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The Great Inflection

This is precisely the wrong moment in economic history to look at the future through the rear view mirror of secular stagnation and Covid-19.

Way back in 1938, Alvin Hansen, the President of the American Economic Association, described how economies could get into a funk of persistent low growth. He coined the phrase “secular stagnation” and described how technology was “the last great hope” for getting out of the rut. The phrase secular stagnation has made a return in recent years, but what has been less stated has been the capacity for technology to accelerate productivity and GDP growth. In fact, the opposite has been the case, with a focus on the paradox of a technological revolution alongside weak productivity growth.

Professor Eric Brynjolfsson, head of the Digital Economy Lab at Stanford University, has written that: “This is one of the great puzzles of our era. Amazing technologies, but so far, slow productivity growth”.

The pervading malaise about the economic outlook has obviously intensified in the wake of Covid-19, but this article will argue that this is precisely the wrong moment in economic history to be pessimistic. We stand at the cusp of profound economic change, as a result of a technology led surge in productivity growth - what might be called The Great Inflection of the 2020s and beyond.

Indeed, to the extent that Covid-19 puts history on fast forward, with the more rapid adoption of new digital models of working, retailing and learning, it could well accelerate the adoption of new digital business models and hasten an acceleration in productivity growth. This is a classic turning point in economic history when you most definitely can’t see the road ahead through the rear view mirror. Past productivity performance is a very poor indicator of the future. Economic history teaches that there is a long lag between the introduction of a new technology and its ultimate impact on the economy. We have been on a journey, with 3G and 4G etc, but now the ultimate destination is becoming clearer. We shouldn’t be surprised it has taken so long. Economic history suggests that the more profound and far reaching the technological shift, the longer the time until it fully impacts the economy.

But what lies behind this potential acceleration? A very big part of the answer is 5G (and in combination with AI, IoT and Edge computing). It is the potential impact of 5G as a General Purpose Technology (GPT) with profound and pervasive impacts across the whole economy. 5G will thrust mobile technology into the elite realm of GPTs such as electricity or the internal combustion engine. 5G will be the missing link between technological revolution and faster productivity growth. It will be that big, as it moves mobile beyond connectivity towards the development of rich solutions and services. There is a fundamental point here. Today’s primary technological innovation is not a change in form (e.g. a physical invention) but in function (e.g. how to enable existing functions to be undertaken more efficiently).

Standard economic modelling techniques suggest that 5G might add around 0.3 percentage points per annum to economic growth. Not bad, and we’ll take what we can get at present, but hardly brilliant. I want to argue that it could be far more. 5G will impact in many ways:

Firstly, by changing the efficiency in production and distribution of existing goods and services. The value is not in 5G itself but in the value of the goods and services enabled by 5G. On one estimate this could reach $12 trillion by 2035. That’s roughly half the size of the US economy!

Secondly, by changing efficiency through the introduction of new goods and services.

Thirdly by changing society in qualitative ways that are hugely significant e.g. the arrival of smart cities, autonomous vehicles and congestion management through 5G and the IoT. Perhaps even greater could be the facilitation of health and wellness through wearables and sensors providing constant monitoring, and telehealth anytime, anyplace, anywhere.

Fourthly, by 5G’s impact on globalisation. 5G and 3D additive manufacturing could herald an era of onshoring not offshoring in the advanced economies. But 5G could also provide the advancement in monitoring processes that companies require before they consider offshoring.

Fifthly, most profoundly, 5G will facilitate a veritable explosion in video content that potentially shrinks the world towards a genuine global village. 5G could help ensure that in a post Covid-19 world we don’t see the end of globalisation.

5G will take us from what might be termed simple to complex digitisation. It will provide the sum of all hopes for the digital economy. What’s more the most profound technological impacts are for those technologies which are largely hidden from view – such as electricity – and yet are central to everything we do. In this sense the real action in the digital economy in the 2020s is likely to be on the supply-side not the demand-side. It is likely to directly impact the producer most, whilst also hugely significant for the consumer. Obvious examples are the gains from 5G in combination with IoT, and predictive maintenance before things fail.

The problem of course is that we can’t easily envisage the form this revolution will take, because that it is the job for the entrepreneurs who will make the future. Who would have described the nature of Google or Facebook 5 years before they were formed? However, there is a deeper point here as well here. 5G could precipitate an entrepreneurial renaissance as investors search for new ways of exploiting the potential in 5G.

As yet there isn’t a killer 5G App which helps define the future, but systems are already in development to incorporate millions of sensors together as part of the manufacturing process. We have a glimpse of the near future.

It’s estimated that by 2025 around $1 trillion will have been invested in 5G. But this could be dwarfed thereafter by the wider investment as a consequence of 5G infrastructure and devices being available across the whole economy.

And it will not be the private sector alone which is profoundly impacted by 5G. One of the defining characteristics of the public sector has been the difficulty in raising productivity in people facing services such as health and education – known as Baumol’s Disease. 5G could facilitate a transformation in productivity in these occupations, helping ease the burden of a rapidly ageing population.

Amara’s law states that we tend to over-estimate the impact of technology in the short-term and under-estimate it in the long-term. That is the mistake we are making at present. A little bit of history might help here as well, when we remember that the Spanish Flu of 1918-19 was followed by the ‘Roaring Twenties’ as the impact of technologies invented decades before (electricity, internal combustion engine) truly came to dominate the economy. That is the great hope now, and one that is more likely to be realised as Generations X and Y move towards the C-suite.