Erik Brynjolfsson - Race Against the Machine: How the Digital Revolution Is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy

How the Digital Revolution is Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment and the Economy.

Erik Brynjolfsson and Andrew McAfee

Digital Frontier Press

Lexington, Massachusetts

2011 Erik Brynjolfsson and Andrew McAfee

All rights reserved. No part of the book may be reproduced in any form by any electronic or mechanical means (including photocopying, recording, or information storage and retrieval) without permission in writing from the publisher.

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Library of Congress Cataloging-in-Publication Data

Brynjolfsson, Erik

Race against the machine : how the digital revolution is accelerating innovation, driving productivity, and irreversibly transforming employment and the economy.

p. cm.

eISBN 978-0-9847251-0-6

1. Technological innovations Economic Aspects. I. McAfee, Andrew.

II. Title.

eBooks created by www.ebookconversion.com

To my parents, Ari and Marguerite Brynjolfsson, who always believed in me.

To my father, David McAfee, who showed me that theres nothing better than a job well done.

If, in like manner, the shuttle would weave and the plectrum touch the lyre without a hand to guide them, chief workmen would not want servants.

Aristotle

This is a book about how information technologies are affecting jobs, skills, wages, and the economy. To understand why this is a vital subject, we need only look at the recent statistics about job growth in the United States.

By the late summer of 2011, the U.S. economy had reached a point where even bad news seemed good. The government released a report showing that 117,000 jobs had been created in July. This represented an improvement over May and June, when fewer than 100,000 total jobs had been created, so the report was well received. A headline in the August 6 edition of the New York Times declared, US Reports Solid Job Growth.

Behind those rosy headlines, however, lay a thorny problem. The 117,000 new jobs weren't even enough to keep up with population growth, let alone reemploy any of the approximately 12 million Americans who had lost their jobs in the Great Recession of 2007-2009. Economist Laura DAndrea Tyson calculated that even if job creation almost doubled, to the 208,000 jobs per month experienced throughout 2005, it would take until 2023 to close the gap opened by the recession. Job creation at the level observed during July of 2011, on the other hand, would ensure only an ever-smaller percentage of employed Americans over time. And in September the government reported that absolutely no net new jobs had been created in August.

Of all the grim statistics and stories accompanying the Great Recession and subsequent recovery, those related to employment were the worst. Recessions always increase joblessness, of course, but between May 2007 and October 2009 unemployment jumped by more than 5.7 percentage points, the largest increase in the postwar period.

An Economy Thats Not Putting People Back to Work

An even bigger problem, however, was that the unemployed couldn't find work even after economic growth resumed. In July of 2011, 25 months after the recession officially ended, the main U.S. unemployment rate remained at 9.1%, less than 1 percentage point better than it was at its worst point. The mean length of time unemployed had skyrocketed to 39.9 weeks by the middle of 2011, a duration almost twice as long as that observed during any previous postwar recovery. And the workforce participation rate, or proportion of working-age adults with jobs, fell below 64%a level not seen since 1983 when women had not yet entered the labor force in large numbers.

Everyone agreed that this was a dire problem. Nobel Prize-winning economist Paul Krugman described unemployment as a terrible scourge a continuing tragedy. How can we expect to prosper two decades from now when millions of young graduates are, in effect, being denied the chance to get started on their careers?

Writing in The Atlantic , Don Peck described chronic unemployment as a pestilence that slowly eats away at people, families, and, if it spreads widely enough, the fabric of society. Indeed, history suggests that it is perhaps societys most noxious ill. This era of high joblessness is likely to warp our politics, our culture, and the character of our society for many years. His colleague Megan McArdle asked her readers to visualize people who had been unemployed for a long time: Think about what is happening to millions of people out there whose savings and social networks are exhausted (or were never very big to begin with), who are in their fifties and not young enough to retire, but very hard to place with an employer who will pay them as much as they were worth to their old firm. Think of the people who can't support their children, or themselves. Think of their despair.

Many Americans did think of such people. Twenty-four percent of respondents to a June 2011 Gallup poll identified unemployment/jobs as the most important problem facing America (this in addition to the 36% identifying economy in general).

The grim unemployment statistics puzzled many because other measures of business health rebounded pretty quickly after the Great Recession officially ended in June 2009. GDP growth averaged 2.6% in the seven quarters after the recessions end, a rate 75% as high as the long-term average over 1948-2007. U.S. corporate profits reached new records. And by 2010, investment in equipment and software returned to 95% of its historical peak, the fastest recovery of equipment investment in a generation.

Economic history teaches that when companies grow, earn profits, and buy equipment, they also typically hire workers. But American companies didnt resume hiring after the Great Recession ended. The volume of layoffs quickly returned to pre-recession levels, so companies stopped shedding workers. But the number of new hires remained severely depressed. Companies brought new machines in, but not new people.

Where Did the Jobs Go?

Why has the scourge of unemployment been so persistent? Analysts offer three alternative explanations: cyclicality, stagnation, and the end of work.

The cyclical explanation holds that theres nothing new or mysterious going on; unemployment in America remains so high simply because the economy is not growing quickly enough to put people back to work. Paul Krugman is one of the prime advocates of this explanation. As he writes, All the facts suggest that high unemployment in America is the result of inadequate demandfull stop. Former Office of Management and Budget director Peter Orszag agrees, writing that the fundamental impediment to getting jobless Americans back to work is weak growth. In the cyclical explanation, an especially deep drop in demand like the Great Recession is bound to be followed by a long and frustratingly slow recovery. What America has been experiencing since 2007, in short, is another case of the business cycle in action, albeit a particularly painful one.

A second explanation for current hard times sees stagnation, not cyclicality, in action. Stagnation in this context means a long-term decline in Americas ability to innovate and increase productivity. Economist Tyler Cowen articulates this view in his 2010 book, The Great Stagnation :

We are failing to understand why we are failing. All of these problems have a single, little noticed root cause: We have been living off low-hanging fruit for at least three hundred years. Yet during the last forty years, that low-hanging fruit started disappearing, and we started pretending it was still there. We have failed to recognize that we are at a technological plateau and the trees are more bare than we would like to think. Thats it. That is what has gone wrong.