The Great Ephemeralization

I recently had the pleasure of reading The Great Stagnation, Tyler Cowen’s excellent “Kindle Single” about the future of innovation and economic growth. Cowen makes the case that, contrary to the right-of-center conventional wisdom, the American economy is in the midst of a decades-long period of mediocre economic growth. Previous generations of Americans enjoyed an abundance of “low-hanging fruit”—cheap land, technological breakthroughs like electricity and the internal combustion engine, rising levels of education, an end to racial and gender discrimination—that allowed rapidly increasing living standards with relatively little effort. But now, he says, the orchard is getting bare. Since the 1970s, big innovations have been few and far between, and this explains the comparatively slow rate of GDP growth in recent decades.

The obvious response is to point to Silicon Valley, where there’s clearly a lot of innovation going on. Cowen anticipates this objection in his third chapter and argues that the IT revolution is overrated as a source of economic growth. Drawing on a previous book, he argues that the Internet is great for “those who are intellectually curious, those who wish to manage large networks of loose acquaintances, and those who wish to absorb lots of information at phenomenally fast rates.” But, he claims, there’s less there than meets the eye. Most people don’t spend enough time on the web for it to significantly improve their standard of living. And in any event, blogs, Facebook and Twitter don’t create jobs or produce revenue for the government, which means that we can’t count on them to drag us out of our current fiscal predicament.

By focusing on “the Internet”—and specifically Facebook and Twitter—Cowen trivializes an industry whose economic effects extend far beyond a few overhyped websites. And Cowen fails to appreciate that information technology innovations have a different economic character than the innovations that drove economic growth in the 20th century. It’s true that software innovations often make a relatively small contribution to measured GDP. But this this is less a reflection of a “great stagnation” than a sign that official economic indicators are a bad way to measure our generation’s low-hanging fruit.

To understand what makes software-powered innovation distinctive, it helps to contrast it with the industrial-age innovations that proceeded it. For most of the 20th century, innovation was embodied in physical products like cars, televisions, washing machines, and airplanes. This style of innovation is relatively easy for government statisticians to deal with. If an economist at the BLS circa 1961 wanted to know how much the television industry was contributing to GDP, he simply added up the prices of all televisions sold to consumers.

Of course, economists aren’t only interested in measuring national output at a single point of time; they want to measure how the standard of living changes from year to year. If total spending on televisions falls, statisticians need to figure out whether this is because consumers are buying fewer televisions or because televisions are getting more affordable. The distinction is crucial because the former represents a decline in national output, while the latter amounts to an improvement in the standard of living. And of course, economists have to be careful about making apples-to-apples comparisons. For example, the switch from black-and-white to color pushed up average television prices, but it would have been a big mistake to record this as a sign of televisions in general getting more expensive.

There are many important subtleties to measuring changes in economic output, and official statistics have tended to overstate inflation (and hence understate growth rates) to some extent. But the important innovations of the industrial era had some common features that made such problems manageable. They came embodied in discrete physical objects with a fixed feature set. And the value of new innovations was roughly reflected by the prices consumers were willing to pay for them. If consumers were paying twice as much for a 60-inch television as a 40-inch one, it’s reasonable to infer that the former is twice as valuable.

Now imagine an alternate universe in which industrial products did not work this way. Suppose we lived in the world of Harry Potter, and one day in the late 1950s RCA hired a wizard to wave his magic wand and transform all of the world’s black and white sets into color sets. This would clearly represent a large increase in the standard of living—a larger increase, in fact, than the non-magical process whereby people have to buy new, more expensive, televisions. Yet the government in the alternate universe would almost certainly have recorded a smaller increase in GDP. Our own BLS would see consumers buying more expensive televisions while in the Harry Potter universe consumers would be happy with the old, cheap ones. Hence, consumers circa 1970 would be wealthier in that universe than in ours, but official GDP statistics would show just the opposite.

