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Will upcoming technological changes finally drive up productivity growth? Will robots take over the labor market after all? Most importantly, how can policymakers best promote technological innovation while preparing the labor force for its adoption? Erik Brynjolfsson joined me on Political Economy to offer answers to these questions.

Erik is a professor at the MIT Sloan School of Management, Director of the MIT Initiative on the Digital Economy, Director of the MIT Center for Digital Business, and a research associate at the National Bureau of Economic Research. He’s also the author of several books, including Machine Platform Crowd: Harnessing our Digital Future (2017) and The Second Machine Age: Work, Progress and Prosperity in a Time of Brilliant Technologies (2014), both of which he co-authored with Andrew McAfee.

What follows is a lightly edited transcript of our conversation, including brief portions that were cut from the original podcast. You can download the episode here, and don’t forget to subscribe to my podcast on iTunes or Stitcher. Tell your friends, leave a review.

Pethokoukis: Do you think that we are living in an age of rapid technological change, and — with this one qualifier — that it’s meaningful, it’s not trivial? Are the changes themselves important?

Brynjolfsson: I have no doubt that that’s the case. It’s hard for me to think of anything that’s as important as intelligence. I mean, that’s really fundamental. And if we’re around a hundred or a thousand years from now, I think we’ll look back at this as when machines started becoming intelligent. So yeah, that’s a very big deal.

Do you think that is an opinion which is generally held? It may be held in Silicon Valley, but there’s a lot of talk about the stagnation of the economy, that things aren’t as good as they used to be. There’ve certainly been books which, while not critical, diminish the value of technological change you might be talking about. They say it’s just information technology, and that’s not that important. What do you see that’s different that they’re not seeing?

Well, there are opinions of lots of different things, but you’ve got to look at the facts. And the facts are that there’s some very core capabilities, like vision. That’s very fundamental. Machines used to not be able to recognize images very well, scoring maybe 70 percent on datasets like ImageNet. Now they’re at 95, 97, and 98 percent — better than most humans at recognizing different breeds of dogs or jaguars or leopards. You know, still room to improve.

Voice recognition is another. Understanding speech in this unusual 10-year period where machines used to not be able to really understand speech. And now a lot of us routinely talk to Siri or Alexa or Google Now. These are not sophisticated conversations, but basically we can ask them to do simple things, and they’ll do it. That’s only getting better. And then lots of decision making: Whether it’s diagnosing cancer from medical images, or making decisions on lots of things from credit to where to place ads, to who gets parole. There are machines that are getting better and better at all of those.

A woman speaks into the Siri service of the Apple HomePod, home sound system, at the Apple store in Manhattan, New York, U.S., February 9, 2018. Via REUTERS/Shannon Stapleton

Now I want to be very clear: There are some huge risks with each of those applications and biases, and perhaps the core of the paradox — the productivity paradox — is that these impressive capabilities have not yet translated into significant improvements in productivity. Maybe we’ll get into this later, but to support the other side, or the concern, productivity growth has actually slowed. We used to grow about one to 2.8 percent — I think was the number of between the late 90s and in 2004 — and then it dropped to about 1.3 percent since then. Even as we do this podcast, the last quarter that was reported, I think, there was actually negative productivity growth in United States. And that’s a worldwide phenomenon. Most countries have seen a productivity slowdown. So I think that’s the reason that people are questioning.

Well, I think they see all the things that you’ve just mentioned. While they may be impressive, they just don’t add up to very much. Certainly not to something that makes us feel like our living standards are… I mean, they’re not the combustion engine, they’re not the discovery of electrification, and they’re not some miracle cure that’s going to radically extend their lives or make our lives, make us healthier. They’re just very interesting. Not big.

You mentioned electricity and some of these other breakthroughs. As you know, Jim, and we’ve talked about this — looking back, nobody would doubt those were big breakthroughs. But at the time, they didn’t lead to productivity gains, either. It was about 30 to 40 years before you saw productivity gains from the electrification of factories.

And that’s the nub of the issue. There are a number of reasons we see this disconnect between what I see as impressive core capabilities and very disappointing economic and productivity growth. And it’s not that the technology is unimpressive. It’s that we aren’t translating them.

