Irving Wladawsky-Berger

From “Buy What We Have” to “Connected Customer Strategies”

Adapting to the ongoing digitization of the economy is one of the key challenges faced by just about every company around the world.  While there are many ways a company can leverage digital technologies to differentiate itself from competitors, two are particularly prominent: streamline operations to develop higher quality products at competitive prices, and provide a superior, cost-effective customer experience through digital channels

The explosive growth of mobile devices means that a company can be engaged with its customers whether they are at home, at work, or shopping in a store.  But, digital customers can be fickle and hard to satisfy.  A successful business will try to make each of its clients feel special by understanding and addressing their unique requirements, and by providing excellent customer service and quickly resolving problems when they come up.  This is hard, which is also why it may very well be the most important way for a business to stand out from its competitors.

“Thanks to new technologies that enable frequent, low-friction, customized digital interactions, companies today are building much deeper ties with customers than ever before,” said a recent Harvard Business Review (HBR) article, The Age of Continuous Connection by Nicolaj Siggelkow and Christian Terwiesch, in its opening paragraph.  “Instead of waiting for customers to come to them, firms are addressing customers’ needs the moment they arise - and sometimes even earlier.  It’s a win-win: Through what we call connected strategies, customers get a dramatically improved experience, and companies boost operational efficiencies and lower costs.”

Most companies engage with their customer fleetingly, using what the authors call the buy what we have model.  In it, companies provide high-quality offerings at competitive prices, but it’s up to customers to identify their needs and seek out the appropriate products or services to meet them.  The key problem with the traditional buy what we have journey is that company and customer are poorly connected throughout.

The Business Value of Augmented Reality

I recently heard a very interesting presentation at the 2019 MIT CIO Symposium, - Why Companies Need an Augmented Reality Strategy, - by Harvard professor Michael Porter and James Heppelmann, CEO of PTC, an industrial software company.  The talk was based on their HBR article A Manager’s Guide to Augmented Reality.

We generally think of products as physical entities built with a combination of mechanical and electrical components, - e.g., appliances, cars, agricultural machines, industrial equipment, - some quite simple and some highly complex.  But, in a 2014 HBR article, Porter and Heppelmann introduced the notion of smart connected products (SCPs), a whole new class of products that, in addition to mechanical and electrical components, use digital components like microprocessors, sensors, data storage, software, and connectivity in a wide variety of ways.  Smart connected products are radically reshaping companies and exposing them to new competitive opportunities and threats, while altering industry boundaries and creating entirely new industries.

Through its first five decades, IT helped companies become significantly more productive, by automating many of their processes, reengineering their overall operations, and reaching out beyond the boundaries of the enterprise.  But, their actual products were largely unaffected.  This is all now changing with the rise of the Internet of Things (IoT), cloud computing, Big Data, AI, and other innovations whose combined impact is driving the new era of smart connected products.

As the world’s digital and physical infrastructures converge, IT is now an integral part of the products themselves. Digital technologies are designed right into the products.  Massive amounts of product-usage data can now be gathered, stored and analyzed by a variety of applications in the product’s cloud counterpart.  The cloud might also include a digital twin of each specific physical product, that is, a highly realistic 3-D digital model that monitors the real-time status of the digital twin’s physical counterpart, - e.g., a jet engine, elevator or turbine, - and helps make important decisions such as the need for preventive maintenance to prevent a product failure.

Is the Digital Revolution At Last Shaking Up Banking?

Digital transformations have generally followed three distinct stages.  First comes the use of IT to improve the productivity and quality of back- and front-end processes.  Distribution is next, leveraging the universal reach and connectivity of the Internet for online transactions and access to information. Finally, the transformation reaches a tipping point when technologies radically change the business model and user experience, leading to a fundamental disruption of the industry.

While such a digital journey is ultimately inevitable, the pace varies widely across industries.  The IT industry has been the most disrupted, - often by its own digital creations in a kind of sorcerer’s apprentice scenario.  Over my long career, I’ve seen many once powerful IT companies done in by technology and market changes, and either disappear altogether or become shadows of their former selves.

Beyond IT, few industries have felt the impact of digital forces like media.  In less than two decades, the global recorded music industry has lost over half its revenues, while the drop in newspaper advertising revenue in the US has been even steeper.  Retail has also undergone major changes with the rise of e-commerce, as has telecommunications with the transition to mobile phones.  How about banking, which has long been a leading user of information technologies?

The May 4 issue of The Economist addressed this question in a special report on Banking and Technology, with several articles on the subject.  “Over the past two decades people across the world have seen digital services transform the economy and their lives,” said its lead article.  “Taxis, films, novels, noodles, doctors and dog-walkers can all be summoned with a tap of a screen.  Giant firms in retailing, carmaking and the media have been humbled by new competitors.  Yet one industry has withstood the tumult: banking.”

But, adds The Economist, “technology is at last shaking up banking.”  Two major forces are driving this shake-up: the dramatic growth of digital payments in China and other Asian countries; and the rise of mobile banking in the West, especially among young digital natives.

The Economic Value of Digital Identity

Identity plays a major role in our everyday life.  It’s the key that determines the particular transactions in which we can rightfully participate as well as the information we’re entitled to access.  Think about going to an office, getting on a plane, logging on to a website or making an online purchase.  We generally don’t pay much attention to the management of our identity credentials unless something goes seriously wrong.

For much of history, our identity systems have been based on face-to-face interactions and on physical documents and processes.  But, the transition to a digital economy requires radically different identity systems.  In a world that’s increasingly governed by digital transactions and data, our existing methods for managing security and privacy are proving inadequate.  Data breaches, large-scale fraud, and identity theft have become more common.  In addition, a significant portion of the world’s population lacks the credentials needed to participate in the digital economy.  Our existing methods for managing digital identities are far from adequate.

A few weeks ago, the McKinsey Global Institute released Digital Identification: A key to inclusive growth, a comprehensive report at over 100 pages that examined the state of digital identities around the world.  The report analyzed the value creation potential of good digital IDs for individuals and institutions, as well as the potential risks and challenges.  McKinsey’s analysis was informed by nearly 100 concrete uses of digital IDs in seven countries: Brazil, China, Ethiopia, India, Nigeria, the UK and the US.

The Evolution of Work in Urban Labor Markets

A few weeks ago I heard a very interesting keynote by MIT economist David Autor at the annual conference of MIT’s Initiative on the Digital Economy.  The talk was based on his recently published paper Work of the Past, Work of the Future.

Professor Autor started his talk by noting that over the last four decades, the US and other industrial economies have seen a remarkable rise in wage inequality by educational attainment, with the earnings of the most-educated increasing, and the earnings of the least-educated falling in real terms.  Since the 1980s, the earnings of those with a four year college degree have risen by 40% to 60%, while the earnings of those with a post-college education have risen 80% to 100%.  At the same time, the earnings of those with a high school education or less have fallen among men and barely changed among women.

At the same time, the supply of educated workers in the US has vastly increased.  From the 1960s to the present, the share of the labor force with college or post-college degrees rose from 12% to 39%,  while the share of those with some college rose from 13% to 28%.  But the share of those with a high school degree or less fell from 75 to 33%.  Based on the law of supply-demand, one would expect that the wages of college-educated workers would have fallen in recent years because there are so many of them, while the wages of those with a high school education or less would have risen because they are a significantly smaller share of the labor force.  But, as we well know, this has been far from the case.

Autor addressed this seeming paradox in his keynote by analyzing a number of potential explanations.  Eroding union penetration, falling minimum wages, and the rise of China, India and other low labor-cost countries have certainly contributed to the wage erosion of non-college workers.  But his main focus was the changing structure of work in the US and other advanced economies, as well as how these changes have unfolded across different geographic regions, from low density rural areas to high density cities.

The Puzzling Personal Productivity Paradox

The past 10-15 years have seen a number of technology advances, from smartphones to machine learning.  Yet, despite these impressive advances, for most of this period economies around the world have been stuck in an era of slow productivity growth.  Opinions abound, but in the end, there’s no consensus on the causes of this apparent productivity paradox, on how long the slowdown will likely last, or on what to do about it.

Some economists have argued that secular stagnation is the reason behind this unusual situation, caused primarily by a reluctance of companies to invest and of consumers to spend.  Others feel that aging populations around the world, accompanied by slow or declining labor forces are major factors.  A few contend that there’s been a fundamental decline in innovation and productivity over the past few decades, compared to the period between 1870 and 1970.

Yet others argue that there have always been time lags between technology advances and their impact on economic growth.  While technologies may advance rapidly, humans and institutions change slowly.  And, the more transformative the technologies, - as is currently the case, - the longer it takes for their impact to be felt across economies and societies.

But, companies and industries are not the only ones trying to adjust to our fast changing digital economy.  Individuals are also experiencing their own version of the productivity paradox.  Personal computers, along with applications like word processing and spreadsheets introduced a whole new category of personal productivity tools in the 1980s. A decade later, the Internet and World Wide Web enabled people to easily communicate with each other, and gave them access to all kinds of information and applications.

