Erik Brynjolfsson is the director of the MIT Initiative on the Digital Economy and the co-author of The Second Machine Age: Work, Progress and Prosperity in a Time of Brilliant Technologies. Brynjolfsson, who will be the keynote speaker at Game Plan 2014 in Chicago, sat down with us recently to discuss his book, the forces driving transformation in the economy and what the future might hold.
FOC: Tell us about the MIT Initiative on the Digital Economy.
EB: There’s a wave of new digital technologies that are changing the way business and the economy operate. Our research initiative is focused on understanding the implications these new technologies are having on business, the economy, and society. This includes understanding the roles of big data and analytics, social networks, new digital business models, and, most importantly, their overarching effects on the U.S. economy, including effects on productivity, income and employment.
FOC: Your Game Plan presentation is called, The Second Machine Age. What is the Second Machine Age?
EB: We use the term “Second Machine Age” as a direct reference to the first machine age, otherwise known as the industrial revolution. In the first machine age, there was a huge increase in productivity and living standards because machines started automating and augmenting a lot of physical work. In other words, machines started replacing human muscles to do work. Things like the steam engine, the internal combustion engine, the electric dynamo.
The second machine age is when machines start to perform cognitive tasks – mental work – not just physical work, such as calculations or analysis. We think this second machine age will be at least as important as the industrial revolution, not only in terms of living standards, but also in terms of disruption to business and the economy.
FOC: Where are we in the second machine age?
EB: We’re in the very early stages. These transformations can take decades or even a century to play out fully, but the second machine age is unfolding more rapidly than the industrial revolution. By our analysis, which is discussed in our book, The Second Machine Age, the power of the steam engine doubled approximately every 70 years, whereas the power of microprocessors doubles every 18-24 months, so it’s a much faster revolution.
FOC: In your Game Plan presentation, you will discuss the forces driving transformation in our economy. What are some of these forces?
EB: The big driver is technology, and within technology there are three main components. First, the rapid increase – doubling and redoubling – not just of computing power but of data storage, of communications, even of software and other digital technologies. The second big change is the digitization of just about all information. We’re moving from a time about a decade ago where all the world’s information was in analog format to today, where most of the world’s information is digital. And in our view, measurement is the lifeblood of science and progress and once you can digitize things you’re able to measure them far, far more accurately, and that’s led to this big data revolution. Then the third force is what we call combinatorial innovation: the ability to combine new innovations with pre-existing innovations and inventions to create even more value. And there are literally billions of brains on the planet now that are tapping into this digital network to contribute ideas in a combinatorial way. Because of the exponential digital and combinatorial nature of innovation, I’m very optimistic about the pace and potential of technological progress.
FOC: What do B2B companies need to do to adapt to this digital transformation?
EB: Managers need to understand the nature and scope of these changes and that they are very disruptive. Business as usual is not going to work at with this rapid rate of digital and combinatorial change. I’m urging businesses to think more about how to use technologies to leverage human labor. Instead of having humans race against machines, and replace humans, we need to look for ways for technologies to augment human capabilities and allow them to do new things that haven’t been done before. Entrepreneurs and managers that think about news ways to use technology are likely to get bigger gains than the ones that simply focus on automation and cost cutting.
FOC: Can you give an example of a business using technology to leverage human labor?
EB: A business example of that is Uber, the taxi service. They’re a business that uses mobile technology to bring together lots of drivers to solve a problem. The drivers I’ve talked to are happier because they have more flexibility and freedom in their jobs than they did previously working for taxi companies. Many end up making more money than they did previously. The customers are happy with the quality and the ease of service and of course the entrepreneurs who developed Uber have done very well for themselves. Uber didn’t just automate or replace taxi drivers. Instead it organized people in a new way so they could create more value than the existing model.
FOC: Are B2B companies leveraging digital technologies to the degree they should?
EB: There are still a lot of unexploited opportunities. We are getting to a stage where these technologies are quite powerful, but the missing ingredient is entrepreneurial innovation to re-think how the value chain should be organized. I don’t think businesses have gone nearly far enough in terms of taking advantage of technology. There have been efforts to take existing value chains and simply add digital technologies on top of them, but the biggest gains come from the companies that fundamentally re-think the way the value chain works, and eliminate many of the steps that previously existed.
FOC: Are companies finding change difficult to manage?
EB: Yes. What we’re seeing in many cases is that acquiring the technology is the easiest step. The hardest step is making the cultural, organizational and human skill changes that are needed to really take advantage of these technologies. These are things that often take longer.
FOC: What do you hope to get across in your game plan presentation, The Second Machine Age?
EB: The key takeaway is that we are in the very early stages of a transformation of the economy that’s been enabled by digital technologies and, just as we had to re-think the nature of business when we moved from a farming economy to an industrial economy, managers today need to re-think the way they organize their businesses to take full advantage of digital technologies. Managing this transformation should be the essential focus of managers today.
There is going to be an enormous amount of wealth created but there are also going to be some losers that don’t keep up.