Limitations of accounting and a requiem for productivity? The high cost of failing to innovate

Robert J. Gordon is a most interesting thinker in contemporary economics. In The Rise and Fall of American Growth: The U.S. Standard of Living Since the Civil War (2016), but already in his 2013 TED Talk, The Death of Innovation, the End of Growth, the globally renowned macroeconomist argues that, despite all the chatter about “disruptive” innovation, new ideas with powerful effect on productivity are just not forthcoming – not since considerable time. Gordon sees innovation limited by four principal factors: demographics, education, debt, and inequality.

A major poll conducted by Inc. Magazine among VCs in late 2015 asked what startups are most likely to take off in 2016. Given that Silicon Valley is likely the most innovative spot on this planet, the results are shockingly disappointing: the presumptive champion most likely to succeed through innovation turned out to be Vulcun, an online betting platform allowing users to gamble real or fictitious money on the outcome of online video games. Another top-ten contestant was Juicero – it sells an internet-based juicer capable of delivering “disruptively fresh juice.”

If one considers the great discoveries of the industrial revolution, say, the steam engine, the combustion engine, electricity, or assembly line production, it is fairly clear how and why they affected productivity. Alas, while the digital age has changed our daily lives, it is less clear if – and how – it has affected productivity and created greater prosperity. Following the 2008 financial crisis, stagnation has set in globally and has endured to date: the Euro zone and Japan grow at a rate barely reaching, much less exceeding one percent of GDP; even the U.S. situation appears dire if one discounts the effect of cheap oil and low costs of capital. But already before the Great Recession, increase of productivity barely hovered above zero.

There are many suspect causes: taxation, bureaucracy, public debt, public austerity, cost of regulation; the list goes on. But regardless of these factors, all industrialized countries find themselves pretty much in the same situation. They face a lack of innovation that results in growth: IT companies barely create any jobs. The world’s three most highly valued corporations (Google, Apple, Microsoft) collectively employ 250,000 around the world, while an industrial engineering conglomerate such as Siemens employs 350,000 while Walmart is home to 2,100,000 jobs. Nothing indicates that 3D printing, drones, robotics or self-driving cars will create growth similar to the automobile, electricity, or aviation.

Arguably, GDP is a deficient measurement for innovation benefits. IT changes lives and processes qualitatively but it does not measurably contribute to productivity. I have written before and elsewhere about the inadequacies of contemporary accounting standards, but this phenomenon fits straight into those arguments. Since redistribution of prosperity by growth seems to have reached its limits at least in the OECD, European socialists argue that personal time should be the new resource to be redistributed: if people are not afforded wage increases, they could be rewarded by having to work fewer hours. But it may take a generation or more to change work ethic and mentality currently fixated on measuring performance by one’s ability to put in long and hard hours. It is a safe assumption that the pursuit of material wealth has released an immense quantity of human energy. It will not be possible to abandon this priority without offering compelling replacements. It is not clear whether the most appropriate substitute may be reduction of global poverty, strengthening of social coherence or ending global threats to the environment, and society will need extended discourse to redefine itself and the individual’s place in it. While this vision will not materialize without lots of innovation, the character of it will likely pivot away from offering top rankings to betting platforms and online juicers.