Blockchain - the Networked Ecosystem is the Business

A few weeks ago I attended two back-to-back blockchain events in Toronto, - the Blockchain Research Institute All-Member Summit followed by the inaugural Blockchain Revolution Global conference.  Both events included a number of excellent talks and panels.  One of the presentations I particularly enjoyed was Scaling Blockchain for the Enterprise: Emerging Business Models, by IBM’s Andrew Martin and Smitha Soman.  Their presentation was based on their recently published report Building your blockchain advantage.

Since it first came to light a decade ago as the public, distributed ledger for the Bitcoin cryptocurrency, people have struggled to understand what blockchain is all about and what it’s truly good for.  This is not unusual for potentially transformative technologies in their early stages, as was the case with the Internet, and is still the case with AI.  The key question is whether blockchain has the potential to become a truly transformative technology over time.  With few exceptions, the answer is positive.

The essence of blockchain, notes the report, is that the unit of competition is the networked ecosystem, no longer a single enterprise.  “As blockchain adoption continues to gather momentum, organizations must approach their blockchain strategies with the same rigor and commitment as any other new and transformative strategies.  They can’t just fall back on prototypes alone.  They need to build a robust business case for blockchain that includes a fair incentive model to attract all the partners required for the success of their networks.”

A Novel Method for Measuring the Value of Free Digital Services

Gross domestic product (GDP) is the basic measure of a country’s overall economic output, based on the market value of all the goods and services the country produces.  Most measures of economic performance used by government officials to inform their policies and decisions are based on GDP figures.  But, concerns have long been raised about the adequacy of GDP-based measurements given the major changes that’ve taken place in economies around the world over the past several decades.

GDP is essentially a measure of production.  While suitable when economies were dominated by the production of physical goods, GDP does not adequately capture the growing share of services and increasingly complex solutions that characterize advanced economies.  Nor does it reflect important economic activity beyond production, such as income, consumption and living standards.

In 2008, a Commission on the Measurement of Economic Performance and Social Progress led by Nobel-prize winning economists Joseph Stiglitz and Amartya Sen was convened to look at the limits of GDP as an indicator of economic performance and progress.  “What we measure affects what we do; and if our measurements are flawed, decisions may be distorted.” noted its report.  The Commission recommended complementing classical measures of GDP and economic production with additional measurements that captured people’s well being, as well as factoring in measurements to help reflect the evolution of the economy into the future.

Over the past decade, a new set of concerns have arisen with the rise of the Internet-based digital economy.  How do you measure the value of the increasing amounts of free information goods available over the Internet, including Wikipedia articles, Google maps, Facebook interactions, smartphone apps and You Tube videos?

Once Lumbering, Now Innovative Incumbents Hit Their Stride

Last year, IBM’s Institute for Business Value published Incumbents Strike Back, a global C-suite study based on survey data from over 12,800 executives from 112 countries,  including CEOs, CFOs, CMOs, COOs, CIOs, and CHROs.

“Two decades after the Internet became a platform for transformation, we’re still wondering how it all might turn out,” notes the report.  “The signals aren’t always clear.  Today, winner-take-all organizations are on the rise, but collaborative ecosystems are flourishing as well.  Even in industries where competitive concentration is increasing, innovation hasn’t – as would be expected – flatlined.”

Overall, respondents were evenly divided on whether the key to the future are established markets or new ones.  But they stand in close agreement on two areas:  68% of executives said that their organizations will emphasize customer experience over products, and 63% said that they will continue to expand their networks of business partners.

There was also general agreement on the top external forces that will have the greatest impact in the 2-3 year timeframe: 69% said market factors such as increased competition and changing customer preferences; 63% said technological factors; and 61% said people skills, reflecting the increased importance of talent and ideas.

AI and the Evolution of History

Several weeks ago, I wrote about the event I attended on February 28 to celebrate the launch of MIT’s new Schwarzman College of Computing, - MIT’s strategic response to the rise of artificial intelligence, - a technology that will reshape “geopolitics, our economy, our daily lives and the very definition of work” in the decades to come.  The all-day celebration featured talks and panels on a wide variety of topics, some focused on innovative applications of AI technologies, others on the challenging issues raised by these powerful technologies.

A few weeks later I wrote about one of these challenging issues, the impact of AI on our social interactions, based on the talk by MIT professor Sherry Turkle on Rethinking Friction in Digital Culture, and a related article by Yale professor Nicholas Christakis on How AI Will Rewire US.

I now want to discuss the interview conducted by NY Times columnist Thomas Friedman with former US Secretary of State Dr. Henry Kissinger at the February 28 event.  The interview, - which can be seen in this video, - was based on a June, 2018 article by Dr. Kissinger in The Atlantic, - How the Enlightenment Ends: “Philosophically, intellectually - in every way - human society is unprepared for the rise of artificial intelligence.”

The Third Wave of the Digital Economy - Promises and Challenges

“The next wave of digital innovation is coming.  Countries can welcome it, prepare for it, and ride it to new heights of innovation and prosperity, or they can ignore the changing tide and miss the wave,” writes Robert Atkinson in The Task Ahead of Us.  Atkinson is founder and president of the Information Technology and Innovation Foundation (ITIF), a think tank focused on science and technology policy.

We’re now entering the third wave of the digital economy, says Atkinson.  The first was based on personal computing, the Internet, Web 1.0, and e-commerce.  The second brought us Web 2.0, big data, smartphones and cloud computing.  The emerging third wave promises to be significantly more connected, - including higher bandwidth and a wide variety of devices; more automated, - with more work being done by machines while integrating the physical and digital worlds; and more intelligent, - leveraging huge volumes of data and advanced algorithms to help us understand and deal with our increasingly complex world.

“Building and adopting the new connected, automated, and intelligent technology system will lead to enormous benefits globally, not least of which will be robust rates of productivity growth and improvements in living standards.  Moreover, these technologies will help address pressing global challenges related to the environment, public health, and transportation, among others.”

We’re in the early stages of this third wave.  5G, IoT, robotics, AI and other promising technologies are being embraced by early marketplace adopters, but their full-scale impact is still 5 to 10 years away.  We’re in a period not unlike the late 1980s, when it was clear that IT was on the brink of a major transition, but the Internet revolution didn’t arrive until the mid-1990s.

The Top Ten Emerging Technologies of 2018

For the past several years, the World Economic Forum (WEF) has published an annual list of the Top Ten Emerging Technologies that would be potentially disruptive over the next three to five years while also providing significant benefits to economies and societies.  Starting in 2017, the Top Ten list has been chosen in collaboration with Scientific American and published in an issue of the magazine.

The Top Ten Emerging Technologies 2018 was released in September, 2018.  The final list was selected by a steering group of experts from an initial list with more than 50 submissions.  Here are the 10 technologies comprising the 2018 list, along with the reasons cited in the report for their selection:

AI and our Social Interactions

I recently wrote about the event I attended on February 28 to celebrate the launch of MIT’s Schwarzman College of Computing.  This new interdisciplinary College is MIT’s response to the rise of artificial intelligence, - a profoundly powerful technology that will likely reshape our economy, society and personal lives in the decades to come.  But, attaining AI’s broad potential will require not only a continuing slew of technological innovations, but equally important research on the challenges our society must get ready for, including ethical issues, workplace disruptions, and human interactions.

The event included keynotes and panels on a wide variety of topics. One of the talks I found most interesting was Rethinking Friction in Digital Culture by Sherry Turkle, MIT Professor of the Social Studies of Science and Technology.

In her many writings and seminars, - including her 2011 best-seller Alone Together, -  Professor Turkle has long been warning about the impact of technology on our social interactions.  “Most of us here today were introduced to the idea of friction free as a really good thing,” she said at the start of her keynote.  “It’s an aesthetic of engineering efficiency, so why shouldn’t it be a really good thing?”  This idea that technical things should be friction free and smooth easily bleeds into other domains. “Efficiency becomes aspirational - in politics, in business, in education, and in our thinking about relationships.”

She cited a few examples of the kinds of friction free interactions she’s come across in her research on technology and social relationships.  People of all ages have told her that they prefer to text rather than talk, - even when interacting with a colleague in the next cubicle or office.  People have said to her that they prefer to text their spouse rather than have a face-to-face conversation.  Friction free, she explained, “is usually tied up with a hope for greater efficiency and less vulnerability.”

Globalization in Transition

I recently read two interesting reports on the state of globalization in 2019, one by The Economist, the second by the McKinsey Global Institute.  They both agree on the facts, - globalization and global trade have been undergoing considerable changes since the 2008 global financial crisis.  But, they differ in their explanations of the reasons for the changes.

“The golden age of globalisation, in 1990-2010, was something to behold,” notes The Economist in its overview article, The steam has gone out of globalization.  “Commerce soared as the cost of shifting goods in ships and planes fell, phone calls got cheaper, tariffs were cut and the financial system liberalised.”

