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Race Against the Machine

Schussel Family Professor of Management Science Erik Brynjolfsson, PhD ’91, and Andrew McAfee, LFM ’90, SM ’90, MIT SB ’89, MIT SB ’88, principal research scientist at the MIT Center for Digital BusinessSchussel Family Professor of Management Science Erik Brynjolfsson, PhD ’91, and Andrew McAfee, LFM ’90, SM ’90, MIT SB ’89, MIT SB ’88, principal research scientist at the MIT Center for Digital Business

Since the Industrial Revolution, workers have feared replacement and impoverishment at the hands of machines. But history’s major technological advancements have only led to a frantic uptick in industry that introduced a bevy of new employment opportunities.

Yet a new revolution, powered by computers and networks, is happening so quickly that economies have little time to adjust. The implications for labor and employment are unnerving.

The crisis and a potential remedy are considered in Race Against The Machine: How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy, a new digital book by Schussel Family Professor of Management Science Erik Brynjolfsson, PhD ’91, and Andrew McAfee, LFM ’90, SM ’90, MIT SB ’89, MIT SB ’88, principal research scientist at the MIT Center for Digital Business.

Brynjolfsson and McAfee explain the drastic economic consequences of accelerating technology, both in terms of employment and wealth distribution.

But the authors are self-described “digital optimists.” They believe humans may not need to race against the machines. Instead, they write, we should learn to race with the machines. In this excerpt, they argue that technological advancements present exciting new opportunities for innovation and entrepreneurship. All in the name of humankind.

Race Against The Machine is available at www.raceagainstthemachine.com.

How can we implement a “race with machines” strategy? The solution is organizational innovation: co-inventing new organizational structures, processes, and business models that leverage ever-advancing technology and human skills. Joseph Schumpeter, the economist, described this as a process of “creative destruction” and gave entrepreneurs the central role in the development and propagation of the necessary innovations. Entrepreneurs reap rich rewards because what they do, when they do it well, is both incredibly valuable and far too rare.

To put it another way, the stagnation of medium wages and polarization of job growth is an opportunity for creative entrepreneurs. They can develop new business models that combine the swelling numbers of mid-skilled workers with ever-cheaper technology to create value. There has never been a worse time to be competing with machines, but there has never been a better time to be a talented entrepreneur.

Entrepreneurial energy in America’s tech sector drove the most visible reinvention of the economy. Google, Facebook, Apple, and Amazon, among others, have created hundreds of billions of dollars in shareholder value by creating whole new product categories, ecosystems, and even industries. New platforms leverage technology to create marketplaces that address the employment crisis by bringing together machines and human skills in new and unexpected ways:

  • eBay and Amazon Marketplace spurred over 600,000 people to earn their livings by dreaming up new, improved, or simply different or cheaper products for a worldwide customer base. The Long Tail of new products offered enormous consumer value and is a rapidly growing segment of the economy.
  • Apple’s App Store and Google’s Android Marketplace make it easy for people with ideas for mobile applications to create and distribute them.
  • Threadless lets people create and sell designs for t-shirts. Amazon’s Mechanical Turk makes it easy to find cheap labor to do a breathtaking array of simple, well-defined tasks. Kickstarter flips this model on its head and helps designers and creative artists find sponsors for their projects.
  • Heartland Robotics provides cheap robots-in-a-box that make it possible for small business people to quickly set up their own highly automated factory, dramatically reducing the costs and increasing the flexibility of manufacturing.

Collectively, these new businesses directly create millions of new jobs. Some of them also create platforms for thousands of other entrepreneurs. None of them may ever create billion-dollar businesses themselves, but collectively they can do more to create jobs and wealth than even the most successful single venture. As the great theorist of markets Friedrich Hayek noted, some of the most valuable knowledge in an economy is dispersed among individuals. It is

the knowledge of the particular circumstances of time and place. … To know of and put to use a machine not fully employed, or somebody’s skill which could be better utilized, or to be aware of a surplus stock which can be drawn upon during an interruption of supplies, is socially quite as useful as the knowledge of better alternative techniques. And the shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices, are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others.

Fortunately, digital technologies create enormous opportunities for individuals to use their unique and dispersed knowledge for the benefit of the whole economy. As a result, technology enables more and more opportunities for what Google chief economist Hal Varian, MIT SB ’69, calls “micromultinationals”—businesses with less than a dozen employees that sell to customers worldwide and often draw on worldwide supplier and partner networks. While the archetypal 20th-century multinational was one of a small number of megafirms with huge fixed costs and thousands of employees, the coming century will give birth to thousands of small multinationals with low fixed costs and a small number of employees each. Both models can conceivably employ similar numbers of people overall, but the latter one is likely to be more flexible.

But are there enough opportunities for all these entrepreneurs? Are we running out of innovations?

When businesses are based on bits instead of atoms, then each new product adds to the set of building blocks available to the next entrepreneur instead of depleting the stock of ideas the way minerals or farmlands are depleted in the physical world. New digital businesses are often recombinations, or mash-ups, of previous ones. For example, a student in one of our classes at MIT created a simple Facebook application for sharing photos. Although he had little formal training in programming, he created a robust and professional-looking app in a few days using standard tools. Within a year he had over one million users. This was possible because his innovation leveraged the Facebook user base, which in turn leveraged the broader World Wide Web, which in turn leveraged the Internet protocols, which in turn leveraged the cheap computers of Moore’s Law and many other innovations. He could not have created value for his million users without the existence of these prior innovations. Because the process of innovation often relies heavily on the combining and recombining of previous innovations, the broader and deeper the pool of accessible ideas and individuals, the more opportunities there are for innovation.

We are in no danger of running out of new combinations to try. Even if technology froze today, we have more possible ways of configuring the different applications, machines, tasks, and distribution channels to create new processes and products than we could ever exhaust.

Here’s a simple proof: Suppose the people in a small company write down their work tasks—one task per card. If there were only 52 tasks in the company, as many as in a standard deck of cards, then there would be 52! different ways to arrange these tasks. Combinatorial explosion is one of the few mathematical functions that outgrows an exponential trend. And that means that combinatorial innovation is the best way for human ingenuity to stay in the race with Moore’s Law.

Most of the combinations may be no better than what we already have, but some surely will be, and a few will be “home runs” that are vast improvements. The trick is finding the ones that make a positive difference. Parallel experimentation by millions of entrepreneurs is the best and fastest way to do that. As Thomas Edison once said when trying to find the right combination of materials for a working lightbulb: “I have not failed. I’ve just found 10,000 ways that won’t work.” Multiply that by 10 million entrepreneurs and you can begin to see the scale of the economy’s innovation potential. Most of this potential remains untapped.

As technology makes it possible for more people to start enterprises on a national or even global scale, more people will be in the position to earn superstar compensation. While winner-take-all economics can lead to vastly disproportionate rewards to the top performer in each market, the key is that there is no automatic ceiling to the number of different markets that can be created. In principle, tens of millions of people could each be a leading performer—even a top expert—in tens of millions of distinct, value-creating fields. Think of them as micro-experts for macro-markets. Technology scholar Thomas Malone, Patrick J. McGovern (1959) Professor of Management at MIT Sloan, calls this the age of hyperspecialization. Digital technologies make it possible to scale that expertise so that we all benefit from those talents and creativity.

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