Where the Money Is Going to Be: Infotech, Health Care, and the Future of "Industry Studies": Keynote for the 2013 Industry Studies Association Conference
It is very good to be here, among a bunch of economists, sociologists, historians, operations researchers and others who understand what the point of the game is.
Social science having to do with the economy is about trying to track the emergent property that arise from the fact that we as a world have decided to organize our extraordinarily productive and diverse 7.3-billion human global division of labour largely through decentralized market exchange, mediated by firms that are islands of hierarchy and bureaucracy swimming in a larger market-oriented albeit government-regulated sea.
It is clear to everyone who tries to do this seriously that figuring out what the emergent properties of this complicated decentralized systems are hinges on the details of the institutions: productive, organizational, and regulatory details matter and matter a lot. There is a very narrow limit to what you can do that is useful by following in the hyper-abstract footprints of David Ricardo. To say anything real, you have to say what’s going on in the industry.
All of you here are the people who understand what the institutional, organizational and regulatory details are, and thus have a chance of accurately determining what the interesting emergent properties are. You are the useful point of the spear. Too many of your colleagues in the social sciences are performing the equivalents of medieval scholastic theology precisely because they lack institutional knowledge of the details. Thus they write about the emergent properties of some other system, but not those of this system that we have here and now.
So: Go Team!! You are, to a large degree, the long run planning department of the human race.
I have now fulfilled the first of my tasks as an opening plenary speaker. I have, hopefully, energized you all--all you who are tired from your flights, tired from waiting on tarmacs for the thunderstorms to pass, tired of fearing that when your plane tries to land it will hit an 80 mph summer prairie downdraft, tired of nights sleeping in strange places, tired of insufficient coffee.
But that is only my first task. My second task is to throw out some interesting and provocative ideas for you to think about. The big question is: what are likely to be the most exciting and fruitful focuses for industry studies over the next generation? In what direction should all of you try to bend your research agendas now going forward--to, most importantly, do the most good for the human race as a whole and to properly fulfill your role as a good proportion of its long run planning department; but also to write papers that journal editors will be willing to publish; that people working in industries will find useful and provocative; that will as well lead to endowed chairs, influence, fortune, world domination, and the other things that are best in life?
Let me say what it looks like from where I stand. And I am going to perform the standard economic historian’s trick of saying that to understand what things will be like in 2040 you first have to think back to 1740.
Since 1740 we have, broadly, had four eras of industrial development. The thing kicks off when engineers thinking seriously about the problem of how the frack you can get water out of the coal mines so you can dig deeper, because isn't a tree you could burn for firewood within 80 miles of London, come up with the steam engine. In the first era from 1740-1830 or so you have very concentrated technological change in a few key leading sectors, largely powered by the steam engine: textile production, textile machinery making, steam engine making itself, the start of the railroad, iron smithing, maybe pottery--it is unclear how much Wedgwood was simply responding to demand, how much Wedgwood was bringing in processes well understood in China, and how much Wedgwood was advancing on Chinese kind of practices by developing and adapting them to the very different factor-cost structure of Britain. Between the rail barons, the iron masters, the textile magnates, the steam engine makers and so forth, as Deirdre McCloskey calculated something like 80% of British total factor productivity growth between 1730 and 1840 comes in those few leading sectors. The rest of the economy feels the demand produced by those leading sectors, but their technology and their workplace practices were largely left unaffected. That produced the Britain that Karl Marx saw in 1840--one that had extraordinarily technological development in a few leading sectors, but because of population growth and immigration your average Briton in 1840 was perhaps an inch shorter with fewer teeth than your average Briton had been in 1700. Marx generalized from that to the future destiny of humanity: "the army of arms looking for work gets thicker and thicker, while the arms themselves get thinner and thinner". But that turned out to be a consequence of the fact that the spear of technological progress and innovation had been so very narrow during this first age.
No sooner did Marx start to write in the 1840s did a second age flourish--call it 1820-1890--the effects on the economy as a whole of the build out of the key leading sectors of the industrial revolution. Even the industries that weren’t affected by technological change saw the surge in demand reach criticality and substantially affect their scale and the terms on which they could get factors of production--especially the terms on which they could hire workers.
