tymshft

Why are some revolutions imperceptible?

I recently read something by Jim Ulvog, which referenced something written by Matthew Yglesias. But before I talk about what they wrote, I’d like to share an example of what they were both talking about.

When I first entered the fingerprint identification industry in 1994, the computational power required for fingerprint encoding and matching exceeded the capabilities of the general-purpose computers available at the time – even high end computers from Digital Equipment Corporation. Because of this, my employer had to build special-purpose cards to insert into these computers to allow them to keep up with the computations that were required. I was writing proposals at the time, and spent a lot of time enthusing about the fact that these special cards were much smaller than the ones used in the prior generation of automated fingerprint identification systems. Because of this small size, I wrote at the time, these products – Printrak’s “Fingerprint Processor 2000” and “Minutiae Matcher 2000” – were truly revolutionary.

Within a few years, the computational power of computers had increased, and Printrak was able to do away with the Fingerprint Processor 2000 and the Minutiae Matcher 2000 altogether. We no longer needed special purpose boards to crank out these processes – and, as an added bonus, some of the computers didn’t have to be expensive Digital Equipment Corporation computers any more. We could buy a computer from Compaq (which, coincidentally, purchased Digital Equipment Corporation), and this computer was completely capable of performing all of the fingerprint processing without any special card.

This completely revolutionized the automated fingerprint identification system industry, since it was now possible to use general purpose computers for fingerprint identification. Rather than depending upon the AFIS vendors such as Printrak to provide souped-up computers, government agencies could (if they wished) now buy the computers themselves, from the same purchasing schedules that they used to purchase their other computers.

A huge revolution, but most of you never heard about it. Why not? Because the automated fingerprint identification industry was, and is, extremely small. The four leading AFIS vendors in the 1990s had aggregated annual revenues of much less than US$1 billion dollars. So it’s safe to say that Printrak’s reduced need for DEC computers was not the catalyst that sent DEC into the arms of Compaq.

Back to Ulvog and Yglesias. Ulvog’s post Impact of the technology revolution has barely begun states that the recent technology revolutions have taken place in industries that don’t play a huge role in the economy. But when technology changes impact larger industries – Ulvog cites education and health care as two examples – then we’ll REALLY see changes.

Ulvog’s thoughts on this were crystallized when he read Yglesias’ article, Why I’m Optimistic About Growth and Innovation. Yglesias begins by talking about a huge technological change that took place several hundred years ago – yet at the time, that change was imperceptible to the broader public.

A printing press based on movable type, for example, was an enormous boon to productivity in the book manufacturing sector. It had almost no impact on economy-wide productivity, however, simply because the book manufacturing sector of 17th-century Europe was trivially small.

So when, according to Yglesias, did the Industrial Revolution really take hold? When technological changes were applied to a much more important industry – apparel manufacturing.

In a similar manner, Yglesias (and Ulvog) note that recent technological changes have occurred in industries such as journalism and music. “But,” you argue, “journalism and music are HUGE. Rupert Murdoch and the music company heads control huge companies.”

Not really.

Take a look at the 2012 Fortune 500. This list doesn’t measure companies based upon stock valuation; it measures companies based upon actual revenue. (An argument could be made that profit is more important than revenue, but I don’t think that a ranking by profit will significantly impact my point here.)

Number one on the list? Not a journalism company. Not a music company. Number one on the list was ExxonMobil, with over $450 billion in revenue.

Number two was WalMart, with revenue of over $445 billion. Yes, they sell music – along with everything else under the sun.

You have to go through a number of companies – other oil companies, auto companies, banks, health firms, diversified companies such as Berkshire Hathaway – before you get to a company that makes a substantial amount of its revenue from journalism or music. That company, News Corp (Murdoch’s firm) is 91st in the Fortune 500, with revenue of about $33.4 billion – or an order of magnitude lower than the revenue of an ExxonMobil or a WalMart. Time Warner, by the way, is 103rd at about $29 billion.

So, for example, if News Corp and Time Warner were both to be completely devastated by technological change, and were to be liquidated, it would cause some discomfort. But if ExxonMobil, Chevon, or ConocoPhillips were to be liquidated, we’d probably be plunged into another Great Depression.

This is one of the reasons why Jim Ulvog talks about the oil industry so much. In his post, he provides this example:

…the astounding ability to change direction on a drill and control its location 10,000 feet underground and out 10,000 feet horizontally from there. Could you push a 20,000 foot piece of steel piping through solid rock and have the tip be exactly where you want it to be, plus or minus a few feet?

What has this technology – and others – done?

Turned North Dakota into the second largest oil-producing state in the country. More than Alaska or California.

Put US oil production back to where it was over 20 years ago.

Makes it a reasonable possibility the US could be a net energy *exporter* in a decade or so. An exporter.

And that’s going to make a bigger difference in our lives than the New York Times’ efforts to work out a monetization model. Not that this isn’t important – I know a number of journalists who have been displaced or adversely affected by change, and it’s undeniable that the music industry is changing. But a $1 per gallon increase of decrease in the cost of gasoline will have a huge impact on the ENTIRE economy.