Most of the writing you see about the economy speaks to narrow questions: What will growth be this year? When will the unemployment rate get back to normal? And so on. But the things that will determine standards of living a generation from now have almost nothing to do with this month’s jobs report or the Federal Reserve's latest policy meeting. Those determinants, instead, depend on companies' innovations — in particular, whether those innovations turn out to have major economic consequences.
Researchers at the McKinsey Global Institute, the in-house think tank of the giant consulting firm, have a new study in which they have taken their best shot at predicting exactly that. They have scoured the range of potential disruptive technologies and done their best to estimate how transformative each might be for the U.S. economy. Their results are hardly definitive — we can’t know what the future holds — but represent a serious effort by some smart people to quantify what appear to be some major forces shaping our technological future. And the results have some important implications for how we think about innovation.
First, the researchers, led by James Manyika, narrowed their focus to technologies that are already advancing rapidly (no pure pie-in-the-sky stuff), have broad potential impact (not something that would just affect one or two industries) and could have significant economic impact (the total numbers are large). Not making the cut were technologies that are unlikely to be available between now and 2025 (fusion power, for example) and those that are coming to fruition but are niche products (like private space flight).
Here’s the list the McKinsey researchers came up with, along with their (very rough) estimates of how much economic potential they hold. They are defining that economic impact broadly to include benefits that won't show up in economic statistics like GDP (consumer surplus is the value people derive from an innovation that they do not pay for).
As the chart shows, the McKinsey folks believe that the most economically significant technologies over the next decade-plus will be those already well underway in their development -- the mobile Internet, largely in place in the advanced world and rapidly growing in emerging markets; the automation of knowledge work, things such as computerized voices that can handle many customer service calls; the "Internet of things," such as embedding sensors in physical objects to monitor the flow of products through a factory; and cloud computing. Each of these areas of innovation, in the McKinsey telling, will be worth north of $1 trillion to the world economy by 2025, even on the low side of their range. (Find detailed definitions of each category here, and click on the full study to read the researchers' methodology and rationale for these estimates).
But what is most interesting about their analysis is that some of the sexiest areas of innovation, including some we have minor obsessions with here in this blog, are seen as less likely to have a massive economic impact between now and 2025. Driverless cars, 3D printing, renewable energy -- each of these is going to have a much smaller economic footprint, the report says.
This disconnect, between how much hype and attention a disruptive technology receives and how much it will affect the real world in dollar terms, can be seen in the chart below. The upper left quadrant of this chart encompasses innovations that receive outsized discussion in the media relative to their expected economic importance.
Indeed, maybe the single biggest takeaway from the study is this: The things that will have the greatest impact on the economy in the medium term aren't the ones that seem to most excite the imagination and public interest. Instead, the potentially powerful innovations are mostly those that have been evolving for many years in new ways.
That's what Federal Reserve chairman Ben Bernanke was talking about in a commencement speech last weekend about long-term economic potential, when he said: "Some would say that we are still in the early days of the IT revolution. After all, computing speeds and memory have increased many times over in the 30-plus years since the first personal computers came on the market, and fields like biotechnology are also advancing rapidly. Moreover, even as the basic technologies improve, the commercial applications of these technologies have arguably thus far only scratched the surface."
Things like cloud computing and mobile Internet connectivity are not brand-new inventions; in various forms they have existed for years. But the innovations that will flow from them --and resulting economic benefits -- are only beginning. Think of it this way: Car services have existed for the better part of a century. Cellphones have been around for decades now. We've had global positioning systems for cars for about a decade. But it is only in the last couple of years that the entrepreneurs at Uber figured out how to combine those technologies into a quite good car service.
In any field -- manufacturing, agriculture, you name it -- businesses are doing the same work trying to mix all these technologies in ways that create big payoffs. The real economic benefits of innovation, at least over the near term, come not from the flashy, mind-blowing ideas, but from clever combinations of technologies that are just maturing with those that have been around for ages.