But now, we’ve transitioned to a so-called Slobalisation era.  “Globalisation has slowed from light speed to a snail’s pace in the past decade for several reasons.  The cost of moving goods has stopped falling.  Multinational firms have found that global sprawl burns money and that local rivals often eat them alive.  Activity is shifting towards services, which are harder to sell across borders: scissors can be exported in 20ft-containers, hair stylists cannot.  And Chinese manufacturing has become more self-reliant, so needs to import fewer parts.”  Finally, we have the well-publicized trade wars and tariffs of the past two years.  All in all, the “rules of commerce are being rewritten around the world.”

The Productivity Paradox: Digital Abundance and Scarce Genius

Despite the relentless advances of digital technologies, productivity growth has been declining over the past decade.  Investment and interest rates have remained low, and income has continued to stagnate for the majority of workers in the US and other developed economies. The world seems to be stuck in a period of slow growth and no one is quite sure what’s causing this apparent contradiction.

Opinions abound.  Harvard economist Larry Summers has argued that secular stagnation is the reason behind this unusual situation, caused primarily by a reluctance of companies to invest and of consumers to spend, with the ensuing excessive savings acting as a drag on economic growth.

Some contend, - most prominently Northwestern University economist Robert Gordon, - that over the past few decades there’s been a fundamental decline in innovation and productivity.  Perhaps our current technologies, advanced and exciting as they might be, aren’t as transformative as the technologies from the period between 1870 and 1970, when we experienced high productivity growth and a rising standard of living. 

Demographic change, namely, the declining population and labor force growth around the world, is another potential cause for slow economic growth.  The global labor force grew at an average of 1.8% per year between 1960 and 2005, but since then it’s been growing at just 1.1% per year, and it’s already shrinking in a number of countries, including Japan, Germany and China.

Another possible explanation, - advanced by Erik Brynjolfsson, Daniel Rock, and Chad Syverson in AI and the Modern Productivity Paradox, - is that the paradox is primarily due to a time lag between technology advances and their impact on the economy.  We’ve been living in a time of major transformative technologies, - the Internet, smartphones, IoT, big data, AI - whose deployment and impact on productivity growth are still lagging.

While technologies may advance rapidly, humans and our institutions change slowly.  Moreover, the more transformative the technologies, the longer it takes for them to be embraced by companies and industries across the economy.  Leading edge firms are already benefiting from these advances, but most are still in the early learning stages.  Translating technological advances into productivity gains requires major transformations in business processes, organization and culture, - and these take time.

The New, Interdisciplinary, MIT Schwarzman College of Computing

A few months ago, MIT president Rafael Reif announced the launch of the Stephen A. Schwarzman College of Computing in an e-mail to the MIT community.  “This new College is our strategic response to a global phenomenon – the ubiquity of computing and the rise of AI…” wrote President Reif.  “To state the obvious, AI in particular is reshaping geopolitics, our economy, our daily lives and the very definition of work.  It is rapidly enabling new research in every discipline and new solutions to daunting problems.  At the same time, it is creating ethical strains and human consequences our society is not yet equipped to control or withstand.”

The new College of Computing is made possible by a $350 million foundational gift from Stephen Schwarzman, - chairman, CEO and co-founder of Blackstone, one of the world’s leading investment firms.  The gift is part of a  $1 billion commitment to reshape MIT to help it better address the continuing advances in technology in our 21st century digital economy, as well as their many applications , - both the exciting opportunities and the difficult challenges.

The College is envisioned as an interdisciplinary hub across all five of MIT’s existing schools: Engineering; Science; Humanities, Arts, and Social Sciences; Architecture and Planning; and the Sloan School of Management.  This MIT News announcement succinctly summarized the key objectives of the new College:

• reorient MIT to bring the power of computing and AI to all fields of study at MIT, allowing the future of computing and AI to be shaped by insights from all other disciplines

• create 50 new faculty positions that will be located both within the College and jointly with other departments across MIT - nearly doubling MIT’s academic capability in computing and AI

• give MIT’s five schools a shared structure for collaborative education, research, and innovation in computing and AI

• educate students in every discipline to responsibly use and develop AI and computing technologies to help make a better world; and

• transform education and research in public policy and ethical considerations relevant to computing and AI.

Fostering an Innovation Culture: Talent, Discipline and Leadership

Innovation has been a hot topic for the past few decades.  Companies all over the world have integrated innovation into their overall strategies and marketing campaigns.  Nations and regions have launched innovation initiatives in an attempt to attract such companies and their accompanying well-paying jobs.  But, as I have learned over my long career, managing innovation initiatives is actually quite hard, much harder than it may at first appear.

I was reminded of this point as I read The Hard Truth About Innovative Cultures, an article in a recent issue of the Harvard Business Review (HBR) by Harvard professor Gary Pisano.  “A culture conducive to innovation is not only good for a company’s bottom line,” writes Pisano.  “It also is something that both leaders and employees value in their organizations.”

Most everyone agrees that such a culture entails five key behaviors: tolerance for failure, willingness to experiment, psychological safety, collaborative, and non-hierarchical. “But despite the fact that innovative cultures are desirable and that most leaders claim to understand what they entail, they are hard to create and sustain.  This is puzzling.  How can practices apparently so universally loved - even fun - be so tricky to implement?”

The reason, answers Pisano, is that these much-liked behaviors are only one side of the coin, which must be counterbalanced with some tougher behaviors.  People love solving problems that seem impossible to everyone else and creating something qualitatively different from anything that came before.  But they will rarely perform at the necessary levels if they’re relaxed and happy.  True innovation is, in fact, not all that much fun.  In order to reach inside yourself and find that something extra needed for true innovation, you have to feel the stress that comes when you know that what you’re doing is absolutely crucial.  In the end, necessity is the mother of true innovation.

Despite All the Bad News that Surround Us… Is the World Actually Getting Better?

The World is Getting Quietly, Relentlessly Better is the title of a recent WSJ article by its chief economics commentator Greg Ip.  “If you spent 2018 mainlining misery about global warming, inequality, toxic politics or other anxieties, I’m here to break your addiction with some good news: The world got better last year, and it is going to get even better this year,” writes Ip in his opening paragraph.  “Poverty around the world is plummeting; half the world is now middle class; and illiteracy, disease and deadly violence are receding.  These things don’t make headlines because they are gradual, relentless and unsurprising.”

Ip’s article is mostly based on data insights from Our World in Data, a comprehensive website that quantifies the evolution of our global living conditions over the past few centuries.  Our World in Data (OWID) is an initiative of the Oxford Martin Programme on Global Development, led by economist Max Roser at the University of Oxford.

OWID analyzes longitudinal data on how the world has been changing over decades and centuries, as well as explaining the causes and consequences of those changes in its accompanying articles. It makes extensive use of visual aids, including interactive graphs and maps, to present its analyses and insights.  Its content is organized into 15 main sections:  population, health, food, energy, environment, technology, growth & inequality, work & life, public sector, global connections, war & peace, politics, violence & rights, education, media and culture, -  each of which further includes a number of subsections.

Let me summarize just a few of the key trends in the OWID website.

The Business Value of Resilience

The Industrial Revolution was “as much about process innovations that reduced waste and increased productivity as it was about the application of new technologies,” wrote Roger Martin in a recent Harvard Business Review (HBR) article, - The High Price of Efficiency.  Martin is professor and former dean of the Rotman School of Management at the University of Toronto, as well as an accomplished writer.

The belief that efficiency is fundamental to competitive advantage has turned management into a science, - taught in every business school on the planet, - whose objective is the elimination of waste, - whether of time, materials, or capital.

“Why would we not want managers to strive for an ever-more-efficient use of resources?,” asks Martin.  Of course we do.  But, an excessive focus on efficiency can produce startlingly negative effects.  To counterbalance such potential negative effects, companies should pay just as much attention to a less appreciated source of competitive advantage: resilience,  - “the ability to recover from difficulties - to spring back into shape after a shock.”

“Think of the difference between being adapted to an existing environment (which is what efficiency delivers) and being adaptable to changes in the environment.  Resilient systems are typically characterized by the very features - diversity and redundancy, or slack - that efficiency seeks to destroy.”

The Current State of AI Adoption

AI is seemingly everywhere.  In the past few years, the necessary ingredients have finally come together to propel AI beyond early adopters to a broader marketplace: powerful, inexpensive computer technologies; advanced algorithms; and huge amounts of data on almost any subject.  Newspapers and magazines are full of articles about the latest advances in machine learning and related AI technologies.

Two recent reports concluded that, over the next few decades, AI will be the biggest commercial opportunity for companies and nations.  AI advances have the potential to increase global GDP by up to 14% between now and 2030, the equivalent of an additional $14-15 trillion contribution to the world’s economy, and an annual average contribution to productivity growth of about 1.2 percent.

