13/7/19: Mapping the declines in jobs creation

Increasing market power concentration, falling entrepreneurship, rising concentration amongst the start ups, unicorns and billions in investment, the markets have been rewarding larger companies at the expense of the smaller and medium enterprises for years. And this has had a problematic impact on human capital and jobs creation.

Here is the data on the levels of employment in medium-large companies over the years, based on the U.S. markets data:

In simple terms, per each dollar of investors' money, today's companies are creating fewer jobs - a trend that was present since at least 2000, and consistent with the onset of the Goldilocks Economy. But the most pronounced collapse in jobs creation from investment has been since 2017. Excluding recessionary periods, in 2002-2006 average annual decline in the number of employees per $1 billion in market valuation was 3.45%. Over 2009-2013 this number rose to 4.73% and in 2014-2019 the rate of decrease averaged 8.05% per annum.

15/11/18: BIS on payments systems and cryptos / blockchain

On November 1, Agustín Carstens, General Manager, Bank for International Settlements delivered a pretty punchy speech on the topic of payments systems evolution in modern age of digital technologies. Punchy, in the sense that much of it is focused on, indirectly, enlisting the evidence as to the lack of the markets for the blockchain and cryptocurrencies deployment in the payments systems at the wholesale and retail levels.

Take the following:  "One of the most significant developments in the evolution of money has been its electronification and, more recently, digitalisation. ...Realtime gross settlement (RTGS) systems for interbank payments, ...emerged in the 1980s. ...RTGS systems allow banks and other financial institutions to send money to each other with immediate and final settlement. They are typically operated by central banks and process critical (read: high-value) payments to allow for the smooth functioning of the economy. Today, the top interbank payment systems in the G20 countries settle more than $17.5 trillion a day, which is over 50 times a working day’s global GDP. ...Given the technology cycle, many central banks are currently looking at next-generation RTGS systems to offer more robust operations and enhanced services."

What does this imply for the world of cryptos? In simple terms, there is no market for cryptos as platforms for interbank payments settlements - the market is already served and the speed of services, cost and security are underpinned by the Central Banks.

Next up: retail payments systems.

Starting with back office: "For retail payment systems, ...in Mexico consumer payments operate at the same speed as interbank payments... The beneficiary of a payment is credited money in near real time. That is, if I were to send you money from my Mexican bank account, you would see the funds in your Mexican bank account in 15 seconds or less. ...Based on a BIS analysis, fast payment systems are likely to become the dominant retail payment system by 2023."

Again, what's the market for blockchain systems to be deployed here? I am not convinced there is one, especially as payments latency and costs are, to-date, more prohibitive under blockchain systems than using traditional payments platforms.

Front office: Carstens notes the progress achieved in delivering what he describes as "payments ... made using bank account aliases" in Argentina that are instant in time, and the ongoing trend toward development of the front-end payments interfaces, based on "cashless systems – no cashiers, no lines, no cash, no physical payment devices. Amazon and others envision a future where you walk into a store, take what you want, and are automatically billed for the items using facial recognition and artificial intelligence. Though this approach may seem a bit scary, it is less so than having microchips implanted inside us, which some firms are also piloting! To be frank, though, neither of these options – facial recognition or microchip implants – are particularly appealing to me."

Carstens presents the evidence that shows current Advanced Economies already carrying more than 90 percent of wholesale payments via cheap, lightning fast and highly secure centralized RTGS systems, with 75 percent of payments via the same occurring in the Emerging Markets:

Given this rate of adoption, coupled with the evolving technology curve (that enables similar systems to be deployed in smaller settlements), one has to question the extent to which cryptocurrency solutions can be deployed in the payments systems.

Beyond the not-too-optimistic view of the market niche size, cryptos and blockchain are also facing some serious pressure points from already ongoing innovation in centralized clearance systems. "Although much attention has been focused on cryptocurrencies as the “it” innovation in payments, there’s much unheralded innovation going on" in the Central Banks and elsewhere (read: legacy providers of payments). "Central banks have been pushing the boundaries of what technology can achieve for operational robustness, including switching seamlessly between data centres at short notice and synchronising geographically dispersed data centres."