It’s not just us. Past generations also had difficulty translating breakthrough technologies. It’s very common that it could take a decade, two decades, three decades before it turns into real productivity growth. So this is not unusual. This is something I’ve written a couple of papers — one called “AI and the Modern Productivity Paradox” (with Daniel Rock and Chad Syverson) that looks at this, another one called “The Productivity J Curve” (also with Rock and Syverson) that calibrates it — that show that what we’re seeing right now is not unusual.

Let me read a quote. It’s from a Republican senator, Josh Hawley. But this opinion isn’t limited to him. You certainly hear it from other people left and right. He said he wrote this, I think, in an op–ed in the Wall Street Journal a few months ago:

“Men landed on the moon 50 years ago, a tremendous feat of American creativity, courage and, not least, technology. The tech discoveries made in the space race powered innovation for decades. But I wonder, 50 years on, what the tech industry is giving America today. … There was a time when innovation meant something grand and technology meant something hopeful, when we dreamed of going to the stars and beyond, of curing diseases and creating new ways to travel and make things. Those are the dreams that fuel the American future. Those are the dreams we need to dream again.”

And I think what he’s suggesting is: That’s not what the tech industry — whether it’s the American tech industry or more broadly — they don’t do that kind of stuff anymore. Do you think that’s just underestimating the potential of the kinds of advances you’re seeing?

Well, let me start by saying I share his disappointment and concern. I mean, raising productivity is absolutely critical. And we’re not translating a lot of these technologies into improvements in living standards. So he’s absolutely right about that.

But the problem is not in the core technologies. Those are as fundamental as anything we’ve ever seen — maybe more fundamental in terms of the breakthroughs. Again, intelligence, being able to have vision, voice recognition, diagnosing diseases, and soon, machines that can do increasingly dexterous things. Those are really, really big deals.

But our society is not translating them. And part of it is that entrepreneurship is actually down. There’s more occupational licensing. I have a paper just coming out about how that’s been bogging things down, and it just takes time for companies to reinvent their business processes, their organizations, and the way they do business. That is something we need to work on. The bottleneck is in there, not in the core technologies.

I mean, I’d be all for even more breakthroughs in the core technologies. But if you want to speed productivity growth, what you do need to do most of all is do a better job of translating the technologies that we have into new products, services, organizational forms, and ultimately higher living standards.

Now, one of the bottlenecks you’ve written about recently you call “human genius.” The genius shortage. What does that mean?

Well, to step back a bit, most economics looks at two inputs to production: labor and capital. And the funny thing is — the sad thing is — that the returns to labor are down. Median wages are stagnating. We haven’t seen the kind of wage growth we saw earlier. But also, returns to capital are down. The interest rates are near all-time lows. Real interest rates may even be negative.

So what’s going on? And the way we model it — Seth Benzell and I model it — is that there’s a third factor — that is, the bottleneck. We don’t exactly know what it is. One interpretation of it is genius: the people who know how to take these new technologies and translate them into new products. The Bezos’s of the world. And all the people that want to immigrate to Silicon Valley and Boston and elsewhere that bring new ideas, and the people in America who are inventing these new ideas.

Jeff Bezos, founder of Amazon, visits Dunbar High school in Washington, D.C., U.S. October 21, 2019 in this picture obtained by Reuters. Via REUTERS/Amazon/Carlose Sellars

The more of those we have, the better we’ll be able to translate, because there are intangible capital and business processes that need to be reinvented. If we’re stuck with the old ones, that slow change prevents us from really allowing capital labor to be as productive as they otherwise would be.

So is it that we do not have enough people generating big innovations? Or we have a lot of innovation coming, but we lack the skill to use it in a productive way? We lack the managerial skill. Some companies certainly seem to have it, and those companies seem to be doing very, very well. Their stocks keep going up. They become trillion-dollar companies, but there’s just not enough of that know–how to go around right now.

I think it’s mostly the latter. Let’s take Amazon. So in the early 90s we all looked at them and said, “Wow, the Internet’s amazing. We’re going to have all this online shopping and B2B.” You didn’t even have to be a genius to see that there was huge potential. But actually translating that into changing the way people shop takes a long time. Here we are 25 years later and electronic commerce is still — depending on how you measure it — single digits, low double digits of total commerce. It’s beginning to really cut into traditional retailing, but it takes a while for us to reinvent just something as straightforward as shopping.

Is this an indictment of our education system that we’re unable to produce the kinds of workers — I guess really high-level workers and managers — that we need to take full advantage of these technologies?

