The Second Machine Age

Erik Brynjolfsson & Andrew McAfee “The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies” W.W. Norton & Co, 2014, 257 Pgs.

Here is another Must-Read book: This book documents that we are on the cusp of true machine intelligence as well as the connection of all humans via a common digital network, truly transforming the planet’s economics.  The authors call this “The Second Machine Age”, distinguishing it from the first (Industrial Revolution).

Up until 200 years ago, days, centuries, and even millenniums were much the same one-to-another for humans.  Then the industrial revolution occurred and bent the human social development index to an almost 90 degree trajectory.  The industrial revolution was the sum of several nearly simultaneous developments in mechanical engineering, chemistry, metallurgy, and other disciplines.  The steam engine was the most important.  Prior to Watts, steam engines were highly inefficient, harnessing only about one percent of the energy released by burning coal.  Watts increased this efficiency three-fold.  His steam engine allowed us to overcome the limitations of muscle power, human and animal.  This led to factories and mass production, to railways and mass transportation.  This was humanity’s first machine age—the first time our progress was driven primarily by technological innovation.

Now comes the second machine age.  Computers and other digital advances are doing for mental power—the ability to use our brains to understand and shape our environment—what the steam engine and it descendants did for muscle power.  This vast boost to mental power should be as great a boost to humanity, as the earlier boost (The Industrial Revolution) to physical power so clearly was.

But there are some disturbing implications.  GDP has never been higher and innovation has never been faster, yet people are increasingly pessimistic about their children’s future living standards.  Adjusted for inflation, the combined net worth on Forbes’ billionaire list has more than quintupled since 2000, but the income of the median household in America has fallen.  Our loss of middle-class job opportunities is not primarily due to globalization, it is primarily due to the digital revolution.

My Notes:

Three fundamental forces enabling the second machine age:

*exponential improvement in computer gear (Moore’s Law)

*digitization (turning text, sounds, photos, videos, etc. into a stream of bits)

*recombinant innovation (combining technologies)

These three forces are yielding breakthroughs that convert science fiction into everyday reality, outstripping even our recent expectations and theories.  The advances we’ve seen in the past few years—cars that drive themselves, useful humanoid robots, speech recognition and synthesis systems, 3D printers, Jeopardy champion computers—are not the crowning achievements of the computer era.  They’re the warm-up acts. 

Pg. 74:  The great inventions of the second industrial revolution (1870 – 1900) were: electricity, the internal combustion engine, and indoor plumbing with running water.

Pg. 112:  GDP is becoming a much less useful heuristic.  More people than ever are using items not measured by GDP: Wikipedia, Facebook, Craigslist, Pandora, Hula, and Google, with thousands of new digital goods introduced each year.

Pg. 119:  Just as free goods rather than physical products are an increasingly important share of consumption, intangibles also make up a growing share of the economy’s capital assets.  Production in the second machine age depends less on physical equipment and structures and more on the four categories of intangible assets: intellectual property, organizational capital, user-generated content, and human capital.’

Pg. 126:  Of the 3.5 trillion photos that have been snapped since the first image of a busy Parisian street in 1838, fully 10 percent were taken in the last year. Analog photography peaked in 2000.  Today, over 2.5 billion people have digital cameras and the vast majority of photos are digital.

Pg. 129 & 162:  The real median household income (adjusted for inflation) peaked in 1999 at $54,939 but then started falling.  By 2011 it had fallen nearly 10 percent to $50,054, even as overall GDP hit a record high.  Meanwhile, for the first time since before the Great Depression, over half the total income in the U.S. went to the top 10 percent of Americans in 2012.  The era of bell curve distributions that supported a bulging social middle class is over and we are headed for the power-law distribution of economic opportunities.  Education per se is not going to make up the difference.  In practical terms this means the when income is distributed according to a power law, most people will be below average.  Over time, average income can increase without any increase in the median income or, for that matter, without any increase in income for most people.

 Addenda:

The big winners in this new era will be consumers, who will be able to buy a wider range of higher-quality goods and services at lower prices. The other winners will be those who create and finance the new machines or figure out how best to use them to gain competitive advantage. Great wealth will be created in the process.

To illustrate the point, the authors cite the example of Instagram and Kodak. Instagram is a simple app that has allowed more than 130 million people to share some 16 billion photos. Within 15 months of its founding, Instagram was sold to Facebook — a company with 1 billion users — for $1 billion. It was only a few months later that Kodak, the Instagram of its day, declared bankruptcy. The authors use this little vignette to illustrate two points. The first is to point out that the market value of Facebook/Instagram is now several times the value of Eastman Kodak at its peak, creating, by their calculation, seven billionaires, each of whom has a net worth 10 times greater than George Eastman ever had. Such is the “bounty” of the second machine age.