Carstens notes the potential for the distributed Ledger Tech (aka, blockchain based on private, enterprise-level blockchain) in this space, where innovation is also a domain of the centralized players, as opposed to decentralised crypto markets. "One interesting development in the central banking community is ongoing experimentation with distributed ledger technology (DLT) as a means to enhance operational robustness. People often use DLT and Bitcoin interchangeably, but they are not the same! ...DLT is simply a set of processes and technologies that enable multiple computers to maintain collectively a common database. DLT does not mean mining of coins, public ledgers and open networks. And no central bank that I’m aware of is contemplating these properties in its DLT experimentation."

There are some problems, however, for DLT enthusiasts:
1) "...a Bank of Canada study noting that a DLT-based payment system meeting central bank requirements would be similar to what we have today (ie private ledgers, closed networks and a central operator). The difference is that a network of computers would be used to settle a transaction instead of one computer." In other words, there is a case, yet to be proven, that DLT offers anything new to the payments systems to begin with.
2) "The second is an ECB and Bank of Japan study concluding that processing times would be three times longer using DLT versus current systems." In other words, DLT/blockchain cannot deliver, so far, on its main premise: higher processing efficiency than legacy systems.

Carstens sums it up: "My take is that current versions of DLT are not any better than what we already have today."

In other words: DLT/blockchain solutions appear to be:

• Not necessary: the technology is attempting to solve the problems that do not exist in the payments systems;
• Inefficient with respect to its core tenants/promises: the technology is inferior to existent solutions and the pipeline of ongoing improvements to the legacy systems.

Which begs two questions that the DLT/blockchain community needs to answer: What niche can blockchain occupy in payments systems going forward? and Is there a sustainable market within that niche that cannot be captured by alternative technologies?

But there is more. Carstens explains: "Cryptocurrencies, such as Bitcoin, Ether and Tether, do not serve the core functions of money. No cryptocurrency is a true unit of account or a payment instrument, and we have seen this year that they are a poor store of value. This then raises the question: what are they?" The answer should be a wake up call for anyone still long cryptos: "From my perspective, cryptocurrencies are, at best, an asset of some sort. Perhaps an asset comparable to a piece of art for those who appreciate cryptography. Buyers of cryptocurrencies are buying into nothing more than a software algorithm. Some firms are trying to back cryptocurrencies with an underlying asset, such as cash or securities. That sounds nice, but it’s the equivalent of making art from banknotes or stock certificates. The buyer is still buying an idea or a concept or, if you will, an asset that is the equivalent of art hanging on your wall. If people want the underlying asset, they might be better served just buying that."

Carstens previously (February 2018) claimed that the #cryptos are “combination of a bubble, a Ponzi scheme and an environmental disaster.”

Nice perspective. If you are an observer. For a holder of cryptos, this is a serious risk. Playing cards in a casino is fun, but it is not investing. Playing investing in the cryptos world is probably the same.


Note: for an even more 'in your face' assessment of the #Bitcoin and #Cryptos, there is ECB's Executive Board member, Benoit Coeure, who called #BTC the “evil spawn of the [2008] financial crisis, per Bloomberg report of November 15 (https://www.bloomberg.com/news/articles/2018-11-15/cryptocurrencies-are-evil-spawn-of-the-crisis-for-ecb-s-coeure).

The reality of #cryptos investments is that they are, empirically, a massively overvalued bet on the largely undeveloped and unproven (in real world applications) technologies that have only tangential relation to the coins currently traded in the markets. It is, in a way, a derivative bet on a future contract.

12/7/18: Technology, Government Policies & Supply-Side Secular Stagnation

I have posted about the new World Bank report on Romania's uneven convergence experience in the previous post (here). One interesting chart in the report shows comparatives in labour productivity growth across a range of the Central European economies since the Global Financial Crisis.

The chart is striking! All economies, save Poland - the 'dynamic Tigers of CEE' prior to the crisis - have posted marked declines in labour productivity growth, as did the EU28 as a whole. When one recognises the fact 2008-2016 period includes dramatic losses in employment, rise in unemployment and exits from the labour force during the period of the GFC, and the subsequent Euro Area Sovereign Debt Crisis - all of which have supported labour productivity to the upside - the losses in productivity growth would be even more pronounced.

This, of course, dovetails naturally with the twin secular stagnations thesis I have been writing about in these pages before. In particular, this data supports the supply-side secular stagnation thesis, especially the technological re-balancing proposition that implies that since the late 2000s, technological innovation has shifted toward increasingly substituting sources of economic value added away from labour and in favour of software/robotics/ICT forms of capital:

Human capital is the only offsetting factor for this trend of displacement. And it is lagging in the CEE:

But the problem is worse than simple tertiary education figures suggest. Current trends in technological innovation stress data intensity, AI and full autonomy of technological systems from labour and human capital. Which implies that even educated and skilled workforce is no longer a buffer to displacement.