Personally, I will sharply dispute the assumption that productivity is flat-lining or on the decline. Innovation as we have known it in recent decades has fundamentally changed almost all processes. A networked, Big Data - based society may very well require a fundamental overhaul of its valuation and accounting standards, but there is no denying that productivity, in the sense of greater efficiency as measured by cost, time, and quality is on the rise. It is difficult to measure the creation of intellectual property through R&D but it has never been at a higher level than today. Another undeniable fact is population growth despite statistically increasing averages of living standards. While it is true that R&D expenditures are rising, their product in terms of GDP does not. But this may well require qualitatively different valuation of innovative products and their utility for every task encountered in life. Productivity-based increases of prosperity in the last centuries largely fell into the comparably brief period from 1870-1940, the time of great inventions. But if a 19^th century woman spent two days of her week doing laundry, the invention of washer and dryer and electric iron changed GDP-measured productivity not because of the quality or significance of those innovations but because women entered the workforce in large numbers, suddenly placing a monetary value on their time. Much the same was true of improved hygiene, with no directly attributable contribution to GDP. Gordon is likely right that productivity increases between 1920 and 1970 raised prosperity more than in 1,000 years prior. However, and to a not insignificant degree, this also had a lot to do with recognizing, valuing and compensating services that previous generations took for granted or considered a mere add-on. While entertainment and communication have limited influence on industrial production processes, and while it is true that digital devices amount only to a limited percentage of household spending, the picture is a lot more differentiated than that: practicability of many tasks that play a significant role in directly GDP-relevant production is inconceivable without digital technology – from recycling to fintech, from robotics to mass transportation and logistics. Concededly, some innovation may not be much of a job creator, or even indeed the opposite, a low-end job killer. But value creation is an altogether different matter more closely related to valuation and accounting standards than the references we inherited from the industrial age.

Single-atom-sized data storage

When Richard Feynman gave his famous 1959 speech suggesting that there is “[p]lentyof room at the bottom,” he not only created a vision for the development of nanotechnology, he also created a school of thought at its extreme limit: he speculated about the possibility of arranging single atoms as sufficiently stable building blocks. His idea moved within realistic reach following the 1981 development of the scanning tunneling microscope that not only enabled imaging surfaces at the atomic level but also arranging and rearranging individual atoms, a breakthrough that earned Gerd Binning and Heinrich Rohrer at IBM Zurich labs the 1986 Nobel Prize in Physics. Feynman himself, along with others, had received the Nobel Prize in Physics already in 1965 for other contributions, primarily to the development of quantum electrodynamics.

Now, a team of physicists at the Delft University of Technology succeeded in manipulating gaps in a chlorine atomic grid on a copper surface in a manner that enables a never before accomplished density of data storage, some 100 times more dense than in the case of the smallest known storage media and about 500 times more dense than contemporary hard disk drives. Given the massive increase in the size and energy consumption of data centers in the age of cloud computing, getting away from the contemporary standard of writable memories that still encompass many thousand atoms, miniaturization of storage media to the submolecular nanolevel is key.

The Delft team’s discovery may lead to a result that would permit to store the data of any and all books ever written by mankind on a single storage media the size of a postal stamp. This is possible because chlorine atoms automatically form a two-dimensional grid on a flat copper surface. By providing fewer chorine atoms than would be required to cover the copper surface in its entirety, vacancies are created in the grid. One bit is comprised of a chlorine atom and a vacancy. To store data, atoms are moved individually by a scanning tunneling microscope (STM). The STM’s ultrafine measuring tip creates electric interaction as it does to analyze the atomic structure of surfaces. If current of about 1 µA flows through the tip, it becomes possible to move a chlorine atom into a vacancy. This process can, of course, be automated and chlorine atoms are moved into vacancies until the desired field of bits emerges. To keep the chlorine atom grid stable, each bit needs to be limited by chlorine atoms. Therefore, bits are never positioned directly adjacent to each other.

It is fair to note that this technology is still very far removed from commercialization: reading a 64-bit block by STM takes about one minute while writing the same 64 bits takes two minutes. To date, a kilobyte rewritable atomic memory has been created – and while 8000 atomic bits are by far the largest atomic precision structure ever created by humans, it is not at all impressive in an era that considers a 1TB laptop a middle-of-the-road standard. This becomes even more clear if one realizes that the entire procedure only works in an ultra-clean laboratory environment and at temperatures of -196 º C lest chlorine atoms start to clot. But regardless, the experiment demonstrated proof of concept and the first viable path for further development on the road to space reduction for atomic-level data storage, currently a central issue in the advancement of storage technology, and it would hardly be the first concept that evolved explosively following fundamental experimental proof.