Over time, AI could become a transformative, general purpose technology like the steam engine, electricity, and the Internet. AI marketplace adoption will likely follow a typical S curve pattern, - that is, a relatively slow start in the early years, followed by a steep acceleration as the technology matures and firms learn how to best leverage AI for business value.

To get a better sense of the current state of AI adoption, McKinsey recently conducted a global online survey on the topic, garnering responses from over 2,000 participants across 10 industry sectors, 8 business functions and a wide range of regions and company sizes.  The survey asked about their progress in deploying nine major AI capabilities, including machine learning, computer vision, natural language text and speech processing, and robotic process automation.

Will Humans Be Better Off in an Increasingly AI-Based Future?

After decades of promise and hype, artificial intelligence is finally becoming one of the most important technologies of our era.  As AI continues to both spread and advance, will it enhance human capacities or will it lessen human autonomy and agency?  By 2030, will most people be better or worse off than they’re today?

To shed light on these very important questions, the Pew Research Center canvassed AI experts this past summer, including technologists developers, and business and policy leaders.  It received almost 1,000 responses, which formed the basis for its recently published report Artificial Intelligence and the Future of Humans.

Overall, 63% of respondents were optimistic, predicting that most individuals will mostly be better off, while 37% thought otherwise.  But optimistic or not, most experts expressed concerns about the long-term impact of AI on “the essential elements of being human.”

The survey further asked the experts to explain their hopes and fears, to sketch out how they envision human-machine interactions over the coming decade, and what actions should be taken to assure the best possible future. Many answered, and their detailed comments are organized into the report’s three main sections: concerns; suggested solutions; and expectations for the future.  Let me briefly discuss the key points in each section.

The Rise of Global, Superstar Firms, Sectors and Cities

In the 1990s, the Internet was supposed to usher a much more open, decentralized, democratic economy and society.  Startups with innovative business models where now able to reach customers anywhere, anytime.  Companies, from the largest to the smallest, could now transact with anyone around the world.  Vertically integrated firms became virtual enterprises, increasingly relying on supply chain partners for many of the functions once done in-house.  Experts noted that large firms were no longer necessary and would in fact be at a disadvantage in the emerging digital economy when competing against agile, innovative smaller companies.

Some even predicted that the Internet would lead to the decline of cities.  People could now work and shop from home; be in touch with their friends over e-mail, video calls, and text messaging; and get access to all kinds of information and entertainment online.  Why would anyone choose to live in a crowded, expensive, crime-prone urban area when they could lead a more relaxing, affordable life in an outer suburb or small town?

But, as we well know, it hasn’t quite worked out as expected.  Instead, we’ve seen the rise of the global superstar company, the unicorn startup, and the winner-take-all city.  As it’s turned out, the Internet’s universal reach and connectivity has led to increasingly powerful network effects and to the rise of platform economies.

Beyond Machine Learning: Capturing Cause-and-Effect Relationships

Artificial intelligence is rapidly becoming one of the most important technologies of our era.  Every day we can read about the latest AI advances from startups and large companies.  AI technologies  are approaching or surpassing human levels of performance in vision, speech recognition, language translation, and other human domains. Machine learning advances, like deep learning, have played a central role in AI’s recent achievements, giving computers the ability to be trained by ingesting and analyzing large amounts of data instead of being explicitly programmed.

Deep learning is a powerful statistical technique for classifying patterns using large training data sets and multi-layer AI neural networks.  It’s essentially a method for machines to learn from all kinds of data, whether structured or unstructured, that’s loosely modeled on the way a biological brain learns new capabilities.  Each artificial neural unit is connected to many other such units, and the links can be statistically strengthened or decreased based on the data used to train the system.  Each successive layer in a multi-layer network uses the output from the previous layer as input.

Machine learning can be applied to just about any domain of knowledge given our ability to gather valuable data in almost any area of interest.  But, machine learning methods are significantly narrower and more specialized than humans.  There are many tasks for which they’re not effective given the current state-of-the-art.  In an article recently published in Science, professors Erik Brynjolfsson and Tom Mitchell identified the key criteria that help distinguish tasks that are particularly suitable for machine learning from those that are not.  These include:

• Tasks that map well-defined inputs to well-defined outputs, - e.g., labeling images of specific animals, the probability of cancer in medical record, the likelihood of defaulting on a loan application;
• Large data sets exist or can be created containing such input-output pairs, - the bigger the training data sets the more accurate the learning;
• The capability being learned should be relatively static, - If the function changes rapidly, retraining is typically required, including the acquisition of new training data; and
• No need for detailed explanation of how the decision was made, - the methods behind a machine  learning recommendation, - subtle adjustments to the numerical weights that interconnect its huge number of artificial neurons, - are difficult to explain because they’re so different from those used by humans.

Blockchain Beyond the Hype

A recent issue of The Economist included a special report on cryptocurrencies and blockchains.  The Economist’s overall conclusion was that “Bitcoin has been a failure as a means of payment, but thrilling for speculators.”  Its assessment of blockchain was somewhat more positive.  “For blockchains, the jury is still out,… For all the technology’s potential, though, most attempts to use it remain tentative,…  The advantages of blockchains are often oversold.” 

In 2016, blockchain made the list of the World Economic Forum’s Top Ten Emerging Technologies.  That same year, blockchain also made its first appearance in Gartner’s yearly hype cycles.  Even The Economist has been guilty of overselling when it featured blockchain in the cover of its October 31, 2015 issue with the tag line “The Trust Machine: How the technology behind Bitcoin could change the world.” 

Is there too much hype surrounding blockchain?  Absolutely,… but not surprising.  All potentially transformative technologies are oversold in their early stages.  Remember the dot-com bubble of the late 1990s.  Blockchain is still in its early phases of experimentation and adoption.  Much work remains to be done on standards, platforms, interoperability, applications and governance. 

But, does blockchain have the potential to become a truly transformative technology over time?  Yes, said McKinsey in a recent article on the strategic value of blockchain beyond the hype.  The article starts out by acknowledging that all the hype around blockchain makes it difficult to nail down not just blockchain's long term strategic value, but also what it actually is and what it isn’t in the present. To make sure everyone is on the same page, the article first recaps what it calls “the nuts and bolts of blockchain.”  Let me start by summarizing blockchain’s nuts and bolts.

Redefining Work - Leveraging Human Capabilities in a Future of Expanding Automation

How will labor markets evolve in our 21st century digital economy?  What’s the likely future of jobs, given that our increasingly smart machines are now being applied to activities requiring intelligence and cognitive capabilities that not long ago were viewed as the exclusive domain of humans?  How will AI, robotics and other advanced technologies transform the very nature of work?

Over the past few years, a number of papers, reports and books have addressed these very important questions.  They generally conclude that AI will have a major impact on jobs and the very nature of work.  For the most part,  they view AI as mostly augmenting rather than replacing human capabilities, automating the more routine parts of a job and increasing the productivity and quality of workers, so they can focus on those aspect of the job that most require human attention.  Overall, few jobs will be entirely automated, but automation will likely transform the vast majority of occupations. 

A recent McKinsey report noted while there will likely be enough work to maintain full employment by 2030, the transition will be very challenging, “on a scale not seen since the transition of the labor force out of agriculture in the early 1900s in the United States and Europe, and more recently in in China.”  The report estimated that “up to 375 million workers, or 14 percent of the global workforce, may need to change occupations - and virtually all workers may need to adapt to work alongside machines in new ways.”

Given these predictions about the changing nature of work, what should companies do?  How should firms prepare for a brave new world where we can expect major economic dislocations along with the creation of new jobs, new business models and whole new industries, and where many people will be working alongside smart machines in whole new ways?

The Jobs Outlook for 2022

A few weeks ago, the World Economic Forum (WEF) released The Future of Jobs Report 2018.  The report takes an in-depth look at the world of work in what the WEF calls the Fourth Industrial Revolution. The report is based on a survey of over 300 chief human resource officers and top strategy executives from large global companies across 12 industry sectors.  These companies collectively represent more than 15 million employees, and conduct business in 20 developed and emerging economies which collectively account for about 70% of global GDP.

First introduced at its 2016 annual Davos Forum, the WEF positions the Fourth Industrial Revolution within the historical context of three previous industrial revolutions.  The First, - in the last third of the 18th century, - ushered the transition from hand-made goods to mechanized, machine-based production based on based on steam and water power.  The Second, - a century later, - revolved around steel, railroads, cars, chemicals, petroleum, electricity, the telephone and radio, leading to the age of mass production.  The Third, - starting in the 1960s, - saw the advent of digital technologies, computers, the IT industry, and the automation of process in just about all industries.

“Now a Fourth Industrial Revolution is building on the Third…” wrote WEF founder and chairman Klaus Schwab in a December, 2015 Foreign Affairs article.  “The possibilities of billions of people connected by mobile devices, with unprecedented processing power, storage capacity, and access to knowledge, are unlimited.  And these possibilities will be multiplied by emerging technology breakthroughs in fields such as artificial intelligence, robotics, the Internet of Things, autonomous vehicles, 3-D printing, nanotechnology, biotechnology, materials science, energy storage, and quantum computing.”