As the result, in countries like Romania, with huge slack in human capital and skills, investment is not flowing to education, training, entrepreneurship and other sources of human capital uplift:

While barriers to entrepreneurship remain, if not rising:

In effect, technological innovation in its current form is potentially driving down not only productivity growth, but also labour force participation. The result, as in the economies of the West:

1. Notional large scale decline in official unemployment (officially unemployed numbers are down)
2. Significant lags in recovery in labour force participation (hidden unemployed, permanently discouraged etc numbers are up)
3. The two factors somewhat offset each other in terms of superficially boosting productivity growth (with real productivity actually probably even lower than the official figures suggest)

These three factors contribute to an expanding army of voters who are marginalised within the system.

Romania is a canary in the European secular stagnation mine. 

6/6/2018: Monopsony Power in US labour market

I have recently written about rising firm power in labour markets, driven by monopsonisation of the markets thanks to the continued development of the contingent workforce: http://trueeconomics.blogspot.com/2018/05/23518-contingent-workforce-online.html. In this, I reference a new paper "Concentration in US labour markets: Evidence from online vacancy data" by  Azar, J A, I Marinescu, M I Steinbaum and B Taska. The authors have just published a VOX blog post on their research, worth reading: https://voxeu.org/article/concentration-us-labour-markets.

23/5/18: Contingent Workforce, Online Labour Markets and Monopsony Power

The promise of the contingent workforce and technological enablement of ‘shared economy’ is that today’s contingent workers and workers using own capital to supply services are free agents, at liberty to demand their own pay, work time, working conditions and employment terms in an open marketplace that creates no asymmetries between their employers and themselves. In economics terms, thus, the future of technologically-enabled contingent workforce is that of reduced monopsonisation.

Reminding the reader: monopsony, as defined in labour economics, is the market power of the employer over the employees. In the past, monopsonies primarily were associated with 'company towns' - highly concentrated labour markets dominated by a single employer. This notion seems to have gone away as transportation links between towns improved. In this context, increasing technological platforms penetration into the contingent / shared economies (e.g. creation of shared platforms like Uber and Lyft) should contribute to a reduction in monopsony power and the increase in the employee power.

Two recent papers: Azar, J A, I Marinescu, M I Steinbaum and B Taska (2018), “Concentration in US labor markets: Evidence from online vacancy data”, NBER Working paper w24395, and Dube, A, J Jacobs, S Naidu and S Suri (2018), “Monopsony in online labor markets”, NBER, Working paper 24416, dispute this proposition by finding empirical evidence to support the thesis that monopsony powers are actually increasing thanks to the technologically enabled contingent employment platforms.

Online labour markets are a natural testing ground for the proposition that technological transformation is capable of reducing monopsony power of employers, because they, in theory, offer a nearly-frictionless information and jobs flows between contractors and contractees, transparent information about pay and employment terms, and low cost of switching from one job to another.

The latter study mentioned above attempts to "rigorously estimate the degree of requester market power in a widely used online labour market – Amazon Mechanical Turk, or MTurk... the most popular online micro-task platform, allowing requesters (employers) to post jobs which workers can complete for."

The authors "provide evidence on labour market power by measuring how sensitive workers’ willingness to work is to the reward offered", by using the labour supply elasticity facing a firm (a standard measure of wage-setting (monopsony) power). "For example, if lowering wages by 10% leads to a 1% reduction in the workforce, this represents an elasticity of 0.1." To make their findings more robust, the authors use two methodologies for estimating labour supply elasticities:
1) Observational approach, which involves "data from a near-universe of tasks scraped from MTurk" to establish "how the offered reward affected the time it took to fill a particular task", and
2) Randomised experiments approach, uses "experimental variation, and analyse data from five previous experiments that randomised the wages of MTurk subjects. This randomised reward-setting provides ‘gold-standard’ evidence on market power, as we can see how MTurk workers responded to different wages."

The authors "empirically estimate both a ‘recruitment’ elasticity (comparable to what is recovered from the observational data) where workers see a reward and associated task as part of their normal browsing for jobs, and a ‘retention’ elasticity where workers, having already accepted a task, are given an opportunity to perform additional work for a randomised bonus payment."

