Winning the Hardware Software Game Winning the Hardware-Software Game - 2nd Edition

Using Game Theory to Optimize the Pace of New Technology Adoption
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A copy of the full analysis can be downloaded by clicking on the link at the bottom of this blog entry.

 

Any attempt to predict what the future might look like should start with an examination of both the present — where are we now? — and the past — how did we get here?

The current global economic environment is unique. A priori, this would tend to suggest that the This Time Is Different view is more likely to prevail. On the other hand, when one examines the specifics of any point is time, one must necessarily conclude that every point is time is different from every other point in time, to varying degrees. In that case, then, this time is no different from any other time. So a priori reasoning doesn’t help.

The circumstances that characterize the current global economic environment include: (i) the increasingly global nature of the world’s economy, (ii) the global recession in which the world has been mired since 2008, (iii) the increasing connectivity of the world’s economies (this goes with increasing degree of globalization), and (iv) the transitional state in which the world’s economies have been engaged over the past few decades. I discuss each of these characteristics below.

Globalization

Over the past few decades the world has experienced a massive, historically unprecedented shift toward globalization. This shift has been facilitated by tremendous decreases in transportation and communication costs, which have fueled global flows of resources (money, jobs, products and services) like never before.

The good news about globalization is that producers have been able to supply, and consumers have been able to afford all sorts of new products and services that globalization has enabled.

The bad news is that more sectors of the economy than ever before have been exposed to massive increases in competition from new sources of supply that have become accessible with the advent of globalization (and improvement in technology, namely, automation). These increases in competition have decimated large swaths of industries, and with them demand for workers, that now find themselves unable to compete with new, much lower-cost sources of supply.

For more on the impact of globalization and automation on labor markets, see my previous blogpost, The Structural Nature of Changes in the Labor Markets.

 

Global Recession

The global economy has been mired in recession since the Financial Crisis of 2008. However, the current level of unemployment is due to a more general confluence of factors, including (i) an uncertain environment, (ii) ever more government regulations, as well as (iii) a severe, global recession.

 

Uncertain Environment

Employers don’t know what the future will bring, so to be safe they are avoiding making commitments, such as investing in new equipment or hiring new employees. To the extent that employers are hiring, they are using contractors, instead of employees, and part-time, instead of full-time, workers.

In particular, Carol Hazard, “Hiring Explodes in Part-Time and Contract Work” notes

While the U.S. economy stumbles along, hiring is igniting in one segment of the labor market — temporary work.

The number of temporary workers nationwide has risen more than 50 percent to 2.7 million — the most on record — since the recession ended in June 2009, the Labor Department reported.

The trend is likely to intensify, workplace experts say.

The rise in the number of temporary workers is being driven by two factors — uncertainty about the economy, and companies cutting employee hours because of costs associated with the Affordable Care Act, workforce experts say.

Whether hiring people part time or on a contract basis, such companies as Capital One Financial Corp., Owens & Minor, Wells Fargo and SunTrust Banks are increasingly relying on temporary workers…

 

Ever More Government Regulations

The increasing number of business regulations over the past few years has significantly increased the burden on employers of hiring and maintaining employees. Such regulations will continue to have a negative impact on hiring and employment.

For example, according to Clyde Wayne Crews Jr., “Small Business Regulations Surge Under Obama,”

The Regulatory Flexibility Act [RFA] directs federal agencies to assess the effects of their rules on small businesses. How’s that going?

As the table below shows, at year-end 2012, overall rules in the pipeline (active, completed, and long-term) affecting small business according to federal agencies stand at 854.

Figure 1

 

Severe and Global Nature of Recession

The Great Recession has been the most severe economic downturn since the Great Depression of the 1930s, exacerbated by the global nature of its reach. In particular, the fact that the recession has been a global phenomenon means that the US has not been able to rely on foreign countries to help pull it out of recession. As Yale Global Online reports:

Since the summer of 2008 the world has experienced the greatest destruction of wealth – paper losses measured in the trillions of dollars – in its history. No industry in the world has been left untouched... Attempts by the US government to save industries led to an increased budget deficit, making some experts predict that the global power epicenter might shift away from the US before the crisis ends. On the other hand, it has become clear that Asian countries need to restructure their domestic economies to encourage consumption. They cannot continue to rely on credit-fueled American consumption to promote growth. Consumer confidence remains low with fears of a double-dip or an anemic recovery being voiced daily. Some poor countries, insulated from foreign finance, suffered from reductions in tourism, remittances and foreign aid. What began as a local problem of excess credit in the United States is likely has affected every member of the global community. All crises in the twentieth century have had world-wide consequences but the crisis of 2008 will go down in history as the first full-blown global crisis.

