mr. Solomon dismisses the technological innovations and focuses on their revenue stream. I believe this is the case because he doesn’t understand the economics of information goods.
And that is the third problem I have with Mr. Solomon’s article. When he says things like “Google, perhaps the company most go gaga over, is stolidly in the advertising business, its genius coming not from a fundamental technological advance — search engines were in popular use before it won its monopoly — but through improvements in the efficiency of advertising” it shows a profound misunderstanding of the nature of information goods. Information goods, such as software, books, videos, music, and images, are generally expensive to create, but extremely cheap to distribute, infinitely reproducible, and never consumed by use. This often drives the competitive advantage of information goods to zero. Furthermore, products like search engines and social networking become more valuable the more people use it, following Reed’s law. Because of these prices pressures, Google and Facebook try to keep their prices as low as possible (zero) and utilize other means to make money (advertising). This isn’t a sign of non-innovative products, but rather an economic requirement to stay in business. It doesn’t mean the product has no economic value, it means competition is very fierce and companies need more creative means of making money. What’s odd is that he lists television as a great innovation from the past, yet condemns Google because its revenue is primarily advertising based. Television is was ad based. So which is it, Mr. Solomon?
Lastly, many of today’s innovations are no longer the easy pickings. Perhaps the late 19th century witnessed a profound number of transformative inventions because these inventions were low hanging fruit – easy to identify and (relatively) easy to implement. As the 20th century progressed, fewer and fewer low hanging fruits remained. New innovations required ever more sophisticated knowledge and ever more time to discover and implement. If Mr. Solomon’s thesis is true that “Those magnificent, almost incomprehensible technological accomplishments — full of daring and a sense that there are no limits to man’s potential — are no more” because “partly because government directs research… partly because political correctness numbs our minds… and partly because economics no longer rules in directing and disciplining inventions”, then he needs to address why the low hanging fruit theory is insufficient to explain the changes he claims to see.
This is not to say that he is wrong about the pace of innovation. I really haven’t studied the issue in enough depth to have a clear opinion, but he certainly hasn’t supported it in his article. My suspicion is that innovation follows opportunity. When existing businesses, expected ROIs, cultural beliefs, and government intervention minimize those opportunities, then innovation lags. But I am in no position to make that argument here. Neither, apparently is Mr. Solomon. If Mr. Solomon wants to be taken more seriously, he needs to better understand how information technology and information goods require a different approach to business. He also needs to improve his argumentative style so as not to leave bulldozer sized holes.