The findings from both approaches are strikingly similar. Both "provide a remarkably consistent estimate of the labour supply elasticity facing MTurk requesters. As shown in Figure 2, the precision-weighted average experimental requester’s labour supply elasticity is 0.13 – this means that if a requester paid a 10% lower reward, they’d only lose around 1% of workers willing to perform the task. This suggests a very high degree of market power. The experimental estimates are quite close to those produced using the machine-learning based approach using observational data, which also suggest around 1% reduction in the willing workforce from a 10% lower wage."

To put these findings into perspective, "if requesters are fully exploiting their market power, our evidence implies that they are paying workers less than 20% of the value added. This suggests that much of the surplus created by this online labour market platform is captured by employers... [the authors] find a highly robust and surprisingly high degree of market power even in this large and diverse spot labour market."

In evolutionary terms, "MTurk workers and their advocates have long noted the asymmetry in market structure among themselves. Both efficiency and equality concerns have led to the rise of competing, ‘worker-friendly’ platforms..., and mechanisms for sharing information about good and bad requesters... Scientific funders such as Russell Sage have instituted minimum wages for crowd-sourced work. Our results suggest that these sentiments and policies may have an economic justification. ...Moreover, the hope that information technology will necessarily reduce search frictions and monopsony power in the labour market may be misplaced."

My take: the evidence on monopsony power in web-based contingent workforce platforms dovetails naturally into the evidence of monopolisation of the modern economies. Technological progress, that held the promise of freeing human capital from strict contractual limits on its returns, while delivering greater scope for technology-aided entrepreneurship and innovation, as well as the promise of the contingent workforce environment empowering greater returns to skills and labour are proving to be the exact opposites of what is being delivered by the new technologies which appear to be aiding greater transfer of power to technological, financial and even physical capital.

The 'free to work' nirvana ain't coming folks.

20/11/17: Your Family Doc, Called AI...

In a recent post, I wrote about the AI breaching the key dimension of 'intelligence' - the ability to self-acquire information and self-replicate knowledge (see http://trueeconomics.blogspot.com/2017/10/221017-robot-builders-future-its-all.html).  And now, Chinese AI developers have created a robot that is capable of excelling at (not just passing) a medical certification exams: https://futurism.com/first-time-robot-passed-medical-licensing-exam/.

Years ago, working for IBM's think tank, IBV, I recall discussions about the future potential applications for Watson. Aside from the obvious analytics involved in finance (my area), we considered the most feasible application for AI and language-based software in... err... that's right: medicine. More precisely, as family doctors replacement. For now, Watson is toiling primarily in the family doctors' support function, but truth is, there is absolutely no reason why AI cannot currently replace 90% of the family doctors' practices.

And, while we are on the subject of AI, here is an interesting article on how China is beating the U.S. (and by extension the rest of the world) in the AI R&D game: https://futurism.com/china-could-soon-overtake-the-us-in-ai-development-former-google-ceo-says/ and https://futurism.com/china-has-overtaken-the-u-s-in-ai-research/.

Still scratching your heads, Stanford folks?.. 

30/9/17: Technological Revolution is Fizzling Out, as Ideas Get Harder to Find

Nicholas Bloom, Charles Jones, John Van Reenen, and Michael Webb’s latest paper has just landed in my mailbox and it is an interesting one. Titled “Are Ideas Getting Harder to Find?” (September 2017, NBER Working Paper No. w23782. http://www.nber.org/papers/w23782.pdf) the paper asks a hugely important question related to the supply side of the secular stagnation thesis that I have been writing about for some years now (see explainer here: http://trueeconomics.blogspot.com/2015/07/7615-secular-stagnation-double-threat.html and you can search my blog for key words “secular stagnation” to see a large number of papers and data points on the matter). Specifically, the new paper addresses the question of whether technological innovations are becoming more efficient - or put differently, if there is any evidence of productivity growth in innovation.

The reason this topic is important is two-fold. Firstly, as authors note: “In many growth models, economic growth arises from people creating ideas, and the long-run growth rate is the product of two terms: the effective number of researchers and their research productivity.” But, secondly, the issue is important because we have been talking in recent years about self-perpetuating virtuous cycles of innovation:

• Clusters of innovation engendering more innovation;
• Growth in ‘knowledge capital’ or ‘knowledge economies’ becoming self-sustaining; and
• Expansion of AI and other ‘learning’ fields leading to exponential growth in knowledge (remember, even the Big Data was supposed to trigger this).

