There is nothing automatic about the “progress” part of technological progress.
– Daron Acemoglu and Simon Johnson, Power and Progress: Our 1,000-Year Struggle Over Technology and Prosperity
In their book, Power and Progress: Our 1,000-Year Struggle Over Technology and Prosperity, Daron Acemoglu and Simon Johnson provide compelling evidence that the path from an invention to inclusive prosperity is rarely straightforward. In fact, they show that in many cases, new technologies often have deleterious effects on workers and society as the technologies tend to exacerbate inequality, increase pollution, and reduce standards of living.
For example, they note that Richard Arkwright–one of the most successful inventors and entrepreneurs during the British Industrial Revolution–built his first mills near coal mining operations. He also hired children who were not allowed to leave their jobs because they were considered “apprentices.” As Arkwright became wealthier, many of his employees–children and women who had little to no rights–couldn’t demand higher wages.
Another problem was pollution. As coal became the fuel of choice after the 1800s, “major industrial centers became a forest of chimneys, belching smoke all day and night,” noted Acemoglu and Johnson. Death rates in different cities were increasing because of the detrimental health effects of pollution. In Birmingham deaths per 1,000 spiked from 14.6 in 1831 to 27.2 by 1841. In “new manufacturing towns, half of all children died before reaching age five.”
The line between technology, innovation, and progress is not straight. Yet it can be drawn with a level of confidence that suggests: more innovation leads to greater shared prosperity. This is because not all innovation activity is created equal.
In Power and Progress, Acemoglu and Johnson helped me understand that many new innovations and technologies are introduced into the market as efficiency innovations. These are innovations designed to do more with less, especially less labor. Some efficiency innovations replace labor thereby resulting in employees becoming redundant while others augment labor causing employees to be more efficient at their work. Either way, the goal of an efficiency innovation is to make operations and processes more efficient. This leads to extra profits for the entrepreneurs and investors in the organization, with little ever reaching the average employees.
This is perhaps why many new inventions initially did not increase wages and standards of living. Acemoglu and Johnson note, “…workers had little chance to receive higher wages or share in the profits of firms. Longer and less autonomous working days and stagnant real incomes were not the only fallout from early industrialization. The social bias of technology also had a broader impoverishing effect.”
The tides began to change in the second half of the 19th century. “What set this period apart was a change in the nature of technology and the rise of countervailing power, forcing the people in charge to get serious about sharing the benefits of higher productivity… None of this was automatic, and it often occurred only after a protracted struggle. Moreover, conditions improved only for those who had sufficient political voice,” the authors write.
How did conditions for workers and society improve so drastically? This is where market-creating innovations make their entrance.
Market-creating innovations are different from efficiency innovations and have a profoundly distinct impact on society. These innovations transform complicated and expensive products into simple and affordable ones and make them accessible to millions more people who don’t have access. Many of the people who don’t have access to existing products that would help them make progress are called nonconsumers. Most nonconsumers are poor.
It is the process of taking a technology and embedding it into a business model focused on serving nonconsumers that often begins the transformation of society from poverty to prosperity. When this happens, more workers are needed to serve nonconsumers, new industries are created, more taxes are generated from broad based economic activity, and perhaps most importantly, more people are empowered to act as the “countervailing power” which forces people in charge to share the benefits of higher productivity.
For example, Thomas Edison’s advancement of our understanding of light not only led to the adoption of the filament bulb, which was more than 20-times better than candles, but also triggered the mass adoption of other electrical technologies by nonconsumers. This fundamentally increased factory productivity and also led to new work for new engineers, technicians, and workers. And new consumption. Similar markets were created in the automobile industry, food production, textiles, and other industries. In short, America needed more labor, spurring an increase in wages. French Economist and historian, Emile Levasseur, observed that as more entrepreneurs targeted nonconsumption, more workers were needed at companies. This need increased their wages and workers could now purchase more products and services with their increased wages. In effect, nonconsumers became consumers.
This same market creation is at play today. It is what lifted hundreds of millions of Europeans, Americans, Japanese, South Koreans, and Chinese out of poverty. In fact, the process of creating a market—a place where willing producers and consumers exchange products, services, and currency valuable to them—has done more to advance human progress than any other activity. It is the bedrock of good and stable governance, which makes it possible for us to hope for a better future.
Leaders in poor countries today would do well to adopt technology with the goal of market creation. It is at the heart of inclusive prosperity.
