Three Longs & Three Shorts

The Exponential Age Will Transform Economics Forever

Albert Einstein is often attributed with the quote of compounding being the eighth wonder of the world. Wonder, because plenty of research has shown that the human mind struggles to get exponentiality. And exponentiality in the context of technology is why we are seeing massive disruptions and why most of us have under estimated the success of tech companies some of whom are dominating the world today in less than a couple of decades of existence. In his new book called Exponential, Azeem Azhar talks about why this will likely be a challenge not just for investors and incumbent businesses but also for the economy and society at large. This piece which is an excerpt from the book talks about how our institutions (whether business, government or social) are built for linearity and incrementality and their consequent inability to adapt to exponential change amplifies the problem caused by our inability to comprehend exponentiality. Azhar uses several examples from the field of business, government and economics to drive home this point in this fascinating read.
“Until the early 2010s, most companies assumed the cost of their inputs would remain pretty similar from year-to-year, perhaps with a nudge for inflation. The raw materials might fluctuate based on commodity markets; but their planning processes, institutionalised in management orthodoxy, could manage such volatility. But in the Exponential Age, one primary input for a company is its ability to process information. One of the main costs to process that data is computation. And the cost of computation didn’t rise each year, it declined rapidly. The underlying dynamics of how companies operate had shifted.
Moore’s Law amounts to a halving of the underlying cost of computation every couple of years. It means that every ten years, the cost of the processing that can be done by a computer will decline by a factor of 100. But the implications of this process stretch far beyond our personal laptop use. In general, if an organisation needs to do something that uses computation, and that task is too expensive today, it probably won’t be too expensive in a couple of years. For companies, this realisation has deep significance. Organisations that understood this deflation, and planned for it, became well-positioned to take advantage of the Exponential Age.
Because, for all the visibility of exponential change, most of the institutions that make up our society follow a linear trajectory. Codified laws and unspoken social norms; legacy companies and NGOs; political systems and intergovernmental bodies – all have only ever known how to adapt incrementally. Stability is an important force within institutions. In fact, it’s built into them. The gap between our institutions’ capacity to change and our new technologies’ accelerating speed is the defining consequence of our shift to the Exponential Age. On the one side, you have the new behaviours, relationships and structures that are enabled by exponentially improving technologies, and the products and services built from them. On the other, you have the norms that have evolved or been designed to suit the needs of earlier configurations of technology.”