Economic Disruption: We’ve Seen This Before

Live-blogging from the IBM Watson University Symposium at Harvard Business School and MIT Sloan School of Management. Additional coverage is on the Smarter Planet Blog. .

Closing Remarks By Martin Fleming, IBM Chief Economist

Martin Fleming, Chief Economist, IBMIf we look at the global economy over the last 250 years, we’ve seen five waves of technology change:

  • Industrial Revolution
  • Age of Steam and Railways
  • Age of Steel, Electricity and Heavy Engineering
  • Age of Oil, Automobiles and Mass Production
  • Age of Information and Telecommunication
The Next Big ThingThis is one in a series of posts that explore people and technologies that are enabling small companies to innovate. The series is underwritten by IBM Midsize Business, but the content is entirely my own.

We’ve seen similar characteristics of each change. One is that we’ve gone through a stage where technology is applied to existing processes. Early factories were still vertically structured near bodies of water. It wasn’t for years that people restructured factories around the new machines.

I can remember when people were paid in envelopes of cash. Then we had payroll checks and now we manage our benefits via the Web. Technology enables us to change the way we do things.

Another example is that we have changed the way we consume media because of the iPhone and iPad, and this has altered fundamentally the media industry.

A third example is Watson in a health care context. This can allude to the democratization of health care, where the practice of health care is altered because of the technology. The whole concept of evidence-based medicine is an important new development.

Each of these five waves has been interceded by a crash in the financial markets. We’re beginning to understand this phenomenon.

When the global economy was declining in 2008, the decline in world trade and industrial production was actually steeper than in the 1930s. The decline didn’t last nearly as long (I would assert because of more assertive economic policy) but it was very steep.

The increase of public and private debt and the concentration of wealth in the financial sector also correlate to historical trends.

As we came to the end of the 1990s, we had opportunities that were typically high in ROI that were increasingly difficult to find. The financial sector had to look to new ways to deliver high returns to their investors. So you had the creative of things like sub-prime mortgages and derivatives. We also saw a reduction in bank regulation because the memories of the previous episode had faded. We also had financial structures in place, like pension funds, that were unsustainable in the new environment.

So we’re seeing new models appear. We’re creating ways to use the new technologies as the old technologies wind down.

When we look at fixed-investment spending, starting in the late 19th century the wave of investment grew rapidly. Then it slowed in the early 20th century and nearly stopped in the 1930s. But then there was a burst in the 1940 and 1950s, another slowing, and now we’re in a period where there is almost no growth. Labor hours and labor productivity showed similar shifts. Real interest rates also went through a similar increase and decline.

I don’t want to say this is a cycle. There is a very stochastic set of events that are occurring, but there are some similarities.

What does this have to do with Watson? The economy is beginning to open up opportunities for innovation. Demand for skills is shifting. It will likely be the case that in some job categories there are insufficient numbers of workers, which will cause assets to be created that reduce skill requirements.

This set of changes are in line with what we’ve seen with Watson capabilities.

Crisis Tests IT’s Influence

From Innovations, a website published by Ziff-Davis Enterprise from mid-2006 to mid-2009. Reprinted by permission.

Between checking retirement portfolios and flipping over to or Moneywatch every hour or two, a lot of people aren’t’ getting much work done this week. Who can blame them? Between the unprecedented bankruptcies of some of Wall Street’s biggest firms, the turmoil in the stock market and dire statements from top officials in the U.S. government, it’s easy to believe that the world is caving in.

I’m nervous, too, but I’m also resisting the urge to forecast disaster because I just don’t think the Great Depression can happen again. Part of the reason is information technology.

There are two ways in which IT can make important contributions to pulling the U.S. economy out of chaos: by empowering rapid decisions and enabling communication. As evidence of the first dynamic, look at the chart below. It shows growth in U.S. gross domestic product from 1930 through 2007. You don’t have to squint much to see where the trend has been going. The huge swings in GDP performance that occurred during the Depression and war years have gradually become gentler and more predictable. Negative growth, which was a regular occurrence during much of the 20th century, has only occurred once in the last 25 years. The further right you go on the chart, the more boring economic performance becomes. That’s precisely how businesses like it. Consistency sets the stage for more confident long-term planning.

Technology’s Shadow Role

There are multiple reasons why the economy has stabilized in recent decades; globalization and the Federal Reserve are certainly two of them. But I would suggest that information technology plays a shadow role. Note that the GDP numbers show a clear smoothing trend beginning around the middle 1960s, which was when computers began to make their way into back offices on a grand scale. The trend becomes even more refined in the late 1980s, when PCs started landing on every desktop.

I think it’s no coincidence that economic cycles became less volatile when managers and regulators began deploying sophisticated models to predict the path of business. Even as the economy has been roiled by financial crises, 9/11 and the bursting of the Internet bubble over the last two decades, recessions have tended to be shallow and brief and recoveries have been smoother and more sustained than in previous cycles. One factor may be that economic plays have more sophisticated means to model the impact of their decisions than they did before. That leads to better forecasting and quicker mid-course corrections, which makes for less volatility. No one’s suggesting that we aren’t in for some difficult times, but if the past is any indication, we’re better equipped to pull out of the tailspin today than ever before.

The other potentially positive IT influence on economic cycles is the Internet, and in particular Web 2.0. Within just the last five years, businesses have embraced robust new ways to communicate with their constituencies. As new economic surprises have turned up almost daily over the past few weeks, people have flocked to their Facebook groups, Twittered their concerns and voiced their opinions on news sites like never before. Smart business leaders should be tapping in to these conversations and using them to help guide their own decisions. If you want to learn how your customers are thinking about the latest dose of bad news these days, you need only to ask them or just listen. Trends that used to take months to identify can now be discerned in a few hours. It’s too early to know what the impact this fact will have on economic performance, but it’s likely to encourage faster and more competent decision-making.

Web 2.0 also enables corporate leaders to communicate directly to their constituents to offer own perspectives on unfolding events. Unfortunately, they aren’t doing much of that yet. A quick check of blogs operated by Chrysler, Marriott, McDonald’s, Whole Foods, Accenture, Boeing, Wal-Mart and Southwest Airlines shows that none has yet departed from delivery cheery good-news fare to comment upon the economic issues that weigh most heavily on American minds. Cheers to General Motors and PriceWaterhouseCoopers for attempting to lend some of their perspective to the conversation. I only hope the others are too busy listening at the moment to make time to state their own views. America certainly wants to hear them.