The Second Machine Age and Business Evolution


I just finished reading a new book titled The Second Machine Age written by Andrew McAfee and Erik Brynjolfsson – both from MIT. The book is a must read for leaders everywhere. Its journey offers a view into the potential societal, economic, and business impact of technological advancement in the digital age. Although I am fascinated by each of these, my interest in summarizing this book is to connect their perspective to the future of business. Consistent with my recent disruption theme, the question is: how does the world that the authors envision impact the future of business?

Over 200 years ago the first industrial revolution arrived to bend the curve of human history almost ninety degrees. Driven primarily by the steam engine, social development was impacted like no time before it. Anthropologist Ian Morris defined social development as a group’s ability to master its physical and intellectual environment to get things done. It unfolded over several decades and is regarded as the biggest and fastest transformation in the history of the world. The resulting Innovations allowed us to overcome the limitations of muscle power (both animal and human) and ushered in the world’s first machine age. Morris famously said that it made a mockery of all that had come before it.

The second industrial revolution was driven by three innovations: electricity, the internal combustion engine, and indoor plumbing. These inventions were so important and far reaching that they took a full 100 years to have their effect. As the authors describe, both industrial revolutions had one thing in common: the technological innovation spread throughout many if not most industries. The steam engine for instance did not just increase the amount of power available to factories, but it revolutionized land and sea travel. Electricity lit factories, office buildings, and warehouses and led to innovations like air conditioning. According to the authors, economists call innovations like these general purpose technologies (GPTs). The consensus on how to recognize these GPTs is that they should be pervasive, improving over time, and able to spawn new innovations. They build the case that digital technologies meet all of these requirements and belong in the same category as the steam engine and electricity. I am a firm believer that this new age will be structurally disruptive and transformative, while as the authors say, ushering in a new age of innovation and growth.

The crux of this belief lies with the foundational pieces of digital technology in place today, and what the authors see as an inflection point – where computer technology once again bends the curve sharply. They advance the argument that digital progress is doing for our mental power what the steam engine did for our muscle power. As such, mental power is at least as important to social development as muscle power. To extend the argument further, one can conclude that the coming transformative period is likely to be as least as impactful as the industrial revolution – and I personally believe that the second machine age will be more impactful. Andrew McAfee himself has said: “It will make a mockery of all that has come before it”. But as the book also points out, it comes with considerable challenge.

But why is this happening now? The authors suggest that three forces are driving breakthroughs that are surpassing our recent expectations and theories. They describe the following forces: exponential, digital, and combinatorial. In the second machine age, exponential technology growth is likely to be quite staggering. Moore’s law enabled this exponential growth, and today it is common to see a doubling of computing power every 18 months. This constant doubling has delivered the advances we see today – many of which appeared after 2006. The digital technology at the heart of these advances is both fast and cheap enough to enable them. These building blocks of computing have been improving at exponential rates.

Digital is the second force driving breakthroughs, in part because of its ability to foster innovation. Two very critical properties of digital make this possible: digital information is non-rival (it cannot be used up) and it has close to a zero marginal cost of reproduction. These two properties make it possible for innovations like Waze, where digital maps are combined with GPS information, social, and sensor data. Digital progress enabled Waze to overcome the limitations of traditional navigation systems, not by inventing new technologies, but combining existing ones in a way that was not possible before. The global digital network fosters this recombinant innovation and enables the third force – combinatorial. The authors effectively leverage the work of economists to support their arguments throughout the book, and in this case, they quote Paul Romer when he said: “Economic growth occurs whenever people take resources and rearrange them in ways that make them more valuable.”

This third force could be the key to understanding the dynamics of our environment, and this insight from the authors brings it into focus: the number of potentially valuable building blocks is exploding around the world, and the possibilities are multiplying like never before. They effectively make their point by focusing on key technological advances of the recent past: the driverless car, IBM Watson, Siri, 3D printing, Robots, and others. The authors tell us that not long ago; many believed that computers would never substitute for humans in areas like driving a car. Yet here we are on the brink of accomplishing just that. Communicating with a computer was said to be a long way off – and then came Siri. What we’ve seen is a small indication of what’s to come in the second machine age. The authors give considerable time to past technological challenges and their accelerating pace of resolution. For example, in the area of Robotics many examples of how Robots are overcoming past limitations are provided. Whereas Robotics experts have been challenged to build robots that match the skill of manual workers; even that is beginning to change. Although each of these technology advances is far from perfected, the progress demonstrates that what was once perceived as impossible is now becoming possible.

