A crude view of technology

By R.A. | LONDON

PETER THIEL is an interesting guy: an entrepreneur and investor with plenty of thought-provoking things to say about startups and the process of innovation. (He's also out touting a new book, which has generated plenty of attention.)

Yet while one has to appreciate Mr Thiel's willingness to grapple with big ideas and to plow his (considerable) financial resources and energy into exploring them, his broad view of technological change strikes me as pretty misguided. One gets a sense of it in the line associated with an investment fund of his: "we were promised flying cars, and instead what we got was 140 characters". The clear implication is that innovation as practiced by most technological firms and investors has failed to deliver transformative change, instead managing little more than diversions like the social network Twitter. But Twitter is an amazing innovation: an example of how a bit of cleverness and code can have significant implications for everything from mass media to geopolitics. And while flying cars might have been the stuff of mid-century science fiction it's far from clear that their actual deployment at scale would mean much for society, apart from minimal improvement in personal transport at the cost of a considerable rise in its deadliness.

Or consider a very interesting passage cited by Tyler Cowen:

Look at the Forbes list of the 92 people who are worth ten billion dollars or more in 2012. Where do they make money? 11 of them made it in technology, and all 11 were in computers. You’ve heard of all of them: It’s Bill Gates, it’s Larry Ellison, Jeff Bezos, Mark Zuckerberg, on and on. There are 25 people who made it in mining natural resources. You probably haven’t heard their names. And these are basically cases of technological failure, because commodities are inelastic goods, and farmers make a fortune when there’s a famine. People will pay way more for food if there’s not enough. 25 people in the last 40 years made their fortunes because of the lack of innovation; 11 people made them because of innovation.

This paragraph feels extraordinarily insightful on first read, but on closer inspection problems begin to emerge. One is that it doesn't appear to be quite right, at least so far as the current list is concerned. There are many more than 11 super-billionaires who owe their fortunes to technology; Forbes tells you there are 16 people worth more than $10 billion who have "technology" to thank for their riches. That doesn't include people like Michael Bloomberg, who quite obviously owes his money to technology, or people who got rich making cars or aircraft, though I think those count as technology too.

Mr Thiel seems to ignore the fact that people who get rich in commodities businesses may have done so thanks to new technology. There are still a few places in the world where being in the oil business means little more than sticking pipes into the ground and cashing cheques, but in the rich countries that long ago used up all of their easily accessible resource reserves that is no longer the case. Making money in commodities instead involves sophisticated exploration, technically difficult drilling miles offshore, and the development of techniques like fracking—which has turned America back into one of the world's leading oil producers, against all popular expectations.

It's also important to remember that innovation responds to the price mechanism. When oil prices are low it's harder to earn oil fortunes and there is little (market) incentive to come up with technologies that limit one's dependence on oil. When oil prices rise, you get oil fortunes...and lots of effort to use less oil, much of which is successful. Since 2006 there has been a rather striking decline in oil consumption across advanced economies, at least some of which can be attributed to soaring vehicle fuel economy. And of course, high energy prices are themselves a reflection of other technological success stories; information technology has contributed greatly to globalisation, which has in turn enabled rapid growth in emerging market economies and a corresponding rise in energy demand. So one could say that commodity fortunes are evidence of technological stagnation. But one could also say that technology allowed billions of people to begin using energy much more intensively in a very short time period, all without destroying the global economy.

But there's another point worth making here, which is that quite a lot of what we think of as innovation is not about innovation at all, but deployment. Another innovation pessimist, Robert Gordon, likes to argue out that today's discoveries are nowhere near as powerful as the great inventions of the late 19th century—electrification, radio, and automobiles chief among them—which generated a remarkable wave of economic growth. And to support that point he trots out charts which show that average growth in output per hour was much faster between 1891 and 1972 than it was after 1972. Dig into the underlying data, however, and one sees that it wasn't the decades immediately after those inventions that were productive; in fact they look about as lousy, in productivity terms, as recent ones. It was the 1940s and 1950s that were amazing.

The amazingness of those decades owed a great deal to government. Not because government was inventive, but because it did things inventors in the private sector couldn't: it prioritised a high level of aggregate demand which forced the private sector to economise on labour and capital, and it invested massively in public infrastructure to maximise the benefit of past inventions. Karl Benz's motorwagen was perfectly lovely, but cars got a lot more useful after governments plowed massive public resources into the construction of purpose-built infrastructure.

That context is important to keep in mind when considering Mr Thiel's argument. On the one hand, the existing stock of purpose-built infrastructure naturally favours particular technologies: in particular, those which run on fossil fuels. And on the other, government hasn't been involved in anything like the kind of demand-boosting infrastructure binge we saw in the middle of the last century. In other words, the rich world's innovation problem may not have anything much to do with innovation. The rich world's innovation problem may simply be the mistaken and ahistorical assumption that rapid productivity growth occurs in a vacuum.