ICangles Investment Post…

Periods of prolonged economic prosperity are driven by technology innovations. Today’s low growth economic paradigm stems in large part from the absence of such a driver. Growth in the nineteen eighties and nineties was driven by microprocessor innovation. In the middle of the twentieth century it was the oil economy characterized by the internal combustion engine. Preceding this, the Roaring Twenties witnessed the electrification of the world. It’s a regular pattern of periods of wealth creation around disruptive technologies interspersed with periods of economic turbulence. The good news is despite today’s poor economy this long cycle argues that another innovation and period of growth isn’t that far off. Some educated guesses about the nature of the next big thing driving a prolonged boom in the stock market can even be made.

Whether it was the steam engine with railroads or the internal combustion engine with highways and airports, economically transformative technologies can be spotted by their surrounding massive infrastructure. In short once a new technology is big enough to begin driving the global economy you don’t have to guess what it is—the infrastructure footprint is too big to miss once you look. Until such infrastructure is developed though, it is a bit of a guessing game as to the shape of the next big thing. The good news is that once that big thing arrives there is plenty of time to recognize the fact and act. Even though no such new technology is quite here yet, however, there is no harm around speculating over some likely candidates for consideration.

Three reasonable possibilities to toss out for drivers of new eras of prosperity are: photon-based computing, fuel cells and robotics. Photon-based computing is likely more a matter of when than if. Today’s computers are struggling against performance limitations. Just as the end of the era of prosperity around the internal combustion engine was characterized with energy crisis, so also is the end of innovation around the microprocessor. Significant speed gains are impossible to realize because at current feature sizes microprocessors simply leak the additional energy out that is pumped in. But a move away from electrons to faster photons would unleash a new era of performance improvements. And this year there was a breakthrough from an international research team claiming photon-based computing is now as little as five years away.

Alternatively, many periods of growth have been driven by new energy technologies from the steam engine to electricity and the internal combustion engine. A lot of people have been optimistic about clean energy technologies. Personally I’ve been a bit dubious given the cost barriers that so far have required government subsidies to make these technologies cost competitive. But if you expand the definition of clean technology to include any energy technology that is simply more efficient things get interesting. The Bloom Box is a fuel cell technology that utilizes fossil fuels and emits carbon dioxide, but does so at high levels of efficiency. Beta systems are already in installation at companies, like eBay, Staples, Google and FedEx, supplying power. There is about four hundred million dollars of venture capital money betting this will be the next big thing, and the founder is predicting residential commercial unit availability in five to ten years.

Sometimes disruptive technologies have involved reducing the need for human labor. In this class of innovations is the assembly line, interchangeable parts and the cotton gin. Like photon-based computing, another innovation that is likely more a matter of when than if is robotics. Japan, with its aging population and homogenous society, which makes immigrant absorption difficult, has heavily invested in robotics. Another big investor in robotics and related advanced  electromechanical systems is the U.S. Department of Defense. Such technology could revolutionize the low-skilled labor market. It’s pretty easy to imagine for instance delivery trucks piloting themselves based on the technology around autonomous weapons systems. Robots of course don’t need vacations, weekends off, pensions, medical insurance, or drug testing.

Then again maybe it will be all of these things or perhaps it will be none. The next big thing could come seemingly out of nowhere. For instance in life sciences a breakthrough was announced just a few weeks ago in anti-aging research. The potential down the road of allowing workers to be more productive for many years longer is an economic game changer bigger than the development of anti-malaria treatments in the nineteenth century. However, one thing photon-based computing, fuel cells and robotics have going for them is that they have proofs of concepts that can be evaluated along with timelines of as little as five years being seriously proposed in the first two instances. Interestingly, those time frames fit nicely with the historical pattern from the last two cycles of about two decade periods of boom followed by about decade and a half periods of bust.

If one dates the start of the current period of economic under performance beginning with the bursting of the dotcom bubble in 2000 another five years or so would make for about a fifteen year period of poor performance basically inline with 1929-1941 and 1966-1981. A logical question is why do disruptive technologies come up at such regular intervals. The answer to that right now can be seen if one looks at the current corporate landscape. Back in the nineties there were good opportunities for productive investments for startups and established companies. After the dotcom bubble burst companies focused on their bottom lines and strengthening their balance sheets, rather than investments. That brings us to today. Corporate America is flush with cash, management as is normal doesn’t want to give it back to shareholders and therefore needs to find new sources of growth, but existing markets are mature.

As a result a lot of work is going on today to develop technologies outside of core markets. A recent example of this is Intel’s acquisitions of software companies Wind River and McAfee, as it looks to blend hardware and software technologies together. Now I don’t think hardware/software co-design is the next big thing, although it is an important new growth market in the semiconductor world. But the Intel example is a clear illustration of companies innovating beyond their core market. And in the technology companies I interact with I’ve seen a similar willingness for leaders to innovate beyond their core markets in search of growth. Large pools of available capital at companies and financial firms, coupled with low rates of return associated with existing technologies, is now driving innovation into new areas.

All of this comes with one important caveat. Disruptive technologies do exactly as the name implies and disrupt the economy. The associated growth comes with pains. Greater productivity results in jobs associated with the “old” economy disappearing. But greater productivity means not just the creation of new jobs, but a greater share of individual income being available for new uses. For instance with a more productive energy technology that lowers costs, unlike many of today’s more expensive albeit cleaner green energy technologies, consumers and businesses are left with more money to spend on other areas of the economy. Real economic growth means greater productivity and more real output. Those conditions don’t change. Yet the technology landscape and real, sustainable growth potential of the economy does change, and is likely at some point in the next decade to improve significantly.

UPDATE on February 10, 2011 the Economist posted the article “Print me a Stradivarius” on the potential around adaptive manufacturing technology.