Well, indictment is a harsh word. I would maybe flip it around and say it’s an opportunity. If we were able to do a better job and invested more in education, we could loosen that bottleneck. If we had more creative people, more people who worked in teams, more people who knew how to translate technology…

Everyone should be a double major in computer science?

They don’t have to be. Well, let me just say, it would help to have both some knowledge of the technology and skills. You know, Steve Jobs famously had a strong arts side, but also a technology side.

But I don’t think everyone has to be like that. I think that there’s value in thinking in very creative ways without being a tech genius and working with other humans in different kinds of skills.

Human capital is probably the biggest bottleneck right now. And I think most economists would agree with me that that’s an opportunity. And that’s at all levels. So K–12, university, lifelong learning. We could do better.

So it’s like the build-or-buy proposition. We can either build it, which is we can educate the people who are here, or we can bring it in. That part’s important too: bringing in high-skill, very talented people. That’s been super important in the past. Are you concerned that won’t be happening in the future?

Yes. And I’m glad you brought up the past, because the way that America — this is a mainly American audience, but everyone can learn from it — has been a world leader is education and immigration. It’s been a talent magnet for smart people from around the world. And I believe in the O-ring Theory, which Michael Kremer described and got a Nobel Prize in part for, which is that smart people make other smart people more productive. If they don’t reduce the wages of our own engineers, they increase their wages by making it possible to build even more amazing products.

Via Twenty20

So we need to work on both sides. We need to invest more in our education. We were always the world leader in America, and we need to continue to be a talent magnet.

What do you think the demand for labor in this country looks like 25 to 50 years from now? I don’t think you have to go all the way to the “robots-take-all-the-jobs” theory. It could be different, or it could be less without the robots taking all the jobs.

Yeah. I think the time scale makes a huge difference. When I look at the next five, 10, probably 20 years, there’s no shortage of work that only humans can do. I look around at what machines can do, and they can’t do most of the creative work. They can’t do the interpersonal work, the stuff that requires the human touch, even most work that requires dexterity. So there’s lots of things in healthcare, childcare, cleaning the environment, the arts and sciences, and entrepreneurship that only humans can do. We need to repurpose people into those kinds of opportunities. And that’s what I see as the big opportunity for the next few decades.

That said, you turn the dial far enough into the future — I don’t know whether it’s 50 years or a hundred years — I can imagine a time when machines can do most of those things that I just listed. But that’s not the challenge for today. And I sometimes worry that we jump too far into that science fiction future. For today, we have lots of work that only humans can do.

Well, I’m also worried that people are looking too far in the future. They look at today’s technologies and talk about things like robot taxes, and say that we need to slow down the pace of technological change.

Are you concerned about that kind of techlash? Usually we hear the phrase “techlash” to pay attention to this thing that we need to break up big technology companies, that kind of thing. There’s also a different kind of techlash that says, “We’ll just try to slow down the pace of technological change.” Are you concerned about that?

I’m very concerned. But some of it is justified, because we haven’t been as careful about using the technology to create widely shared prosperity or, for that matter, to create fairness, privacy, and other things that are being eroded by some of the technologies today.

These tools are more powerful than anything we’ve ever had before. And by definition, that means we have more power to change the world. So we need to think carefully about how we want to change the world. It will be a huge mistake to assume the machines will automatically do the right thing, or they can only create good outcomes. Too often, the machines have been used to create more concentration of wealth or to erode privacy and amplify biases, but it doesn’t have to be that way.

So the techlash serves a purpose if it helps us point these powerful tools in the right direction. If the techlash simply slows down progress, though, then that’s going to be very damaging. Then people won’t be saved from cancer the way they could be, and poverty won’t be alleviated the way it could be, and our living standards won’t rise as fast as they could be rising. So let’s make sure we take this techlash and channel it towards using technology to create more benefits for the world and not simply slowing down progress.

Earlier on, we were talking about productivity growth. Despite the perception we live in a time of rapid technological change, you don’t see it in the numbers. You’ve also done some research. Maybe there’s a better way of looking at and determining the value of the kinds of things being generated by a digital economy, these free goods search and social media. Just maybe take a minute or two and talk about your work there, and what you’ve discovered, and how perhaps we can measure economic growth and productivity growth more accurately in the future?

