It’s hard to know how to react when someone you’re criticizing insists you don’t actually disagree. Tyler Cowen is a smart guy, so I’m going to take it as a compliment. And it’s true that very little in Chapter 3 of The Great Stagnation directly contradicts anything I say in my last post. Still, there’s a big difference in emphasis between his chapter and my post, and I think readers of The Great Stagnation are likely to get a misleading impression of how the software industry is affecting the “real economy.”
Cowen draws a distinction between “the Internet”—which he portrays as a kind of playground for white-collar workers—and “the revenue-generating sectors of the economy.” The impression that the software industry is largely producing new forms of leisure is important because a lot of people are concerned with their material standard of living defined in a relatively narrow way. Reading The Great Stagnation, one gets the impression that someone making $50,000 in 2010 lived about as well as someone making $50,000 in 1990 (in real dollars as computed by the BLS) except that the guy in 2010 had more fun when he turned on his PC.
The point of my last post was that the 2010 guy’s $50,000 goes farther because there’s a long list of products that he would have paid money for in 1990 that had free, or dramatically cheaper, digital substitutes in 2010. The money the 1990 guy would have spent on newspaper and magazine subscriptions, books and CDs, travel agents and maps, cameras and film development, and the rest is disposable income that the 2010 guy can spend on other “real economy” goods and services like restaurant meals, housing, travel, etc. Which is to say that the 2010 guy is wealthier, even if we only care about goods and services that were in the “revenue-generating sector of the economy” in 1990.
In Cowen’s account, the difficulty of measuring the wealth produced by Twitter and Facebook helps explain why those companies haven’t measurably increased GDP, but we still have to explain why the rest of the economy hasn’t been growing very fast. My point is that software might actually be reducing measured GDP by driving certain industries out of business. If that’s true, then it’s possible that the rest of the economy actually is growing at a healthy clip, but that this fact is being masked by the rapid implosion of a few unlucky industries.
Cowen’s focus on Facebook and Twitter also gives a misleading impression about opportunities for future software-driven growth. The low-hanging fruit of our generation is not just “the Internet,” but software powered by Moore’s Law. Moore’s Law made the modern Internet possible, but it also gave birth to the personal computer, various consumer electronics devices like iPods and smart phones, electronic financial networks, medical breakthroughs (e.g. medical imaging, computational genomics), and a vast array of embedded systems (computerized fuel injection in cars, airplanes with auto-pilot, industrial robots).
Looking at this list, it’s obvious that software innovation is not necessarily (in Cowen’s words) “interior to the human mind rather than set on a factory floor.” The output of a CAT scan is “interior to the human mind” in the trivial sense that it’s displayed on a computer screen, but the ultimate result—spotting a tumor, say, is clearly a “real world” result. I think people have a skewed intuition about this because the PC is the computing device with which they have the most direct contact. But as computers get cheaper and more powerful, they’re going to get embedded in an ever-growing list of devices, and the distinction between “Internet innovation” and “real-world innovation” will make less and less sense.
Self-driving cars are a good example of where things are heading. They will probably put millions of truck drivers out of work, lowering the cost of almost every consumer product. They’ll make taxicabs drastically more affordable, putting taxi drivers out of work and virtually eliminating demand for off-street parking. They’re likely to have significant environmental benefits, as consumers can order only as much car as they need for any given trip. They are likely to save thousands of lives by reducing accidents. They’re likely to transform the retail sector—how often would you drive to store if a self-driving Amazon-bot delivered your orders in an hour rather than 2 days? And of course they’ll have many other consequences we can’t anticipate.
The wealth created by self-driving technology will not be “in our minds and in our laptops” the way Facebook and Twitter are. By using these sites as exemplars of software innovation, Cowen dramatically undersells software’s potential for creating wealth in the “real economy” and producing our generation’s “low-hanging fruit.”