Know your limits

...or perhaps try something else?

A fit person can sprint at about 20-30km/h. A horse at about ~80-90km/h at top speed. The first person to jump on a horse and ride at that speed would consider it an absolute game-changer. That's about double the speed of Usain Bolt. The time it took to get from A to B would have been much quicker than anything they experienced before.

Cars can drive at speeds of 200km/h or more, though for practical reasons speed limits mean speeds of around 100km/h are likely. On a full tank of gas, a car can travel hundreds of kilometers at that speed. The Wright brothers invented an even faster means of transportation with airplanes now propelling people at speeds of 900km/h.

Diminishing outcomes are core to economics and resource allocation. Above we see that advancements in transport lead to a big reduction in travel time, but the marginal improvement declines each time. To travel 5 km might take a person about 30 minutes at a run. A horse could take 11 minutes at a gallop of 27km/h. A car would take 3 minutes at 100km/h, assuming you didn't have to pull out of a garage and park. You wouldn't bother catching a plane. In absolute terms, the biggest improvement came from learning to ride a horse.

That outcomes diminish doesn't mean new technology isn't transformative or worthwhile, after all, traveling overseas by plane beats going by boat. But there are limits in terms of what is possible, or even useful. Shaving an extra minute off that 5km journey by going faster isn't necessarily enough to justify the investment required to make that happen. Diminishing outcomes raises the question of when it is worth stopping in favour of other pursuits.

Early versions of new technology offer significant benefit, with subsequent iterations typically adding less value

New innovations develop quickly offering new and improved value to consumers. However, as the technology matures the marginal value diminishes. Innovations approach a limit to how much value they offer, be it physical, functional, natural, technological, or human-made. Using iPhones as an example - each generation isn't always that different from the last, no matter how much Apple talks up the improvements.

Diminishing outcomes occurs in many areas:

  • Computers - early computers were a big jump in productivity and leisure potential for consumers, improvements today aren't as impressive.

  • Medical technology - some of the most important innovations from a health perspective were relatively simple and contributed to large increases in life expectancy e.g. washing hands to fight infection. Nowadays it takes a lot more investment to extend life - some estimates have the cost of drug development at over $2billion, compared to about half that in the early 2000s.

  • Kitchen technology - the first microwaves, stovetops, ovens and fridges were a gamechanger for chefs and homemakers everywhere with subsequent iterations providing less benefit. Smaller innovations like adding icemakers to freezers are important, but not to the same degree.

  • Televisions - we use to just have colour TV. Now we have HDMI, LCD, OLED, uHD, LED, QLED, and probably some others that I am missing. It just feels like different ways of branding colour and images. TV companies probably can't go much further with just enhancing an image.

Limits of technology can get 'pushed out' through new developments, but often the improvements in innovations get smaller and are more expensive to achieve.

Marginal outcomes from innovation aren't always useful

Returns to technology often depend on where the technology is in terms of its lifecycle. Genuinely transformative technology such as AI or virtual reality has a long way to go before diminishing returns make it 'uneconomic' kick in.

At a point, it becomes questionable whether it is worth pursuing innovation when the marginal gains are really small. Does it matter that much if a new drug allows people to live an extra two months? That's a personal judgment but worth considering, particularly for public funders.

Whether investment in innovation continues is determined by the interactions between investors and the people who ultimately pay for that investment. In theory, if an investor can make a decent enough return they will continue to invest even if the improvements are small, which implies there is someone on the other side of a transaction willing to pay - usually a consumer. Rich consumers may be willing to pay more for marginal improvements than poorer ones.

It becomes counter-intuitive when consumers pay more for smaller marginal improvements. Think about the price of the iPhone over different generations. The iPhone 12 retails for USD$699 compared to USD$599 for the iPhone 11. The iPhone originally sold for USD$499 in 2007. Particularly in recent years, the iPhone has only had small improvements relative to the previous version. The price is going up as the marginal benefit falls.

Yes, I know, inflation etc., but does the new price reflect the improvement for consumers? That is economist logic talking. It's important to recognise consumers are often paying to retain benefit due to obsolescence - or potentially brand value in the case of the iPhone. Consumers could also choose to pay less for a similar product.

Is pushing the boundary of innovation really worth it?

The low-hanging fruit from innovation from a societal perspective is not necessarily the next invention that shifts the boundary of what is possible. Though there is a place for that. It's probably more about broader access to technologies to further generate scale, and facilitating sustainability.

There is a certain irony in being on iPhone 12 when each iteration adds little value, at the same time that many people lack basics. If Africa looked more like Europe, the returns to many forms of investment would be a lot higher.

Not to mention that Earth is running up against hard environmental limits. Innovation has a big role to play in developments that help to reduce emissions and mitigate the effects of climate change. Innovation that is unsustainable has no place in the circular economy of the future.

Managing the juxtaposition between returns from innovation for an investor, and investment for broad societal benefit is challenging - but a focus on the 'triple bottom line' of profit, people and planet has never been more important.

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