The Future of Jobs 2018 examines the potential of these advanced technologies to eliminate and create new jobs, as well as to improve the current workplace and prepare people for emerging jobs. Rather than looking at the future of work over the longer term, the report chose to examine the 2018-2022 period, which is within the planning horizon of the companies and executives that participated in the survey.

Blockchain’s Potential for Environmental Applications

In mid-September, the World Economic Forum (WEF) released Building Block(chain)s for a Better Planet, a report that examined how blockchain technologies could be harnessed to address serious environmental issues, better manage our shared global environment and help drive sustainable growth and value creation.  The report outlines some of the world’s most-pressing environmental challenges and highlights eight blockchain-based game changers that could lead to transformative solutions to these pressing problems.

The WEF report includes a short blockchain tutorial.  Blockchain is essentially “a new, decentralized and global computational infrastructure that could transform many existing processes in business, governance and society.”  Blockchain technologies promise to significantly improve the efficiency and security of business transactions and data sharing among participants in a global ecosystem, such as supply chains, financial services, and similar complex applications involving multiple institutions.

But, the hype surrounding blockchain, can tempt solution designers to try to use it for applications that it’s not suitable for.  The report recommends that designers first consider three key questions:

• Will blockchain solve your actual problem; is a distributed architecture vital to your solution?
• Have you built the right ecosystem of stakeholders; do they understand and trust how blockchain is being used?
• Can you acceptably manage the downside risks or unintended consequences, e.g., scalability, performance, implementation risks?

The 2018 MIT Inclusive Innovation Challenge

In 2016, MIT’s Initiative on the Digital Economy launched its first annual Inclusive Innovation Challenge (IIC).  The key objective of the IIC is to help create greater shared prosperity around the world by awarding over one million dollars in prizes each year to to entrepreneurs that are leveraging technology advances to reinvent the future of work.

“The IIC believes that Inclusive Innovation is an economic and moral imperative, and that the key question of our era isn’t what technology is going to do to our economy and society, but what we will do with technology.  By identifying and promoting the powerful global community of future of work visionaries, the IIC proactively accelerates the technology-driven solutions enabling greater economic opportunity for working people around the world facing the challenge of rapidly advancing digital progress.”

Entrepreneurs from around the globe compete for awards in four categories: income growth and job creation, skills development and opportunity matching, technology access, and financial inclusion. Approximately 1,500 organizations registered to compete this year, and 500 judges reviewed their applications.   

In 2018, rather than having one global competition as in the previous two years, there were five separate regional competitions, - North America, Latin America, Europe, Africa, and Asia, - each region selecting its own category winners.  A Grand Prize winner was then selected in each category from among the regional winners and each awarded $250,000.  The winners were announced at a gala event that took place in MIT on November 8.

A Biological Approach to Management

Darwinian principles seem to apply in business almost as much as in biology.  After analyzing the longevity of more than 30,000 public US firms over a 50-year span, Martin Reeves, Simon Levin, and Daichi Ueda noted in a 2016 HBR article, The Biology of Corporate Survival, that companies are disappearing faster than ever before.  “Public companies have a one in three chance of being delisted in the next five years, whether because of bankruptcy, liquidation, M&A, or other causes.  That’s six times the delisting rate of companies 40 years ago… Neither scale nor experience guards against an early demise.”

Biological systems have long been an inspiration in the study of complex systems.  In their HBR article, the authors argued that companies are not just like biological species, but in some important respects they’re actually identical to biological species.  Companies and biological systems are both what’s known as complex adaptive systems, that is, systems in which a perfect understanding of their individual components does not automatically lead to a perfect understanding of their overall system behavior.

Companies are an example of sociotechnical systems, that is, systems that have to deal with  complex technologies and infrastructures, and the even more complex issues associated with human and organizational behaviors.  Other examples include cities, government agencies, industries and economies.  The dynamic nature of their technology and human components, as well as their intricate interrelationships renders such systems increasingly unpredictable and accounts for their emergent behavior and unintended consequences.

It's All About the Business Model, - Not the Technology

In Reinvent Your Business Model, his recently published book, Mark Johnson argues that digital transformation and business model innovation are not the same thing.  New technology alone, - no matter how transformative, - is not enough to propel a business into the future.  The business model wrapped around the technology is the key to its success or failure.  Johnson is Senior Partner in Innosight, the strategy consulting firm he cofounded with Harvard Business School professor Clayton Christensen in 2000.  He’s been conducting research on business model innovation for over a decade, and in 2010 published Seizing the White Space.

Business model innovation has long been the domain of disruptive startups looking to compete against established companies by changing the rules of the game, - and, hopefully, creating new markets and reshaping entire industries.  But, it’s no longer enough for established companies to just roll out improved products and services based on their once-reliable business models.

“Building a great business and operating it well no longer guarantees you’ll be around in a hundred years, or even twenty,” notes Johnson.  “In 1965, the average length of time a company remained on the S&P 500 was thirty-three years.  By 1990, it had dropped to twenty years; in 2012, it was just eighteen.  Based on the 2017 churn rate, it is forecast that half of the S&P 500 will be replaced over the next ten years.”

Examples abound.  In the 1970s, Xerox PARC famously developed, - but didn’t commercialize, - some of the key innovations of the PC era, including the graphical user interface, the mouse and local area networks.  In 2010, Blockbuster filed for bankruptcy, a victim of Netflix’s new business models.  Done in by Apple’s iPhone and Android-based smartphones, the Blackberry, - once the undisputed leader in its market, - fell into a death spiral from which it never recovered. 

The Economic Value of Artificial Intelligence

 PwC recently released a report on the potential economic value of AI to different regions and industry sectors around the world.  The report defined AI, “as a collective term for computer systems that can sense their environment, think, learn, and take action in response to what they’re sensing and their objectives.”  By this broad definition, AI includes the automation of physical and cognitive tasks; assisting people to perform tasks better and faster; helping humans make better decisions; and automating decision making with no human intervention.

The report’s overriding finding is that AI is the biggest commercial opportunity for companies, industries and nations over the next few decades.  PwC estimates that AI advances will increase global GDP by up to 14% between now and 2030, the equivalent of an additional $15.7 trillion contribution to the world’s economy.

Around $6.6 trillion of the expected GDP growth will come from productivity gains, especially in the near term.  These include the continued automation of routine tasks, and the development of increasingly sophisticated tools to augment human capabilities.  Companies that are slow to adopt these AI-based productivity improvements will find themselves at a serious competitive disadvantage.

But, over time, increased consumer demand for AI-enhanced offerings will overtake productivity gains and result in an additional $9.1 trillion of GDP growth by 2030.  Moreover,  network effects, - that is, the more data and better insights companies are able to gather, the more appealing the products and services they’ll be able to develop, - will further increase consumer demand.  AI front-runners will gain an enormous competitive advantage through their ability to leverage this rich supply of customer data to shape product developments and business models, making it harder for slower moving competitors to catch up. 

Serverless Computing - An Innovative Approach to Software Development

In October of 2008, The Economist published a special report on a then relatively new, rapidly growing IT development, - cloud computing.  In the lead article, technology editor Ludwig Siegele defined cloud computing by first giving a very succinct history of computing:

“In the beginning computers were human. Then they took the shape of metal boxes, filling entire rooms before becoming ever smaller and more widespread.  Now they are evaporating altogether and becoming accessible from anywhere…  Now,… computing is taking on yet another new shape.  It is becoming more centralised again as some of the activity moves into data centres.  But more importantly, it is turning into what has come to be called a ‘cloud’, or collections of clouds.  Computing power will become more and more disembodied and will be consumed where and when it is needed…  It will allow digital technology to penetrate every nook and cranny of the economy and of society…”

I was reminded of Siegele’s decade-old article when recently learning about another, relatively new, IT innovation, - serverless computing, - a name that connotes the increasingly disembodied nature of computing.  I first came across the term in a Forrester report on the Top Emerging Technologies to Watch in 2018.

Serverless is an approach to software development for quickly building and deploying applications as a collection of loosely coupled modules and microservices.  According to Forrester, “Firms report a better software development experience, rapid scaling of services that compose applications, lower costs, and better infrastructure utilization when workloads are variable.  They also spend less time maintaining cloud infrastructure.” 

Automation and the Changing Demand for Workforce Skills

In 2015, the McKinsey Global Institute launched a multi-year study to explore the potential impact of automation technologies on jobs, organizations and the future of work.  In the intervening three years, the study has published a number of report on the subject.