 

State of Transition

The pace of technological change has increased at an exponential rate over the past 100 years. However, since the invention of the integrated circuit in the late 1950s, together with the development of computing power that has been growing according to Moore’s Law, the global economy – and the US economy in particular – has been in a state of transition, trying to keep up with the rapid pace of introduction of new technologies.

Robert Hallberg in “The Promise Of Accelerating Growth In Technology” provides a fantastic illustration of the accelerating growth in technology:

The chart below [Figure 2] shows the rapid growth in technology. Just during the last 100 years the progress in technology has exploded, and we should expect this growth to continue. The internet has made the distribution of information available to virtually anyone; fostering an environment for collaboration and sharing of ideas. In addition, there are currently more engineers and scientists in the field today than all the accumulated engineers and scientists throughout history. The combination of these two variables will lead to greater growth in the field of science with evermore discoveries and innovations.

Figure 2

Yet, while technological change is being introduced into the marketplace at a phenomenal rate, the associated adoptions and assimilations of new technologies by society are slowed by social factors and frictions, including: (i) technology changes faster than the law, (ii) existing competitors impede the adoption of new technologies, (iii) special interests impede the adoption of new technologies, (iv) uncertainty regarding the permanence of change inhibits adaptation to new technologies, (v) government laws and regulations impede timely transitions to new technologies, and (vi) unwillingness to be first mover inhibits adaptation to new technologies.

 

Technology Changes Faster Than the Law

In “Can the Law Keep Up with Technology?” Manav Tanneeru notes,

Legal experts said it's difficult for the law to keep up with emerging technology.

"Generally, it is at least five years behind technology as it is developing," said Andrea Matwyshyn, a professor at the University of Pennsylvania's Wharton School, who tracks the intersection of law and technology.
 

In a different article with almost the same title, “Can Law Keep Up with Technology?” Heather Bussing Provides two specific examples of how the law can’t keep pace with the introduction of new technologies:

Courts and legislatures are struggling to keep up with the fast pace of technology. New laws and cases are quickly outdated. For example in 2007, the Ninth Circuit issued Perfect 10 v. Google, a copyright case with a cutting-edge description of how the Internet works. That description is now wrong and so is most of the basis for the holding.

Recently, a jury awarded Apple $1billion in a patent infringement case. The complaint was filed in April 2011. Since then, Apple has released new versions of the Macbook Pro, iMac, Macbook Air, iPad, iPhone, and at least two operating systems.
 

 

Existing Competitors Impede the Adoption of New Technologies

Existing competitors in society tend to fight the introduction and use of new technologies that threaten their profits.

An example of this resistance that is currently playing out right now is the opposition by the taxi industry to the introduction of new, technology-based, ride-sharing companies, such as Uber and Lyft. (See, for example, “The taxi industry is crushing Uber and Lyft on the lobbying front, 3,500 to 1,”or “Growing opposition to ride share companies goes global.”).

More generally, labor unions have historically opposed the introduction of most labor-saving technologies that threaten the jobs of union members.

 

Special Interests Impede the Adoption of New Technologies

Special interests groups in society tend to fight the introduction and use of new technologies that threaten their interests. For example, environmental groups oppose many new technologies that threaten the environment (see for example, “Conservative, Environmental and Green-Energy Groups Fighting Solar Surcharge Bill,” or “As Wind Farm Industry Matures, Environmental Opposition Grows.”)

 

Uncertainty as to the Permanence of Change Inhibits Adaptation

When any new change is introduced into society, people are generally slow to adapt to the new environment – in particular, firms are slow to purchase new equipment and workers are slow to acquire new skills – until they are certain that the new conditions are not transitory, but rather, have some sort of staying power.

More specifically, potential losers (users of obsolete technologies) are slow to adapt to new technologies until the new technologies become firmly established, thereby ensuring the permanence of the new and the obsolescence of the old.

At the same time, consumers (individuals and businesses alike) are especially reluctant to adopt new technologies when suppliers have introduced competing technologies. In these cases, consumers tend to wait on the sidelines, as the new technology suppliers battle it out for market dominance, until a dominant technology prevails.

 

Government Laws and Regulations Impede Timely Transitions

Government policies often work against the timely social transition to new technologies.

For example, during the current recession, government’s policy of continually extending unemployment benefits has had a negative impact on employment. Specifically, by providing unemployed workers with a viable alternative to seeking new employment or job training, government is prolonging the current “job mismatch problem” that has been contributing to the unemployment problem. And since unemployed workers often cannot afford to purchase new technologies (e.g., iPhones or electric vehicles), they end up slowing the pace of society’s adoption of the new technologies.