Today these magic wands exist. For example, a couple of years ago, Google waved a magic wand that transformed millions of Android phones into sophisticated navigation devices with turn-by-turn directions. This was functionality that people had previously paid hundreds of dollars for in stand-alone devices. Now it’s just another feature that comes with every Android phone, and the cost of Android phones hasn’t gone up. I haven’t checked, but I bet that this wealth creation was not reflected in GDP statistics. And it’s actually worse than that: as people stop buying stand-alone GPS devices, Google’s innovation will actually show up in the statistics as a reduction in GDP.

Cowen writes that the Internet is producing wealth that “is in our minds and in our laptops and not so much in the revenue-generating sector of the economy.” This isn’t exactly wrong, but it fails to appreciate the extent to which the software industry is entangled with the “revenue-generating sector of the economy.” The digital revolution isn’t just introducing novel ways to amuse ourselves, it’s rapidly displacing a wide variety of “revenue-generating” products and services: typewriters, newspapers, magazines, books, maps, cameras, film development, camcorders, yellow pages, music players, VCRs and DVD players, encyclopedias, landline telephones, television and radio broadcasts, calendars, address books, clocks and watches, calculators, travel agents, travelers checks, and so forth.

Paul Graham and Reihan Salam have been popularizing the term “ephemeralization”, originally coined by Buckminster Fuller, to describe this process whereby special-purpose products are replaced by software running on general-purpose computing devices. As the list above suggests, ephemeralization is affecting a growing fraction of the economy. And with technologies like self-driving cars on the horizon, its importance will only grow in the coming decades.

Ephemeralization offers an alternative explanation for the puzzling growth slowdown of the last decade. Every time the software industry displaces a special purpose device, our standard of living improves but measured GDP falls. If what you care about is government revenue, this point might not matter much—it’s hard to tax something if no one’s paying for it. But the real lesson here may not be that the American economy is stagnating, but rather that the government is bad at measuring improvements in our standard of living that come from the software industry.

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60 Responses to The Great Ephemeralization

  1. james katt says:

    Software “ephemeralization” does result in lower GDP.

    What you don’t realize is that by reducing the need for products through consolidation, you reduce the number of available jobs for workers. With a growing population, that spells trouble.

    This is why, despite record profits from large corporations, there are fewer jobs to go around. And companies AREN’T HIRING.

    Sure, there is more convenience for the people who have jobs. But for the people who are unemployed and those soon to lose their jobs through “ephemeralization”, it is of little solace. And those who luckily get hired will get lower paying jobs.

    Some things get more expensive: gas, utilities, rent, cars, homes, groceries, medical insurance. Sure, “ephemeralization” results in less costly gadgets. But everything else is getting more expensive, not less. “ephemeralization” can’t solve these problems. It exacerbates them by helping lower people’s disposable incomes.

  2. chris lee says:

    i think while there are good points, there are two flawed assumptions here, represented by the google example:

    1) people are not just going to suddenly lock up those hundreds of dollars into a safe where they aren’t being circulated into the economy. they’re going to substitute into something else. assuming that free turn-by-turn’s impact on GDP is negative is thus a bit off.

    2) google adds free turn-by-turn to incentivize android device purchase. many customers who may have had cheap dumbphones may now feel sufficiently incentivized to buy a much more expensive android phone. that will show up as an increase in GDP .

  3. greg Gerritt says:

    as we go through ecological collapse people will point out all the ways that computers raise our standard of living, but they never subtract ecosystem depletion and the destruction of communities that accompanies this. If we subtract the medical industrial complex that is eating the USA and the wealth going to the 1% rich folks, it is totally clear that the US economy that most of us live in is actually shrinking, and that what we need to do is figure out how to have strong communities in a smaller economy

  4. Chris Taylor says:

    The comments fairly point out what you could think is missed in the article…that only those who have jobs are benefitting from the reduced price of gadgets and that those who were displaced are the losers (the person who builds GPS units). What isn’t captured in the comments is the fact that the US-led technology revolution is leading to a US dominance in technology that means there are Oracle databases and Windows operating systems in place all over the world, each contributing currency back into the US economy. We used to measure how many John Deere tractors were in Argentina, but we don’t pay much attention to how our software and other technological advances colonize the World (and to our benefit). The winners and losers in this are the same as they were at the turn of the 19th Century…blacksmiths and wheelwright were being replaced by assembly line workers who turned out a much higher volume of products but were paid comparatively less for their productivity. If you don’t want to be in the losing category, you have to adapt to where the productivity and revenues are moving.

