This week Rory Sutherland, Vice Chairman of Ogilvy, in a column in the Spectator, points out that the take up of tech is much more limited by the demand side than the supply side, which is true. He then suggests that he is one of the very few people to observe this, a more dubious claim. Actually he is repeating one of the key points in my best selling (for 18 hours!) book The Flat White Economy published five years ago, and the point has been made by many others as well. George Stigler won a Nobel Prize in economics for amongst other papers his seminal 1961 article on the economics of information.
In Flat White I commented based on serving as Chief Economist to IBM UK that take off of tech products and services tended to happen about a decade after they had become technically viable. I then tried to explain the underlying economic theory, which is actually not all that simple.
The two key economic reasons are what I called ‘supereconomies of scale’ and network effects. The former relies on the infinite scalability of information which means that unit costs depend on take up. The latter relies on the fact that many tech and especially communications products have part of their use determined by whether others are using the same product. One question I ask interviewees for posts at Cebr is ‘Who bought the first telephone and why?’
What this generates is the well known shape of the demand forecast for tech – a low straight line edging gently upwards followed by an almost vertical line as demand takes off, finally followed by a new gently upward sloping straight line as the product matures. I would guess (though one shouldn’t mark one’s own homework) that we at Cebr are better than anyone else at understanding this but the margin of error remains huge.
And more relevant to the present, chance events (so-called path dependency) can completely disrupt the process. Covid 19 has provided such a disruption with technology enabling quite a lot of work to be done from home, and so Zoom and Teams discussions have become routine much earlier than would otherwise have occurred. Cebr research using transport economics techniques concluded that the rise in working from home on any one day resulting from tech improvements without Covid 19 would be 4 percentage points to 2025. We now think this rise will be about three times as large.
I’ve been very pessimistic about the outlook for the recovery. An initial bounceback was inevitable, given the amount of savings burning a hole in consumers’ pockets. But the true underlying economic situation will only be known when the outcome of Rishi Sunak’s brave decision to end furlough in October is known. Only then will we know how many businesses and jobs are currently viable. I suggested a couple of weeks ago that a third of companies might cease trading and 4 million people lose their jobs. These are pretty rough estimates subject to yet another huge margin for error. But better to be roughly right than precisely wrong!
Yet this potential catastrophe has its redeeming features. The UK has a sound economic base in the digital economy, dependent more on using digital than generating it. Working from home creates huge new demands – for example Tenterden High Street will probably need at least three shops where one can get bits of IT kit repaired, which will replace some of the clothing shops that will have to shut down. And we are just scratching the surface of what technology enables – it is only in the past decade that the internet has become seriously commercial despite being invented nearly 40 years ago.
It is the redeployment of people into this expansion of this digital economy that will drive the recovery. And the speed of take-up will be crucial for all our futures. The sector so far has been helped by lack of government involvement. But as it becomes more central to the economy, further involvement is inevitable and might even be beneficial. I wonder if there is a case for a really good nationwide training course on ‘Working the Digital Economy’?
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