One of the great, perhaps unsung, inventions of the 20th century was the concept of GDP and the national account that Simon Kuznets developed. But it needs to be updated, and we need additions for the 21st century. In particular, GDP doesn’t measure things that don’t have a positive price. If something’s free, it counts zero: Wikipedia, Google Maps, lots of other things.

So if we want to measure the benefits we’re getting from those, we need an alternative metric. We’ve developed something with my team here at MIT — Avi Collis in particular, along with W. Erwin Diewert, Felix Eggers, Kevin J. Fox, and myself — called GDP-B, with a B that stands for measuring the benefits, not the costs. What we’ve done is looked at how much you’d have to pay somebody to give up some of these things I mentioned: Wikipedia or Maps or Facebook — and you often have to pay them quite a bit to give it up for a month. In other words, they’re getting a lot of value for it, even if they aren’t paying for it.

Google Maps application is displayed on a smartphone as central Seoul is seen in the background in Seoul, South Korea, in this photo illustration on August 24, 2016. Via REUTERS/Kim Hong-Ji

When you add these numbers up, it adds up to hundreds of billions, even trillions of dollars, of unmeasured value. And of course, that mismeasurement is only getting worse as more and more of the economy becomes digitized and we all benefit from more free goods and services.

What do you want to see government do? We mentioned education and immigration a bit earlier. What do you want to see government do to help workers who may be buffeted by some of these changes? What do you want to see government do to even accelerate the pace of innovation?

This is one of the most frustrating things for me: I see these amazing technologies and they are breathtaking, especially if you get up close to them. And then I see that on the government side, we’re almost going backwards. Things are worse and worse. We aren’t unleashing them the way we could. There are half a dozen things we can do. And I mentioned these in my book, Second Machine Age with Andrew McAfee, and other writings.

Let me just list them quickly and then I can dive in deeper. So on the top of the list is education. Reinventing that, not just spending more.

Second, I would put entrepreneurship. It has slowed. We need to make it easier for people to recombine technologies with labor and capital to do new things. We actually have fewer startups than we used to, believe it or not.

A third thing is investing in innovation directly through R&D. I like Simon Johnson and Jonathan Gruber’s idea of these innovation hubs. Ro Khanna has picked up on that. But just directly investing in R&D. We’re doing it less of it now than we used to as a nation.

Fourthly, I would mention immigration: Bringing more smart people together so they can create great things for each other. It’s good for America. I think it’s good for the world when people can freely move, connect with each other, and work on breakthrough ideas.

Finally, I wouldn’t leave out things we can do to make the tax code fair, to distribute wealth more evenly. It’s very unevenly balanced right now. Things like the earned income tax credit are very appealing to me because they help people at the low end of the wage scale, while also encouraging them to stay in the labor force.

Also, we’ve really been very unbalanced in terms of how we tax labor and capital, having low rates on capital and much higher rates on labor. And that’s probably exactly backwards. My colleague, Daron Acemoglu, has shown that if anything, the optimal tax code would have somewhat higher rates on capital than labor. But I would say, at least let’s try and even them out, and balance and level the playing field and not favor entrepreneurs who put people out of work by replacing them with capital.

Every once in a while, I’ll go on Twitter before an interview like this, and I’ll ask people for questions. And this, I thought it was a pretty good question. I assume it will be factually accurate. If it isn’t, let me know. But here’s the question directed toward you.

You were at Davos recently. What do the Davos–goers not understand about AI and its effect on the economy that they should?

Davos–goers, with all due respect to them, like a lot of people, just have a very naive understanding about AI. They fall into two camps. There’s one group that thinks AI is like magic. There’s artificial general intelligence like you see with the Terminator, and that will soon replace all the jobs. And as we said earlier, we’re very far from that, if ever. And then there’s another group that sees the disappointing productivity growth and say, “Oh, AI is really nothing new, we can ignore it.”

United Nations Secretary-General Antonio Guterres speaks next to WEF President Borge Brende during a session at the 50th World Economic Forum (WEF) annual meeting in Davos, Switzerland January 23, 2020. Via REUTERS/Denis Balibouse

Both of them are wrong in opposite directions, and there’s a huge disruption underway already that is going to surprise a lot of people, but it’s not going to create mass unemployment.

My guest today has been Erik Brynjolfsson. Erik, thanks for coming on the podcast.

Absolutely. My pleasure.