Megatrend: Diminishing Marginal Innovation -- Six Consequences

How Revolutionary Is Social Media?

"We wanted flying cars, instead we got 140 characters." Founders Fund website, Peter Thiel

We live in an age of rapid change. Amazon, Apple, Facebook, Google, Twitter and many other innovators have changed how we work, communicate and live. But is this a new industrial revolution?

Twenty-some years ago, a large bookstore might have had 100,000 books available. Today online retailers (e.g., Amazon) have millions of books to sell. Similarly, there were no smartphones two decades ago -- just simple mobile phones and land lines. Social media then consisted of email and a Iistserv; now we have Facebook and Twitter. A 1990s personal computer had only basic capabilities (word processing, spreadsheets, and a few others). Now an iMac has the power of an earlier generation's supercomputer.

Revolutionary? Well, it depends on what we mean by a revolutionary innovation. I propose that: An innovation is revolutionary if it so changes society, that going back to the pre-innovation technology would be catastrophic. By this standard, many of our most recent innovations are incremental, not revolutionary.

Consider the car, that archetypal innovation of a few generations ago. If all motor vehicles vanish tomorrow, the result would be catastrophic. If all phones (land lines and mobiles) suddenly stop working -- the result would be disastrous for communication.

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Now, let's imagine that all social media (e.g., Twitter, Facebook, etc.) disappear. Would the economy collapse? I don't think so. Or, if every online store in America closed, would it be catastrophic? Probably not.

Leaving aside these anecdotal examples, it's noteworthy that there isn't an obvious economic growth spike resulting from the Internet era.

Founders Fund believes that many recent innovations have been incremental, and not revolutionary. It attributes this incrementality to the VC community's failure to support revolutionary technology companies. Critical as this view may be, it implies that incrementalism is a reversible choice. Founders Fund itself is dedicated to investing in revolutionary technologies (for more on Founders Fund's analysis, please read their manifesto).

My hypothesis, however, is that we're at the start of a new Megatrend: Diminishing Marginal Innovation. The low-hanging fruits of revolutionary technologies have already been discovered. Consequently, we'll need increasing effort to achieve changes that are only incremental and at most, transform a sector. If this Megatrend is real, consider these potential consequences:

1. The Trend is Your Friend: Incrementalism is the Way to Go -- For many entrepreneurs/VCs, incrementalism will be their defining strategy. Stretching to develop revolutionary products will be a losing proposition. Incrementalism isn't unprofitable. LinkedIn, for example, hasn't revolutionized society, but has been very lucrative.

2. Diminishing Marginal Innovation Applies at the Economy Level, Not the Sector Level -- We don't have flying cars as routine transport, and it's difficult to see this occurring. On the other hand, DNA technology is still in its infancy, and might have "running room." We will continue to see sectors transformed (e.g., conventional retailing impacted by online retailing). But innovations in the remaining high growth sectors won't be sufficient to drive revolutionary change/growth in the overall economy. (Consider that even in the 21st Century, an estimated 1/10th of all American jobs are connected to the car industry; it's difficult to see Social Media having that kind of impact.)

3. America as a Relative Backwater Economically and Politically -- By the end of the 21st Century, the world's global multi-nationals will increasingly be headquartered in Asia. Since the late 1970s, the rest of the world has been catching up economically with the West. This trend will only accelerate, unless there's new high-impact revolutionary technological innovation in the United States, or economic collapse/stagnation in China/India. (If country GDPs per capita converge to about the same level, country GDPs will then be driven by population. Consequently, China will have four times America's GDP.)

4. Offshoring Will Reverse -- As wage levels converge globally, wage differentials (as a driver of offshoring) will also decline/reverse. This is already happening, as the global management consultancy BCG has recently highlighted.

5. Politics of Divide the Pie -- As the public increasingly understands that growth has slowed, and won't soon increase, the focus of politics will be on the zero-sum game of dividing up what already exists (it feels like this political trend has already started).

6. The Future Belongs to Corporate Apparatchiks -- A future of slow-growth incremental capitalism will favor corporate bureaucrats rather than visionary entrepreneurs.

For most of human history, economic innovation and productivity growth have been low, as were productivity differences between countries. The last two or so centuries have been an exciting exception -- but not the norm -- for human history.

I hope Founders Fund will be right and I'll be wrong. So, let me close with the sage counsel of Yogi Berra: "Prediction is very hard, especially about the future."

Note: The Oxford English Dictionary (online) defines a Megatrend as -- an important shift in the progress of a society or any other particular field or activity. Through a series of commentaries in the coming months, I'll explore other Megatrends that may shape our future. I offer these thoughts -- not because I'm sure I'm right - but in the hope that debate will help us prepare for the future. If you would like to see more posts in this series, or want to share your thoughts with me, I invite you to follow me on Twitter @Steven_Strauss or on www.facebook.com/Steven.Strauss.Updates.

About the Author: Steven Strauss was founding Managing Director of the Center for Economic Transformation at the New York City Economic Development Corporation (NYCEDC). He is an Advanced Leadership Fellow at Harvard University for 2012. He has a Ph.D. in Management from Yale University and over 20 years' private sector work experience.  

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