The first report, published in November, 2015, explored whether we can look forward to vast improvements in productivity and quality of life, or whether automation will mostly threaten jobs, disrupt organizations, and strain the social fabric.  Based on an analysis of around 2,000 work activities across 800 different occupations, the report concluded that “fewer than 5 percent of occupations can be entirely automated using current technology.  However, about 60 percent of occupations could have 30 percent or more of their constituent activities automated.”  In other words, relatively few jobs will be entirely automated, but automation will likely transform the vast majority of occupations.

McKinsey’s December, 2017 report analyzed whether there will be enough work in the future.  The overall conclusion was that a growing technology-based economy will create a significant number of new occupations, - as has been the case in the past, - which will more than offset declines in occupations displaced by automation.  However, “while there may be enough work to maintain full employment to 2030 under most scenarios, the transitions will be very challenging - matching or even exceeding the scale of shifts out of agriculture and manufacturing we have seen in the past.”

Let me now discuss the more recent report published earlier this year, which examined the changes in skills required of human workers over the next 10-15 years.  To do so, the study analyzed how the total number of hours worked in 25 different skill areas has changed between 2002 and 2016 and estimated the expected change in hours worked by 2030.  This was done for the US and 5 Western European countries.  I’ll focus my discussion on the US skill changes, as the European changes were similar.

Social Physics and Cybercrime Detection

A few weeks ago I wrote about social physics, a new discipline that aims to help us better understand and predict the behavior of human groups.  Social physics is based on the premise that all event-data representing human activity, - e,g,, phone call records, credit card purchases, taxi rides, web activity, - contain a special set of group behavior patterns.  As long as the data involves human activity, - regardless of the type of data, the demographic of the users or the size of the data sets, - similar behavioral dynamics apply.  These patterns can be used to detect emerging behavioral trends before they can be observed by other data analytics techniques.

Physics, biology and other natural sciences have long relied on universal patterns or principles to detect a faint signal within a large data set, - i.e., the proverbial needle in a haystack.  It’s what has enabled the discovery of very short lived elementary particles in physics, - like the Higgs boson  in 2013, - amidst the huge amounts of data generated by high energy particle accelerators.  In biology, it’s given rise to DNA sequencing and its growing list of applications in medicine, biotechnology and other disciplines. 

It’s not surprising that evolutionary biology and natural selection have led to similar universal patterns in the behavior of human crowds.  Humans and our ancestors have evolved with the drive to learn from each other because it’s been a major part of our survival over millions of years.  And if a new behavior, - whether the result of an innovative idea like the discovery of tools, or a mutation like a larger brain size, - helps a human group better adapt to a changing environment, natural selection will favor the survival of that group over others.

Social physics originated in MIT’s Human Dynamics Lab based on research by professor Alex (Sandy) Pentland, his then postdoctoral associate Yaniv Altshuler and their various collaborators.  In 2014, Pentland and Altshuler co-founded Endor, an Israeli-based startup that leverages social physics methods to make fast accurate predictions by analyzing data derived from human behavior. 

Cryptocurrencies and Blockchains - How Are They Doing After 10 Years?

Bitcoin was created about a decade ago, with the release of the original design paper, Bitcoin: A Peer-to-Peer Electronic Cash System, under the pen name of Satoshi Nakamoto.  Bitcoin aimed to become a decentralized cryptocurrency and digital payment system that would enable the secure exchange of digital money without the need for central government authorities or financial intermediaries.  It introduced the blockchain, - which most everyone agrees is a truly brilliant architecture built on decades-old fundamental research in cryptography, distributed data, distributed computing, game theory and other advanced technologies.

How are they doing after 10 years?  The September 1 issue of The Economist includes a special report on cryptocurrencies and blockchains, with nine articles on the subject. The report’s overview article doesn’t mince words in articulating its overall assessment: “Bitcoin and other cryptocurrencies are useless.  For blockchains, the jury is still out.”

“Bitcoin has been a failure as a means of payment, but thrilling for speculators,” it further added.  Its price has been subject to wild fluctuations over the past two years.  It rose from around $600 in September, 2016, to $6,000 in September, 2017, reaching a peak of over $19,000 in December, 2017, before falling to around $7,000 earlier this year.  It’s been hovering between $6,500 and $7,500 for the past few months.  Other cryptocurrencies have experienced similar price fluctuations.  “That has made a few people very rich (just 100 accounts own 19% of all existing bitcoin), encouraged others to play for quick gains and left some nursing substantial losses.”

Solow Paradox 2.0: The Lagging Impact of Technology Advances on Productivity Growth

Fewer workers is one of the key reasons for our stagnant economic growth.  Over the coming decades, the labor force is expected to shrink in most parts of the world as fertility rates continue to decline, especially in advanced and emerging economies.  The US labor force is growing very slowly while fertility rates keep hitting record lows.

Our aging economies are thus dependent on productivity gains to drive long-term economic growth, future prosperity and higher standards of living.  Which is why few topics have generated as much concern among economists and policy makers as the sharp decline in productivity growth in the US and other advanced economies over the past decade, - despite accelerating technology advances.

“Labor productivity growth is near historic lows in the United States and much of Western Europe,” noted Solving the Productivity Puzzle, a report published earlier this year by the McKinsey Global Institute (MGI).  The report analyzed the productivity-growth declines across a sample of seven countries, - France, Germany, Italy, Spain, Sweden, the United Kingdom, and the United States, - which represent about 65% of the GDP of advanced economies.  Their average productivity growth in the 5 years between 2000 and 2004 was 2.4%.  A decade later, - in the 5 year period between 2010 and 2014, - their average productivity growth had declined to .5%.  While starting to pick up recently, productivity growth remains at or below 1 percent in many of the countries in the study, still quite low relative to historical levels.

Social Physics - Reinventing Analytics to Better Predict Human Behaviors

Social physics first emerged over 200 years ago as an attempt to understand society and human behavior using laws similar to those of the physical sciences.  But, it wasn’t until the past two decades that we finally had enough data, powerful computers and sophisticated mathematical algorithms to develop quantitative theories of human social interactions.  We were now able to reliably predict how large groups of people make decisions by analyzing how information and ideas flow from person to person.

“The engine that drives social physics is big data: the newly ubiquitous digital data now available about all aspects of human life,” wrote MIT professor Alex (Sandy) Pentland in his 2014 book Social Physics: How Good Ideas Spread - The Lessons from a New Science.  “Social physics functions by analyzing patterns of human experience and idea exchange within the digital bread crumbs we all leave behind as we move through the world, - call records, credit card transactions, and GPS location fixes, among others.  These data tell the story of everyday life by recording what each of us has chosen to do… Who we actually are is more accurately determined by where we spend our time and which things we buy, not just by what we say we do.”

The book was the result of over a decade’s worth of research in the Human Dynamics group at MIT’s Media Lab.  Pentland, along with his graduate students and research associates, partnered with a variety of companies to obtain and analyze real-world data, properly anonymized to protect the privacy of the individuals whose behavior was reflected in the data.  They eventually discovered that all event-data representing human activity contain a special set of social activity patterns regardless of what the data is about.  These patterns are common across all human activities and demographics, and can be used to detect emerging behavioral trends before they can be observed by any other technique. 

Deep Learning: Is it Approaching a Wall?

Deep learning and related machine learning advances have played a central role in AI’s recent achievements, giving computers the ability to be trained by ingesting and analyzing large amounts of data instead of being explicitly programmed.  In just the past two years, Google’s deep-learning-based AlphaGo defeated the world’s top Go players, surprising most AI experts who thought that it would take another 5 to 10 years to achieve such a milestone.  Similarly, when Google switched to its new deep learning AI system in late 2016, it achieved an overnight improvement in the quality of its machine translations roughly equal to the total gains that the previous program had accrued over its 10 year lifetime.

As is typically the case with major technology achievements, - e.g., the dot-com bubble, - deep learning has quickly climbed to the top of Gartner’s hype cycle, where all the excitement and publicity accompanying new, promising technologies often leads to inflated expectations, followed by disillusionment if the technology fails to deliver.  AI may be particularly prone to such hype cycles, as the notion of machines achieving or surpassing human levels of intelligence leads to feelings of wonder as well as fear.  Over the past several decades, AI has gone through a few such hype cycles, including the so-called AI winter in the 1980s that nearly killed the field.

In a recent article, Deep Learning: A Critical Appraisal, author and NYU professor Gary Marcus offers a serious assessment of deep learning.  He argues that, despite its considerable achievements over the past 5 years, deep learning may well be approaching a wall, an opinion apparently shared by University of Toronto professor Geoffrey Hinton, the so-called Godfather of Deep Learning.  

The Myth of the Washed-Up, Middle-Age Entrepreneur

Steve Jobs, Bill Gates, and Mark Zuckerberg were in their early 20s; Sergei Brin and Larry Page were 25; and Jeff Bezos was just 30 when they founded their world leading high-tech companies.  Their companies are truly in a class by themselves, even having their own, somewhat frightful acronym - FAMGA.  Their founders’ ages are not only evidence that young people can be highly successful entrepreneurs, but it’s led to the belief that they’re uniquely capable of coming up with big, transformational ideas.

