Race Against the Machine

Over at Free Exchange, I write about the new ebook by Erik Brynjolfsson and Andrew McAfee titled Race Against the Machine. The authors argue that many of America’s recent economic troubles can be ascribed to the enormous rapidity of technological change in information and communication technologies, and that the answer to this challenge lies in investing in human capital and “fostering organizational innovation”. On the latter, they write:

How can we implement a “race with machines” strategy? the solution is organizational innovation: co-inventing new organizational structures, processes, and business models that leverage ever-advancing technology and human skills. Joseph Schumpeter, the economist, described this as a process of “creative destruction” and gave the entrepreneurs the central role in the development and propagation of the necessary innovations. Entrepreneurs reap rich rewards because what they do, when they do it well, is both incredibly valuable and far too rare…

Because the process of innovation often relies heavily on the combining and recombining of previous innovations, the broader and deeper the pool of accessible ideas and individuals, the more opportunities there are for innovation…

We are in no danger of running out of new combinations to try. Even if technology froze today, we have more possible ways of configuring the different applications, machines, tasks, and distribution channels to create new processes and products than we could ever exhaust…

Most of the combinations may be no better than what we already have, but some surely will be, and a few will be “home runs” that are vast improvements. The trick is finding the ones that make a positive difference. Parallel experimentation by millions of entrepreneurs is the best and fastest way to do that. As Thomas Edison once said when trying to find the right combination of materials for a working lightbulb: “I have not failed. I’ve just found 10,000 ways that won’t work.”

I kept waiting for some mention of the geographic component of innovation, but it never came, even as the authors name-checked innovative tech company after innovative tech company located in Silicon Valley. I kept waiting for the famous Alfred Marshall quote:

When an industry has thus chosen a locality for itself, it is likely to stay there long: so great are the advantages which people following the same skilled trade get from near neighbourhood to one another. The mysteries of the trade become no mysteries; but are as it were in the air, and children learn many of them unconsciously. Good work is rightly appreciated, inventions and improvements in machinery, in processes and the general organization of the business have their merits promptly discussed: if one man starts a new idea, it is taken up by others and combined with suggestions of their own; and thus it becomes the source of further new ideas. And presently subsidiary trades grow up in the neighbourhood, supplying it with implements and materials, organizing its traffic, and in many ways conducing to the economy of its material.

I think that the authors have basically gotten the state of innovation right: we are approaching a critical point at which impressive progress in information technology becomes explosive progress. And I think that the authors are right that the extent to which we are able to take advantage of these technological developments will hinge on how successful America’s tinkerers are at experimenting with new business models and turning them into new businesses. But I also think that there is a critical geographic component to that process of experimentation and entrepreneurship and, as I wrote in my book, I think we are systematically constraining the operation of that component.

High housing costs constitute a substantial regulatory tax burden on residence in many high productivity areas. These are the places where the tinkerers are having their ongoing innovative conversation. But if the tinkerers are driven away, the conversation loses depth and breadth, and we lose many of the combinations that might go on to be the next big company — the next big employer. That, to me, is a very worrying idea.