So what do the authors find?

“We present a wide range of evidence from various industries, products, and firms showing that research effort is rising substantially while research productivity is declining sharply.” In other words, there is no evidence of self-sustained improvements in research productivity or in the knowledge economies.

Worse, there is a diminishing marginal returns in technology, just as there is the same for every industry or sector of the economy: “A good example is Moore's Law. The number of researchers required today to achieve the famous doubling every two years of the density of computer chips is more than 18 times larger than the number required in the early 1970s. Across a broad range of case studies at various levels of (dis)aggregation, we find that ideas — and in particular the exponential growth they imply — are getting harder and harder to find. Exponential growth results from the large increases in research effort that offset its declining productivity.”

We are on the extensive margin when it comes to knowledge creation and innovation, which - to put it differently - makes ‘innovation-based economies’ equivalent to ‘coal mining’ ones: to achieve the next unit of growth these economies require an ever increasing input of resources.

Computers are not the only sector where the authors find this bleak reality. “We consider detailed microeconomic evidence on idea production functions, focusing on places where we can get the best measures of both the output of ideas and the inputs used to produce them. In addition to Moore’s Law, our case studies include agricultural productivity (corn, soybeans, cotton, and wheat) and medical innovations. Research productivity for seed yields declines at about 5% per year. We find a similar rate of decline when studying the mortality improvements associated with cancer and heart disease.” And more: “We find substantial heterogeneity across firms, but research productivity is declining in more than 85% of our sample. Averaging across firms, research productivity declines at a rate of around 10% per year.”

This is really bad news. In recent years, we have seen declines in labor productivity and capital productivity, and TFP (the residual measuring technological productivity). Now, knowledge productivity is falling too. There is literally no input into production function one can think of that can be measured and is not showing a decline in productivity.

The ugly facts presented in the paper reach across the entire U.S. economy: “Perhaps research productivity is declining sharply within every particular case that we look at and yet not declining for the economy as a whole. While existing varieties run into diminishing returns, perhaps new varieties are always being invented to stave this off. We consider this possibility by taking it to the extreme. Suppose each variety has a productivity that cannot be improved at all, and instead aggregate growth proceeds entirely by inventing new varieties. To examine this case, we consider research productivity for the economy as a whole. We once again find that it is declining sharply: aggregate growth rates are relatively stable over time, while the number of researchers has risen enormously. In fact, this is simply another way of looking at the original point of Jones (1995), and for this reason, we present this application first to illustrate our methodology. We find that research productivity for the aggregate U.S. economy has declined by a factor of 41 since the 1930s, an average decrease of more than 5% per year.”

This evidence further confirms the supply side of the secular stagnation thesis. Technological revolution has been slowing down over recent decades (not recent years) and we are clearly past the peak of the TFP growth of the 1940s, and the local peak of the 1990s (the ‘fourth wave’ of technological revolution).

Update June 7, 2018: A new version of the paper is available at https://web.stanford.edu/~chadj/IdeaPF.pdf.

30/11/15: WarningSignals on Secular Stagnation Threats

The readers of this blog know that I have been covering the twin theses of Secular Stagnation (long-term trend in slowdown of global growth) consistently over recent years.

Here is an interesting summary of the theses and literature on it, with extensive references to this blog (among other sources): http://www.warningsignals.org/#!Where-are-we-on-Secular-Stagnation/covf/565464fb0cf29e70f2253e70.

My own view summarised most recently here: http://trueeconomics.blogspot.ie/2015/10/41015-secular-stagnation-and-promise-of.html.

4/10/15: Secular Stagnation and the Promise of the Recovery

An unedited version of my recent requested guest contribution for News Max on the issue of secular stagnation (July-August 2015).

Secular Stagnation and the Promise of the Recovery

Recent evidence on economic growth dynamics presents a striking paradox. As traditional business cycles go, recovery period following a prolonged recession should follow certain historical regularities. Shortly after exiting a recession, growth in productivity, output, investment and demand accelerates and exceeds pre-crisis growth.

These stylized facts are absent from the data for the major advanced economies to-date, prompting three distinct responses from the economic growth analysts. On the one hand, there are proponents of two theories of secular stagnation – an idea that structurally, long-term growth in the advanced economies has come to a grinding halt either due to the demand side collapse, or due to the supply side exhausting drivers for growth. On the other hand, the recovery bulls continue to argue that the turnaround reflective of a traditional recovery is likely to materialize sometime soon.

