Technological Miracles Will Keep Generating Profits and Jobs

Over the weekend, I booked a pair of airline tickets from Seattle to south Florida – over 3,300 miles – for under $330, round trip, or just five cents per mile. I used the Internet to shop among competing airlines, dates, times and warm-weather transfer points. It’s tempting to complain about TSA delays, bad food and tight seating, but I appreciate these cheap, long flights – fruits of our reasonably free market in air travel.

This brings to mind an event 110 years ago this morning. At 10:30 am on December 17, 1903, two Dayton bicycle mechanics flipped a coin to see who got the first chance to fly like a bird on the beach of Kitty Hawk, North Carolina. Shortly thereafter, Orville Wright took a short (and VERY slow) flight, for a man, while creating a giant leap for mankind. He “flew” (a few feet above the sand) 40 yards in 12 seconds. That works out to 10 feet per second, or less than seven miles per hour – slower than your average jogger.

Wilbur and Orville made a total of four flights that day in 1903. The longest jaunt covered 852 feet in 60 seconds, ending in a nose dive. That’s less than 10 miles per hour. Even the lightest of today’s planes would stall at under 10 miles per hour, but the Wrights’ 605-pound bird was not much heavier than air.

For nearly five years, few believed the Wrights, because nearly everyone else failed in flight and the Wrights kept their invention under wraps, fearing patent infringement. Finally, in the summer of 1908, in France, Wilbur flew his plane 40 miles in 90 minutes, or 27 miles per hour. This flight was astounding to its viewers, but no more astounding than a half dozen other technological innovations from 1901 to 1905.

Planes, Cars, Radio and Other Innovations Took Time to Mature

America is particularly suited to invention, especially at that time in our history. In 1900, most guys had access to a shop or a tool barn, and most loved to tinker, looking for better, easier and cheaper ways to get a job done. America had a system of patents that encouraged innovation. The Wright brothers were bicycle makers first, tinkerers second. Henry Ford was a mechanic with Edison Electric in the 1890s, but he was also a nocturnal tinkerer. He spent nights reading manuals about the new internal combustion engine. Ford asked for a loan in 1903, but the president of the Michigan Savings Bank told him that “the horse is here to stay, but the automobile is a novelty.” Ford failed often, but Ford Motor finally opened.

When Ford started making cars, Detroit had a speed limit of 8 miles per hour, and fines of $100 – two months’ wages – for a first infraction, so Ford’s cars and Wright’s planes were incredibly slow at first.

Innovation does not directly lead to profitable commercial applications, but innovation is vital for the continuation of long-term economic growth. Airplanes didn’t become useful or profitable until World War I forced plane makers to develop a series of technological innovations, improving speed and safety.

You can see the same delayed payoff in other early 20th Century technologies. Ford Motor incorporated in 1903, but Ford’s continuous assembly line did not emerge until 1913. Guglielmo Marconi sent the first transatlantic radio broadcast on December 12, 1901, but radio did not captivate the public until the 1920s.

In 1904, the diesel engine debuted in St. Louis. In 1905, Einstein developed the theory of relativity and several other insights, but they were not proven true until 1919 or later. For the most part, the major inventions of 1901 to 1905 did not reach the consciousness of the general public until the 1920s.

Likewise, many of the greatest breakthroughs of the 1950s and 1960s – like Xeroxing, faxing or color TV transmission – were developed in the late 1930s, but it took decades to reach commercial viability.

Ben Bernanke’s Most Important 2013 Speech was Not about QE or Tapering

Federal Reserve Chairman Ben Bernanke has taken a lot of heat for his expansive policies over the last eight years, but last May he said something far more important than anything he said before Congress or during some FOMC meeting. Four days before he introduced “tapering” last May 22, Bernanke give a commencement address at Bard College. His subject was technology, and he referred back to the time of the Wright Brothers and Henry Ford, saying that innovation didn’t die with Edison, Ford or the Wrights.

Bernanke told Bard graduates and their families that “the modern industrial era, which lasted from the mid-1800s well into the years after World War II….featured multiple innovations that radically changed everyday life, such as indoor plumbing, the harnessing of electricity for use in homes and factories, the internal combustion engine, antibiotics, powered flight, telephones, radio, television, and many more.” The result, he said, is that our output per person increased by about 30 times between 1700 and 1970.

Bernanke concluded his talk by saying that “pessimists may be paying too little attention to the strength of the underlying economic and social forces that generate innovation in the modern world…. Moreover, because of the Internet and other advances in communications, collaboration and the exchange of ideas take place at high speed and with little regard for geographic distance…. [T]he economic rewards for being first with an innovative product or process are growing rapidly. In short, both humanity’s capacity to innovate and the incentives to innovate are greater today than at any other time in history.”

Other academic experts echo Bernanke’s optimism. In a September BusinessWeek survey (“Is Innovation Leading to a New Age of Productivity in the U.S.?”), we hear from Chad Syverson, an economics professor at the University of Chicago, who has charted the cycle of productivity in the development of technology, citing the many “lags between the introduction of new technologies and productivity gains.” MIT Management Professor Erik Brynjolfsson agrees, saying: “In my papers, we found that companies that installed big, new enterprise information systems didn’t get the full benefits for five to seven years.”

Technology is vital to create future profits, but any new technology may take several years to generate profits. A Bloomberg BusinessWeek chart shows that productivity gains run in cycles. From this 50-year chart, we can see sharp declines in 1972, 1982 and 1992, followed by significant productivity booms.

Here’s a safe prediction: We don’t know what the world will look like in 50 years, but the most important innovations are probably taking shape now, in the form of the 50th or 100th failure in some university or corporate laboratory, or in some tinkerer’s garage. Creativity did not die with Steve Jobs. What we once considered wildly innovative – like phones with cameras or a talking GPS in your car – are considered normal now. What’s next? Bitcoins you can trust? 3-D imaging for something more beautiful than guns (violins, perhaps), delivered in 30 minutes by an Amazon drone? Or how about a hyper-loop bullet car taking you 300 miles in 30 minutes? Or a trip to space, orbiting the earth or shooting off to the moon?

We have no idea what tomorrow will bring, but somebody, somewhere, is inventing tomorrow today.

- Gary Alexander

Posted by on December 17th, 2013 at 7:24 am


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