When cars sit on death panels

Many have warmed up to Tesla, Google, Apple and others in the U.S., EU and Japan promoting the idea – and feasibility – of self-driving, even fully autonomous cars. Meanwhile, little attention has been paid to the fact that the decisions left by drivers to their cars need to be made by someone, somehow. Life in the digital age implies some algorithm applying artificial in lieu of human intelligence and ethics.

One of the greatest anticipated benefits of fully autonomous cars is a dramatic reduction of accidents by up to 90%, assuming that such cars represent a majority of vehicles in circulation. That should be achievable reasonably soon, since 10 million of them are expected to be on the road by 2020. The elimination of “pilot error” alone – for example influence of alcohol and drugs, distraction by smart phones or other devices, and speeding – rationally accounts for such a forecast.  But even fully autonomous cars will encounter unforeseeable events, and some of those will result in accidents, including fatal accidents. NHTSA has started to examine the first fatality involving a Tesla S, which showed that full autonomy is the only acceptable solution for self-driving cars under most circumstances, not least because reaction speed and decisional quality and predictability can be developed to surpass human capabilities by a considerable margin.

But making and carrying out decisions does not absolve manufacturers, drivers, and society at large from the burden of analysis and – sometimes tragic – choices. How is an “autonomous” car to react when a child suddenly runs into the traffic lane but the evasive action would hit another pedestrian? Should the car be programmed to accept death for its passenger(s) if, say, ten other lives will (or merely can) likely be saved? AI is a matter of coding, but also of machine learning.

Researchers including Jean-François Bonnefon of the Toulouse School of Economics, Azim Shariff  of U. Oregon’s Culture and Morality Lab, and Iyad Rahwan at MIT’s Scalable Cooperation Group polled some 2,000 individuals on their views and values on ethical choices in autonomous vehicles. The participants considered the questions in different roles and situations, as either noninvolved bystanders or as passengers of the car. The participants were then asked how they would like to see their own autonomous car programmed.

A clear majority of participants preferred to minimize the total number of casualties. 76% chose to sacrifice the driver to save ten other lives. The scenario pitting one driver against one pedestrian, however, produced a virtually exact complementary outcome: only 23% approved of sacrificing the driver. But passengers that were not drivers took fundamentally different positions.

While utilitarian ethics may leave questions to be probed, there are also commercial considerations for the automotive industry: if autonomous cars are programmed to reflect generally accepted moral principles, or legally ordained ones, fewer individuals may be prepared to buy them. Another option may be to allow for “scalable morality” by allowing the buyer or driver to choose to some extent how selfish or altruistic he wants to set his car’s “ethics thermostat.” Welcome to machine ethics. Tort law reaches a new frontier by naming software (or its programmer, i.e., the manufacturer) as a defendant – with prospects for mass recalls based on the stroke of a judicial pen.

Megaprojects, meet reality

In a relatively recent assessment of Oxford Said Business School’s Bent Flyvbjerg, megaprojects are characterized, roughly speaking, by budgets in the billions of dollars, while major projects run in the hundreds of millions and garden variety projects amount to tens of millions and less.

 

In the fifteen years to come, a deal volume of $35-90 trillion in megaprojects is expected to materialize world-wide. At the high estimate, that exceeds the current annual GDP of the planet while, at the low estimate, it is still twice the GDP of the United States or the European Union. Annually, this amounts to at least the GDP of France, up to twice the GDP of Germany. So we are not talking about a footnote in the global economy. Quite the contrary, they are often centerpieces of substantial economic stimulus plans.