“Young people are just smarter,” Zuckerberg told the audience of a 2007 VC conference, adding that successful start-ups should only employ young people with technical expertise.  In 2010, PayPal’s co-founder Peter Thiel created the Thiel Fellowships, a program that provides $100,000 over two years to would-be entrepreneurs 23 and under so they can drop out of school to work on their ideas.  “The stereotype of an entrepreneur is a college drop-out,” said a recent Economist article.

“Silicon Valley has become one of the most ageist places in America,” noted a 2014 New Republic article on The Brutal Ageism of Tech, where years of experience are considered obsolete.  “People under 35 are the people who make change happen,” said VC Vinod Khosla at a 2011 conference.  “People over 45 basically die in terms of new ideas” because they “keep falling back on old habits.”  Entrepreneur and VC Paul Graham said in a 2013 interview that investors tend to be biased against older founders.  “The cutoff in investors’ heads is 32… after 32, they start to be a little skeptical.”

These various statements remind me of the 1960s counterculture saying don’t trust anyone over 30.  But, are they justified?  Are young entrepreneurs more likely to produce high-growth firms?  Can middle-age founders in their 40s be successful? 

AI - the Creation of a Human-Centric Engineering Discipline

AI is rapidly becoming one of the most important technologies of our era.  Every day we can read about the latest AI advances from startups and large companies, including applications that not long ago were viewed as the exclusive domain of humans.  Over the past few years, the necessary ingredients have finally come together to propel AI beyond the research labs into the marketplace: powerful, inexpensive computer technologies; huge amounts of data; and advanced algorithms.

Machine learning  and related algorithms like deep learning, have played a major role in AI’s recent achievements.  Machine learning gives computers the ability to learn by ingesting and analyzing large amounts of data instead of being explicitly programmed.  It’s enabled the construction of AI algorithms that can be trained with lots and lots of sample inputs, which are subsequently applied to difficult AI problems like language translation, natural language processing, and playing championship-level Go.

Over the past several decades, AI has been besieged by rounds of hype which over-promised, under-delivered, and nearly killed the field.  Once more, a recent Gartner article positioned machine and deep learning at the top of their hype cycle, - when all the excitement, publicity and promising potential often leads to a peak of inflated expectations, risking falling into the trough of disillusionment if the technology fails to deliver.  Now that AI is finally reaching a tipping point of market acceptance, it’s particularly important to be cautious and not repeat past mistakes.

In Artificial Intelligence - The Revolution Hasn’t Happened Yet, UC Berkeley professor Michael I. Jordan aims to inject such a note of caution.  “AI has now become the mantra of our current era…  The idea that our era is somehow seeing the emergence of an intelligence in silicon that rivals our own entertains all of us  -  enthralling us and frightening us in equal measure.  And, unfortunately, it distracts us…  Whether or not we come to understand intelligence any time soon, we do have a major challenge on our hands in bringing together computers and humans in ways that enhance human life.”

The Identity Challenge: On the Internet, Nobody Knows You're a Dog

I recently read Better Identity in America, a report by the Better Identity Coalition, an organization launched earlier this year to focus on promoting the development and adoption of solutions for identity verification and authentication.  The report outlines a policy agenda for improving the privacy and security of digital systems and help combat identity fraud.

How bad is the problem?  Data breaches, large-scale fraud, and identity theft are becoming more common.  In 2017, there were 16.7 million victims of identity fraud in the US, causing a loss of $16.8 billion; there was a 44.7% increase in US data breaches between 2016 and 2017 and a 30% rise in online shopping fraud; 179 million personal information records were exposed to data breaches, 69% of which were identity theft incidents.

The report notes that “the ability to offer high-value transactions and services online is being tested more than ever, due in large part to the challenges of proving identity online. The lack of an easy, secure, reliable way for entities to verify identities or attributes of people they are dealing with online creates friction in commerce, leads to increased fraud and theft, degrades privacy, and hinders the availability of many services online.”

As the report reminds us, the extent of this challenge was famously captured back in 1993 by Peter Steiner’s New Yorker cartoon with the caption On the Internet, nobody knows you’re a dog.  25 year later, the cartoon still perfectly describes the identity challenge.  If anything, the challenge is even more serious in 2018, given that the volume and variety of online transaction services are greater than ever before.

An Agile, Incremental Approach to Business Process Automation

I’ve long believed that customer self-service was key to the success of e-business, - the IBM Internet strategy I was closely involved with in the mid-late 1990s.  It was quite revolutionary how easy it was to now do for yourself so many ordinary activities that previously required a phone call during office hours or a trip to a store or office.

Moreover, such e-business applications were relatively easy to develop.  By integrating their existing transaction and data base applications with a web front-end, - a strategy we succinctly described as Web + IT, - any business could now be in touch with its customers, employees, suppliers and partners at any time of the day or night, no matter where they were.  Companies were able to engage in their core activities in a more productive way by web-enabling their back-end systems, that is, linking their web front-ends to the presentation services of their back-end applications.

I was reminded of IBM’s e-business strategy when recently reading about Robotic Process Automation (RPA), a technology for automating business processes based on emulating the manual actions of a human at a keyboard.  RPA aims to improve the operational efficiency of office and service workers by automating tedious, repetitive, tasks, such as those associated with widely used horizontal processes in HR, Finance & Accounting and IT services.

RPA enables process automation at a fraction of the cost and time of classic software development.  Rather than automating a process by redesigning the overall back-end application, RPA interfaces with the back-end system by performing the same actions that a human does via the application’s user interface.  RPAs thus creates kind of software robots, or bots for short, that work alongside the humans.

The Emergence of a Blockchain-Based Token Economy

Blockchain Revolution, published in May of 2016 by Don Tapscott and Alex Tapscott, was one of the first books that explained the promise of blockchain technologies to the general public.  Its central argument is that for nearly four decades, the Internet has been great for reducing the costs of searching, collaborating, and exchanging information.  But, it has serious limitations for business and economic activity.  “Doing business on the Internet requires a leap of faith,” the book noted.  The Internet was designed to move information, but it’s lacked the necessary trust, security and privacy safeguards to move assets of value.  With blockchain, we’re now seeing the emergence of such an Internet of value.  “Now for the first time ever we have a native digital medium for value, through which we can manage, store, and transfer any asset.”

An updated edition of Blockchain Revolution was published this past June.  A lot has happened with blockchain in the intervening two years.  The updated edition explains some of these recent developments in a new preface, including cryptoassets, permissioned networks, identity and supply chains.  I’ll focus my comments on the emergence of a blockchain-based token economy, driven by the explosive growth in the value and variety of cryptoassets.

When the original book was published, the entire cryptoasset market had a value of $9 billion, - mostly dominated by the value of Bitcoin at $7 billions, while Ether, the Ethereum cryptocurreny, had reached around $1 billion.  The new edition estimates that as of March, 2018, the cryptoasset market was around $400 billion in size, a value subject to rapid fluctuations.  In addition, a wide variety of cryptoassets have been developed over the past two years. 

What Machine Learning Can and Cannot Do

Artificial intelligence is rapidly becoming one of the most important technologies of our era.  Every day we can read about the latest AI advances from startups and large companies.  Over the past few years, the necessary ingredients have come together to take AI across the threshold: powerful, inexpensive computer technologies; huge amounts of data; and advanced algorithms, especially machine learning.  Machine learning has enabled AI to get around one of its biggest obstacles, - the so-called Polanyi’s paradox.

Explicit knowledge is formal, codified, and can be readily explained to people and captured in a computer program.  But, tacit knowledge, a concept first introduced in the 1950s by scientist and philosopher Michael Polanyi, is the kind of knowledge we’re often not aware we have, and is therefore difficult to transfer to another person, let alone capture in a computer program.

“We can know more than we can tell,” said Polanyi in what’s become known as Polanyi’s paradox.  This common sense phrase succinctly captures the fact that we tacitly know a lot about the way the world works, yet aren’t able to explicitly describe this knowledge.  Tacit knowledge is best transmitted through personal interactions and practical experiences.  Everyday examples include speaking a language, riding a bike, and easily recognizing many different people, animals and objects.

Machine learning, and related advances like deep learning, have enabled computers to acquire tacit knowledge by being trained with lots and lots of sample inputs, thus learning by analyzing large amounts of data instead of being explicitly programmed.  Machine learning methods are now being applied to vision, speech recognition, language translation, and other capabilities that not long ago seemed impossible but are now approaching or surpassing human levels of performance in a number of domains.

The Transformative Power of Analytics - The Houston Astros: a Case Study

In 2013, the Houston Astros finished the season with a 51-111 record, - the worst record in the history of the franchise, having also lost over 100 games in the previous two years.  In 2017, the Astros won 101 games, finished first in the American League West Division, and went on to win their first ever World Series.  How did the Astros go from worst team record to first World Series victory in only four years?