Driverless cars and Siri are not anomalies say the authors, but part of a broader phenomenon. In the past five years, digital progress on a number of fronts became sudden after being gradual for so long. Digital started racing ahead; accomplishing things that technology was traditionally incapable of. This is perhaps the best explanation for this current disruptive environment. While many leaders believe that we are simply in the midst of another passing cycle, digital progress and the structural change it has driven is telling a different story. The book effectively dispels this belief, and perhaps this is why I find the content so refreshing and invaluable. The question is one of impact and timing. As the authors note, there is a growth constraint associated with the sheer number of combinations, and the trick will be finding those that are truly valuable. This aligns well with the need for ecosystem thinking where multiple companies come together to evaluate potentially valuable combinations and take the resulting innovation to market together. It also underscores the critical need for ideation, creativity, and design thinking in this new digital age.

Aside from benefiting from the insights so effectively shared by the authors, this book is a call to action. It helps us to understand why future success and viability are not guaranteed. For instance, the authors state that the best way to accelerate progress is to increase our capacity to test new combinations of ideas. Digital technologies help us here, as communities focus on finding these new combinations through approaches like crowdsourcing and the use of collective intelligence. The authors describe the main impediment to progress being that until recently; a sizable portion of the world’s people had no effective way to access or add to the world’s supply of knowledge. As we know, this is changing rapidly. The World Bank estimates that three quarters of the planet now has access to a mobile phone. The conclusion by the authors therefore, is that the second machine age will be characterized by countless instances of machine intelligence and billions of interconnected brains working together to better understand and improve our world. Experimentation and other characteristics like lean, agile, iterative, adaptive, fast, flexible, and responsive are critical.

The book then focuses on two economic consequences of the scale and pace of innovation – bounty and spread. Bounty is defined as an increase in volume, variety, and quantity and a decrease in the cost of offerings brought on by modern technological progress. Spread is the growing differences among people with economic success – wealth, income, and mobility. The book positions bounty and spread as a critical focal point: how can you maximize bounty while mitigating the negative effects of spread?

From a productivity perspective, we learn that general purpose technology requires complementary innovation, creating a lag between the introduction of technology and productivity gains. Additionally, complementary innovations in the areas of process and organization are perhaps the most important in driving these gains. In the case of electricity, it took over thirty years to realize productivity gains – and interestingly, it was after retired managers were replaced by a new generation. I can’t help drawing an analogy to modern day. Digital technologies are deployed as isolated initiatives (versus combinatorial), they are layered onto broken processes, forced to work within the construct of antiquated operating models, and inhibited by a management approach that has not changed since the 1920’s. Will we have to wait for the next generation of managers to realize productivity gains?

As we read on, we find that what matters in the second machine age is: ideas not things; mind not matter; bits not atoms; and interactions not transactions. These and other changes enabled by digital progress prompt the authors to conclude that GDP and productivity growth are not sufficient measures of overall or economic well-being. In essence, traditional metrics are not a good measure of value creation in this new digital age. They explore alternative measures like consumer surplus: the amount a consumer would have been willing to pay for something versus the amount they actually pay. In a recent Post regarding a Mckinsey Report, the notion of consumer surplus is discussed and quantified in relation to twelve disruptive technologies.

The focus then shifts to the other side of the story: the spread, or the large and growing difference among people in income, wealth, standard of living, and opportunities for advancement. Much thought and time is given to describing how digital technologies are driving a redistribution of wealth and income. Median wages have stopped tracking productivity and wages for unskilled workers in developed countries have trended downward. They then focus on the biggest winners – those they call superstars – describing how profits have increased for capital owners and dropped for labor. An entire chapter is dedicated to describing this phenomenon and why it is happening now.

The authors conclude that our fundamental challenges are deep and structural. A very important but misunderstood point. Structural change requires a movement from the status quo – and too many business and Government leaders remain stuck there. In establishing the argument, the book does a wonderful job of describing the implications of these challenges on the future of work and jobs. The structural changes that occurred after the great recession had its roots in a time when revenues and profits were on the rise. Even though it was clear to at least one CEO that information technology made many routine jobs superfluous – it was hard to eliminate jobs when profits were good.  The recession made it easier to streamline and cut workers – but when demand returned, the jobs did not. Companies used technology to scale up without these workers – and that is structural.

When technology eliminates one type of job, or the need for an entire skillset, impacted workers will have to develop new skills. Today’s information technology favors more skilled over less skilled workers. So what are the human skills and abilities that will still be valued as technology continues to improve? They predict that people who are good at idea creation will continue to have a comparative advantage over digital labor for some time to come. Applied in an enterprise context, companies that excel at not just idea creation, but the ability to convert ideas to value will increasingly drive competitive advantage. The many traits that allow humans to think outside the box – ideation, large frame pattern recognition, and complex forms of communication – is another area of advantage for humans. Computers and robots find it difficult to do anything outside the frame of their programming. Yet according to the authors, our education environment does not emphasize those skills. The book spends some time discussing necessary changes to the education environment and the role that technology will likely play in improving it.