Greg Clark at UC Davis thinks that at that point the British Industrial Revolution might have petered out. There had bee previous ages during which you’d had extremely large bursts of technological progress in extremely narrow sectors. If you were literate, your life in 1600 after Gutenberg was very different from your life in 1300, before Gutenberg, but printing was such a small part of the economy. It made a very big difference for a small class of habitual book readers--and it caused big sociological and long-run economic changes: Reformation and Scientific Revolution anyone?--but it is very hard to see its impact in the macroeconomic statistics. Why was the steam, textile, rails complex different? It was different because its combination was what Tim Bresnahan and company like to call a "general purpose technology". They are good not just for their original purpose of making it so that the coal mine is dry enough. They are good not just for taking a good deal of the drudgery out of spinning, so that your typical woman no longer has to spend three hours a day in the evening at the spinning wheel and at the loom--that was to a remarkable degree the destiny of the female half of humankind before 1830: watching the children, tending the garden and spend every single other minute of your day at the loom or at the spinning wheel. In Homer's Odyssey, I believe, whenever you encounter a new female character--there’s one, a pre-adolescent girl, Nausicaa, who’s playing with her attendants--but everyone else from Penelope in Ithaka to Helen of Troy herself re-established as queen of Sparta is at the spinning wheel at the loom or in the kitchen.
The technologies of machine making and of steam-driven power application proved to be much broader in application. And between 1860 and 1950 we shifted into age number three, what Nate Rosenberg and David Mallory trace to the emergence of the machine tool industry as a second general-purpose technology, in which nearly every single industry that we know of develops the pace of technological and organizational change that in the industrial revolution had before been confined to the narrow leading sectors.
And between 1950 and 2010, we have had age number four: the building-out of mass production, routinization, organization, and information not just into manufacturing, mining, and transport but over the economy as a whole. Today in the wider world we have about three times the pace of total factor productivity growth that we had in the heroic age of Andrew Carnegie and company in the late 19th century, six times the pace of total factor productivity growth that Nick Crafts tells us Britain had in its heroic age of industrialization just after the Napoleonic war. And if we go back to 1500 or so, and try to compare total factor productivity in the economy as a whole now to it then? You get numbers like 100. The technological progress that it used to take a century to have in relative terms, we do in a year. And we start from a much higher base. That‘s the fourth era, the era we are in.
The question is: what comes next? Is era number five going to be a continued build out of what we’ve seen over the past half century? Is it going to be a reversion of one of the earlier three patterns? Is something else going to happen?
I am going to give a supply and a demand perspective.
The supply perspective resumes the Olympian Ricardian economist’s perspective. There are ideas. There is energy. And there is control. We need ideas as to how to manipulate matter and energy. We need extra energy to do the manipulation. We need control in order to successfully apply energy to realize ideas and complete the process.
Since 1730 or so, we’ve had an awful lot of ideas, and they have not been particularly scarce--it has been fairly easy to copy them from others. We have done absolutely, extraordinary, amazing things in terms of energy. They may come and give this place, Kansas City, the climate of Houston in a generation. But they have given us extraordinary energy to do the manipulation.
The problem has been, for the past two centuries, that the human eye-brain-hand loop has still been the best possible control mechanism for manipulating matter and energy to produce useful stuff. Humans--even unskilled humans--have thus been an essential complement to ideas and energy, and the past two centuries have seen real wages--even the real wages of the unskilled--multiply enormously because human eye-brain-hand loops have been remarkably useful and somewhat scarce. Now, however, we may be moving into a future in which information technology is providing us with plausible substitutes along a substantial range of economic activity for human eye-brain-hand loops. Google’s driverless cars aren't artificial intelligence, but they are something--call it artificial moronicity. And much of what human eye-brain-hand loops have been used for to add value in the past two centuries have been moronic--that is the point of Chaplin's "Modern Times".
I think driverless cars will work fine here, in Kansas City. I don’t think that they will work in Barkley. In Berkeley if you want to get your car to move you have to be willing to risk your life or at least your bumper in order to threaten other people with property damage or injury to get them to give way. I can’t see Google programming its driverless cars to actually threaten the property and limbs of those in the vehicle next door. That would be a violation of Isaac Asimov’s First Law of Robotics, which I think that Google holds to.
But infotech's further development, and not just as calculation and organization but rather as a substitute for human eye-brain-hand control loops is definitely a thing.
And se also have biotech. That is, Nature does fine without using the human eye-brain-hand loop as a control mechanism. Nature uses cells and chemical signals and genetic switches, and grows stuff. So far we’ve been quite good at figuring out how to adapt that for our own purposes--we have ever since the first time that someone took a sip of old rotten barley porridge because they were really hungry, and realized: “Hey, yeast can do absolutely wonderful things to old rotten barley porridge.”
