The narrative is fantastic. A software entrepreneur launches a service, hires a few dozen staff to get it off the ground, then sells it to a big tech company for billions.
“In 2006, Google bought YouTube for $1.65 billion. It had sixty-five employees, so the price amounted to $25 million per employee. In 2012, Facebook bought Instagram, which had thirteen employees, for $1 billion. That came out to $77 million per employee. In 2014, it bought WhatsApp, with fifty-five employees, for $19 billion, at a staggering $345 million per employee.”
Productivity growth measures the output per hour of labor. If YouTube can create billions of dollars of value with a minimal amount of human input, that is an astronomic level of productivity, at the firm-level. But YouTube, Instagram and WhatsApp are more of the exception than the rule. If anything, it is getting harder to discover the game changing technologies that push business and the economy forward.
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In a recent article “Wearied science,” the Economist columnist Ryan Avent writes that it is becoming harder, not easier, to discover new ideas. A team of economists at Stanford and MIT argue that new ideas are becoming more expensive to uncover. Avent says,
“As the authors acknowledge, squeezing oranges dry is not a problem if new oranges keep arriving: ie, if new lines of research appear even as others are exhausted. Yet they reckon that, across the economy as a whole, the notion that the cost of ideas is rising holds true. Since the 1930s, the effective number of researchers at work has increased by a factor of 23. But annual growth in productivity has declined.”
We have seen this slowing productivity growth across the world. In the United States, an estimate from the Bureau of Labor Statistics shows that productivity actually fell by 0.1 percent in 2016. That has risen to an average of +0.8 percent in the first two quarters of 2017. As a benchmark, productivity has risen 2.1 percent on average since 1947.
Productivity: What makes your life better than it was before
Since productivity is ultimately what makes people better off, this is a big problem. As Paul Krugman once quipped, “Productivity isn’t everything, but, in the long run, it is almost everything.” If it takes more money and more manpower to come up with the next big technology, those costs will have to be passed onto consumers. Some ideas might work in practice, but might not be economical. Without a way to justify the commercial viability of many productivity-enhancing technologies, some useful ideas might collect dust on research lab shelves.
It is beginning to look more like YouTube and Instagram were the low-hanging fruit of the digital world. Giant platforms like Google and Facebook were able to leverage them to become the indispensable, ubiquitous products they now are.
But the next game-changing app or technology could to require a lot more engineers, and a lot more money. The problem isn’t that robots are taking over the world, rather they might not be taking it over fast enough.
Cover photo: Maurizio Pesce (Flickr Commons)
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