Additionally, skills that are necessary for humans to work side by side with machines become more important. The authors talk to the combination of humans and machines being more impactful than either alone. They use a great chess example where the strongest chess computer was no match for a human with a computer: furthering their notion that humans should race with machines instead of against them. A partnership between IBM Watson and a human doctor is more impactful than either working alone. In this union with machines, ideation in its many forms stands out as an area where humans have a comparative advantage over machines.

The automation of knowledge work is a key disruptive force, and one that is discussed at length in the previously mentioned Mckinsey Report. As the book suggests, machines that can accomplish cognitive tasks are more important than those that accomplish physical ones. As Ken Jennings said after being soundly beaten by IBM Watson on Jeopardy – “Just as factory jobs were eliminated in the twentieth century by new assembly line robots, Brad (Rutter) and I were the first knowledge industry workers put out of work by the new generation of thinking machines. Quiz show contestants may be the first job made redundant by Watson, but I’m sure it won’t be the last.” We’re seeing this play out in examples like IBM Watson helping doctors better diagnose their patients. The implications are far reaching both to society as a whole and the future of business.

The last section discusses policy recommendations with a belief that the best way to tackle labor force challenges is to grow the economy. They focus on education, entrepreneurship, the regulatory environment, support for academic research, infrastructure upgrades, immigration, taxes, and revisiting our view of income. The authors – as they have in the past – talk about the importance of working. In a future where work may not be necessary, there is a real danger that society will decline. They quote Voltaire: “Work saves a man from three great evils: boredom, vice, and need”. If for example we moved to a guaranteed universal income (one of the options discussed), need would be taken care of but not the other two.

The authors (and yours truly) are convinced that we are at an inflection point – the early stages of a shift as profound as the Industrial Revolution (if not more so). Most of the gains – as they indicate – are ahead of us. But, significant organizational innovation is required to capture the full benefit of the second machine age. Much like the Industrial Revolutions, the pace of that organizational innovation is painfully slow, and it may take the next generation of managers to lead us there. I highly recommend this book on a number of levels; a wake-up call at a time when so many choose to ignore the signs. Andrew McAfee and Erik Brynjolfsson take us on a journey into the future. It’s impossible to predict what will happen – but it’s good to have a view into what might happen. This view is only useful however, if as our authors put it – we use it to shape our destiny. Will the second machine age be regarded as the biggest and fastest transformative period in history? Time will tell.

12 thoughts on “The Second Machine Age and Business Evolution

  1. Frank, thanks for sharing your insights on this intriguing book which I have ordered on your recommendation. I concur with your key ongoing point that we live in a time of historical transformation and that enterprises & individuals must adapt or be bypassed by this oncoming train.

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  2. Well said, Frank! McAfee was ahead of the curve with Enterprise 2.0 and this book is already on my reading list.

    I am pleased that you included a discussion of the public policy issues that are a critical driver of these “disruptive trends”. The broader policy debate tends to focus on those developments that are “inevitable” and difficult to address. Unfortunately, the public policy debate is almost always at least neglected, if not ignored, when responses to these trends are proposed.

    I emphasize to my students that they focus on becoming more flexible, adaptable, creative and resilient. Those skills will help students to become, and remain, competitive going forward.

    I would suggest that those interested in preparing for the disrupted future that the authors discuss will be well served by reading your review and then the book!

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  3. Thanks John! Those next generation leaders that you are educating are the future. Much like the early transformative periods before this, I have a feeling this next generation will lead the way.

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  4. Great insights. I am definitely downloading this book today. I am a healthcare technology consultant focused on the digital connected trends. The ecosystem and partnership and “how you put together the pieces” is what I help companies realize and create new strategies for. It is a challenge.

    Your point of “Experimentation and other characteristics like lean, agile, iterative, adaptive, fast, flexible, and responsive are critical.” is opposite of the healthcare industry and definitely explains the slow movement of healthcare industry to move into the digital connected age. I see more and more ecosystem discussion but the entities are uncomfortable in working in ecosystems.

    Thanks again for the summary.

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    • Donna – thanks for your thoughts. Alas there are many industries that struggle with those you articulated. It’s going to get interesting as competitive pressures mount: barriers to entry are falling and getting ideas to market are easier than any time in history – and it will just get easier.

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  5. […] of Things, AI, Robotics), but for the most part, the focus is isolated in nature. As described in The Second Machine Age, the combinatorial effect of these forces enables disruptive scenarios at an unprecedented pace. […]

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