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Innovation Is Not Enough

CAMBRIDGE – We seem to be living in an accelerated age of revolutionary technological breakthroughs. Barely a day passes without the announcement of some major new development in artificial intelligence, biotechnology, digitization, or automation. Yet those who are supposed to know where it is all taking us can’t make up their minds.

At one end of the spectrum are the techno-optimists, who believe we are on the cusp of a new era in which the world’s living standards will rise more rapidly than ever. At the other end are the techno-pessimists, who see disappointing productivity statistics and argue that the new technologies’ economy-wide benefits will remain limited. Then there are those – the techno-worriers? – who agree with the optimists about the scale and scope of innovation but fret about the adverse implications for employment or equity.

What distinguishes these perspectives from one another is not so much disagreement about the rate of technological innovation. After all, who can seriously doubt that innovation is progressing rapidly? The debate is about whether these innovations will remain bottled up in a few tech-intensive sectors that employ the highest-skilled professionals and account for a relatively small share of GDP, or spread to the bulk of the economy. The consequences of any innovation for productivity, employment, and equity ultimately depend on how quickly it diffuses through labor and product markets.

Technological diffusion can be constrained on both the demand and supply sides of the economy. Take the demand side first. In rich economies, consumers spend the bulk of their income on services such as health, education, transportation, housing, and retail goods. Technological innovation has had comparatively little impact to date in many of these sectors.