 

Yet 90 percent of all megaprojects – however one wants to define the category did not seem to matter terribly much in a study of about 1,000 of them – result in grotesque cost and time overruns relative to budget. The primary diagnosis is that megaprojects, be they major infrastructure projects or capital investments, are typically one of a kind, without comparable precedent, complex and first of their kind, at least in their setting. It is also fairly obvious that, under such circumstances, challenges emerge only midstream. Regardless of political or economic system, cost overruns average 55 percent. Munich-based consultancy and study author Roland Berger concludes that savings of just 10 percent through avoidance of management errors and omissions would result in savings of $3.5-9.0 trillion – not a particularly ambitious assessment given average cost overruns of 55 percent. There is considerable potential for intelligent systems engineering as well as for improved risk management. The general problem with high-quality cost control and risk minimization is that damnum cessans (damage avoided) is a very tricky base for performance reward and incentive compensation, as opposed to lucrum emergens – and thus frequently enough is not avoided.

 

Criticism of megaprojects has addressed a wide range of issues: their top-down planning and adverse effects on certain communities as much as their extreme complexity in technical as well as human terms, a long record of poor delivery, its remodeling of urbanism in the spirit of neoliberalism in recent years, introverted governance lacking democratic participation and accountability, global economic positioning at the expense of local issues, physical and social disconnect from the context of the host city or region, and, in too many cases, lack of public benefit and social outcomes – they “foreclose upon a wide variety of social practices, reproducing rather than resolving urban inequality and disenfranchisement” and “inhibit the growth of oppositional and contestational practices.”

 

Megaprojects appeal to policymakers consistently for a quadriga of reasons set forth by Flyvbjerg, all rooted in ambition and yearn for a legacy: their technological, political, economic and aesthetic dimension.  A seldom mentioned reason should be added: megaprojects mean mega-budgets and present unique opportunities for credible justification of elevated cost due to unforeseen and quasi-unique challenges: where challenges of coordination and integration run high, it is almost impossible to lay blame for relatively minor deviations from planning. But if Roland Berger arrives at an average of 55 percent in cost overruns, it shows a very similar effect to the one I hold ultimately responsible for the 2007-2008 financial crisis: too many, virtually everyone, tried to pass off 98-99 percent compliance as 100 percent. This has a way off adding up to a meltdown, or to extreme leverage in the compilation of adverse effects. I am also inclined to believe that the average of 55 percent deviation is very generously calculated, or by inclusion of many projects in the sample that present fewer opportunities for it. There are simply too many megaprojects in the 200 percent overrun range to support a less than absolutely shocking figure.

 

Interestingly, less than a decade following overrun disasters, the mere fact of each project’s completion and the pride and identification it entails furnish proof of Sir Frederick Henry Royce’s adage: “The quality will remain long after the price is forgotten.” In a way, megaprojects are the Rolls Royce of legacy and pride – for all categories of stakeholders. Secure knowledge of the fait accompli of this investment and its consequences is the reason why so many get safely away with so much. It is not a sign of personal failure or wrongdoing so much as it is indicative of systemic flaws and the absence of genuine system auditing and adjudication.

Bioresorbable technology: passing the human-machine barrier?

Bioresorbable materials are on their way to revolutionize manipulations of the human body, to create previously unimaginable applications, and to take the concept of minimally invasive medicine to a new level.

The idea of bioresorbable stents, fine meshes implanted in a vessel or body cavity via catheter to keep it from closing up, has been around for some time. Bioresorbable drug-eluting coronary stents promise a significant breakthrough: most physicians and patients would agree that a medical device that dissolves after serving its useful function without need for additional intervention is preferable to a permanent implant or one that requires removal with attendant risk.

If bioresorbable metals (magnesium-, iron- or zinc-based alloys) are degraded safely within the body, the scope of application is highly diverse. They must have an appreciable degradation rate in order to be absorbed within a reasonable period relative to the application, and to avoid toxicity or inflammation, their decomposition product needs to be capable of safe absorption, distribution, metabolism and excretion (ADME).

