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Wednesday, 8 June 2011

3D Printing Is Not Exogenous

Disruption on Demand

The advent of 3D printing, a technology that will allow you to print your own office furniture – in your office – threatens to overturn the whole basis of the global economy. When you can make anything, anywhere, anytime then the advantage of a pool of low cost labour, no matter how well trained, is vastly reduced. Indeed, capital, knowledge and basic commodities become the only constraints on world markets: the death of distance is nearly complete.

Such disruptive advances in technology occur from time to time and have the power to change pretty much everything. Yet the study of finance regards these events as exogenous: external to the economy and therefore outside of its purview. This is like arguing that medicine shouldn’t take biological research into account in developing treatments: all we need is a better leech. It's just not true: echnology and economics are linked at the hip, whatever the theories tell us.

Knowledge is Power

The idea behind 3D printing is simple and extraordinarily powerful. This Economist article explains it, but in lay terms it’s now possible to create templates to download to printers which can create three dimensional objects by laying down layer upon layer of material combined with bonding substances – glue, to you and me. Using this technique you can “print” jewellery, tea sets, architecture models, Airbus wings or, eventually, high powered weaponry.

Most of us will pretty much instantly recognise the import of such a technology if it can be commercialised and brought into the mainstream. It would make mass production a thing of the past, upturn three hundred years of pin making labour division and radically rebalance the world. Cheap labour would no longer be an economic advantage, because labour wouldn’t matter anymore: the value of a product would be almost entirely in the template. The knowledge economy would have triumphed.

Exogenous Innovation

Now this may or may not happen. If it does it’s unlikely that the outcome will be as simplistic as presented above but, clearly, it would represent a profound change in the way that the world is structured. It would affect the global economy deeply and permanently.

Yet mainstream economics doesn’t regard technological innovation as central to its remit. In the terminology it’s exogenous, it's external to the serious business of financial matters and therefore not something that the subject needs to directly concern itself about. What this means is that new technology like the printing press, the steam engine, the motor car and the microprocessor are regarded as being outside of economics. These things, apparently, spontaneously appear in response to pricing signals and therefore don’t need to be included within the economic models.

This, of course, is utter madness even by the standards of the bipolar attendees of the Mad Hatter’s Tea Party that is modern financial theory. Technological innovation isn’t something external to the economy but is absolutely fundamental to it, created by people working within it and capable of changing its nature completely. We noted this in Time for Shiva and Schumpeter, in looking at Schumpeter’s creative-destructionism, the idea that technological cycles can cause mass extinctions in parts of the economy, but clear the way for new advances, taking global wealth and health to new levels.

Heroic Investment Bankers

Schumpeter’s ideas never became mainstream economics, in part because they were just a bit too off-the-wall to be accepted. At the centre of the Schumpeter world was the “heroic entrepreneur”, developing new ideas and bringing them to market. In the real-world it’s a bit more complicated than that: many epoch changing inventions require vast pools of capital investment to make them a reality. The “heroic capitalist investment banker” doesn’t have quite the same ring to it, sadly.

Schumpeter’s other problem was that he was working at the point in the development of economics when mathematics became the dominant theme and he never figured out how to turn his ideas into equations. In truth, although Schumpeter had identified the critical factor behind human economic development he never translated this into a reusable theory and his ideas long fell into disrepute.

Romer's Growth

In fact it was fifty years before Paul Romer introduced a way of modelling technology changes within economics, as an attempt to rescue innovation from the outer limits. Of course, it wasn’t a very important fifty years as far as technology is concerned, covering such unimportant events as the development of microprocessors and the digital computer, satellite communications, the internet, asymmetric cryptography, nuclear power, mobile phones and the frisbee. So, nothing there that changed the global economy, then.

Romer noticed, as others had before him, that technology has a snowballing effect: one invention begets others, in an ever accelerating manner. Unlike others, though, Romer managed to model this behaviour within economics, in his endogenous growth theory. The idea, to simplify drastically, is that by engaging in research and development in the hope of monopoly profits self-interested agents drive technological change and growth, which can then be exploited by the eventual product manufacturers.