 

Unwillingness to be First Mover Inhibits Adaptation

Industries can be slow to adopt new technologies when doing so might put them at a disadvantage relative to their competitors. In this case, “follow-the-leader” or “late-mover” strategies may end up being more profitable than “first mover” strategies. Darren Dahl explains this idea in “9 Reasons Why It Pays to Imitate”:

"A first-mover advantage is the position held by a firm for being first in a market or first to use a particular strategy," says Mundi. "A late-mover advantage is the position earned by firms that are late in entering a market, usually following the first movers and innovators. Late movers and market challengers often imitate the technological advances of other firms or reduce risks by waiting until a new market is established."

In other words, Facebook and Google are examples of companies that allowed their predecessors to establish a market before swooping in with, say, improved technology and business models to take control. Employing a late-mover advantage is not unlike the technique of drafting used in auto, bike and horse racing where the pack initially allows a competitor to expend themselves by setting the pace. Then, as that competitor begins to tire, the pack closes in and leaves the early leader in the dust.
 

Connectedness

The evolutions of the US and global economies have resulted in societies that are interconnected with respect to resources and information – financing, employment, resource availability, etc. What this connectedness means is that any policies meant to address specific national industries will necessarily impact all other industries, nationally as well as globally. John Mauldin, in “A Most Dangerous Era”, describes this issue succinctly:

It's all connected: healthcare, financial regulation, technological transformation, energy policy, foreign policy, trade policy, immigration, tax reform (and the list goes on and on and on). Everything contributes to the environment for business and economic activity; and when the environment is good, that translates into jobs. It is becoming ever more vitally important to focus on how our policies across the board connect and to see them as parts of a whole rather than in a simplistic one-off manner.

The problem, as Mauldin notes, is that policy makers don’t seem to understand the extent of this connectedness. Rather, politicians have been focusing on different pieces of the economy and attempting to address them separately, without considering their connectedness. As an example, the Affordable Care Act (Obamacare) was passed in 2010 in an effort to increase access to the healthcare system for people who couldn’t previously afford healthcare. More specifically, Obamacare requires all employers with 50 or more full-time employees to provide healthcare benefits for their employees or else pay a fine for not doing so.

This mandate, of course, raises the costs to business owners of hiring full-time employees. Specifically, the law provides incentives for business to not grow past 49 employees and/or to hire part-time, rather than full-time, employees.

At the same time, so far this year many states and cities have passed minimum wage laws in attempt to help the economic well-being of low wage workers. From Paul Davidson, “More States, Cities Raising Minimum Wage”:

…[S]even states have passed legislation this year to raise the minimum wage. Four have approved increases to at least $10.10 an hour — Connecticut, Maryland, Hawaii and Vermont. Three others — Minnesota, West Virginia and Delaware — have passed smaller increases.

Proposals to increase the minimum wage have been introduced in at least 30 other states, according to the Associated Press.

Cities are also taking action. San Francisco, Santa Fe, San Jose and Washington are among cities that have voted to increase the minimum wage above the proposed $10.10 federal level. Others are weighing increases, including New York, San Diego and Portland, Maine. Seattle is considering setting the nation's highest minimum wage — $15 an hour, which would match what the striking fast-food workers are seeking.

Along with the passage of Obamacare, the minimum wage laws also serve to increase the costs to employers of hiring low-wage workers.

The policy makers who enacted Obamacare, minimum wage laws, and all the hundreds of other recent regulations to help employees (see Table 1 above) didn’t seem to consider (or, more likely, were not convinced of) the negative impact on low-wage employment that all of these policies (taken together) would have. As a result of the current economic environment, which includes the Obamacare mandates, minimum wage laws, and all the other hundreds of new penalties on employers for creating new jobs, there are currently a record low number of small businesses in the US. From Michael Snyder, “Small Business Ownership In America Is At An All-Time Low”,

According to the Federal Reserve, the percentage of American families that own a small business is at the lowest level that has ever been recorded. In a report that was just released entitled "Changes in U.S. Family Finances from 2010 to 2013: Evidence from the Survey of Consumer Finances", the Federal Reserve revealed that small business ownership in America "fell substantially" between 2010 and 2013.

What government creates with one hand it destroys with the other.

So now I have established that the circumstances that characterize the current global economic environment are unique.  To briefly summarize, the current environment is global in nature, currently in the midst of a severe recession as well as a long-term state of transition as society adapts to new technologies, and actions undertaken by players (businesses, policymakers, etc.) will have an impact on other players globally.

Next I consider how the nature of jobs in the US has changed over time with the introduction of and adaptation to new technologies.

 

Go to Automation of Jobs, Part 1: Two Schools of Thought

Go to Automation of Jobs, Part 3: The Nature of Jobs Has Changed over Time with the Introduction of New Technologies

Go to Automation of Jobs, Part 4: What Automation Can and Cannot Do

Go to Automation of Jobs, Part 5: What Will the Future Hold for Jobs?

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