Digital Economy Dispatch #093 -- Why is Digital Transformation Taking So Long?

Digital Economy Dispatch #09319th June 2022

Why is Digital Transformation Taking So Long?

It has all gone a bit pair-shaped, hasn’t it? No matter which way you turn right now, you hear more about the on-going negative effects of the pandemic, sky rocketing energy prices, environmental disasters, chaos for travellers facing queues and cancellations, significant gaps in product supply chains, challenges to reboot the economy, and so much more. As we witness the disruption to people’s lives and livelihoods, it is fair to say that this is not exactly the “golden digital age” that many of us had been hoping for.

It will continue to be a very difficult time for many individuals, families, communities, and organizations. Yet, however painful and confusing this may be, it is essential to try to examine the current state in more objective ways to see if we can make some sense of what is going on. Is there a pattern to what is happening? Can we reasonable compare the challenges we face today with similar periods in the past? Do we see previous patterns that indicate how we might emerge from these difficulties?

For answers to these questions, the most meaningful commentaries I have read come from Carlotta Perez. She is a British-Venezuelan scholar working over many years to understand the social and technological impact of past technology revolutions. Her work is highly regarded and widely cited by academics and popular press. It is worth taking a few minutes to review how she puts today’s challenges into context based on what we have learned from previous periods of technological upheaval.

The Path of Technological Change

From a broad viewpoint, one way to see today’s disruptive change is as a significant part of a new phase in our economic story. Carlota Perez holds that there is a repeating sequence of “technological revolution–financial bubble–collapse–golden age–political unrest” that recurs about every half century and is based on “causal mechanisms that are in the nature of capitalism.” Over a 50-60 year period, this cycle repeats. Given her view that the Information age began in the 1970’s and has dominated economics ever since, it seems appropriate that we should be in the late stages of that cycle and significantly enjoying the “golden age” for all organizations.

From Perez’s perspective, these cycles follow a familiar pattern. For about 20 to 30 years, in a period that she calls installation, these technologies are rapidly advanced funded by speculative high-risk investment chasing rapid returns. The speed that this happens creates a knowledge, skills, and wealth disparity creating a bubble which bursts to be followed by a crisis period During this extensive period, efforts to get back to normal are made involving regulation and fiscal stimulus to evolve organizations and upskill individuals. This creates conditions for a “golden age” for 20 to 30 years stable economic growth funded by production capital, not speculation. Perez calls this period deployment. It is during this period when the maximum benefit occurs for the widest parts of our society, including those who felt left behind just a few years before.

So What Just Happened?

The question, then, is where we see ourselves in this sequence of “technological revolution–financial bubble–collapse–golden age–political unrest” and whether the digital revolution currently being experienced will face the same fate as the previous 5 revolutions she identifies.

In her most recent writings, Perez directly addresses the question of why this “golden age” of the IT revolution has been delayed and whether we will soon transition to the “deployment” period in this phase. Her analysis is revealing.

She begins by recognizing the that the current situation is out of line with previous revolutions, and highlights that we seem to be trapped in the “turning point” between “installation” and “deployment”. She places the blame on this delay in 3 areas:

  1. Rather than a shift in manual labour, this revolution is about mental power and intellectual change. By their nature, these are more complex and involve more time to take effect.

  2. This is a global change and requires greater propagation across countries and cultures.

  3. The underlying technologies creating these changes based on the internet are newer hence less evenly deployed across different domains. Its robust adoption requires additional effort.

These all ring true and provide a useful commentary on what we see happening in many organizations and institutions. And, of course, into this we also must factor a variety of other issues: the Covid pandemic; the rise of China as a significant source of manual labour; and the inertia of a system where key leadership positions are held much longer as people stay in power well into their 70s or 80s.

Follow the Money!

Yet, Perez sees that biggest barrier to moving us to the new “golden age” lies elsewhere. In particular, it is the financing that will make the difference. And right now, the finance has been separated from production. The investments made from public sources have gone into banks and other institutions to prop up existing ways of working. While the private financing has placed insufficient attention on solving “real world” problems” in favour of chasing the high returns from new digital assets such as cyptocurrencies, space travel, and inventing the “virtual world”.

As a consequence, this has created instability across many areas. In any revolution, Perez emphasizes the importance of managing the relationship between science, technology, politics, economics, and culture. The current financial investment strategies, in her view, have only sought to bring instability to this critical balance.

The Digital Future

It is hard not to be overwhelmed by the unpredictability and uncertainty of events that surround us today. How can we make sense of digital transformation disruption in light of this chaos? The latest analysis by Carlota Perez places these challenges into the context of 5 previous technological revolutions, provides a framework we can use to make sense of the turbulence we see around us, and gives us the steps to a “golden age” to come. It is essential reading for everyone trying to understand more about the foundations of our digital age.

Digital Economy Tidbits

A long delayed golden age: or why has the ICT ‘installation period’ lasted so long? Link.

For some time, Carlota Perez has been one of the most important voices in the discussions about the impact of technological change and the future of our digital world. This recent short article is perhaps the most insightful and meaningful analysis I have read on the current challenges in digital transformation. Highly recommended reading.

In particular, a couple of things in this article struck me.

She describes the delays in moving forward into the digital age and makes several important comments. One that made me smile was her view that leaders holding on to their positions for too long is holding back the new thinking that needs to emerge:

…the longer lives that have allowed traditional leaders in politics and business to remain in place until their 70s and even 80s.

But the most surprising for me is her comment that:

…the most acute impediment to a golden age deployment is the continued decoupling of finance from production.

Her view is that:

The appreciation of assets with less and less connection with what happens in the real economy results in a sort of ‘differential inflation’ where asset owners become richer and salary earners poorer, in both real and relative terms.