Bioresorbable bulk metallic glass made of a Magnesium-Zinc-Calcium ternary alloy is cooled at a speed of one mega-kelvin per second. Because it consists only of elements that exist naturally in the human body, it dissolves in the body at a rate of approximately 1 mm per month (depending on zinc content) and is replaced by bone tissue. Biocorrosion can be exceptionally expedient: Ca₆₅Zn₂₀Mg₁₅ alloys, for example, disintegrate in a biocorrosive environment within three hours. Applications include orthopedic fixations but may extend to other surgical uses, but also have electronic and aerospace applications.

A quantum leap was the development of silicone-based bioresorbable electronic sensors for implantation in the brain that can be used to report and monitor temperature and pressure within the brain, for example after accidental or surgical trauma. Because there is no need for subsequent removal, the risk of complications is minimized. In animal trials, the implants remained functional for approximately three days and were completely resorbed within a few weeks. But this technology is by no means confined to the brain and may be adapted for use in other organs.

I have followed developments in transhumanism for some time, not least the conceptual work done by Nick Bostrom and others at the Future of Humanity Institute at Oxford University. Bioresorbable implants and their neurological applications promise to be essential to crossing the man-machine barrier and thus integrating man with trans-human elements, in a first step temporarily. At present, cybernetic concepts and AI are far ahead of biomedical integration, so technologies and applications with benefits in that area are of immense value for expedited research in neuroscience, brain-to-brain interfaces as well as for exploring potential applications in biological computing.

The inutility of mass surveillance, backdoors, and limits to encryption

Terrorist attacks such as the ones in Paris on November 13, 2015 raise the specter of prevention through increased surveillance of digital communication. But as is the case with most knee-jerk reactions following dramatic unforeseen events, the call for increased mass surveillance of the internet has very little practical utility. On the contrary, if the events in Paris taught one lesson, it is that mass surveillance failed resoundingly. It could not be otherwise: since many decades, analysis in hindsight has consistently demonstrated one thing, and one thing only: regardless of how much computing power agencies like NSA, GCHQ, DGSE, BND, ISNU and many others dedicate to the task, the current state of algorithms does not enable sorting massive data for relevance.  Therefore, the entire plethora of intercepted and stored data can be made sense of only after the fact but is more often than not of limited use in the prevention of attacks. Neither 9/11 nor the 2005 London Subway Bombing nor the Madrid Train Station attack nor the Paris Bataclan incident nor any other could be prevented through digital mass surveillance. Admittedly, there are claims – for the most part not verifiable – of a great number of thwarted attempts. But proof of success in mass surveillance has not been adduced in a single case of an individual prosecuted for attempted crimes. While this fits the adage that law enforcement needs to be successful 100% of the time while perpetrators only need to succeed once, it does not change one fundamental insight: despite the fact that many attackers in prominent terrorist incidents had previously shown up on agency radar screens, they were still able to carry out their nefarious plans.

While government-sponsored digital mass surveillance is yet to show any tangible benefits in securing its purported goal – our safety, revelations of the scale of data collection prompted calls for individual and organized resistance, as exemplified by Bernard Harcourt’s Exposed: Desire and Disobedience in the Digital Age, Frank Pasquale’s The Black Box Society: The Secret Algorithms That Control Money and Information, and others, and by the discussions they spurred. 

NSA is, of course, entirely aware of the inutility of mass surveillance. Documents revealed by Edward Snowden show the agency’s struggle with its skyrocketing data overload, forcing it to apply artificial limitations in order to be able to conduct any meaningful analysis at all. The reason why it – and its peers abroad – keeps striving to collect even more Big Data lay in every bureaucracy’s ambition to increase power and status through size and budget as an end in itself. Originally, NSA was established to collect Soviet signal intelligence to prevent another Pearl Harbor – comparably a relatively simple task with few points of communication and data flows to monitor – but one that is not infinitely scalable.