The answer, in a nutshell, is analytics.  In December, 2011 the Astros hired Jeff Luhnow from the St Louis Cardinals as their General Manager.  As VP of scouting and player development in St Louis, Luhnow built a strong analytics department and enjoyed great success as one of the top talent producers in baseball, helping the Cardinals win the 2011 World Series as well as reach the playoffs from 2012 to 2015.  Luhnow then brought his analytics and management skills to Houston and proceeded to transform the team into a top contender in a short few years.

Today, just every major sports team makes extensive use of sports analytics, but none more so than Major League Baseball (MLB) teams.  Baseball has long been a game of statistics, collecting and analyzing vast amounts of data going back to the founding of the MLB in the years following the Civil War. 

Top MLB players are constantly compared not just to other contemporaneous players, but to other top players across the long history of the game, - a history that was very nicely depicted in Baseball, Ken Burns excellent documentary miniseries. Babe Ruth, Willie Mays, Mickey Mantle, Hank Aaron and countless other players are never forgotten in the world of baseball statistics.  For those of us who are fans, - as I am, not surprisingly given my Cuban roots, - baseball’s rich history is a major part of our enjoyment of the game. 

Are Innovation and R&D Yielding Decreasing Returns?

Given the pace of technological change, we tend to think of our age as the most innovative ever.  But over the past several years, a number of economists have argued that increasing R&D efforts are yielding decreasing returns.

Has the ideas machine broken down?, asked The Economist  in a January, 2012 article that examined the growing concerns that we may be in a long-term period of slow innovation despite our rapidly advancing technologies.  “With the pace of technological change making heads spin, we tend to think of our age as the most innovative ever,” said The Economist.  “We have smartphones and supercomputers, big data and nanotechnologies, gene therapy and stem-cell transplants. Governments, universities and firms together spend around $1.4 trillion a year on R&D, more than ever before.”  But, perhaps these don’t quite compare with modern sanitation, electricity, cars, planes, the telephone, and antibiotics.  These innovations, first developed in the late 19th and early 20th century, have long been transforming the lives of billions.

In a September, 2012 paper, Northwestern University economist Robert Gordon questioned the generally accepted assumption that economic growth is a continuous process that will persist forever.  He wrote that the slow growth we’ve been experiencing in the US and other advanced economies isn’t cyclical, but rather evidence that long-term economic growth may be grinding to a halt.

The rapid growth and rising per-capita incomes we experienced at the height of the Industrial Revolution, - between 1870 and 1970, - may have been a unique episode in human history.  Since the 1970s, US productivity and income growth have dipped sharply except for an Internet-driven productivity boost between1996 and 2004.  Innovation may be hitting a wall of diminishing returns.  There was little growth before 1800, and there might conceivable be little growth in the future.

A similar pessimistic view was expressed by George Mason University economist Tyler Cowen in his 2011 book The Great Stagnation.  According to Cowen, over the past two centuries the US economy has enjoyed lots of low-hanging fruit, including a vast, resource rich land, waves of immigrant labor, access to education and the technological advances of the Industrial Revolution.  But, Cowen believes that we are at a technological plateau, and wonders whether long term growth is still possible because the supply of low-hanging economic fruit is nearly exhausted.

Getting on the AI Learning Curve: A Pragmatic, Incremental Approach

After decades of promise and hype, AI is now seemingly everywhere.  Over the past several years, the necessary ingredients have come together to propel AI beyond the research labs into the marketplace: powerful, inexpensive computer technologies; huge amounts of data; and advanced algorithms including machine learning.

While AI is likely to become one of the most important technologies of our era, we’re still in the early stages of deployment, especially outside leading-edge technology companies.  But, as AI continues its rapid progress, it’s not too early to ask a few important questions: What is AI’s overall value to the economy? What are the biggest application opportunities?; and, what are AI’s most serious challenges and limitations?

To address these questions, McKinsey recently published a discussion paper on the marketplace potential of AI.  The paper is particularly focused on machine learning and related technologies, and is based on a detail analysis of more that 400 use cases across 19 industries and 9 business functions.

“Two-thirds of the opportunities to use AI are in improving the performance of existing analytical use cases,” is the paper’s overriding finding.  This is a very interesting insight.  AI is now being successfully applied to tasks that not long ago were viewed as the exclusive domain of humans, - machine translation, natural language processing, defeating the world’s top Go players, - but only 16% of the use cases studied by McKinsey are greenfield cases, where only machine learning techniques can be used.  For the vast majority of the use cases, 69%, the key value of machine learning is to improve performance beyond that provided by traditional analytic techniques.  And, in the remaining 15% of cases, machine learning provided limited additional performance over existing analytical methods. 

Education, Work and US Leadership in the 21st Century

A few weeks ago, the Council on Foreign Relations (CFR) released The Work Ahead - Machines, Skills, and U.S. Leadership in the Twenty-First Century, a report by a CFR-sponsored Task Force to assess the future of work and its implications for the US economy and national security.  The Task Force was led by Penny Pritzker, - former Secretary of Commerce and founder and chair of PSP Partners, and by John Engler, - former Governor of Michigan and interim President of Michigan State University.

Their comprehensive report, - over 150 pages and 276 citations, - explored in great depth the changing nature of work as global competition and advanced technologies like AI, robotics, and smart IoT devices transform jobs and careers.  It states right up front that “The most important challenge facing the United States - given the seismic forces of innovation, automation, and globalization that are changing the nature of work - is to create better pathways for all Americans to adapt and thrive.  The country’s future as a stable, strong nation willing and able to devote the necessary resources and attention to meeting international challenges depends on rebuilding the links among work, opportunity, and economic security.”

For much of the 20th century, technology and globalization helped lead America to its leadership position in the world stage.  Underpinning this US leadership was the American Dream, - the promise that anyone can get ahead and achieve success and prosperity through talent and hard work.  But this promise has been eroding for decades.  For many of its citizens, the American Dream has been steadily disappearing.

Technology advances have led to massive innovations and efficiencies, enabling companies to get the same work done with significantly fewer people.  At the same time, many US-headquartered companies are truly global, doing business all over the world.  Beyond outsourcing jobs to countries with lower labor costs they’ve been investing and adding jobs where the demand is highest, - which has often been in faster growing emerging markets.

The US thus faces two major challenges: “creating new work opportunities, better career paths, and higher incomes for its people, while developing a workforce that will ensure U.S. competitive success in a global economy that will continue to be reshaped by technology and trade.” 

The 2018 Inclusive Internet Index

Earlier this year, the Economist Intelligence Unit (EIU) published the Inclusive Internet Index 2018.  Now in its second year, the Index analyzes and compares the current state of the Internet across 86 countries, ranging from advanced to developing economies and covering 91% of the world’s population.  Its key objective is to help policymakers understand the key factors necessary for the wide, inclusive use of the Internet in their respective countries.

Countries are evaluated based on 54 indicators organized around four major categories:

• Availability,  which captures the quality of breadth of the infrastructure available for Internet access, including network availability, access points for landline and mobile connections, and the basic electricity infrastructure needed to support Internet connectivity in urban and rural areas.
• Affordability, which measures the cost of Internet access relative to income, the competitive environment for wireless and broadband operators and the measures taken to decrease costs and promote access.
• Relevance, which looks at the availability of Internet content in the local language(s) and the value of being connected to get access to relevant services like news, entertainment, health advice and business and financial information.
• Readiness, which examines the capacity to take advantage of accessing the Internet, including level of literacy, educational attainment, cultural acceptance, privacy and security, and trust in the sources of online information.

Each country is assigned a score for each of the four categories, as well as an overall index score. 

The Impact of AI on R&D and Innovation

For the past couple of centuries, general-purpose technologies (GPTs) have been the key drivers of productivity and economic growth, - thanks to their rapid improvements in price and performance, pervasive applications, and ability to spur complementary innovations across a wide variety of industries.  The steam engine, electricity and the internal combustion engine are prominent examples of GPTs in the 18th and 19th century.  More recently, semiconductors, computers and the Internet have led to the digital revolution of the past several decades.

Beyond innovations in existing sectors, the rapidly improving price/performance of GPTs have led over time to the creation of whole new applications and industries.  For example, the steady declines in the price of electricity-generated power and the improvement in the efficiency of electric motors led to the radical transformation of manufacturing in the early part of the 20th century with the advent of the assembly line.  It also led to the creation of the consumer appliance industry, e.g., refrigerators, dishwashers, washing machines.  Similarly, as the semiconductor industry took off, it led to the historical transition from the industrial economy of the past two centuries to our ongoing digital economy.

How about artificial intelligence?  Beyond its use by leading edge technology companies, we’re still in the early stages of AI deployment.  It’s only been in the last few years that major advances in machine learning have taken AI from the lab to early adopters in the marketplace.  While considerable innovations and investments are required for its wider deployment, AI is likely to become one of the most important GPTs in the 21st century.