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Changing technology presents a double-edged sword for the world economy. Disruptive start-ups will probably remain important, particularly if new products are deflationary or challenge established players.
“The emergence of all kinds of new technologies, such as the development of increasingly powerful computer chips and the advance of the internet as a distribution channel, is dividing the world into two camps,” says Lukas Daalder, Chief Investment Officer of Robeco Investment Solutions.
“On the one hand, there are those who believe the combination of these trends will provide a solution to all our economic and climatic problems. The people that believe in this scenario are the advocates of the school of exponential growth, who extend every growth rate into infinity.”
“At the other end of the spectrum, there are those who have serious doubts about the potential that these new technologies offer. They point to the loss of jobs associated with the ongoing growth of robotics and automation, and the emergence of ‘disruptive businesses’ is doing more harm than good, leading only to economic chaos. Reality probably lies somewhere in between.”
Change at the speed of light
Daalder says the rise of smartphones, from a niche product five years ago to a mainstream device today, is a case in point. However, development of the smartphone was led by the mighty Apple and other tech giants. Future innovation is more likely to come from disruptive start-ups, he says.
And the speed at which innovation can take hold still has the power to surprise. It took 75 years for the telephone to become in general use, whereas Facebook went from founder Mark Zuckerberg’s university dorm room to one of the world’s largest companies in less than five years. Meanwhile, the much-admired ‘Moore’s Law’, in which the capacity of new microchips doubles every two years while their price halves, is becoming redundant by the advent of quantum technology.
‘Disruptive start-ups could be bad for the shares of established companies’
“As a result, the ‘old’ economy has too little time to adapt to these changes, which could have major social consequences. Examples are students being trained for jobs that may no longer exist in four years’ time, or pension funds being confronted with a sudden drying up of capital inflows,” he says. “In the case of the self-driving car, it is difficult to see what professional drivers and insurance companies will do if it is introduced on a large scale.”
Daalder says a side-effect of new technology is that it is deflationary, which would encourage central banks to keep interest rates low, which means bond yields would remain low. For equities, disruptive start-ups could be negative for established companies, but it would depend on final demand. Productivity gains from innovation and any economic growth associated with new technology would however be more positive for equity markets generally.
The wider impact on the economy and financial markets could be either positive or negative – the double-edged sword – as shown in the table below. “There are more negative than positive points, but much depends on the weight given to the different elements,” says Daalder. “For instance, a true techno-optimist will hold that new breakthroughs will be all-decisive, tipping the scales to the positive side.”
Being a ‘techno-realist’
The likely impact of innovation, detailed in a special section for Expected Returns entitled ‘The economic effects of the technological revolution’ builds on a previous examination of the future, in which Daalder described himself as a ‘techno-realist.’
“If you ask me whether the next 20 years will be boring and marked by stagnation or vibrant with highs and lows, I would definitely go for the second scenario,” he commented in the July 2015 article. “Yes, there are sectors that will be damaged by technological developments such as publishers and the music industry. But at the same time there is a revolution underway that for the most part has gone under the radar of the traditional calculations used to measure economic growth. The value of all that digitization in those sectors simply cannot be 'zero'.”