In my opinion, neither one of the three views of the current economic cycle is correct or sufficient in explaining the lack of robust global recovery from the crises of 2007-2009 and 2011-2014. Instead, the complete view of today’s economy should integrate the ongoing secular stagnation thesis spanning both the supply and the demand sides of the global economy.

The end game for investors is that no traditional indexing or asset class approach to constructing investor portfolios will offer a harbor from the post-QE re-pricing of economic fundamentals. Instead, longer-term strategy for addressing these risks calls for investors targeting smaller clusters of opportunities in sectors that can be viewed as buffers against the secular stagnation trends. Along the same lines of reasoning, forward-looking economic policymaking should also focus on enhancing such clustered opportunities.

Investment-Savings Mismatch

The demand-based view of secular stagnation suggests that the global growth slowdown is linked to a structural decline in consumption and investment, reflected in a decades-long glut of aggregate savings over investment.

This theory, tracing back to the 1930s suggestion by Alvin Hansen, made its first return to the forefront of macroeconomic thinking back in the 1990s, in the context of Japan. By the early 1990s, Japan was suffering from a demographics-linked excess of savings relative to investment, and the associated massive contraction in labor productivity. During the 1980-1989 period, Japan's real GDP per worker averaged 3.2 percent per annum. Over the following two decades, the average was 0.81 percent. Meanwhile, Japan's investment as a percentage of GDP gradually fell from approximately 29-30 percent in the 1980s to just over 20 percent in 2010-2015.

The Great Recession replicated Japanese experience across the majority of advanced economies. Between 1980 and 2014, the gap between savings and investment as percentage of GDP has widened in North America and the Euro area. At the same time, labor productivity fell precipitously across all major advanced economies, despite a massive increase in unemployment.

Some opponents of the demand side secular stagnation thesis, most notably former Fed Chairman Ben Bernanke, argue that low interest rates create incentives for investment and reduced saving by lowering the cost of the former and increasing the opportunity cost of the latter.

However, this argument bears no connection to what is happening on the ground. Current zero rates policies appear to reinforce the savings-investment mismatch, not weaken it, rendering monetary policy impotent, if not outright damaging.

How can this be the case?

Today's pre-retirement generations are facing insufficient pensions coverage. For them, lower yields on retirement investments, tied to lower policy rates, are incentivizing more aggressive savings, further suppressing returns on investment. Meanwhile, middle age workers face severe pressures to deleverage their debts accumulated before the crisis, while supporting ageing parents and, simultaneously, increasing numbers of stay-at-home young adults.

To address the demand-side of secular stagnation in the short run, requires lifting the natural rate of return on investment, without increasing retail interest rates. This will be both tricky for policymakers and painful for a large number of investors, currently crowded into an over-bought debt markets.

The only way real natural rate of return to investment can rise in the environment of continued low policy and retail rates is by widening the margin between equity and debt returns for non-financial assets and reducing tax subsidies awarded to physical and financial capital accumulation. In other words, policymakers must rebalance taxation systems to support real enterprise formation, entrepreneurship and equity investment, while reducing incentives to invest in debt and financial assets.

Good examples of such policy tools deployment can be found in the areas of gas and oil infrastructure LLPs and property REITs used to fund long-term physical capital investments via tax optimized returns structures. Transforming these schemes to broader markets and to cover non-financial, technological and human capital investments, however, will be tricky.

From the investor perspective, the demand-side stagnation thesis implies that  longer-term investment opportunities will be found in allocations targeting entrepreneurs and companies with organic growth that are debt-light, technologically intensive (with a caveat explained below) and human capital-rich. There are no real examples of such companies currently in the major stock markets’ indices. Instead, the future growth plays are found in the high risk space of start ups and early stage development ventures in the sectors that bring technology directly to end-user engagement: biotech, nanotechnology, remote health, food sciences, wearables, bio-human interfaces and artificial intelligence.

Tech Sector: Value-Added  Miss

The caveat relating to technology investments briefly mentioned above is non-trivial.

Today, we have two distinct trends in technological innovation: technological research that leads to increased substitution of labor with technology and innovations that promise greater complementarity between labor and human capital and the machines.

