Technology and the innovation possibilities frontier

If there were a betting market in future winners of the Nobel prize in economics, MIT’s Daniel Acemoglu would be at pretty short odds. His highly innovative work has already won him a string of prizes.

So his research is always worth following. Especially when he challenges the conventional wisdom, as in his paper in the latest issue of the Journal of Economic Perspectives.

Economists are usually optimistic about the impact of new technology. The innovation itself destroys jobs. The Luddite riots in the early 19^thcentury in the UK, for example, were in direct response to the displacement of skilled handloom weavers by the then new machinery in textile factories.

But this, along with all subsequent waves of innovation, enabled goods and services to be produced more cheaply. As a result, the spending power of everybody else in the economy was increased, and new jobs created.

Mass production in factories during the Industrial Revolution was of course a phenomenon without precedent in the history of the world. Other completely revolutionary technologies followed, such as the railways and electricity.

The rapid advance of robots and AI seems to be the latest example of a transformative new technology.

Acemoglu argues that it is not these “brilliant”, as he puts it, technologies which threaten jobs and wages. These enable things to be produced very much more cheaply than before. As a result, the boost to real incomes elsewhere in the economy is substantial. New kinds of goods and services can be created as a result of the increase in spending power.

The risk to overall employment and living standards comes from the introduction of “so-so technologies”, which generate only small productivity improvements.

Examples of so-so technologies include automated customer service, which has displaced human service representatives. It is, however, generally deemed to be low quality and thus unlikely to have led to large productivity gains.

The cost of your bank charges, say, or your supermarket shop have not exactly been reduced very much by the introduction of automated answering systems or self-service tills. But jobs have been lost as a result.

Acemoglu suggests a key reason why modern economies have moved, as he puts it in the jargon, “moved along this [particular] innovation possibilities frontier”. In the US and also here in the UK, the tax system has evolved in ways which subsidise the use of equipment and penalise the use of labour through payroll taxes such as our employers’ national insurance contribution.

Interestingly, he also points the finger at the big tech companies. Their business model is based on automation and small workforces.

The impact of innovative technology which destroys particular jobs needs to be counter-balanced by innovation elsewhere, which creates new tasks, new jobs which no-one had previously thought of. We have had some, such as software and app development, database design, but not enough.

Governments need to re-think the tax system as it applies to investment and employment. And they need to re-build support for long term innovation, which gives more scope to invent completely new tasks.