Agreement is usually a scarce phenomenon among economists and politicians. One of the few exceptions to this rule is: the general consensus that technological innovation is our best – if not our only – option to create business value in the future. Time and time again I hear parties across the board homogeneously agree that: “We have to innovate, and start producing stuff again” and that: “We need more ‘hard skilled’ engineers, and less ‘soft skilled’ art and social science graduates”.
Now, I will be the first to admit that in an increasingly mechanized world, it could very well be the case that we just need more engineers. But what if technological innovation is not necessarily the best answer to create new business value in an already saturated market?
In a video called “The next revolution won’t be technological- but psychological”, Rory Sutherland makes an entertaining, yet compelling case that human understanding and psychology will be the critical factors, when it comes to creating future business value. He substantiates this with a wide range of interesting examples and arguments that really hit home. (I won’t rehash, but you can easily find his video on YouTube)
The interesting thing about this perspective is that it not only contradicts the dominant view on value creation, but it also raises some interesting questions like: is there really is a shortage of ‘hard’ analytical skills, or rather a shortage of business organizations that know how to use ‘soft skills’ to their economic advantage?
Not all progress should of course be measured in business value. Innovation has – and should have – its innate merits outside the realm of commercial interests. But when used as an economic argument, it should be scrutinized as such. There are some compelling reasons why I think we should be sceptical about the high economic expectations that technological innovation has to live up to. Here are some:
1. Returns on technological innovation are declining
According to Deloitte’s Shift Index the ROA of all the publicly listed companies in the US has declined with a staggering 75% since 1965. Leaving the occasional economic boom or bust aside, profitability has been spiralling downwards for the last 40 years and there is no indication of this long-term trend slowing down. What’s interesting here, is that the study mentions technology as one of the worst performing industries; “While product and technology innovation may be necessary, they are not sufficient”.
This of course begs the question if the assumptions about the economic potential of technological innovation are warranted in the light of broader developments. Historically we are not doing that well at all: the rate of global innovation steadily increased from the renaissance until 1873, after which a steep decline sets in that continues until today.
According to economist Charles I. Jones, 80% of the economic growth between 1950 and 1993 was a direct result of previously discovered ideas instead of new ones. During most of the 20th century the number of patents has more or less stayed the same, while the number of people employed in R&D departments has gone up dramatically. In other words; relative to research capacity, the number of patents has dropped for the better part of our lifetime.
In his book “The great stagnation” economist Tyler Cowen concludes that: “Meaningful innovation has become harder, and so we must spend more money to accomplish real innovations, which means a lower and declining rate of return on technology”.
A race to the bottom
What about efficiency? While technology and automation have a spectacular track record when it comes to improving productivity, today they guarantee little more than being able to keep up with competition. The economies of scale and increase in efficiency have locked business organizations in a “race to the bottom” that is slowly squeezing out what is left of their profit margins. Although cost reduction has brought much value to the consumer, it is yielding diminishing returns for business organizations.
Although we may be getting better at making stuff, we are definitely getting worse at making money from it. It seems to me that our technological proficiency is not bringing business organizations what it used to.
2. Innovations commoditize faster
Globalization, technological advance and the digital revolution have transformed our world into a hypercompetitive global village. Production and transportation costs are at an all-time low and there is such an endless supply of goods and services, that there is practically no scarcity anymore when it comes to consumer goods.In this increasingly transparent world where technological knowledge and people flow freely, businesses are finding it exceedingly difficult to distinguish themselves with traditional differentiators like: price, quality or product features.
Similar and interchangeable features
Products and services are now commoditizing at an ever increasing rate, because most manufacturers and suppliers completely understand each other’s production techniques and processes. Because weak product features are relentlessly weeded out and strong features are immediately copied, we end up with products that are a much better, but also more similar. Just look at the specifications of any product or service that has been around for a little while and I’ll bet you that –within a comparable price range- they will be more or less interchangeable.
With commoditization relentlessly killing ‘cash cows’ and shortening product life cycles, businesses have to come up with new products and services at an increasingly higher frequency. More engineers might help them stay ahead of the game for a little while, but I seriously doubt the sustainability of this strategy in the long run. There are already clear signs that the accelerating technological productivity is starting to saturate our finite set of human needs. With more than 80% of product releases failing or underperforming, isn’t it time we ask ourselves if we have been taking the right approach to innovation?
In part two, later this year, I will argue that innovation has primarily become a psychological activity and I will explore why we don’t need any more stuff.