The first type of innovation is what the financial markets are currently long. And it is also directly linked to the supply-side secular stagnation thesis formulated by Robert Gordon in the late 2000s. The thesis challenges the consensus view that the current technological revolution will continue to fuel a perpetual growth cycle.

Per Gordon, "The frontier established by the U.S. for output per capita, and the U. K. before it, … reached its fastest growth rate in the middle of the 20th century, and has slowed down since.  It is in the process of slowing down further." The reason for this is the exhaustion of economic returns to technological innovation.  Financial returns are yet to follow, but inevitably, with time, they will.

Gordon, and his followers, argue that a sequence of three industrial or technological revolutions explains the historically unprecedented pace of growth recorded since the mid-18^th century. "The first with its main inventions between 1750 and 1830 created steam engines, cotton spinning, and railroads. The second was the most important, with its three central inventions of electricity, the internal combustion engine, and running water with indoor plumbing, in the relatively short interval of 1870 to 1900.” However, after 1970 “productivity growth slowed markedly, most plausibly because the main ideas of [the second revolution] had by and large been implemented by then.” Thus, the computer and internet age – the ongoing third revolution – has reached its climax in the late 1990s and the productivity gains from the new computer technologies has been declining since around 2000.

Gordon’s argument is not about the levels of activity generated by the new technologies, but about the declining rate of growth in value added arising form them. This argument is supported by some of the top thinkers in the tech sector, notably the U.S. tech entrepreneur and investor, Peter Thiel.

The older generation of players in the tech sector attempted to challenge Gordon’s ideas, with little success to-date.

A recent study from IBM, titled "Insatiable Innovation: From sporadic to systemic", attempted to show that technological innovation is alive and well, pointing to evolving ‘smart’ tech, globalization of consumer markets, and universal customization of production as signs of potential growth capacity remaining in tech-focused sectors.

However, surprisingly, the study ends up confirming Gordon’s assertion. Tech industry today, by focusing on substituting technology for people in production, is struggling to deliver substantial enough push for growth acceleration. The promise of new technologies that can move companies toward more human capital-intensive modes of production remains the stuff of the future. Meanwhile, marginal returns on investment in today’s technology may be non-negligible from the point of view of individual enterprises, but they cannot deliver rapid rates of growth in economic value added over time and worldwide.

Disruptive Change Required

In my view, the reason for this failure rests with the nature of the modern economy, still anchored to physical capital investment, where technology is designed to replace labor. As I noted in a number of research papers and in my TED presentation a couple of years ago, long-term global growth cycles are sustained by pioneering innovation that moves economic production away from previously exhausted factors (e.g. agricultural land, physical trade routes, steam, internal combustion, electricity, and, most recently capital-enhancing tech) toward new factors.

Thus, the next global growth cycle can only arise from switching away from traditional forms of capital accumulation in favor of structurally new source of growth. The only factor remaining to be deployed in the economy is that of human capital.

Like it or not, to deliver the growth momentum necessary for sustaining the quality of life and improvements in social and economic environment expected by the ageing and currently productive generations will require some radical rethinking of the status quo economic development models.

The thrust of these changes will need to focus on attempting to reverse the decline in returns to human capital investment (education, training, creativity, ability to take and manage risks, entrepreneurship, etc) and on generating higher economic value added growth from technological innovation.

The former implies dramatic restructuring of modern systems of taxation and public services to increase incentives and supports for human capital investments and their deployment in the economy.  The latter requires an equally disruptive reform of the traditional institutions of entrepreneurship and enterprise formation and development.

From investor perspective, this means seeking opportunities to take equity positions in companies with more horizontal, less technocratic distributions of management and ownership. Cooperative, mutual, employees-owned larger ventures and firms offer some attractive longer term valuations in this context. Entrepreneurs who are not afraid to allocate wider ranges of managerial and strategic responsibilities to a broader group of their key employees are also interesting investment targets.

Within sectors, companies that offer more flexible platforms for research and development, product innovation, customer engagement and are design and knowledge-rich will likely outperform their more conservative and rigid counterparts over the long run.

The new world of structurally slower growth does not imply lack of opportunities for investors seeking long run returns. It simply requires a new approach to investment allocation across asset classes and individual investment targets. When both, supply and demand sides of the economic growth equation face headwinds, safe harbours of opportunities lie outside the immediate path of disruption, in the areas of tangible real equity closely linked to the potential drivers of future growth.