Economist Carl Benedikt Frey: “Decentralization Sparks Innovation Beyond USSR's Building Strengths”

In 1882, Thomas Edison launched his first power plant, illuminating Pearl Street in southern Manhattan. However, it wasn't until nearly four decades later that electricity became widespread, significantly transforming industrial production and productivity statistics. By the early 20th century, motor vehicles were costly and largely viewed as luxuries for the wealthy. It took half a century, particularly after World War I, for these vehicles to gain widespread acceptance in densely populated American cities. The emergence and acceptance of new technologies are inherently unpredictable, as are their consequences.

Carl Benedikt Frey, a Swedish associate professor of Artificial Intelligence and Work at the Oxford Internet Institute and founder of the technology and employment program at the Oxford Martin School, has recently published How Progress Ends: Technology, Innovation, And The Fate Of Nations (Princeton University Press). This work explores 1,000 years of human history to understand why some societies thrive while others falter in the face of new technologies.

In his book, Frey challenges the pervasive notion that technological progress is a given. He references historical powers, such as Song dynasty China and Victorian Britain, which ultimately lost their innovative advantages, as well as contemporary nations like Japan that experienced economic stagnation after periods of rapid growth. Frey emphasizes the unpredictability of the future and points to the Soviet Union's economic collapse in the 1990s, highlighting how its decline had begun much earlier. As artificial intelligence (AI) emerges, the question remains: what new order will it establish?

Understanding Technological Exploration

Question: What drives nations to explore and innovate technologically?

Answer: Societies that lack room for experimentation find it challenging to maintain technological and economic progress. The Soviet Union serves as a prime example; for four decades, it enjoyed economic growth rates of around six percent and successfully adopted foreign technologies. However, by the 1970s, when mass production began to wane, the USSR lagged significantly in computer innovations due to constrained exploration opportunities. Unlike in the United States, where multiple funding options exist, Soviet engineers faced limited choices that could stifle new ideas.

Question: Did this limitation in exploration contribute to the emergence of Silicon Valley?

Answer: A decentralized economy allows for the exploration of diverse technological trajectories. The U.S. federal system, which promotes local regulatory experimentation, fostered conditions conducive to innovation. Landmark decisions, such as the nullification of non-compete agreements in the early 1980s, played a vital role in the rise of Silicon Valley. These changes permitted engineers to transition from one venture to another effectively.

Question: How do major tech companies operate today?

Answer: Established companies often resist technologies that threaten their profitability. They engage in aggressive acquisitions of startups, only to suppress new innovations, and employ lobbying strategies to push for protective regulations. Frey asserts that when large firms regulate in their favor, the risk of stifling progress and inducing economic stagnation increases, especially in the absence of competitive pressures.

Question: Isn't decentralization criticized for fostering regional inequality?

Answer: While the Soviet system was efficient in certain areas like electrification, it struggled to foster a telecom industry akin to that in the U.S. This distinction underscores the necessity for decentralized systems capable of fostering diverse technological innovations, as central planning may inhibit long-term leadership in technology.

Question: How does the current AI revolution compare to previous industrial advancements?

Answer: The ongoing AI revolution resembles the first industrial revolution, which focused predominantly on automation, a departure from the transformative nature of the second industrial revolution that birthed new industries. While recent technological advancements have created certain sectors, they remain limited to specific geographical areas, such as Silicon Valley.

Question: What about the significant investments by tech giants in large data centers?

Answer: The era of scalability in AI, predicated on increasing data size and computational power, is nearing its end. Future advancements in AI are expected to stem from innovations in algorithms rather than merely expanding existing models. A decentralized and competitive landscape is essential for truly progressing in AI.

Question: What implications do these trends have for major global players: Europe, the U.S., and China?

Answer: China presents a unique case with its hybrid political and economic systems where state-owned enterprises often lag in innovation compared to private firms. The increasing state influence may not foster innovation but does benefit from a large talent pool. In contrast, the U.S. seems to be politicizing its private sector and implementing protective measures that stifle competition. Meanwhile, Europe faces challenges with rigid labor laws and complex regulations hampering growth in its service and digital sectors, despite sufficient public spending on research and development.