  5. Ray says:

    With extra wealth being produced, it should be possible to maintain a larger unemployed workforce.

    Maybe the day will come, when everyone is obsolete…and the only job anyone has is to enjoy life. The more automation the better, I say.

  6. Kevin says:

    You have two Hs in your link to ephemeralization at Wikipedia, resulting in a broken link.

  7. David says:

    Unlike some previous posters, I don’t think ephemeralization will reduce GDP, but it will definitely reduce employment – and increase social unrest.
    John Ludd wasn’t wrong, but merely early. Computers and virtualization of so many things takes fewer workers in each new generation of companies, and it allows unprecedented wealth concentration. This has been temporarily masked by the growth in globalization, but the globe isn’t very large. Soon well all have to contend with a very uncomfortable fact: if you aren’t among the owners of the world’s leading companies, and if you arent among the poorest, you are utterly cut out.

  8. Barry Gander says:

    The link between unemployment and the introduction of ephemeralization has not been made. In fact, over the past 30 years, the weight of all the physical goods being shipped around the world has remained the same, while the value of the world economy has soared and the number of people has increased many-fold. We have been ephemeralizing for decades, without impact on employment. Here in the backwoods, many of my neighbours make a nice living doing hand-crafted software — a case where the software economy is creating jobs (jobs that probably don’t show up in the official numbers, if I judge my neighbours right!). Today’s unemployment figures have many complicated drivers, but none of them is “ephemeralization”. In fact, it is our inability to systematically exploit the use of innovation in the Service Economy that is one of the greatest threats to our employment numbers. We’re not talking about factories, folks! We’re talking about ‘knowledge studios’….

  9. DaveT says:

    A complicated subject to which the government tries to apply fairly simple statistics. Hard for anyone to grasp the complete global picture.

    I do think the US, probably other nations as well, has a problem with a population growth rate that was supported by industrialization that’s now shrinking. This will continue to be a problem. Too many average people and not enough average jobs. Plenty of exceptional jobs, and this will continue. But your average worker who worked an assembly line: There’s no place for those folks anymore.

  10. Dr.A.Jagadeesh says:

    Excellent post.
    Buckminster Fuller was very fond of the word “ephemeralization”, which he used roughly in the sense of “progressively accomplishing more with less”. A gradually smaller and smaller amount of materials and effort will accomplish more and more useful functions. We get better and better at using materials in more sophisticated ways, so we need less and less quantity of materials.
    Bucky gives many examples. It took Magellan two years to sail around the planet in a wooden sailing ship in 1520. 350 years later it took a steel steamship two months to do the same. 75 years later a plane, made of metal alloys, took 2 weeks to fly around the planet. 35 years later a space capsule, made of exotic metals, takes 1 hour to circle the planet. Continuously the materials used get lighter and stronger and more versatile.
    Not only can we do more with less, the rate of doing-more-with-less-ness is increasing. There is an acceleration taking place.
    We can also very well project out that the eventual result of increasingly doing more with less is doing everything with nothing. Bucky gives examples of how war shifted to being fought more effectively with PR and economics (i.e. with no equipment) rather than with lots of heavy equipment.
    Now, the example of the Internet readily comes to mind. The Internet represents a degree of ephemeralization that allows one individual to influence or interact with hundreds, thousands, or even millions of people, with a use of resources that is negligible.
    For example, my Internet account costs $17.50 per month. I get on the average 100 messages per day and I send 500(some group)..
    In the past each letter sent by Air-Mail used to cost 20 cents. It means lot of paper, printing or writing,envelope,gumming, posting..lot of operations.
    Indeed Internet has made the world small and distance meaningless.
    Dr.A.Jagadeesh Nellore (AP), India

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