Much discussed lately, backdoors for encryption software are nonetheless technological nonsense: a backdoor for NSA would result in claims by any number of governments starting with China, yet nothing would prevent “evildoers” from using proprietary, backdoor-free encryption software. While the ostensible target of surveillance would continue to avoid detection, commercial enterprises with business and industrial secrets to protect that seek secure communication would be exposed – to competitors as well as to their governments. Industrial and fiscal espionage has ultimately blurred the line between public and commercial interest, and, honi soit qui mal y pense, government surveillance is of considerably greater value in commercial exploitation of the findings than most justifiable security purposes could rationalize.

Quite the contrary: in a world with secure end-to-end encryption freely available, law enforcement and intelligence agencies would be compelled to perform their actual job and focus on targeted surveillance and traditional police work – which is superior to mass surveillance not only in terms of effectiveness but also as a matter of cost-benefit analysis: eroding privacy rights of the population at large and of business  needs to be factored in as a cost and balanced against the purported benefits of information gleaned through surveillance. This is also the only way to confront low-tech, asymmetric responses to computational and cryptologic superiority.

It is ultimately the same calculus that applies to the cost-benefit analysis of military response to terrorism: while eliminating threats by drone may be one thing, “avenging” (though certainly not forestalling) the death of a few thousand people over time by military expeditions costing trillions and causing the death of hundreds of thousands of wartime casualties, be they servicemen, civilians, or sympathizers, shows a crass imbalance. After all, given the fact that an American citizen is approximately 10,000 times more likely to die in a motor vehicle accident, and vastly disproportionately more likely to die in a plane crash, than in a terrorist attack, nobody has yet proposed to shut down private or public transportation – the only “reliable” way to avoid those casualties.

There is also the aspect of constitutional rights: in countries where governments and their agencies are, for one or the other legal reason, precluded from surveillance of their own citizens without meeting an at least somewhat demanding standard of probable cause, no country currently applies a variant of the “fruit of the poisonous tree” doctrine to information obtained through intergovernmental cooperation that, had the receiving government conducted the warrantless search, would have been ruled inadmissible at best and a violation of constitutional rights of the surveilled. It is difficult to predict timing but it is foreseeable that the absurdity of obtaining information from a foreign government that your own constitution and laws prohibit you from collecting will meet with increasing judicial rejection.

As I have argued elsewhere, the matter boils down to our standards of accounting for intangible values. For the sake of avoiding hypocrisy, this has to include putting a realistic valuation on human life (as is done by every wrongful death award and certainly in terms of medical insurance) but also on the quality thereof. Maximum protection lacks economic viability – and is unlikely to be total.

Aside from such considerations, futility is also evidenced as mass surveillance perpetuates the failed logic of the arms race: the Manhattan Project delivered an impressive proof-of-concept demonstration in Hiroshima and Nagasaki – some historians argue, in fact, that Little Boy and Fat Man were used primarily to deter the Soviet Union, as a military purpose against Imperial Japan was difficult to substantiate given that the nation was already very near collapse and surrender. Yet it took only until 1949 for the first Soviet device to see the light of day, while the largest hydrogen bomb ever detonated, Tsar Bomba, capable of 50 megatons or twenty times the amount of all explosives used in World War II combined, was set off in 1961. The role of foreign intelligence for closing this knowledge gap is irrelevant as it has remained a constant across time, and digital technologies tend to seep faster into commercial availability than most intelligence operations would take to set up and harvest. In the cat-and-mouse game with the “dark forces” of hackers and foreign governments, any U.S. lead will be equally temporary, but the effects of this technological arms race on the remaining quality of human life and individual rights and liberties will not be.

Confronted with the need to price for balancing purposes the goods we lose and gain through temporary governmental monopolization of technology, this challenge may have one desirable consequence: it may force us to fundamentally rethink our accounting and valuation treatment of intangibles that will include not only constitutional rights but also assets such as the environment. While no one will dispute that any rational, non-random and non-arbitrary valuation will be difficult and depend on complex consideration and balancing of the purposes thereof, part of the reason for this realization may be that they are, at least with the benefit of hindsight, priceless.