These two trends are, I think, very bad news for unskilled labor. It seems to me unlikely that many people in the future will be able to make a good living by renting out their eye-brain-hand loops as control mechanisms. As biotech--growing stuff--and infotech--sophisticated feedback loops--are able to successfully substitute for human eyes-brains-hands, the prosperous will be those who own beachfront property, scarce natural resources, or have been assigned royalties from ideas. But that is more for labor economics than industry studies.
For industry studies, the key questions for leading sectors experiencing technological change are always two: First, how elastic is demand? Second, in what directions does demand push innovation? Infotech helps us move and organize bits a lot more cheaply--we are going to see great things in infotech. But demand is not terribly elastic. We use it to control processes. we use it to provide ourselves with virtual experiences. We are getting very good at both. In fact, we have gotten so good that we have carried ourselves already into the realm in which price elasticity is less than one--as technological change in infotech continues total spending is likely to shrink rather than grow as technological change delivers us capabilities at lower cost rather than new capabilities. Book production was, relatively, a smaller share of the Western European economy in 1600 than it was in 1000 when there were few books but when they were really expensive because each required six months of highly skilled monk labor to produce a single copy of them. Alexander the Great carried with him a jeweled chest made of gold. In the jeweled chest made of gold were his two scrolls of the Iliad and the Odyssey. It was those two scrolls that were the valuable things.
In infotech, we are going to see great things--but they’re unlikely to produce huge valuations.
The healthcare sector is a different story. There demand is extraordinarily elastic indeed. If you don’t get those extra three years of high-quality life, who cares how many Gwen Stefani videos you have? So far, at least, the bias of technological innovation in healthcare has been to do more things rather than to do things more cheaply. That has carried us into our present world, in which at the moment healthcare is 18% of US GDP--in large part because the US has a uniquely inefficient healthcare system in terms of dollars for outcomes--but health care is growing.
Consider Kansas City. Kansas City gets its start as the first place where a railroad bridge crosses the Missouri River. It becomes a transportation hub and then a distribution hub. Those lead it to become a food-processing hub. Then in the 1920s it makes its bid to become the third city of the United States--behind New York and Chicago. Three miles north of us you will find the second largest train station in the United States, built when this was seen as likely to become the late 20th century equivalent of Dallas and Houston rolled into one.
But the oil turned out to be further south.
Airframes chased cheap hydro power to Seattle.
Food processing became decentralized.
With the coming of air conditioning people discovered that they would rather suffer indoors through an awful Houston summer than a Minneapolis winter, and Kansas City's winter is just too much like Minneapolis's on bad days.
Kansas City plateaued at two million people, while Dallas and Houston now have twelve million.
And if you look at what it is the greater Kansas City area sells to the world right now--well, it is still a transportation hub, but that isn't a large source of value added; it is to some degree a distribution hub; it is to some degree an entertainment hub; but overwhelmingly what it is is a health-care hub: Kansas City sells health-care services to the Lower Missouri Valley, and that is why it is two million people rather than 150,000.
As best as I can calculate right now, the healthcare sector is 23% of greater Kansas City’s GDP and something like 70% of greater Kansas City’s exports to the rest of the world--if you count net federal transfers from Medicaid and Medicare flowing in.
And health care is only going to grow.
Thus the supply and demand perspectives are pushing in the same direction.
We are going to see information technology advance, as we get better game and other virtual-experience machines and as we drive to get the still-expensive human eye-brain-hand out of more and more control loops. But demand elasticity looks to be too low for it to be where the money is going to flow.
It is healthcare, broadly construed, that will grab the lion’s share of increases in spending over the next generation. That’s where the money will go. The economy is all about where the money is. It is about what things are expensive and valuable. The British classical economists puzzled over this in the late 18th century, when they said: “Wait a minute, it’s water and air that are truly essential for life, why don’t water and air have enormous prices? Why is it diamonds that have enormous prices? Why do people care about diamonds rather than about water and air?” The answer is the economy is that the things we care about--the things that are expensive and valuable--are things where given demand there are tight limits about supply.
That means that there are going to be very interesting research questions concerning infotech--transformations of control processes, and so forth. Lots of people will make very good careers in them. But that’s not where the money is going to be. That’s not where the focus of attention going to be. That’s not where industries or governments or societies as a whole will think their big problems are going to be.
Rather, the focus is likely to be on the interface of different industries with biotech and healthcare. That’s where the money’s going to be. That’s what people are going to care about. And I can’t think of a single industry in the world that isn’t going to have an important interface with healthcare delivery over the course of the next generation.
And let me stop there, and thank you for your attention.