The potentially exponential growth of IT power is having a transformative effect on industry structures, as I posted last week. But thinking about some of the responses to the post, it occurred to me that I have it back to front. Yves of Naked Capitalism, for example, expresses scepticism about growth projections: “I am always leery of forecasts that amount to ‘trees grow to the sky'”. Anyone who has tried to pick high tech start ups would agree.
David L, rather wryly, commented that if my “‘post’ continues to grow, then we have ‘proof’ there is exponential growth in IT based industries (e.g. in this case WordPress).” On that basis my post should take over the entire internet by about 2023, at which point I will launch my IPO, offering David L some discounted stock.
It set me thinking that the real question posed by the sudden IT-driven growth is not the growth itself, but the limits to that growth. There is no doubt about the sudden disruptive change that IT can cause: witness Facebook and Google or the way that algorithmic trading has transformed finance. But in a sense that is not the main issue. The issue is what stops, or slows, the growth, because that is what will tell us most about how technological innovation will change industries and which companies will make good investment picks.
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The limits can take many forms. In high frequency trading, for example, one obvious limit is time. They are already down to microseconds, eventually they will hit nano-seconds and that will be that. Another limit is the impact that sudden growth has on the system, and set of rules, on which the IT activity depends: witness the obsession now with systemic risk in the financial architecture. Another limit is attention, as described in the literature on so-called “attention economics”.
That is partly a time metric (the amount of time people have available to pay attention) but it is also a cognitive measure (how long people are able to pay attention). One suspects that the latter is getting shorter and shorter, one of the legacies of the digital revolution. Even Twitter may soon seem too prolix; if it gets shorter it will eventually hit the limit of individual letters.
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Another limit, as described by Yves, is simple habit: lack of imagination, perverseness, cynical self interest. Humanness, in other words:
“But professions with restricted entry tend to be slow to adopt new technologies (readers have heard me rant about mammograms; thermal imaging is a better diagnostic and has been around for at least a decade, but radiologists don’t want to give up their installed base of equipment). And just as Max Planck said that science advances funeral by funeral, I suspect the same is true of medicine. Look at how resistant the medical community was to the idea that bacteria caused ulcers. I even recall reading a story around the time a Nobel Prize was awarded for this discovery (2005) that something approaching 1/3 of the doctors in the US still treated ulcers as if they were a stress related ailment. “
Economics is very much a discipline concerned with scarcity, by which is usually meant scarce physical resources. As has routinely been observed, technological change has changed the nature of scarcity. In some industries a scarcity of physical resources remains the fundamental limit. As economies become more advanced, physical limits (with some exceptions such as energy) tend to recede. It is worth remembering that the mining industry had declined for half a century until China and other parts of the developed world started growing sharply. In many other industries, what is scarce or limited is not physical. It is things like the limits to customer time, customer interest, customers’ imagination. In other industries, such as energy, the limits are habitual ways of doing things that are hard to reverse, these habits are also non-physical.
Such intangibles, being hard to measure, are problematic for economics, which is remorselessly positivist (if you can’t measure it it doesn’t exist). But when it comes to framing effective policy, or making reasonable investment plays, an understanding of limits is really the key concern. Perhaps developing a morphology of limits will tell us much more than trying to understand growth. One might also hope that common sense, the limit that is really worth having, might become more common.
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