Dis-equilbrium

As ever, this is an equilibrium based model, where the creators of ideas and the producers of products can each maximise their returns. There are some nasty side effects of this approach, though:
"An endogenous growth model ... predicts that a development miracle is just as likely to occur in the United States as it is in South Korea. All the United States needs to do to accomplish this feat is to adopt South Korean policy and institutions. This is highly implausible, as most people view current policy and institutions in the United States to be at least as good as South Korean ones. Moreover, the model predicts that a growth miracle is just as likely to have occurred in 1850 and 1950."
There are plenty of variations on this theme, but they all seem to struggle to cope with the reality of innovation driven growth. To point out that rich countries are rich because their entrepreneurs and producers are in some kind of good equilibrium and that poor countries are poor because they're not isn't an insight, it's begging the question.

This is a worry really, as technological change is the one of the major drivers, if not the major driver, of the amazing economic growth experienced over the past three hundred years. Nothing disrupts economic equilibrium like a nice new invention.

Incumbant Inefficiency

So, disruptive technology is a key part of this, but is also hard to explain. How many times have we witnessed an incumbent, entrenched, dominant market player felled by smaller – and usually non-obvious – competitors? And as this process occurs the world becomes wealthier, because the nature of business innovation is that we become more economically efficient overall.

What’s odd about this is how the incumbents ever allow themselves to be overtaken, when in the early days of new developments the financial strength of the market leaders could easily be used to take over the tiny pretenders; but this seems to be the nature of innovation. If we could see it coming we could take advantage of it but, mostly, we don't. Who saw Google overturning Microsoft and what possible thought process could get you to Facebook as the next big thing?

The best explanation for this at the moment is that initially the competitors’ technology is less efficient than that of the existing players who, not unnaturally, don’t see the reason for adopting an inefficient technology. Eventually, however, the newer technology becomes more effective and suddenly the dominant player finds themselves playing catch-up – and almost inevitably failing, because new technologies require new skills and corporations are surprisingly bad at re-inventing themselves.

S-Curves

This idea, of disruptive technology, was originally developed by Everett Rogers, who showed that technology development typically follows an S-curve. Initially it takes a lot of effort to deliver poorer performance, but eventually the performance takes off while the effort requires drops until the technology reaches a saturation point, when further increases in performance require disproportionately more effort. At this point technologies, and their purveyors, become vulnerable to new technologies which may be inefficient but have the potential to deliver improved economic performance beyond the existing capability. At this point innovative competitors have the opportunity to jump the S-curve.

A classic case is the replacement of sailing ships with steam. Initially steam ships were unreliable and had a nasty habit of blowing up. They consumed vast quantities of coal, and were inefficient because of the additional weight. Specialist engineers had to travel with them to keep them working. With hindsight it's obvious what was going to happen, but by the time sailship manufacturers realised this they'd long since lost the ability to catch up. Being able to rig a really efficient sail isn't much use when what you need is spot welding technology. Although it did take nearly seventy years to make this transition.

Disruption, As Usual

None of this, of course, lies outside the economy. It would be more true to say that it is the economy. 3D printing, if it can be deployed effectively and efficiently, is most certainly a disruptive technology which will overturn long-term certainties and transform the world. It may also continue to create disparities in wealth within countries: as the need for labour of all kinds continues to decline, then the premium associated with being a knowledge worker will rise.

The future is, as always, mired in uncertainty. What we can be sure of is that technological innovation is unlikely to stop any time soon. The explosion in ideas occasioned by the Scientific Revolution is, if anything, accelerating. And if you don't think 3D-printing is disruptive look away now ... and if you're short of time start around the 10 minute point.


Related articles: From the Railroad to the Internet ... and Back Again, Pulling Up the Intellectual Property Ladder, Time for Shiva and Schumpeter

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